BCAJ | Bombay Chartered Accountant Journal

Service Tax

TRIBUNAL

6. Commissioner of Central Excise & Service Tax, Goa vs. Goa Golf Club Pvt Ltd
Date of order: 9th February, 2023

Share of Profit received by co-venturer under a joint venture agreement was not liable to service tax.

FACTS

Respondent M/s Goa Golf Club Pvt Ltd (GGCPL) had entered into a joint venture agreement with M/s Britto Amusement Pvt Ltd (BAPL) to run and operate a casino at the premise of M/s BAPL, on a mutually agreed profit-sharing ratio. SCN was issued demanding service tax on the distribution of share of profit. The respondent submitted the response and the adjudicating authority dropped the demand of service tax. Aggrieved by the same, an appeal was filed by the department contesting the dropping of service tax demand.

HELD

Tribunal after relying upon Circular No. 109/03/2009 dated 23rd February, 2023 held that there was no relationship of the service provider and service receiver with the parties to joint venture agreement. Also, no consideration was received by GGCPL for rendering any service. Consequently, the appeal was decided in the favor of respondent.

7. M/s Lakshmi Electrical Driver Ltd. vs. CCE & ST (Appeals)
2023-TIOL-462-CESTAT-MAD

Whether RCM is applicable under section 66A when the foreign service provider has a 100 per cent subsidiary in India.

FACTS

Appellant, a manufacturer, availed services of technical inspection and certification for which payment was made in foreign currency to a company in Canada who had also issued inspection certificate. However, the said service was performed by a 100 per cent subsidiary of the Canadian company in India. During departmental audit, the revenue raised the issue of non-payment of service tax under Reverse Charge Mechanism (RCM) for payment made to the foreign party who had also issued the certificate of inspection. It was the Revenue’s contention that in terms of sub-section (2) of section 66A, when a person is carrying only business through a permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purpose of this section. On the other hand, as per the appellant, relying on Explanation 1 it was argued that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country, and since the Canadian company had 100 per cent subsidiary in India which had performed the service, RCM was not applicable to them. The appellant in support of their contention, submitted factory inspection reports which were signed by the representatives from the Indian subsidiary company to evidence that services were performed in India by the subsidiary company.

HELD

It was observed that at the relevant time (period of 2009-2010) there was no condition attached for RCM that the Foreign Service provider should not have an office in India. The reports indicate that the inspection service was performed in India though the certificate was issued by the Canadian company. Hence, invoking section 66A of the Finance Act and fastening tax liability on appellant on RCM basis is not legally sustainable. Accordingly, the appeal was allowed.

8. M/s Max Life Insurance Company Ltd. vs. CCE-ST
2023-TIOL-426-CESTAT-DEL
Date of order: 12th April, 2023

Service Tax on interest for reviving a lapsed insurance policy not liable to be paid.

FACTS

The issue in the appeal relates to leviability of service tax on the amount of interest charged by the appellant insurance company on the reinstatement of a lapsed policy. The Service Tax was confirmed for the reasons of lapsed interest charged for revival of the lapsed policy. According to the Revenue, interest was not chargeable when the policy got terminated on account of the failure to make premium payment. Interest was not charged at a uniform rate and according to the revenue, it must be recovered periodically and whereas it was neither charged at a uniform rate nor periodically. It was alleged that it was not interest, and was in the nature of administration charge or a processing fee and hence liable for service tax.

In the said context, the basic concepts of a life policy were examined and more specifically the relevant aspect was that the policy contract allows a policy holder to revive a lapsed policy within a specified period of non-payment of the last premium and subject to payment of overdue premium, along with charges as per terms and conditions specified in the policy. In the instant case, the policy specified the payment of overdue premium along with interest. Thus, a policy does not terminate on non-payment of premium due.

HELD

The order of the Commissioner was held unsustainable as the contract provided for interest only and not for any processing fee or administration charge.

9. M/s. SEW Infrastructure Ltd vs. CCE
2023-TIOL-470-CESTAT-DEL
Date of order: 2nd May, 2023

Composite contracts involving both good and services are necessarily works contracts and were not liable for service tax prior to the introduction of specific entry on 1st June, 2007.

FACTS

Appellant, an infrastructure construction company executed turnkey contracts such as irrigation, power projects, etc. An electric supply company awarded a contract for setting up a power plant to Bharat Heavy Electricals Ltd (BHEL) who in turn sub-contracted a portion of the work to the appellant. The job required the appellant to perform land development involving earth work, excavation, back filling, site levelling, grading and disposal. The Revenue alleged that it was an activity that would be categorised as “site formation and clearance excavation and earthmoving and demolition” as contained in section 65(97a) of the Finance Act, 1994 and hence taxable under section 65(105)(zzza) of the Act. Further, the payment made through CENVAT credit was also rejected on the grounds that invoices on which the credit was availed were not issued to the Bhilai premises of the appellant. However, the credit availed was already reversed by the appellant. The period involved in the case was up to September, 2006.

HELD

a) The work order is a composite contract consisting of goods and services. The contract specified that earth work was to be done by using borrowed good earth and which had to be arranged by the contractor at its own cost. Relying upon Larsen & Toubro’s case 2015-TIOL-187-SC-ST, it was observed that in that case a distinction was drawn between service contracts simplicitor and composite works contracts which would involve both services and goods. It was held in that case that it was a composite contract involving both goods and services as the work order so specified and hence, the service performed was a works contract and not one of “site formation” service. However, only after 1st June, 2007, this service was subjected to service tax. Hence prior to this date, no service tax was payable.

b) As regards availment of CENVAT credit, it was held that since the order finds that no service tax was liable to be paid prior to 1st June, 2007, the appellant cannot avail CENVAT credit. However, interest was not chargeable as the credit was already reversed by the appellant. Thus, penalty and interest were also set aside.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

26. VVF India Ltd. vs. State of Maharashtra
2023 (72) GSTL 444 (S.C.)
Date of order: 3rd December, 2021

Amount paid under protest before passing of assessment order can be adjusted against amount of mandatory pre-deposit for filing an appeal as per section 26(6A) of MVAT Act, 2002.

FACTS

The petitioner was issued a SCN notice demanding payment of tax along with interest. It submitted a reply contesting the said demand. During the course of personal hearing, an amount was deposited comprising of tax and interest under protest. Later, an assessment order was passed by respondent imposing tax along with penalty after adjusting the amount paid under protest. The petitioner filed an appeal against the order of assessment which was rejected by the appellate authority on the ground that payment made under protest could not be considered towards mandatory pre-deposit as per section 26(6A) of MVAT Act, 2002. Further, the Hon’ble High Court also dismissed the petition contending that petitioner was duty bound to deposit 10 per cent of total tax liability after adjusting the amount already paid under protest, prior to the said order. Being aggrieved, petitioner preferred this petition before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that section 26(6A) of MVAT Act, 2002 does not specifically exclude amount deposited under protest for calculation of mandatory pre deposit. Also, taxing statute should be strictly construed as it stands, by adopting the plain and grammatical meaning of the words used which was deviated by the Hon’ble High Court. The appeal was allowed to be restored, subject to depositing 10 per cent of tax disputed amount by the petitioner. The petition was allowed in favor of the petitioner.

II. HIGH COURT

27. Brij Mohan Mangla vs. Union of India
2023 (72) G.S.T.L. 511 (Del.)
Date of order: 23rd February, 2023

Refund cannot be withheld by the department merely because it has decided to file an appeal against order granting refund passed by the appellate authority.

FACTS

The petitioner had filed a refund claim of accumulated ITC. Thereafter, SCN was issued stating why the claimed refund should not be rejected due to non-existence of premises on physical verification and cancellation of GSTIN registration. The petitioner’s explanation was not accepted since he was no longer a registered person. Subsequently, an order rejecting refund claim was passed by respondent. Further, an appeal was filed by the petitioner against order rejecting refund and the same was decided in favor of petitioner by Appellate Authority since it was registered at the time of application of refund. However, the respondent did not process the petitioner’s claim for refund on the grounds that it was decided that an appeal was to be filed against the order passed by the Appellate Authority. Aggrieved by the same, the petitioner preferred this petition before Hon’ble High Court.

HELD

It was held that the Respondent cannot refuse to follow the order granting a refund passed by the Appellate Authority even if department intended to file an appeal. It would debilitate the rule of law if respondents were permitted to withhold implementation of orders passed by the authority. The Respondent was directed to process the petitioner’s claim for refund along with interest and petition was allowed.

28 Y.B. Constructions Pvt Ltd vs Union Of India
2023 (72) G.S.T.L. 332 (Ori.)
Date of order: 22nd February, 2023

Rectification of error while filing GSTR -1 after the time limit was allowed since tax was already deposited with the Government and recipient was entitled to ITC.

FACTS

The petitioner had wrongly shown supplies under B2C instead of B2B while filing outward supply return in GSTR-1 for a period of two years. As a result, recipient was not able to avail ITC. This error was noticed subsequently after the time limit for rectification of returns filed had passed. Thereafter, the petitioner requested the respondent to permit correction in GSTR-1 forms but the same was denied by the respondent stating that deadline for rectification of forms was over and hence permission for the same could not be granted to the petitioner. Being aggrieved by such denial, this petition was filed before Hon’ble High Court.

HELD

Hon’ble High Court relied upon the decision made in the M/s Sun Dye Chem. vs. Assistant Commissioner (ST) [2021 (44) G.S.T.L. 358 (Mad.)] case wherein the petitioner was permitted to file the corrected form. Further, it was held that allowing the petitioner to rectify the mistake would not result in any loss to the respondent, as there was no escapement of tax. The petitioner was thus allowed to resubmit the corrected GSTR-1 manually to respondent and enable their uploading on the GST portal. Consequently, a petition was disposed of in favor of the petitioner.

29 Siddharth Associates vs. State Tax Officer, Ghatak 103 (Gandhidham)
2023 (72) GSTL 299 (Guj.)
Date of order: 11th January, 2023

Registration cancelled by passing a non-speaking order is violative of principle of natural justice, it ought to be restored.

FACTS

The petitioner was a registered person engaged in the business of civil construction work. Registration of the petitioner was suspended by issuing SCN. Subsequently, an order cancelling his registration was passed. Thereafter, an appeal was filed 75 days after expiry of time of three months and hence it got rejected on the grounds of time bar. Hence, no opportunity was granted for personal hearing. Being aggrieved by the order cancelling the registration and not mentioning the reason for such an order, the petitioner preferred a writ petition before this Hon’ble High Court.

HELD

The hon’ble High Court squarely relied upon the decision in Aggarwal Dyeing & Printing Works (Supra) vs. State of Gujarat [2022 (66) GSTL 348 (Guj.)] wherein it was held that it is a settled law that assigning reasons in speaking order are heart and soul of the order and non-communication of the same itself amounts to denial of reasonable opportunity of being heard which results in miscarriage of justice. Accordingly, order cancelling the registration was set aside with a direction to issue fresh notice and pass a speaking order after providing opportunity of personal hearing.

30 Marjit Basumatary vs. The Union of India and Others (Gauhati High Court)
Date of order:7th June, 2023 in WP(C)/2620/2023

“Reasons to believe” examined in lease mining.

FACTS

Petitioner, a works contractor of construction of roads and bridges is also engaged in undertaking mining of sand, stone etc. under license from the forest department of the State of Assam Government against payment of royalty. Consequent upon investigation by DGGI under section 67 of CGST Act triggered based on alleged intelligence for GST payable under reverse charge mechanism on the royalty, audit was conducted under section 65 of the CGST Act and issued a Show Cause Notice proposing demand of GST on various grounds including mismatch of credit, delayed filing of returns, etc. The petitioner challenged legality and validity of the Show Cause Notice as well as the letter issued by DGGI’s office at Gauhati.

The petitioner produced books of account and records before the authorities and submitted that the issue of GST on royalty and/or mining lease was the subject matter of decision by a larger bench of Supreme Court of India and in support, they cited inter alia, the order dated 19th September, 2018 of Gujarat High Court in the case of Gujmin Industry Association vs. UOI R / Special Civil Appl. No.8167/2017 and others and order dated 04th October, 2021 passed by the Supreme Court of India in the case of Lakhwinder Singh vs. UOI W.P.(C) 1076/2021. However, according to the petitioner they did not receive the relied upon documents which they had demanded from the department and hence they were prevented from making exhaustive reply to the Show Cause Notice. Per revenue, the relied upon documents are listed in the Show Cause Notice annexure and the department is not liable to disclose the material giving them “reasons to believe”.

HELD

The department is directed to produce record relating to the Show Cause Notice for the perusal of the Court and copies would not be provided to the petitioner and as an interim measure, the department was directed to defer the proceeding.

31. Instakart Services (P.) Ltd. vs. Sales Tax Officer
[2023] 151 taxmann.com 192 (Delhi)
Date of order: 31st May, 2023

If there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable.

FACTS

The petitioner had inadvertently typed its CGST liability in GSTR-3B of September 2017 as Rs.32,33,36,855 instead of Rs.3,23,36,855. It discharged its liability by using the available balance of Input Tax Credit (ITC) in the electronic credit register; an ITC of Rs.29,10,00,000 was used for discharging the said liability, which the petitioner claims as an apparent error. The petitioner immediately reversed the said ITC that was used for discharging the overstated liability and reported the same in its returns filed for the month of October, 2017. Thereafter, the petitioner filed its GSTR-1 for the month of September, 2017 and correctly stated the tax liability at Rs. 3,23,36,855 instead of Rs.32,33,36,855 as reported earlier. Notwithstanding the fact that the petitioner had rectified the apparent mistake, the department issued a letter informing the petitioner as to the mismatch in the FORM GSTR-2A and FORM GSTR-3B for the relevant financial year. The petitioner clarified the same, however, it appears that the said clarification was not considered and SCN was issued to the petitioner.

HELD

The Hon’ble Court held that if there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable. It is apparent that the explanation provided by the petitioner has not been considered. The Court, therefore, directed the concerned authority to pass an appropriate order pursuant to the show cause notice considering the petitioner’s responses to the show cause notice.

32 Samyak Metals (P.) Ltd vs. UOI[2023]
151 taxmann.com 225 (Punjab & Haryana)
Date of order: 24th May, 2023

When the assessee makes the payment through DRC-03 during the investigation and the department neither issued acknowledgment in DRC-04 nor the show cause notice under sections 73 or 74 of the CGST Act, even after the significant lapse of time, the High Court directed the department to refund the said amount with interest.

FACTS

The business premises of the petitioner were searched. During the course of the search, the department examined the purchase ledger of one party, and the petitioner was forced to deposit tax against the Input Tax Credit claimed by it on the purchases made from the said party along with interest and penalty vide DRC-03. The grievance of the petitioner was that even after depositing the said amount, no GST DRC-04 has been issued by the department and amounts have been recovered from them without passing any adjudicating order or following any procedure under sections 73/74 of the Act.

HELD

The Hon’ble Court observed that the petitioner has deposited the tax in terms of provisions of section 74(5) of the CGST Act. As per Rule 142(2) of the CGST Rules, when a payment is made in FORM GST DRC-03, the proper officer has to issue acknowledgment, accepting the payment made by the said person in FORM GST DRC-04. The Court observed that although payment was made long back, no DRC-04 or notice under section 74(1) was issued to the petitioner. The Court also observed that the department has faulted with the Government’s instruction No.01/2022-23 dated 25th May, 2022 in which it is clarified that there is no bar on the taxpayers for voluntarily making the payments based on ascertainment of their liability on non-payment/short payment of taxes before or at any stage of such proceedings. Since in the present case, the officer did not follow the provisions of Rule 142(2) of the CGST Act nor did he issue any notice under section 74 (1) of the CGST Act, the Court directed the department to return the amount in question to the petitioner along with simple interest at the rate of 6 per cent per annum from the date of deposit till the payment is made

33 Naarjuna Agro Chemicals (P.) Ltd vs. State of UP
[2023] 151 taxmann.com 112 (Allahabad)
Date of order: 20th April, 2023

The scrutiny proceedings of return as well as proceeding under section 74 are two separate and distinct exigencies and issuance of notice under section 61(3), therefore, cannot be construed as a condition precedent to initiation of action under section 74 of the Act.

FACTS

The issue raised before the Court was whether the department is enjoined to issue a notice under section 61(3) of the CGST Act once returns have been submitted by the assessee before initiating action under section 74 of the Act.

HELD

The Hon’ble Court held that section 61 regulates the scrutiny of returns. In the process of scrutiny of such returns, the proper officer has been vested the jurisdiction to examine the return. In case any discrepancies are noticed therein, the proper officer can intimate such discrepancy to the assessee with the object of conferring an opportunity upon the assessee to rectify such discrepancy. The exigency, which is dealt with under section 61 is, therefore, quite distinct and is confined to the scrutiny of returns. In case where no discrepancies in the returns are found but at the later stage of the proceedings the department concludes that tax is not paid properly, it is permissible for the department to take recourse to section 73 or 74 directly. The argument that unless deficiency in return is pointed out to the assessee and an opportunity is given to rectify such deficiency, that the department can proceed under section 74 is not borne out from the statutory scheme and the argument in that regard therefore, must fail.

34 Electro Steel Corporation vs. State of Jharkhand
[2023] 150 taxmann.com 407 (Jharkhand)
Date of order: 31st March, 2023

Whether the assessee’s registration is cancelled on the grounds of excess ITC availment in GSTR-3B as compared to GSTR2A/2B as the petitioner’s vendor did not file GSTR-1/GSTR-3B, the department was directed to verify the facts and revoke the cancellation if no fault lies with the assessee.

FACTS

The petitioner was issued a show cause notice alleging wrongful availment of ITC in respect of inward supplies against invoices raised by one party who had not filed GSTR-1 nor submitted GSTR-3B. The petitioner’s registration was also cancelled on the grounds that the petitioner was availing excess ITC in GSTR-3B than ITC accrued in GSTR2A/2B in violation of section 16 of the JGST Act for the period 01st June, 2020 to 31st October, 2020. The petitioner challenged the said cancellation contending that cancellation on the said grounds cannot be done as the said grounds was introduced by the amendment to Rule 21 which came into force from 22nd December, 2020 i.e. prospectively. The party who did not file GST returns was also made the respondent in this petition.

HELD

After going through the affidavit of the said party, the Hon’ble Court observed that although the said party completed the work, the petitioner did not make the full payment to it and there was a billing dispute between them. The Court stated that the gist of the stand of the respective parties noted herein above creates an impression that taxes were paid by the petitioner purchaser to the said party against the invoices raised in respect of which the petitioner is making a claim for rightful availment of ITC for the said tax period but whether the entire payments were made against those invoices, is something which needs verification at the end of the respondent authorities. The Court therefore held that such a verification be done by the authorities and in case the fault lay with the said party in not depositing taxes, it would be open for authorities to take the decision for revocation of cancellation of registration of the petitioner subject to such conditions it deems fit.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Transactions between Related Parties (RP) and whether the same are at “Arms’ Length” have always been a contentious issue for regulators. Of late, identification of such RP and Related Party Transactions (RPT) has attained a high level of regulatory scrutiny by SEBI, Income Tax and Goods and Service Tax authorities. Auditors have also started closely looking at the identification process of RP and disclosure of RPT by companies. Given below is a Qualified Opinion for transactions with certain parties for which sufficient and appropriate evidence was not available to the satisfaction of the auditors to confirm whether these parties were RP and whether the disclosures for the RPT was as per requirements.

ADANI PORTS AND SPECIAL ECONOMIC ZONE LTD

From Independent Auditor’s Report on audit of annual standalone financial results and review of Quarterly financial results for the year and quarter ended 31st March, 2023

QUALIFIED OPINION AND CONCLUSION

We have (a) audited the Standalone Financial Results for the year ended March 31, 2023 and (b) reviewed the Standalone Financial Results for the quarter ended March 31, 2023 (refer ‘Other Matters’ section below) which were subject to limited review by us, both included in the accompanying “Statement of Standalone Financial Results for the Quarter and Year Ended March 31, 2023 of Adani Ports And Special Economic Zone Limited (“the Company”) being submitted by the Company pursuant to the requirements of Regulation 33 and Regulation 52 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“the Listing Regulations”).

(a) QUALIFIED OPINION ON ANNUAL STANDALONE FINANCIAL RESULTS

In our opinion and to the best of our information and according to the explanations given to us and except for the possible effects of the matter described in Basis for Qualified Opinion / Conclusion section below, the Standalone Financial Results for the year ended March 31, 2023:

is presented in accordance with the requirements of Regulation 33, Regulation 52 and Regulation 54 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended; and

gives a true and fair view in conformity with the recognition and measurement principles laid down in the Indian Accounting Standards and other accounting principles generally accepted in India of the net loss and total comprehensive loss and other financial information of the Company for the year then ended.

(b) QUALIFIED CONCLUSION ON UNAUDITED STANDALONE FINANCIAL RESULTS FOR THE QUARTER ENDED 31ST MARCH, 2023

With respect to the Standalone Financial Results for the quarter ended March 31, 2023, based on our review conducted as stated in paragraph (b) of Auditor’s Responsibilities section below and except for the possible effects of the matter described in Basis for Qualified Opinion / Conclusion section below, nothing has come to our attention that causes us to believe that the Standalone Financial Results for the quarter ended March 31, 2023, has not been prepared in accordance with the recognition and measurement principles laid down in the Indian Accounting Standards and other accounting principles generally accepted in India and has not disclosed the information required to be disclosed in terms of Regulation 33, Regulation 52 and Regulation 54 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the manner in which it is to be disclosed, or that it contains any material misstatement.

BASIS FOR QUALIFIED OPINION / CONCLUSION

The Company has entered into Engineering, Procurement and Construction (EPC) purchase contracts substantially with a fellow subsidiary (contractor) of a party identified in the allegations made in the Short Seller Report. As at 31st March, 2023, a net balance of Rs. 2,457.05 crores is recoverable from this contractor, of which Rs.713.63 crores relate to security deposits paid to the contractor and Rs. 1,501.50 crores in respect of capital advances. The security deposits carry an interest of approximately 8 per cent per annum and are refundable by the contractor either on completion or termination of the project against which the security deposit was given by the Company. Security deposits totaling Rs.713.63 crores have been given prior to 1st April, 2022, of which security deposits amounting to Rs.253.63 crores relate to projects which have not commenced as on 31st March, 2023. The Company has represented to us that the contractor is not a related party.

Additionally, there were financing transactions (including equity) with/by certain other parties identified in the allegations made in the Short Seller Report, which the Company has represented to us were not related parties. As on 31st March, 2023, all receivable and payable amounts were settled including interest and there were no outstanding balances.

Subsequent to the year-end, the Company re-negotiated the terms of sale of its container terminal under construction in Myanmar (held through a subsidiary audited by other auditors) with Solar Energy Ltd, a company incorporated in Anguilla. The Company has represented to us that the buyer is not a related party. The carrying amount of the assets (classified as held for sale) was Rs. 1,752.92 crores. The sale consideration was revised from Rs. 2,015 crores (USD 260 million) to Rs. 246.51 crores (USD 30 million), which has been received, and an impairment loss of Rs. 1,558.16 crores has been recognised as an expense in the Profit & Loss Account.

The Company has represented to us that there is no effect of the allegations made in the Short Seller Report on the Statement based on their evaluation and after consideration of a memorandum prepared by an external law firm on the responses to the allegations in the Short Seller Report issued by the Adani group. The Company did not consider it necessary to have an independent external examination of these allegations because of their evaluation and the ongoing investigation by the Securities and Exchange Board of India as directed by the Hon’ble Supreme Court. The evaluation performed by the Company, as stated in Note 11 to the Statement, does not constitute sufficient appropriate audit evidence for the purposes of our audit. In the absence of an independent external examination by the Company and pending completion of investigation, including matters referred to in the Report of the Expert Committee constituted by the Hon’ble Supreme Court of India as described in Note 11 to the Statement, by the Securities and Exchange Board of India of these allegations, and in respect of the sale of asset described in the immediately preceding paragraph, we are unable to comment whether these transactions or any other transactions may result in possible adjustments and/or disclosures in the Statement in respect of related parties, and whether the Company should have complied with the applicable laws and regulations.

We conducted our audit in accordance with the Standards on Auditing (“SAs”) specified under section 143(10) of the Companies Act, 2013 (“the Act”). Our responsibilities under those Standards are further described in paragraph (a) of Auditor’s Responsibilities section below. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India (“the ICAI”) together with the ethical requirements that are relevant to our audit of the Standalone Financial Results for the year ended March 31, 2023 under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI’s Code of Ethics. Except for the matter described in the Basis for Qualified Opinion/Conclusion section above, we believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our qualified audit opinion.

FROM NOTES BELOW STANDALONE FINANCIAL RESULTS FOR THE QUARTER AND YEAR ENDED 31ST MARCH, 2023 (EXTRACTS)

11. During the quarter ended March 31, 2023, a short seller report was published in which certain allegations were made involving Adani Group Companies, including the Company and its subsidiaries. A writ petition was filed in the matter with the Hon’ble Supreme Court (“SC”), and during hearing the Securities and Exchange Board of India (“SEBI”) has represented to the SC that it is investigating the allegations made in the short seller report for any violations of the various SEBI Regulations. The SC had constituted an expert committee for assessment of the extant regulatory framework and share recommendations. The SC had constituted an expert committee for assessment of the extant of regulatory framework including volatility assessment on Adani stocks, investigate whether there have been contraventions / regulatory failures on minimum shareholding and related party transactions pertaining to Adani group.

The expert committee, post the reporting date, issued its report on the given remit, wherein no regulatory failures are observed, while SEBI continues its investigations.

Separately, to uphold the principles of good governance, Adani Group has undertaken review of transactions (including those for the Company and its subsidiaries) with parties referred in the short seller’s report including relationships amongst other matters and obtained opinions from independent law firms. These opinions confirm that the Company and its subsidiaries are in compliance with the requirements of applicable laws and regulations. Considering the matter is sub-judice at SC, no additional action is considered appropriate and pending outcome of the SEBI investigations as mentioned above, financial results do not carry any adjustments.

14. The company has been working with the contractor for its capital projects over a decade. The payment terms have been negotiated to secure contractor capacity, reduced cost / overruns and improved operational efficiency of the projects. The contractor has successfully delivered the projects without defaults and with highest operating credentials. The net balance outstanding on such contracts as on reporting date stood at Rs. 2,457.05 crore, which includes purchase contracts worth Rs. 1,501.50 crore and security deposits of’ Rs. 713.63 crore carrying interest @ 8% p.a. and other receivables of’ Rs. 241.92 crore. The security deposits approximate to about 20% of the cost of projects under execution. Of the security deposits, deposits for which projects are in progress amount Rs. 460 crore and the balance are for projects under engineering and design stage. The security deposits are refundable either on completion or termination of the project against which the said security deposit was given and in every instance the deposits were returned when due along with interest. The company has also obtained an independent opinion from a reputed law firm that the contractor is an unrelated party.

BCAJ Admin

Glimpses of Supreme Court Rulings

Tax deducted at source (TDS) – Belated payment of TDS – Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person / Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B and failure to pay the whole or any part of the tax is dealt by Section 271C(1)(b) but it does not speak about belated remittance of TDS – No penalty is leviable on belated remittance of TDS – In such cases, prosecution can be launched in appropriate cases in terms of Section 276B.

40. US Technologies International Pvt Ltd vs. CIT
(2023) 453 ITR 644 (SC)

From 1st January, 2002 to February, 2003, the Appellant – Assessee, engaged in a software development business at Techno Park, Trivandrum which employed about 700 employees, deducted tax at source (TDS) in respect of salaries, contract payments, etc., totalling Rs.1,10,41,898 for A.Y. 2003-04. In March, the Assessee remitted part of the TDS being R38,94,687 and balance of Rs.71,47,211 was remitted later. Thus, the period of delay ranged from 05 days to 10 months.

On 10th March, 2003, a survey conducted by the Revenue at Assessee’s premises noted that TDS was not deposited within the prescribed dates under Income Tax Rules (IT Rules).

On 2nd June, 2003, Income Tax Officer (ITO) vide order under section 201(1A) of the Act levied penal interest of Rs. 4,97,920 for the period of delay in remittance of TDS.

On 9th October, 2003, the ACIT issued a show cause notice proposing to levy penalty under section 271C of the amount equal to TDS. The Assessee replied to the said show cause notice vide reply dated 28th October, 2003.

On 6th November, 2003, another order under section 201(1A) was passed levying the penal interest of Rs. 22,015. On 10th November, 2003, the ACIT vide order under section 271C levied a penalty of Rs. 1,10,41,898 equivalent to the amount of TDS deducted for A.Y. 2003-04. That order of the ACIT levying the penalty under section 271C came to be confirmed by the High Court. The High Court vide impugned judgment and order dismissed the appeal preferred by the Assessee by holding that failure to deduct/remit the TDS would attract penalty under section 271C of the Act, 1961.

Further, by order(s) dated 26th September, 2013, the ACIT by way of orders under section 271C levied penalty equivalent to the amount of TDS deducted for A.Ys. 2010-11, 2011-12 and 2012-13 on the grounds that there was no good and sufficient reason for not levying the penalty.

The CIT (Appeals) dismissed the Assessees’ appeals. By common order dated 1st June, 2016, the ITAT allowed the Assessees’ appeals by holding that imposition of penalty under section 271C was unjustified and reasonable causes were established by the Assessee for remitting the TDS belatedly. By the common judgment and order the High Court allowed the Revenue’s appeals relying upon its earlier judgment.

According to the Supreme Court, the questions posed for its consideration were of belated remittance of the TDS after deducting the TDS, whether such an Assessee is liable to pay penalty under section 271C of the Act, 1961? And, as to what is the meaning and scope of the words “fails to deduct” occurring in Section 271C(1)(a) and whether an Assessee who caused delay in remittance of TDS deducted by him, can be said a person who “fails to deduct TDS”?

The Supreme Court noted that all these cases were with respect to the belated remittance of the TDS though deducted by the Assessee.

According to the Supreme Court, this was, therefore, a case of belated remittance of the TDS though deducted by the Assessee and not a case of non-deduction of TDS at all.

The Supreme Court observed that as per Section 271C(1)(a), if any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVIIB then such a person shall be liable to pay by way of penalty a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.

So far as failure to pay the whole or any part of the tax is concerned, the same would be with respect to Section 271C(1)(b), which was also not the case here.

Therefore, Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person/Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B. The words used in Section 271C(1)(a) are very clear and the relevant words used are “fails to deduct.” It does not speak about belated remittance of the TDS.

Therefore, on plain reading of Section 271C of the Act, 1961, the Supreme Court held that no penalty is leviable on belated remittance of the TDS after the same is deducted by the Assessee.

The Supreme Court observed that wherever the Parliament wanted to have the consequences of non-payment and/or belated remittance/payment of the TDS, the Parliament/Legislature has provided the same like in Section 201(1A) and Section 276B of the Act.

So far as the reliance placed upon the CBDT’s Circular No. 551 dated 23rd January, 1998 by Revenue, the Supreme Court observed that the said circular as such favoured the Assessee. According to the Supreme Court, on fair reading of said CBDT’s circular, it talks about the levy of penalty on failure to deduct tax at source. It also takes note of the fact that if there is any delay in remitting the tax, it will attract payment of interest under section 201(1A) of the Act and because of the gravity of the mischief involved, it may involve prosecution proceedings as well, under section 276B of the Act. If there is any omission to deduct the tax at source, it may lead to loss of Revenue and hence remedial measures have been provided by incorporating the provision to ensure that tax liability to the said extent would stand shifted to the shoulders of the party who failed to effect deduction, in the form of penalty. On deduction of tax, if there is delay in remitting the amount to Revenue, it has to be satisfied with interest as payable under section 201(1A) of the Act, besides the liability to face the prosecution proceedings, if launched in appropriate cases, in terms of Section 276B of the Act. According to the Supreme Court, even the CBDT has taken note of the fact that no penalty is envisaged under section 271C for belated remittance/payment/deposit of the TDS.

The Supreme Court quashed and set aside the order of the High Court and the question of law on interpretation of Section 271C of the Income Tax Act was answered in favour of the Assessee and against the Revenue. It was specifically observed and held that on mere belated remitting the TDS after deducting the same by the concerned person/Assessee, no penalty shall be leviable under section 271C of the Income Tax Act.

BCAJ Admin

Regulatory Referencer

DIRECT TAX

The Central Government notifies that
all the provisions of the Agreement and Protocol for the elimination of
double taxation and the prevention of fiscal evasion and avoidance with
respect to taxes on income between India and Chile shall be given effect
to in the Union of India – Notification No. 24/2023 dated 3rd May, 2023

COMPANIES ACT, 2013

1. Establishment of C-PACE to provide hassle-free filing, timely and process-bound striking off companies from MCA Registry: The MCA vide Notification No. S.O. 1269(E) dated
17th March, 2023 has established the Centre for Processing Accelerated
Corporate Exit (C-PACE) to facilitate the quick, transparent and
process-bound exit of companies. With the establishment of C-PACE, the
striking-off process of companies has been centralised, resulting in
reduced stress on the MCA Registry. Also, this initiative is expected to
ensure hassle-free filing and timely striking off names of companies
from the Register. [ Press release dated 13th May. 2023]

2. MCA brings more clarity on filing of overdue financials before applying
for striking-off: The authority has notified an amendment to strike-off
rules. The amendment provides more clarity on filing requirements of
overdue financials before applying for strike-off. As per the amended
norms, all pending and overdue financial statements under section 137
and overdue annual returns under section 92, must be filed up to the end
of the financial year in which the company ceased to carry its business
operations before applying for strike-off. [Notification no. G.S.R.
354(E), dated 10th May, 2023]

SEBI

1 Guidelines issued regarding exclusion of investors from investing in schemes of AIFs:
SEBI has issued guidelines regarding exclusion of an investor from an
investment in an AIF. As per the new norms, an AIF may exclude an
investor from participating in a particular investment if the manager is
satisfied that participation of such an investor in the investment
opportunity would lead to the scheme of AIF being in violation of
applicable law or regulation or would result in material adverse effect
on scheme of an AIF. [Circular No. SEBI/HO/AFD-1/POD/P/CIR/2023/053,
dated 10th April, 2023]

2 Introduction of a direct plan allowing investors to invest in AIFs without distribution fee: With a
view to providing flexibility to investors for investing in AIFs, SEBI
has introduced a direct plan for schemes of AIFs. Such a direct plan
shall not entail any distribution fee/placement fee. Further, SEBI has
prescribed the Trail model for the distribution of commission in AIFs.
They shall disclose the distribution/placement fee, to the investors at
the time of on-boarding. Also, Category III AIFs shall charge
distribution fee/placement fee to investors only on an equal trail
basis. [Circular No. SEBI/HO/AFD/POD/CIR/2023/054, dated 10th April,
2023]

3 Master Circular for “Market Infrastructure Institutions”: The SEBI had issued multiple circulars, directions, and operating instructions for Market Infrastructure Institutions (MIIs) on a
regular basis for necessary compliance. In order to ensure that all
market participants find all provisions at one place, master circular
for MIIs has been prepared. A master circular is a compilation of all
the existing circulars, and directions issued and applicable as on 31st
March of every year, segregated subject-wise. [Circular No.
SEBI/HO/MRD/POD 3/CIR/P/2023/58, dated 20th April, 2023]

4. AMCs to file all final offer documents in digital format: SEBI has
directed all Asset Management Companies (AMCs) to file their final offer
documents in digital form only by emailing the same to a dedicated
email address i.e., imdsidfiling@sebi.gov.in. Further, there will be no
need to file physical copies of the same with SEBI. Also, all new fund
offers (NFOs) must remain open for subscription for at least three
working days. The provisions of this circular shall be applicable from
1st May, 2023 [Circular No. SEBI/HO/IMD/IMD-RAC-2/P/CIR/2023/60, dated
25th April, 2023]

5. Stock Brokers/Clearing Members barred from creating bank guarantees on clients’ funds: The SEBI has barred Stock Brokers and Clearing Members from pledging their clients’ funds with
banks. Presently, stock brokers and clearing members pledge their
clients’ funds with banks, which in turn issue bank guarantees (BG) to
clearing corporations for higher amounts. Now, from 1st May, 2023, no
new bank guarantees shall be created out of clients’ funds by stock
brokers. Also, existing BGs created out of clients’ funds must be wound
down by 30th September, 2023 [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/061, dated 25th April, 2023]

6. Payment for Mutual Funds on behalf of a minor to be made via
Minor/Parent/Legal guardian’s bank account: Earlier, SEBI prescribed a
uniform process to be followed by Asset Management Companies (AMCs)
regarding investments made in the name of a minor through a guardian.
Now, SEBI has directed that payment for investments in mutual funds by
any mode shall be accepted from the minor’s bank account, the parent or
legal guardian of the minor, or from a joint account of the minor with
the parent. Also, all AMCs are required to make changes to facilitate
mutual fund transactions effective 15th June, 2023. [Circular No.
SEBI/HO/IMD/POD-II/CIR/P/2023/0069, dated 12th May, 5-2023]

FEMA AND IFSCA REGULATIONS

1. IFSCA prescribes reporting requirements for IFSC Insurance Offices
IFSCA has issued the IFSCA (Assets, Liabilities, Solvency Margin and Abstract
of Actuarial Report for Life Insurance Business) Regulations, 2023 to
specify the requirements related to capital, solvency and submission of
abstract of actuarial report by an IFSC Insurance Office for undertaking
Life Insurance Business. [Notification No. IFSCA/2022-23/GN/REG039,
dated 19th April, 2023]

2. IFSCA prescribes regulatory framework for IFSC Insurance Offices
IFSCA has prescribed IFSCA (Management Control, Administrative Control and
Market Conduct Of Insurance Business) Regulations, 2023 with the aim to
put in place the regulatory framework related to Management Control,
Administrative Control and Market Conduct of insurance business carried
out by an IIFSC Insurance Office or International Insurance Intermediary
Offices. It also lists several IRDAI regulations, circulars or
guidelines which cease to apply in IFSCs on promulgation of these
Regulations. [Notification F.No. IFSCA/2022-23/GN/REG035 dated 26th
April, 2023]

3. Resident Individuals’ idle funds in Foreign Currency Account in IFSC:
Resident Individuals who have a Foreign Currency Account (FCA) in IFSCs had to
repatriate any funds lying idle in the account for a period up to 15
days from the date of its receipt to their domestic account. On a review
and with an objective to align the LRS for IFSCs vis-à-vis other
foreign jurisdictions, RBI has now withdrawn this condition and the
holding period shall now be governed by the provisions of the scheme as
contained in the Master Direction on LRS. [A.P. (DIR SERIES) Circular
No. 3, dated 26th April, 2023]

4. MoF revises a list of designated officers for adjudication of penalties under FEMA:

The revised list is as under:

Sl. No.	Designation of Officers	Monetary limit
(1)	(2)	(3)
(1)	Special Director of Enforcement	Cases involving amount exceeding rupees twenty five crores.
(2)	Additional Director of Enforcement	Cases involving amount upto rupees twenty five crores but not less than five crores.
(3)	Joint Director of Enforcement	Cases involving amount upto rupees twenty five crores but not less than five crores
(4)	Deputy Director of Enforcement	Cases involving amount upto rupees five crores and not less than two crores
(5)	Assistant Director of Enforcement	Cases involving amount not exceeding rupees two crores.

[Notification No. S.O. 2128(E) [F. NO. K-11022/5/2023-AD.ED], dated 8th May, 2023]

5. Levy of charges on forex prepaid cards, etc.:

RBI has advised that fees/charges levied by Authorised Persons which are payable in India on use of International Debit Cards/Store Value Cards/Charge Cards/Smart Cards have to be denominated and settled in Rupees only and not in foreign currency. [A.P. (DIR SERIES 2023-24) Circular No. 04, dated 9th May, 2023]

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. It’s about Beverages – A GST Perspective – Indirect Tax Laws Study Circle Meeting

In a meeting organised on 8th May, 2023, CA Gaurav Kenkre, group leader of the BCAS Indirect Tax Laws Study Circle presented six crisp and interesting case studies on GST rates, classification and input tax
credit on supply of Beverages. The presentation and discussion broadly covered the intricacies on the following topics:

1. Eligibility of Input Tax Credit on purchase of various beverages (including water) for consumption of staff, customers, etc.,

2. Charge of GST on Cocktails (Mix of alcoholic and non-alcoholic drink) in a Pub,

3. Charge of GST on Cover Charge towards unlimited alcoholic drinks and food,

4. Reversal of Input Tax Credit towards use of non-alcoholic drinks along with alcoholic drinks,

5. HSN classification of carbonated fruit beverages,

6. HSN classification of aerated tea beverages.

Around 102 participants across India benefitted by actively participating in the meeting held under the mentorship of Adv. A Jatin Christopher.

2. Controversies under Liberalised Remittance Scheme (‘LRS’) – FEMA Study Circle Meeting

On 28th April, 2023, a meeting of the FEMA Study Circle was organised. The meeting was led by CA Bhavya Gandhi, group leader. The topic for the meeting was “Controversies under Liberalised Remittance Scheme.”

The meeting focused on issues arising from the amendments to the LRS in August 2022, especially the restriction on holding idle funds abroad beyond 180 days, clubbing of remittances for purchase of immovable property abroad and insertion of definition of “bonafide business activity.” Other existing controversies under LRS were also taken up like extending loans under LRS, remittance out of borrowed funds, etc. The relevant provisions and issues under each controversy were presented by the speaker along with his views on the same.

Held at the Society’s premises, the meeting was attended by about 15 members in-person and over 90 members virtually. The members raised and discussed several queries and also shared their views and practical experiences.

3. GST implications on Digital Assets – Indirect Tax Laws Study Circle Meeting

The Indirect Tax Laws Study Circle of the Society held a meeting to discuss the Goods and Services Tax (‘GST’) implications of digital assets. The meeting was led by CA. Hanish S, discussing six case studies that addressed the practical issues of virtual digital assets. The presentation and discussion covered the following topics:

1. Understanding whether Virtual Digital Assets/Crypto Currency are currency as per GST Law,

2. Whether purchase or sale through mobile app tantamount to supply,

3. If consideration of supply is discharged in crypto currency whether it results in a separate supply,

4. Can crypto assets or virtual digital assets be attached as property of taxable person by the department in case of non-recovery of taxes or other dues,

5. GST implications on mining rewards w.r.t supply, employer-employee relationship and subsequently Schedule I effect and overall GST Implications.

6. Can illegal income be subjected to tax like Income tax Act.

74 participants from all over India took an active part in the meeting held under the mentorship of Adv. K. Vaitheeswaran. Participants expressed gratitude for the immense work of the group leader and expert inputs by the mentor.

4. – Season 2

In the words of Galileo Galilei, “You cannot teach a man anything. You can only help him discover it within himself.”

Seminar, the Public Relations & Membership Development Committee of the Society organized the second season of the meeting with an aim to nurture young professionals and give them an opportunity to explore the possibilities that await them. The meeting was held under the guidance of senior professionals who in turn derived the satisfaction of having mentored young professionals and contributed to their lives.

The Committee invited registrations from both members and non-members aged thirty-five and below. It also reserved a few seats for women participants with no age limit. The mentees performed their own SWOT analysis and shared their questions and concerns at the time of registration. They were also requested to submit their CV to enable the mentor to prepare better for the online mentoring session.

Season 2 of the special series “” saw twenty-three mentors from the Core Group help twenty-nine mentees introspect, reflect and discover the potential within themselves. These twenty-nine mentees hailed from six states and included three rank-holders.

Due care was taken to pair the right mentor with the mentee, and the online session was scheduled at their mutual convenience. In most cases, the session went well beyond the planned sixty minutes, with both the mentor and mentee enjoying the conversation and identifying the prospects that lie ahead for the mentee.

The feedback obtained post the session from both the mentees and mentors to this unique program was exceptionally encouraging.

BCAJ Admin

Miscellanea

I. BUSINESS

1 Analysis – Audiobook narrators say AI is already taking away business

As people brace for the disruptive impact of artificial intelligence on jobs and everyday living, those in the world of audiobooks say their field is already being transformed.

AI has the ability to create human-sounding recordings — at assembly-line speed — while bypassing at least part of the services of the human professionals who for years have made a living with their voices.

Many of them are already seeing a sharp drop off in business.

Tanya Eby has been a full-time voice actor and professional narrator for 20 years. She has a recording studio in her home.

But in the past six months, she has seen her workload fall by half. Her bookings now run only through June, while in a normal year, they would extend through August.

Many of her colleagues report similar declines.

While other factors could be at play, she told AFP, “It seems to make sense that AI is affecting all of us.”

There is no label identifying AI-assisted recordings as such, but professionals say thousands of audiobooks currently in circulation use “voices” generated from a databank.

Among the most cutting-edge, DeepZen offers rates that can slash the cost of producing an audiobook to one-fourth, or less, that of a traditional project.

The small London-based company draws from a database it created by recording the voices of several actors who were asked to speak in a variety of emotional registers.

“Every voice that we are using, we sign a license agreement, and we pay for the recordings,” said Kamis Taylan, CEO, DeepZen.

For every project, he added, “we pay royalties based on the work that we do.”

Not everyone respects that standard, said Eby.

“All these new companies are popping up who are not as ethical,” she said, and some use voices found in databases without paying for them.

“There’s that gray area” being exploited by several platforms, Taylan acknowledged.

“They take your voice, my voice, five other people’s voices combined that just creates a separate voice… They say that it doesn’t belong to anybody.”

All the audiobook companies contacted by AFP denied using such practices.

Speechki, a Texas-based start-up, uses both its own recordings and voices from existing databanks, said CEO Dima Abramov.

But that is done only after a contract has been signed covering usage rights, he said.

The five largest US publishing houses did not respond to requests for comment.

But professionals contacted by AFP said several traditional publishers are already using so-called generative AI, which can create texts, images, videos and voices from existing content — without human intervention.

“Professional narration has always been, and will remain, core to the audible listening experience,” said a spokesperson for that Amazon subsidiary, a giant in the American audiobook sector.

“However, as text-to-speech technology improves, we see a future in which human performances and text-to-speech generated content can coexist.”

The giants of US technology, deeply involved in the explosively developing field of AI, are all pursuing the promising business of digitally narrated audiobooks.

Early this year, Apple announced it was moving into AI-narrated audiobooks, a move it said would make the “creation of audiobooks more accessible to all,” notably independent authors and small publishers.

Google is offering a similar service, which it describes as “auto-narration.”

“We have to democratise the publishing industry, because only the most famous and the big names are getting converted into audio,” said Taylan.

“Synthetic narration just opened the door for old books that have never been recorded, and all the books from the future that never will be recorded because of the economics,” added Speechki’s Abramov.

Given the costs of human-based recording, he added, only some 5 per cent of all books are turned into audiobooks.

But Abramov insisted that the growing market would also benefit voice actors.

“They will make more money, they will make more recordings,” he said.

“The essence of storytelling is teaching humanity how to be human. And we feel strongly that should never be given to a machine to teach us about how to be human,” said Emily Ellet, an actor and audiobook narrator who cofounded the Professional Audiobook Narrators Association (PANA).

“Storytelling,” she added, “should remain human entirely.”

Eby underlined a frequent criticism of digitally generated recordings.

When compared to a human recording, she said, an AI product “lacks in emotional connectivity.”

Eby said she fears, however, that people will grow accustomed to the machine-generated version, “and I think that’s quietly what’s kind of happening.”

Her wish is simply “that companies would let listeners know that they’re listening to an AI-generated piece… I just want people to be honest about it.”

(Source: International Business Times – By Thomas URBAIN – 13th May, 2023)

II. WORLD NEWS

1 G7 Finance chiefs move to diversify supply chains

The G7 plans to launch a partnership scheme to diversify supply chains this year, ministers from the group said Saturday following finance talks in Japan ahead of a major summit next week.

The ministers did not directly mention efforts to reduce reliance on trade with China or Russia as motivation for the new framework, which focuses on clean energy technology.

But after meeting her Japanese counterpart, US Treasury Secretary Janet Yellen pointed to recent shocks to the global economy. “Spillovers from Russia’s war against Ukraine and disruptions caused by the pandemic have made clear the importance of diversified and resilient supply chains,” she told reporters.

The Group of Seven’s finance ministers and central bank chiefs highlighted the “urgent need to address existing vulnerabilities within… highly concentrated supply chains”.

In a joint statement, they said they hoped to launch the partnership in collaboration with the World Bank “by the end of this year at the latest”.

The scheme, dubbed RISE — Resilient and Inclusive Supply-chain Enhancement — builds on guidance released in April, and will offer interested developing countries “finance, knowledge and partnerships”, the ministers said.

Their three-day meeting in Niigata, a coastal city in central Japan, took place just days before the leaders of the group of major developed economies gather from 19-20 May in Hiroshima.

Support for Ukraine and the G7’s relationship with China is expected to be high on the agenda at the summit, along with nuclear disarmament and action on climate change.

(Source: International Business Times – By AFP News – 13th May, 2023)

BCAJ Admin

Allied Laws

10 Indian Oil Corporation Ltd vs.

Sudera Realty Pvt Ltd

AIR 2023 SUPREME COURT 5077

Date of order: 6th September, 2022Lease – Tenancy after the expiry of lease – liable to Mesne profits [Code of Civil Procedure, 1908, S 2(12), O. 20, R. 12; Transfer of Property Act, 1882, Section 111(a)]

FACTS

The Defendant is the original Plaintiff. It was the case of the Defendant that the current Appellant was in wrongful possession of its property and thus claimed mesne profits. The Appellants on their reading of the lease agreements found that they were not illegally occupying the said property. The Ld. Single judge found the appellant entitled to pay mesne profits.Hence, the present appeal.

HELD

A tenant continuing in possession after the expiry of the lease may be treated as a tenant at sufferance, which status is a shade higher than that of a mere trespasser, as in the case of a tenant continuing after the expiry of the lease, his original entry was lawful. But a tenant at sufferance is not a tenant by holding over. While a tenant at sufferance cannot be forcibly dispossessed, that does not detract from the possession of the erstwhile tenant turning unlawful on the expiry of the lease. Thus, the appellant while continuing in possession after the expiry of the lease became liable to pay mesne profits.The appeal was dismissed.

11 Chhanda Choudhury and another vs.

Bimalendu Chakraborty and another

AIR 2023 TRIPURA 01

Date of order: 12th September, 2022Partnership – Dissolution of the firm – Dispute regarding the determination of shares – Chartered Accountant appointed by the Court – Report of the Chartered Accountant upheld. [Indian Partnership Act, 1932, Sections 43, 48]

FACTS

The Original plaintiff, a partner, sought for dissolution of the firm and rendering of accounts and approached the Civil Judge for the same. The Trial Court appointed a Chartered Accountancy firm for the determination of the shares and accordingly passed an order.The plaintiff preferred an appeal before the District Judge. The District Judge quashed the order of the trial court with respect to the determination of shares.

Hence, the present Appeal by the Original Respondents.

HELD

Section 48 of the Indian Partnership Act, 1932 prescribes the mode for settlement of accounts after the dissolution of the partnership and the same has to be followed. The order of the District Court is modified upholding the report filed by the Chartered Accountant.The Appeal was allowed.

12 Sasikala vs. Sub Collector and another

AIR 2022 MADRAS 323

Date of order: 2nd September, 2022

Sale Deed – Unilateral cancellation by the Registrar – Illegal [Constitution of India, Art. 226; Registration of Act, 1908, Section 22A]

FACTS

The Petitioner’s father settled some of his immovable property to his son and daughter. It is stated that the same was unconditional and out of love & affection. Later, he cancelled the settlement deed. The cancellation deed was registered unilaterally and not mutually agreed upon by the parties.A Writ Petition was filed challenging the cancellation.

HELD

After the insertion of section 22A of the Registration Act, 1908, in the State of Tamil Nadu, every sale deed and cancellation of the same has to be mutually entered into by the parties. Therefore, the registrar was not correct in unilaterally cancelling a transfer deed. A unilateral cancellation is only possible in cases of conditional gifts which was not the case in the present petition. The deed of cancellation was quashed.The Writ Petition was allowed.

13 Leelamma Eapen vs. Dist. Magistrate and others

AIR 2022 KERALA 151

Date of order: 28th March, 2022Maintenance – includes ensuring a life of dignity – not merely a monthly allowance. [Maintenance and Welfare of Parents and Senior Citizens Act, 2007, Sections 7, 9, 2(b), 5]

FACTS

The Petitioner’s husband executed a will whereby life interest in the properties was created in her favor and after her death, the property was to devolve absolutely in favor of her son.

The Petitioner filed an application before the Maintenance Tribunal complaining that her son and daughter-in-law were not permitting her to stay in the house or collect usufructs (benefits) from the property. The Tribunal passed an order in favor of the petitioner. However, the Petitioner again approached the Tribunal stating that the directions of the Tribunal were not enforced.

The enforceability of the order of the Tribunal is the issue in the Writ Petition.

HELD

A senior citizen including a parent who is unable to maintain himself from his own earning or out of the property owned by him alone is entitled to be maintained. When a Senior Citizen or parent who has earnings makes an application to the Maintenance Tribunal contending that her right to earning is obstructed by the son who has a statutory obligation to maintain the parent, the Maintenance Tribunal has to ensure that the Senior Citizen or parent is able to maintain herself from her earnings. The object of the Act is not only to provide financial support but also to prevent the financial exploitation of senior citizens and parents by relatives or children.It was further observed that technicalities should not be given importance in such cases.

The Writ petition was allowed.

14 Bondada Purushotham vs.

Satta Dandasi and others

AIR 2022 (NOC) 854 (AP)

Date of order: 27th January, 2022Registration – Validity of unregistered sale deed – No perpetual injunction. [Specific Relief Act, 1963, Section 38; Registration Act, 1908, Section 17]

FACTS

The appellant/original plaintiff filed a suit for perpetual injunction restraining the defendant from interfering and enjoying the property of the plaintiff. The claim is based on two unregistered sale deeds. On the other hand, the case of the defendant is that the said property belonged to his grandfather and he had only one child i.e., his mother. On the death of the grandfather, his mother being only daughter got the same. Upon her death, he, being the only son and legal heir continued to enjoy this land.

The trial court dismissed the suit for injunction. The Appeal Court confirmed the findings of the trial court and dismissed the appeal.

On the second appeal

HELD

The possession of these lands was claimed under documents which were unregistered sale deeds. There is no explanation offered by the plaintiffs as to why the same are unregistered. Being an integral part of the transaction whereby the appellant claimed the sale of these lands in their favor, it cannot be dissected and considered dehors right and interest to this property. Therefore, possession claimed under the said unregistered deeds cannot be deemed as a collateral factor which shields these transactions from the application of bar under Section 49 of the Indian Registration Act. Therefore, the documents are clearly inadmissible in evidence in terms of Section 17(1) of the Indian Registration Act.The Appeal was dismissed.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

National Financial Reporting Authority (NFRA) had on 29th March, 2023 issued an Order (14 pages) under section 132 of the Companies Act, 2013 and NFRA Rules, 2018 in respect of Complaint made by Brigadier Vivek Chhatre against Mahindra Holidays Resorts India Ltd (MHRIL). In terms of the said order, NFRA issued certain directions to the company and its auditor. Given below is an extract of the said directions and disclosures by the company in its results declared on 25th April, 2023 for the year ended 31st March, 2023.

EXTRACT OF ORDER DATED 29TH MARCH, 2023

We pass the following directions to the MHRIL and its auditor:

1. MHRIL shall, going forward, thoroughly and proactively review its accounting policies and practices in respect of segment reporting, as they relate to application of Ind AS 108; and also Ind AS 115, keeping in mind our above findings relating to deficiencies in accounting disclosures. Following such a review, MHRIL shall take necessary measures to address the deficiencies pointed out in the foregoing paragraphs and effect changes in the disclosures in its financial statements in the letter and spirit of the disclosure as required under the Companies Act and the SEBI LODR. MHRIL shall complete this process by 30th June, 2023.

2. MHRIL’s review and the changes brought in its accounting practices and reporting should be properly documented, especially with respect to the CODM’s exercise of monitoring and control, both at the aggregated and disaggregated, granular level, and such documentation shall be verified by MHRIL’s statutory auditor who shall complete this process by 31st July, 2023.

3. MHRIL and its statutory auditor shall report separately to NFRA the results of their review and the changes effected in the MHRIL’s accounting policies and practices. Based on its own review of the reports of MHRIL and its statutory auditor, NFRA will take further course of action as provided under the existing provisions of the CA-2013 and the NFRA Rules.

CODM’s -Chief Operating Decision Maker

FROM AUDITORS’ REPORT ON STANDALONE FINANCIAL RESULTS

Emphasis of Matter

We draw attention to Note 6 to the standalone financial results which explains that the National Financial Reporting Authority (‘NFRA’) has found that the current accounting policies and practices of the Company in respect of application of Ind AS related to segment reporting and revenue recognition need a review and the Company is required to take necessary measures, if any, resulting from such review by 30th June, 2023. The note also states that basis the current assessment by the Company considering the information available as on date, the existing accounting policies and practices are in compliance with respective Ind AS.

Our opinion is not modified in respect of this matter.

FROM NOTES BELOW FINANCIAL RESULTS

6. The Company has received an order (‘the Order’) from National Financial Reporting Authority (‘NFRA’) on 29th March, 2023 wherein NFRA has made certain observations on identification of operating segments by the Company in compliance with requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight-line basis over the membership period. As per the order received from NFRA, the Company is required to complete its review of accounting policies and practices in respect of disclosure of operating segments and timing of recognition of revenue from customers and take necessary measures to address the observations made in the Order by 30th June, 2023. The Company is conducting a review as required by the Order. As on 31st March, 2023, the management has assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company, after considering the information available as on date; the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly have been applied by the Company in the preparation of these financial results.

BCAJ Admin

Service Tax

TRIBUNAL

3 Punjab National Bank vs.
Commissioner, CGST Division H, Jaipur
2023 (71) G.S.T.L 290/4 (Tri.-Del.)
Date of order: 12th January, 2023

CENVAT credit cannot be denied merely on the grounds that input services were availed by offices located in different premises which formed an integral part to execute business operations even if ISD registration was not taken.

FACTS

The Appellant was engaged in providing “banking and financial services” and had availed entire CENVAT credit of the service tax paid under reverse charge mechanism. The said input services were provided at a Zonal Training Centre, Zonal Audit office and Zonal Office. These offices were set up by the Appellant at different premises for operational efficiency and better control. The appellant had obtained a centralised service tax registration. A show cause notice was issued for recovery of the CENVAT credit availed by the appellant along with interest and penalty was confirmed by Adjudicating Authority. The appeal filed was dismissed on the grounds that no output service was provided on their own by Zonal Training Center and Zonal Audit Centre while the Zonal Office provided administrative services to six different offices and no ISD registration was obtained for distribution of credit. Aggrieved by the impugned order, the Appellant filed an appeal before the Tribunal.

HELD

The Tribunal held that the offices are not a separate entity but an integral part of the business. The service tax has already been paid by the Appellant for its offices under Centralised registration obtained. It was further held that the failure to obtain ISD registration is a mere procedural lapse and credit cannot be denied for the same. Thus, demand raised in Show Cause Notice was not sustainable.

4 Credence Property Developers Pvt. Ltd v/s. Commissioner of CGST & C. Ex., Mumbai
2023 (71) G.S.T.L. 294/3 (Tri. – Mumbai)
Date of order: 5th January, 2023

Refund of service tax paid on account of cancellation of flat purchase ought to be granted where appellant had himself borne the same.

FACTS

The appellant was engaged in providing the service of construction of residential projects. A buyer had booked two flats in the project and paid advance along with service tax to appellant. Subsequently, the buyer cancelled the booking of both the flats and entire advance along with service tax paid was returned by the appellant. Accordingly, refund was claimed for the service tax paid which was rejected by adjudicating authority as well as first appellate authority. Hence the appeal.

HELD

The Tribunal held that as per Article 265 of Constitution, the Government was not authorised to retain the amount of service tax which was not payable under the law. Moreover, since no services were rendered, the question of liability to pay service tax does not arise. The appeal was thus allowed.

5 Balmer Lawrie & Company td. vs. CST
2023-TIOL-346-CESTAT-DEL
Date of order: 1st May, 2023

Profit share / mark-up of overseas agent being an associated component of air freight or ocean freight, not liable for service tax in case of logistics services of multimodal transport operator.

FACTS

The Appellant provides comprehensive logistics services which inter alia include import consolidation by air, handling of cargo, air and sea freight forwarding, multimodal transportation including door to door services, transportation and other incidental services. The current appeal relates to confirmed demand of Rs.5.25 crores of which the major demand in relation to ocean freight was dropped by the Commissioner. However, the department also filed appeal against some part of the dropped demand. During the course of logistics services, the appellant had entered into agreement with overseas service providers for handling cargo of their clients on their behalf at foreign ports. As per terms between them, the profit received by such Foreign Service providers is shared 50:50 basis in every transaction. The Appellant’s invoice on their customers has four parts, viz. freight, other charges – origin, other charges – destination and service tax. They paid service tax on the destination charges in case of imports but not on other components of freight and charges at origination. The confirmed demand mainly relates to profit share as it is considered a part of cargo handling service. According to the revenue, the Foreign Service providers are located outside India providing taxable services to the appellants and hence they are liable to pay service tax under reverse charge mechanism on the value of such services. Further, the revenue contended that appellant paid consideration for the actual freight, other charges, origin charges and the profit share to overseas service providers and which was much higher than the actual freight. Therefore, the excess amount collected is liable to be taxed. As against this, appellant contended that as a part of ocean or air freight, the overseas service provider receives invoices towards airline fuel surcharge, airline security fee and their revenue share. Since these are associated components of freight, air or ocean, they are not subject to service tax whereas on the other components of charges such as break bulk fee, charges collect fee etc. they had always paid due service tax including for transportation of goods by road. Reliance was placed inter alia on the cases of Greenwich Meridian Logistics, India Pvt Ltd vs CST, Mumbai 2016 (43) STR 215 (Tri-Mum), Satkar Logistics vs CST, Delhi 2021-TIOL-543-CESTAT-DEL and Tiger Logistics India Ltd vs CST, Delhi [2022 (2) TMI 455 (Cestat-New Delhi).

HELD

The primary issue involved in the matter being one of taxability of service tax on ocean freight and the liability of tax on profit / mark-up which is no more res-integra as it has been decided in a catena of decisions including the latest being the judgment in the case of M/s Tiger Logistics (supra), wherein it has been held that this activity is business in itself on account of the appellant and cannot be called a service at all. The space bought by appellant from shipping line is sold to customers against a House Bill of Lading. The Shipping line issues a Master Bill of Lading in favor of the appellant. The first leg is a contract between shipping line and the appellant and second leg is between appellant and its customers. Hence, profit earned from such business cannot be termed as consideration for services. Respectfully following inter alia Satkar Logistics (supra), it was held that appellant is not liable for service tax. The above having been held in Tiger Logistics (supra) and while also citing paras from Greenwich Meridian’s case (supra), the demand with interest and penalties are set aside and department’s appeal has been dismissed in toto.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

21 Sikha Debnath v/s. Assistant Commissioner of State Tax, Cooch Behar
2023(71) GSTL 362/4 (Cal.)
Date of order: 10th February, 2023

An appeal was allowed where delay was for negligible period by extending time as per section 107 of CGST Act.

FACTS

The petitioner had filed an appeal with a delay of 21 days of the available time as per section 107 of the CGST Act. He submitted before the Court that the appeal should be allowed as the period of delay was negligible. The respondent rejected the appeal stating that the same was time-barred. Being aggrieved, the petitioner preferred this petition.

HELD

Hon’ble High Court relied upon its own decisions passed in the matter of Suraj Mangar Versus Assistant Commissioner of West Bengal State Tax, Cooch Behar Charge, Jalpaiguri, West Bengal [WPA No. 2809 of 2022] as well as Debson Pumps vs. Assistant Commissioner of State Tax, Bowbazar Charge, Dharmatola & Anr. [MAT No. 1496 of 2022] where delay of negligible period was condoned. Accordingly, writ petition was disposed off.

22 Mehta Enterprise vs. State of Gujarat

2023 (71) GSTL 399/3 (Guj.)
Date of order: 21st December, 2022

When the petitioner was willing to pay a deposit for the release of perishable goods confiscated no auction for such goods would be made.

FACTS

The petitioner was a dealer of tobacco. The respondent had intercepted a truck carrying tobacco and recorded the statement of driver after interrogation and detained both the goods as well as the vehicle. Later on, an order of confiscation was passed in Form GSTR MOV-11. The petitioner had initially approached the Court but subsequently withdrew the petition to take a different legal recourse. Subsequently, the notice of auction of confiscated goods was issued. Being aggrieved by such a notice, the petitioner challenged the auction before Hon’ble High Court.

HELD

Hon’ble High Court held that the petition, previously withdrawn, should be entertained as there was a new cause of receipt of notice of auction. It was held that when the petitioner was willing to make the bare minimum deposit for the release of perishable goods, the authority should decide interim release of goods within one week and no auction should take place till then. Petition was thus allowed.

23 UOI vs. Cosmo Films Ltd. [2023]
149 taxmann.com 473 (SC)
Date of order: 28th April, 2023

The mandatory fulfilment of a “pre-import condition” incorporated in the Foreign Trade Policy of 2015-2020 (‘FTP’) and Handbook of Procedures 2015-2020 (‘HBP’) by Notification No.33/2015-20 and Notification No.79/2015-Customs, both dated 13th October, 2017 cannot be regarded as unreasonable and cannot be faulted with on the grounds of being arbitrary or discriminatory. The Notification No.1/2019-Cus dated 10th January, 2019 withdrawing the “pre-import condition” cannot be construed as applicable from 13th October, 2017.

FACTS

The issue before the Court was whether the mandatory fulfilment of a “pre-import condition” incorporated in the Foreign Trade Policy of 2015-2020 (‘FTP’) and Handbook of Procedures 2015-2020 (‘HBP’) by Notification No.33/2015-20 and Notification No.79/2015-Customs, both dated 13th October, 2017 is valid. The Hon’ble High Court concluded that the impugned condition (xii) in the Notification No.79, as well as the amendment in paragraph 4.14 of the FTP, vide Notification No.33 to the extent the same imposes a “pre-import condition” in case of imports under Advance Authorisation (AAs) for physical export for exemption from the whole of the integrated tax and GST compensation cess leviable under sub-section (7) and sub-section (9) respectively, of section 3 of the Customs Tariff Act, do not meet with the test of reasonableness and are also not in consonance with the scheme of Advance Authorisation. Aggrieved by the same, the department filed the present appeal.

HELD

The Hon’ble Court noted that exporters were made aware of the changes brought about due to the introduction of GST, through a trade notice, (Trade Notice 11/2017, dated 30th June, 2017 and the said notice clearly forewarned that AAs, and their utilisation would not continue in the same manner as the AA scheme was operating hitherto. It further noted that the HBP was amended and para 4.27(d) was inserted which stated that duty-free authorisation for inputs subject to “pre-import condition” could not be issued. The Hon’ble Court held that both these aspects are ignored by the High Court.The Hon’ble Court also noted that by paragraph 4.13 of the FTP, the DGFT can impose “pre-import conditions” on any goods other than those specified and held that the High Court has not discussed this aspect, and proceeded on the assumption that only specified goods were subject to the “pre-import condition”. It further held that the indication of a few items by virtue of paragraph 4.13 (ii) per se never meant that other articles could not be subjected to “pre-import conditions”. The existence of this discretion itself would mean that there was flexibility in regard to the nature of policies to be adopted, having regard to the state of export trade, and concessions to be extended in the trade and tax regime. The Court thus held that the object behind imposing the “pre-import condition” is discernible from paragraph 4.03 of FTP and Annexure-4J of the HBP; and that only a few articles were enumerated when the FTP was published, is no ground for the exporters to complain that other articles could not be included for the purpose of “pre-import condition”.

The Hon’ble Court discussed the concept of “physical export” in paragraph 4.05(c) and paragraph 9.20 of the FTP and held that except read with section 2(e) of the Foreign Trade (Development and Regulation) Act, 1992 (FTDRA) and held that except for “physical exports” including exports to SEZ defined in clause (c)(i), all other categories stated in clause (c) (ii), (iii) and (iv) for which AAs can be issued are ineligible for being considered as “physical exports” and are automatically ineligible for the exemption.

The Hon’ble Court held that the introduction of the “pre-import condition” may have resulted in hardship to the exporters, because even whilst they fulfilled the physical export criteria, they could not continue with their former business practices of importing inputs, after applying for AAs, to fulfil their overseas contractual obligations. The new dispensation required them to pay the two duties, and then claim refund, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export goods. The re-shaping of their businesses caused inconvenience to them. Yet, that cannot be a ground to hold that the insertion of the “pre-import condition”, was arbitrary.

The Hon’ble Court also rejected the assessee’s contention of alleged discrimination. It held that there cannot be a blanket right to claim exemption and that such a relief is dependent on the assessment of the State and tax administrators, as well as the State of the economy and above all, the mechanism for its administration. The Court held that there is no constitutional compulsion that whilst framing a new law, or policies under the new legislation – particularly when an entirely different set of fiscal norms are created, overhauling the taxation structure, concessions hitherto granted or given should necessarily be continued in the same fashion as they were in the past. In this background, the Hon’ble Court held that the exporter respondents’ argument that there is no rationale for differential treatment of BCD and IGST under AA scheme is without merit. BCD is a customs levy at the point of import. At such stage, there is no question of credit. On the other hand, IGST is levied at multiple points (including at the stage of import) and input credit gets into the stream, till the point of the end user. As a result, there is justification for a separate treatment of the two levies. The impugned notifications, therefore, cannot be faulted for arbitrariness or under classification.

The Hon’ble Court also held that the FTPRA contains no power to frame retrospective regulations. Construing the later notification of 10th January, 2019 that withdrew the “pre-import condition” as being effective from 13th October, 2017 would be giving effect to it from a date prior to the date of its existence which is not permissible.

24 Pinstar Automotive India (P.) Ltd vs.
Additional Commissioner
[2023] 149 taxmann.com 13 (Madras)
Date of order: 20thMarch, 2023

Where the suppliers have filed GSTR-1 but failed to deposit tax to the Government due to non-filing of GSTR-3B, the department may reverse credit in the hands of the purchaser as a protective move and it must be restored when the recovery is effected from such suppliers. The Hon’ble Court held that substantive liability falls on the supplier and the protective liability upon the purchaser directs that a mechanism must be in place to address such situation.

FACTS

The three suppliers who had supplied goods to the petitioner and to whom the petitioners had paid the full consideration including the tax portion included therein, had uploaded their invoices in GSTR-1, but no tax had been remitted by them since GSTR 3B had not been filed by them. The petitioner, as a consequence, suffered a reversal of ITC, IGST, CGST, and SGST.

HELD

The Hon’ble Court held that there can be no dispute on the position that the provisions of section 16 are to be observed strictly. It observed that the provisions of the Central Goods and Services Tax Act, 2017 have, assimilating the wisdom of experience from the erstwhile tax regimes, gone one step further to ensure that the interests of the revenue are protected by providing for a mandate that the tax liability is defrayed/met either at the hands of the supplier or the purchaser. However, it further held that where the tax liability has been met by way of reversal of ITC and similarly recovery is effected from the supplier as well, this would amount to a double benefit to the revenue. Hence, the Hon’ble Court held that while the department may reverse credit in the hands of the purchaser, this has to be a protective move, to be reversed and credit restored if the liability is made good by the supplier. Thus, the substantive liability falls on the supplier and the protective liability upon the purchaser. A mechanism must be put in place to address this situation.

25 AC Impex vs. UOI [2023]
150 taxmann.com 175 (Delhi)
Date of order: 13th March, 2023

The petitioner is entitled to interest on refund from the date when the initial application for refund was filed as the orders passed by the High Court only pushed the respondents/revenue in the right direction and it cannot be said that any “lis” was pending between the parties and it cannot be said that during such period there was a “lis” pending between the parties so as to attract the proviso to section 56 of the CGST Act.

FACTS

The petitioner filed a refund application on 6th January, 2017. The deficiency memo issued by the department dated 13th Febuary, 2018 was cured on 16th February, 2018. A show cause notice was issued to the petitioner on 07th May, 2018 which was replied to by the petitioner on 10th May, 2018. The order rejecting the refund was passed on 11th May, 2018. The petitioners challenged the orders before the Hon’ble Court. Various rounds of litigation happened from 11th May, 2018 until the explanation given by the petitioner was finally accepted by the department on 24th May, 2019 when the refund order came to be passed on account of the order issued by the High Court on 28th March, 2019, and the amount of refund was finally paid to the petitioner subsequent thereto. The issue before the Court was what would be the date from which statutory interest on refund under section 56 of the CGST Act would get triggered. The petitioner claimed that interest should be paid from the date when the initial application for refund was filed. On the other hand, the respondent/revenue asserted that in terms of the proviso appended to section 56 of the CGST Act, interest will get triggered 60 days after the date when this Court passed an order directing consideration of the application.

HELD

Referring to the proviso to section 56 of the CGST Act, the Hon’ble Court held that the proviso envisages a situation where, while processing an application for a refund, the respondents/revenue are required to deal with a lis and the refund is a consequence of that lis. Where there is no lis with regard to either the quantum or the value, then the proviso will have no application. The Hon’ble Court observed that it passed the order dated 28th March, 2019 in the background of the order dated 11th January, 2019 whereby the Court had permitted the petitioner to file an application manually and yet the said applications were rejected by the department vide order dated 22nd March, 2019. In this factual background, the Court held that the orders of the Court only pushed the respondents/revenue in the right direction, in consonance with the main provision of section 56 of the CGST Act and there was no element of lis pending between the parties which required adjudication and allowed the petition.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

I. Notification No.10/2023-Central Tax dated 10th May, 2023

The above notification seeks to implement e-invoicing for the taxpayers having aggregate turnover exceeding Rs. 5 crore from 1st August, 2023.

II. Notification No.5/2023-Central Tax (Rate) dated 9th May, 2023

The above notification seeks to amend notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017 so as to extend the last date for exercising of option by GTA to pay GST under forward charge.

III. ADVISORY

A) An advisory dated 1th April, 2023 is issued to inform that the E-invoices will be allowed to be uploaded/reported within 7 days from the issuance of system invoice for taxpayers having Aggregate turnover Rs.100 crores and above. This was to apply from 1st May, 2023.

By subsequent advisory dated 6th May, 2023, the above decision is deferred for 3 months.

IV. CBIC INFORMATIONS

(i) The CBIC, vide its post, dated 11th May, 2023, has informed that the Automated Return Scrutiny Module for GST return in ACES–GST backend application for Centre Tax Officers is rolled out and preparations are made for its implementation for scrutiny of returns for 2018-2019.

B. ADVANCE RULINGS

20 Sri Bhavani Developers (AAR No. A. R. Com/29/2021 dated: 14th July, 2022) (TSAAR Order no.38/2022) (Telangana)

Labour supply services – Tax will not be attracted for the labor engaged on daily basis or employees, etc.

The facts are that the applicant M/s Sri Bhavani Developers are into construction of residential buildings and have opted for a new tax scheme as per Notification No.3/2019 dated 29th October, 2019. It was submitted that, in a particular case, they have entered into a Joint Development Agreement (JDA) with one Mr. Sadanda Chary for construction of residential units at Moulali.

It was further explained that the Joint Development agreement between land owner and builder was entered on 7th December, 2017 and subsequently supplementary development agreement was entered on 17th December, 2018 on area sharing basis. The further facts were that work had started but they didn’t have any bookings as on 31st March, 2023-2019. Based on the above, a ruling was sought on following questions:

“1. Whether notification 4/2019 can be followed and GST be paid on RCM basis for the share of landlord as the project is falling under “other than On-going Projects” as it can be considered as new project?

2. Is RCM applicable to daily wages, Labour Charges and Contract Labour?

3. Whether there is any limit on the percentage of material to be used in project for Eg: cement 15%, sand 10% etc.?

4. Whether Salaries, Incentives, Brokerage, Remuneration and interest on Working Capital are liable for RCM?

5. In a project of combination of affordable Flats (Carpet Area is less than 60Sq Mts), and other flats (Carpet Area is more than 60Sq Mts), can different rate of tax be adopted for different units, i.e., GST 1% in case of affordable Units and 5% in case of other units based on the Carpet area?

6. That, the customer is entering into two types of agreements at the time of selling the semi-finished residential flat.

a) “SALE AGREEMENT” and

b) Completion of semi-finished works called “WORK ORDER”,

In such case what is the rate of tax for:

a) For SALE DEED @ 5%

b) For WORK ORDER @ 18% or 12% or 5%.

Whether they are eligible for ITC in case of 18% /12%?

What is the tax rate in case of affordable housing project in the above situation?”

The Ld. AAR took note of the fact that the work commenced in June,2018 and the GST structure on real estate services was greatly altered w.e.f. 1st April, 2019 through notification no. 3/2019 and Notification no.4/2019 both dated 29th March, 2019.

The Ld. AAR held that the Notification No. 03/2019 makes a distinction between ‘Ongoing project’ in clause (xx) of Para 4 and ‘Other than ongoing project’ in clause (xxviii) of Para 4. Accordingly, the Ld. AAR observed that ‘Other than ongoing project’ means a project which commences on or after 01st April, 2019. In view of above, the Ld. AAR held that the project undertaken by the applicant does not fall under this definition.

However, the notification offers that the promoter can shift to the new scheme or continue under the earlier scheme, by filing declaration till 20th May, 2019.

Since the applicant has not opted for the old scheme, they fall under new scheme and accordingly the Ld. AAR held that the applicant has to pay tax @ 1 per cent for affordable residential apartment and @ 5 per cent for other residential apartments, without availing ITC.

In respect of liability on developer for the project commenced before 1st April, 2019, taking note of provisions in above Notification nos. 3/2019 and 4/2019 dated 29th March, 2019, the Ld. AAR held that the tax in relation to the portion of constructed area shared with the land owner promoter, applicant developer has to pay GST as his liability in the capacity of developer promoter and not under Reverse charge mechanism (RCM). The land owner-promoter can claim such tax as ITC.

In respect of other questions also the Ld. AAR observed as under:

“i) Cement for the project must be purchased from registered supplier only even if total value of supplies received from unregistered suppliers is less than 80% and the promoter is required to pay GST @28% under reverse charge if the purchase is from unregistered supplier.

ii) Excluding cement, minimum 80% of the procurement of inputs and input services used in supplying the real estate project service shall be received from registered supplier only. For the shortfall from this requirement GST @18% is payable on value to the shortfall. This adjustment is to be done financial year wise and not project wise.

iii) In case of capital goods procured from unregistered person, the promoter is liable to pay GST under reverse charge.

iv) For residential apartments, GST is not payable on TDR, FSI or payment of upfront amount for long term lease of land if such supply takes place after 01.04.2019 and if residential apartment is sold before completion. However, for residential apartments remaining unsold after completion, proportionate GST is payable on TDR, FSI or long term lease of land by developer-promoter under reverse charge.

v) In respect of service by employees the Ld. AAR held that no RCM is payable as services by employees is covered by Schedule III, not amounting to supply of goods or services. However, manpower supply or labor supply by manpower supply agency was held liable in the hands of such supplier on forward charge basis @ 18 per cent.

vi) Regarding the two separate contracts, the Ld. AAR held that, even if there are two different un-severable agreements, they constitute a single contract and hence will attract tax @ 1 per cent for affordable housing and @ 5 per cent for other housing without ITC. However, it is also observed that if any other agreement, which is beyond the scope of initial agreement and is a severable agreement vis-à-vis the initial agreement then the construction made under such contract will attract tax @ 18 per cent with ITC.

21 Rites Ltd

(AAR No. HR/ARL/19/2022-23

dated 18th October, 2022 (Haryana)

The applicant, RITES Ltd is a Government of India Enterprise established in 1974, under the aegis of Indian Railways. RITES Ltd is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management. It is a multi-disciplinary consultancy organisation in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organisations.

The Applicant has receipts from various other charges or amounts forfeited in the course of its routine business.

Following are the main headings of such receipts.

A. Notice pay recovery,

B. Bond Forfeiture of the Contractual Employees,

C. Canteen Charges,

D. Recovery on account of Loss/Replacement of ID Cards,

E. Liquidated Damages due to delay in completion,

F. Taxability on the forfeiture of Earnest Money and Security Deposit/Bank Guarantee by the applicant,

G. Taxability of amount written off as Creditors balance in the books of account of the applicant.

Based on receipts under above headings following questions were raised before the learned AAR.

“1. Whether the amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee would be taxable under GST law and if yes, rate of GST thereupon?

2. Whether the amount of Surety Bond forfeited/encashed by the Applicant company from the outgoing contractual employee would be taxable under GST law and if yes, rate of GST thereupon?

3. Whether GST would be payable on nominal & subsidized recoveries made by the Applicant from its employees towards provision of canteen facility by 3rd party service provider to Applicant’s employees and if yes, rate of GST thereupon?

4. Whether the amount collected by the Applicant company from its employees in lieu of providing a new identity card (ID Card) would be chargeable to GST and if yes, rate of GST thereupon?

5. Whether the amount collected by the Applicant as liquidated damages for non-performance/ short-performance/delay in performance is taxable under GST and if yes, rate of GST thereon?

6. Whether the amount forfeited by the Applicant company pertaining to Earnest Money, Security Deposit & Bank Guarantee due to the reasons mentioned supra would be chargeable to GST and if yes, rate of GST thereon?

7. Whether the amount of Creditors balance unclaimed/untraceable and written off by the Applicant by way of crediting P&L Account is taxable and if yes, rate of GST thereon?”

Applicant has submitted his version for non-taxability of above receipts. The available precedents were also referred.

After analysis of submission of applicant, the Ld. AAR observed as under in respect of issues raised.

1. The Ld. AAR held that first two issues are covered by circular dated 03rd August, 2022 issued by the CBIC. The Ld. AAR observed that the amount received as notice pay recovery by the applicant from the employees who leave the applicant company without serving mandatory notice period mentioned in the employment contract is not a consideration for any supply of services. The Ld. AAR also held that the action of surety bond forfeiture by the applicant, which is furnished by the contractual employee at the time of joining of the employment, who leave the company without serving minimum contract period as per the employment contract, is also not a consideration per se. The Ld. AAR held that these amounts are covered under Schedule III(1) and not clause 5(e) of Schedule II appended with the CGST Act, 2017 and hence, outside the scope of supply. It is held that said amount recovered by the applicant is in lieu of un-served notice period/non-serving the contract period by the employees. The Ld. AAR held that it is the employee who is the service provider and service supplied by him in the course of its employment is excluded from the definition of Supply under the GST Act and there is no service by applicant. Accordingly issue decided in favor of applicant.

2. In respect of provision of the canteen facility at its premises by the applicant company to its employees the Ld. AAR observed that the applicant incurs expenses including of GST on same. The applicant company charges a nominal amount from its employees for this facility. The Ld. AAR held that the transaction/deduction of nominal amount from the salary of the employees at fixed rate is outside the preview of the taxability under the GST Act. It is observed that the principal supply of the applicant is of consultancy in the field of transport, infrastructure and related technology and not of any catering services. Tax already stands charged by the third party service provider from the applicant for the supply of food to the employees of the company. The applicant is charging a nominal amount from its employees to recover part of its cost and accordingly not liable to GST. The AR of other States also relied upon.

The Ld. AAR further justified its holding by observing that, the facility of canteen is being provided by the companies to its employees under the Factory Act, 1948 wherein it is mandatory for the applicant to make provisions of the canteen facility to its employees. The further findings also noted like there is no independent contract between the applicant and the employees for setting up the canteen facility at the company’s premises but it is being undertaken on account of the legal obligation cast upon the applicant. Therefore the Ld. AAR concluded that the said transaction of recovering the part payment of the meals from the staff by the applicant is outside the purview of scope of supply.

3. In respect of charges for re-issuance of ID card to the employees the Ld. AAR observed that the applicant uses the in-house printing facility for the services i.e. re-issuance of identity cards to the employees and charges fees of Rs. 100 per card form its respective employee for issuance of the new Identity card. There is no third party contractor for the printing of Id-cards. The Id-card is reissued in case of loss of the same or the card is in non- serviceable condition. Therefore, the Ld. AAR held that this transaction does not fall under the taxable event under the GST as it is covered under the schedule III(1) appended to the CGST Act, 2017.

4. In respect of Taxability on the transaction of liquidated damages charged due to delay in completion of work and forfeiture of Ernest / Bank Guarantee / Security Deposit, the Ld. AAR observed that the factual as well as legal details of the transactions are examined along with the details of the copy of Tender flouted/issued by the applicant company for the works. The authority further observed that the matter stands clarified in the circular dated 03rd August, 2022 of the Board and Ld. AAR held that the issue is decided accordingly.

5. In respect of Taxability of amount written off in the books of account of the applicant as creditors balance, the Ld. AAR observed that amount of the contractor which was deposited as security before the execution of the contract is not reclaimed by the contractor, and similarly certain other credit balances which remain unclaimed for a certain period of time, are written off by way of credit entry in profit and loss account.

The Ld. AAR held that there are no services received or provided by the applicant company in the above-mentioned situations and transactions is basically an income and not a supply, hence outside the purview of scope of supply under the GST Act.

With above discussion the Ld. AAR gave ruling on each issue as under:-

“Questions	Answers
Whether the amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee would be taxable under GST law and if yes, rate of GST thereupon?	No
Whether the amount of Surety Bond forfeited/encashed by the Applicant company from the outgoing contractual employee would be taxable under GST law and if yes, rate of GST thereupon?	No
Whether GST would be payable on nominal & subsidized recoveries made by the Applicant from its employees towards provision of canteen facility by 3rd party service provider to Applicant’s employees and if yes, rate of GST thereupon?	No
Whether the amount collected by the Applicant company from its employees in lieu of providing a new identity card (ID Card) would be chargeable to GST and if yes, rate of GST thereupon?	No
Whether the amount collected by the Applicant as liquidated damages for non performance/short-performance/delay in performance is taxable under GST and if yes, rate of GST thereon?	No
Whether the amount forfeited by the Applicant company pertaining to Earnest Money, Security Deposit & Bank Guarantee due to the reasons mentioned supra would be chargeable to GST and if yes, rate of GST thereon?	No
Whether the amount of Creditors balance unclaimed/untraceable and written off by the Applicant by way of crediting P&L Account is taxable and if yes, rate of GST thereon?	No

22. Shree Ambica Geotex Pvt Ltd

AAR No.GUR/GAAR/R/2022/46 (In App.No. Advance Ruling/SGST & CGST/2022/AR/34) dated 18th October, 2022 (Guj)

Classification – Geomembrances

The applicant, M/s Shree Ambica Geotex Pvt Ltd, submitted that it is engaged in the business of manufacture and sale of textile products and articles like Geomembranes. The applicant has submitted that it also produces intermediate products like Tapes/Strips, but almost entire quantity of these intermediate products is used within the factory in relation to manufacture of the final product, viz. Geomembranes. The applicant is licensed by the Bureau of Indian Standards (BIS) for manufacture of the above-referred goods in accordance with IS 15351:2015 and IS 7903: 2017. The Indian Standards i.e. IS 15351:2015 is for ‘Agro-textiles – Laminated HDPE woven Geomembranes for water proof lining’.

The applicant further submitted that the application is filed for classification of the final products namely, Geomembranes under the GST Tariff and claimed that Geomembranes merit classification under Heading 5911 Sub Heading 59111000, as textile products and articles for technical uses.

The Ld. AAR referred to nature of Geomembranes. It was observed that the BIS has published IS 15351:2015 for the products, namely, Laminated HDPE woven Geomembrane for waterproof lining. These goods are also known and referred to in the trade by various other nomenclatures like Agro-textiles, Geo-grid Fabrics, and the like. The products are basically in the nature of fabrics, and they are used for water proofing in ponds, and for agricultural applications.

The manufacturing process also discussed.

The Ld. AAR referred to use of the product. It is mainly used in Biofloc technology which is mainly used in farming and Aquaculture ponds. Using Biofloc technology can bring big benefits to aquaculture farmers.

The submission of applicant that Heading 5911 of the Tariff is the most appropriate classification for the products viz. Geomembrane, because the product is textile products for technical uses was found acceptable. The product is in the nature of textile fabrics coated or laminated with plastic processed and used for technical purposes.

The Ld. AAR referred to observation in Porritts & Spencer (Asia) Ltd vs. State of Haryana reported in 1983 (13) ELT 1607 (S.C.) – 1978- VIL-03-SC as reproduced below:

“5. It was pointed out by this Court in Washi Ahmed’s case (supra) that the same principal of construction in relation to words used in a taxing statute has also been adopted in English, Canadian and American Courts. Pollock B. pointed out in Gretfell v. I.R.C. (1976) 1 Ex. D. 242 at 248 that “if a statute contains language which is capable of being construed in a popular sense, such a statute is not to be construed according to the strict or technical meaning of the language contained in it, but is to be construed in its popular sense, meaning, of course, by the words popular sense’ that which people conversant with the subject-matter with which the statute is dealing would attribute it.”

Ld. AAR further relied upon Ruling pronounced by the AAR, Daman, Diu & DNH in case of M/s. EMMBI Industries Ltd reported in 2019 (29) GSTL 105 (AAR- GST) – 2019-VIL-295-AAR and reproduced following observations –

“Geomembranes for water proof lining – Classification of – “Laminated High Density Poly Ethylene HDPE Woven Geomembrane for water proof Lining Type-II, IS:15351:2015” – Product known in market as agro textiles –Main product around which whole process of manufacturing revolves is HDPE Woven Fabrics – Perusal of Chapter Note 1 to Chapter 39 of Customs Tariff Act, 1975 making it clear that textile materials of Section XI excluded from scope and terms of plastics and cannot be covered under scope of Heading3926 of HSN – HDPE Tapes/Strips of less than 5 mm specifically covered under HSN Heading 5404 as Synthetic Textile Material and specially woven fabrics from said HDPE Tapes/Strips covered under HSN Heading 5407 20 – HDPE Woven Fabrics referred as Woven Fabrics made from Synthetic Textile Material subjected to LDPE Coating and Lamination referred as Sandwich Lamination – Two or more pieces of said Sandwiched Laminated Geomembrane fabrics joined/seamed together by a suitable heat air blower scaling process keeping into requirement of customer based on which said fabrics cut and joint and cut sealed as per standard sealing process to be used as pond liner – Such Laminated Coated Fabrics used for technical purpose and is specifically covered under scope of HSN Heading 5911 10 00 – Product fit for using as pond liner laminated textiles products and correctly classifiable under HSN Code 5911. [paras 7.3, 8, 8.1, 8.2, 8.3, 9].”

Concurring with above ruling the Ld. AAR held that Geomembrane merits classification at HSN 5911, tariff item 59111000.

23 Shalby Ltd (AAR No. GUJ/GAAR/APPEAL/2022/22

(In App. No. Advance Ruling/SGST & CGST/2021/AR/14) dated6th October, 2022 (Guj)

Maintainability of AR vis-à-vis ‘any proceedings’

The original applicant (now appellant) has raised the following question for advance ruling in the application for Advance Ruling dated 02nd December, 2020 filed by it.

“Whether the medicines, consumables and implants used in the course of providing health care services to in-patients for diagnosis or treatment for patients opting with or without packages along with allied services i.e. (room rent/food/doctor fees etc.) provided by hospital would be considered as “Composite Supply” and accordingly eligible for exemption under the category “Health Care Services”?”

The Ld. AAR, vide Advance Ruling No. GUJ/GAAR/R/11/2021 dated 20th January, 2021 – 2021- VIL-202-AAR, ruled as follows:

“The medicines, consumables and implants used in the course of providing health care services to in-patients for diagnosis or treatment for patient opting with or without packages along with allied services i.e. (room rent/food/doctor fees etc.) provided by hospital is a “Composite Supply”. Supply of inpatient health care services by the applicant hospital as defined in Para 2(zg) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, is exempted from CGST as per Sl. No. 74 of the above notification.”

After pronouncing above ruling, the Ld. AAR received a letter F. No. CST/ENFORCEMENT/SHALBY/ADVANCE RULING/20-21/O.NO.5376 dated 06.03.2021 from the Additional Commissioner of State Tax (Enforcement), Gujarat State, Ahmedabad, informing that search proceedings u/s.67(2) were initiated against the application on 5th June, 2019 and continued till 6th June, 2019. Based on discrepancies noted in search DRC 01A was issued dated 11th February, 2020. The applicant has sought AR on 2nd December, 2020 and AR is pronouncement on 20th January, 2021.

Based on the above information, invoking section 104 of CGST Act, lLd. AAR granted personal hearing to the applicant. Before the Ld. AAR the applicant sought to argue that there is no fraud or suppression. The search action is not a proceeding for section 98(2). The applicant insisted on meaning of ‘proceedings’ and relied upon various judgments like judgement of Delhi High Court in case of CIT-1 vs. Authority of Advance Ruling [2020] 119 Taxmann.com80 (Delhi HC) and the case of Sage Publication Ltd vs Deputy Commissioner of Income Tax (International Taxation) reported at [2016] 387 ITR 437 (Delhi), which was later affirmed by the Supreme Court in [2017] 246 Taxman 57 (SC).

It was argued that the term ‘Proceedings’ only includes any proceedings that may result in a decision i.e. show cause notice or order and cannot include mere inquiry or investigation initiated by investigation agencies as Show Cause Notice is the point of commencement of any proceeding as per Master Circular No. 1053/02/2017-CX dated 10th March, 2017 issued by CBIC. It was therefore summarised that in absence of Show Cause Notice till date, no proceeding can be said to be pending before any authority and there is no suppression of material facts.

However, rejecting the contention of applicant, the Ld. AAR declared the AAR as void ab-initio.

The applicant filed appeal against above order declaring its AR as void ab-initio.

The arguments before Ld. AAR were also reiterated before the Ld. AAAR. It was specifically submitted that the term ‘proceeding’ does not cover any and all steps/actions that the department may take under the act. Applying principle of noscitur a sociis, it was submitted that the term ‘pending’ has to derive color from the term ‘decided’ and ‘proceedings’ only includes any proceedings that may result in a decision i.e. in nature of show cause notice or order and cannot include mere inquiry/investigation initiated by investigating agencies such as enforcement wing, which are merely empowered to investigate. The appellant further submitted that filing of application for advance ruling was well within the knowledge of department but no show cause notice was issued till date.

The Ld. AAAR made reference to above submission and the judgments cited by the appellant. The Ld. AAAR recorded chronological order of events as under:

“(i) Proceedings to access business premises of appellant was initiated on 04.06.2019 by Gujarat State Tax and Commercial Tax Department which was later on converted into search proceeding on 05.06.2019 under section 67(2) of GGST Act and the same continued till 06.06.2019.

(ii) On account of various discrepancies, appellant was issued with three GST DRC-01A Part A on 11.02.2020.

(iii) Appellant submitted application for advance ruling on 02.12.2020 for which AAR pronounced ruling dated 20.01.2021 answering the question raised by appellant.

(iv) On 22.01.2021, appellant submitted the ruling dated 20.01.2021 to Assistant Commissioner of State Tax, Enforcement & Co-ordination, Gujarat State, Ahmedabad.

(v) On 08.03.2021, the AAR received a letter informing about the proceedings initiated against the appellant before the appellant had filed application before AAR.

(v) On 09.06.2021, intimation about personal hearing to decide whether ruling dated 20.01.2021 is required to be declared void ab-initio under section 104 of CGST Act or not was issued.

(vi) The Ld. AAR declared its previous ruling dated 20.01.2021 as void ab-initio in terms of Section 104 of CGST Act, 2017 vide ruling dated 19.7.2021.”

Thereafter the Ld. AAAR made reference to provision of Section 98(2) of CGST Act and reproduced the said section as under:

“98(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorised representative and the concerned officer or his authorised representative, by order, either admit or reject the application:

Provided that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act:

Provided further that no application shall be rejected under this sub-section unless an opportunity of hearing has been given to the applicant:

Provided also that where the application is rejected, the reasons for such rejection shall be specified in the order.”

The Ld. AAR observed that the term proceeding is a very comprehensive term and generally speaking means a prescribed course of action for enforcing legal right. Hence, it necessarily comprises the requisite steps by which judicial action is invoked. If further observation that the process of investigation in tax administration is such a step towards the action of issuing a show cause notice which culminates in a decision. Investigation is activated when there is evidence to show that there is tax evasion. The objective of investigation is to carry out in-depth analysis of taxpayer’s transactions, activities and records to ensure that tax due to government exchequer is not lost in evasion. Accordingly the Ld. AAR came to the conclusion that, initiation of investigation can be said to be the start of proceedings to safeguard government revenue. Issue of Form GST DRC-01A Part A, which was the intimation of liability, under the provisions of Section 74(5), to pay GST is part of proceedings initiated against the appellant.

The Ld. AAAR also rejected other contentions about fraud / suppression on ground that it was duty cast on appellant to disclose the proceedings. After elaborate discussion, the Ld. AAAR observed that there can be no doubt that the appellant had indeed not declared/ mis-declared the fact of initiation of proceedings clearly evidenced by GST DRC-01A Part A issued in this case. Therefore, this is also covered under the scope of the term ‘suppression’ as defined. It was held that it was encumbent upon the appellant while making application for Advance Ruling, to have declared the true and complete facts, given the provisions of the GST law, in particular Sections 98(2) and 104 of the CGST Act, 2017. Accordingly, the invocation of Section 104 of CGST Act by the AAR declaring the advance ruling dated 20th January, 2021 void ab – initio was held to be legal.

BCAJ Admin

Glimpses of Supreme Court Rulings

Reassessment – Change of the AO– Fresh notice issued under section 148 by the new incumbent – The High Court quashed the assessment as subsequent notice was barred by limitation and no reasons were recorded prior to issue of subsequent notice – Order of the High Court quashed and set aside – Section 129 of the Act permits to continue with the earlier proceedings in case of change of the AO from the stage at which the proceedings were before the earlier AO – Fresh show cause notice is not warranted and/or required to be issued by the subsequent AO

35 DCIT, New Delhi vs.
Mastech Technologies Pvt Ltd
(2022) 449 ITR 239 (SC)

The Assessee filed its return of income for the A.Y. 2008-09 declaring loss of Rs. 6,10,314 which was processed under section 143(1) of the Income Tax Act, 1961 (“the Act”).

After obtaining the prior approval of the Additional CIT for re-opening of the assessment, the AO issued a notice under section 148 of the Act on 23rd March, 2015.

At the instance of the assessee, the AO supplied the reasons for re-opening, vide letter dated 18th May, 2015. However, the earlier AO, who had issued the notice under section 148 of the Act dated 23rd March, 2015, was transferred and the new AO took charge. The subsequent AO issued another notice under section 148 of the Act on 18th January, 2016.

Again, at the request of the assessee, the subsequent AO supplied the reasons for re-opening of the assessment.

Thereafter, the AO issued the notice under section 142(1) of the Act and also issued a notice under section 143(2) of the Act on 16th February, 2016.

The AO, vide letter dated 23rd February, 2016, informed the assessee of the reasons for re-opening of the assessment for the A.Y. 2008-09.

The assessee submitted its objections to the re-opening of the assessment, vide communication/letter dated 07th March, 2016. The AO rejected the objections of the assessee to the re-opening of the assessment, vide letter/communication dated 21st March, 2016.

Thereafter, the AO passed the order of assessment under section 143(3) of the Act on 30th March, 2016 making an addition of Rs. 1,35,00,000 on account of accommodation entry and an addition of Rs. 2,43,000 on account of commission.

The assessee approached the High Court by way of writ petition challenging the re-opening of the assessment for the A.Y. 2008-09 on 1st April, 2016. The High Court passed an interim order on 1st April, 2016 that the assessment proceedings may go on but no final assessment order shall be passed, and the same shall be subject to the ultimate outcome of the final decision in the writ petition (the final assessment order was already passed on 30th March, 2016).

By the impugned judgment and order, the High Court has set aside the reopening of the assessment for the A.Y. 2008-09 mainly on the following grounds:

i) That in view of the issuance of the second notice under section 148 of the Act dated 18th January, 2016, the first notice under section 148 dated 23rd March, 2015 was given up/dropped;

ii) In view of the above, the second notice dated 18th January, 2016 was considered to be the fresh notice, and the same was barred by limitation;

iii) no reasons were recorded while reopening when the second show cause notice dated 18th January, 2016 was issued.

The High Court further observed that in the notice dated 18th January, 2016, it was not specifically mentioned that the same was in continuation of the earlier notice dated 23rd March, 2015.

The Supreme Court, on appeal by the Revenue was of the opinion that the order passed by the High Court quashing and setting aside the re-opening of the assessment for the A.Y. 2008-09 was unsustainable. Section 129 of the Act permits to continue with the earlier proceedings in case of change of the AO from the stage at which the proceedings were before the earlier AO. In that view of the matter, fresh show cause notice dated 18th January, 2016 was not at all warranted and/or required to be issued by the subsequent AO.

According to the Supreme Court, the subsequent issuance of the notice dated 18th January, 2016 could not be said to be dropping the earlier show cause notice dated 23rd March, 2015, as observed and held by the High Court. The reasons to reopen the assessment for the A.Y. 2008-09 were already furnished after the first show cause notice dated 23rd March, 2015 which ought to have been considered by the High Court.

However, the High Court sought the reasons recorded for issue of the second show cause notice dated 18th January, 2016, which was not required to be considered at all.

Therefore, the Supreme Court held that the finding recorded by the High Court that the subsequent notice dated 18th January, 2016 was barred by limitation, was unsustainable.

The Supreme Court noted that the Assessment Order was passed on the basis of the first notice dated 23rd March, 2015 and not on the basis of the notice dated 18th January, 2016.

Under the circumstances, according to the Supreme Court, the High Court had erred in quashing and setting aside the reopening of the assessment for the A.Y. 2008-09. The order passed by the High Court holding so was unsustainable and the same was quashed and set aside. However, as the assessee had not challenged the Assessment Order on merits which it ought to have challenged before the CIT(A); and the High Court had set aside the Assessment Order on the grounds that initiation of the reassessment was bad in law, the Supreme Court relegated the assessee to file an Appeal before the CIT(A) within a period of 4 weeks from the date of the order. The same was to be considered in accordance with law and on its own merits, subject to compliance of other requirements, while preferring the appeal against the Assessment Order. However, the assessee would not be able to re-agitate before the CIT(A) and/or the Appellate Authority that the reopening was bad in law.

Manufacturer of polyurethane foam – Entry 25 to the Eleventh Schedule of the IT Act –- The assessee was manufacturing ‘polyurethane foam’ [which was ultimately used for making automobile seat] and not automobile seat, and hence was not entitled to deduction under section 80IB of the Act

36 Polyflex (India) Pvt Ltd vs. CIT and Ors.
(2022) 449 ITR 244 (SC)

The assesse, at its manufacturing unit at Pune, was manufacturing ‘polyurethane foam,’ which is ultimately used as automobile seat. The assessee filed its return of income for the A.Y. 2003-04 and claimed deduction under section 80-IB of the Income Tax Act (for short, ‘IT Act’). The AO disallowed the deduction under Section 80-IB of the IT Act by observing that the nature of the business of the assessee was “manufacturer of polyurethane foam seats” which fell under entry 25 to the Eleventh Schedule of the IT Act and therefore the assessee was not entitled to deduction under section 80-IB. However, it was the case of the assessee that different sizes of polyurethane foam are used as automobile seats and therefore the end product can be said to be the automobile seat which is different than the polyurethane foam, and therefore the same does not fall under entry 25 to the Eleventh Schedule of the IT Act. However, the AO did not accept the same by observing that as ‘polyurethane foam’ is made of Polyol and Isocyanate and other components, the deduction under section 80-IB of the IT Act cannot be given to the assessee-company. This is because section 80-IB(2)(iii) states that the benefit of deduction under the said Section cannot be given if the assessee manufactures or produces any Article or thing specified in the list in the Eleventh Schedule of the IT Act.

The assessee preferred an appeal before the CIT (Appeals) against the assessment order. The CIT(A) upheld the order of the AO. It observed that the two chemicals, namely, Polyol and Isocyanate used in the manufacture of polyurethane foam seats assemblies were the basic ingredients of polyurethane foam and therefore the case would squarely fall in what is specified in the Eleventh Schedule.

Against the order of the CIT(A), the assessee filed an appeal before the ITAT. The ITAT set aside the assessment order as well as the order passed by the CIT(A) and allowed the appeal filed by the assesse. The ITAT observed that polyurethane foam was neither produced as a final product nor was an intermediate product or a by-product by the assessee. The same was used as automobile seat and does not fall within entry 25 to Eleventh Schedule of the IT Act. Therefore, the assessee was entitled to claim deduction under section 80-IB of the IT Act.

The order passed by the ITAT was set aside by the High Court, specifically observing that what was manufactured by the assessee was polyurethane foam in different sizes/designs and there was no further process undertaken by the assessee to convert it into automobile seats. Therefore, what was manufactured by the assessee was polyurethane foam falling in entry 25 to Eleventh Schedule and therefore the assessee was not entitled to deduction claimed under section 80-IB of the IT Act.

Consequently, the High Court allowed the appeal preferred by the revenue and quashed and set aside the order passed by the ITAT and restored the assessment order denying the deduction claimed under Section 80-IB of the IT Act.

According to the Supreme Court, the short question posed for its consideration was, “whether the assessee was eligible for the benefit under Section 80-IB of the IT Act?”

The Supreme Court noted that the High Court has specifically observed and held that what was manufactured and sold by the assessee was polyurethane foam manufactured by injecting two chemicals, namely, Polyol and Isocyanate. The polyurethane foam manufactured by the assessee was used as an ingredient for the manufacture of automobile seats. According to the Supreme Court, the assessee was manufacturing polyurethane foam and supplying the same in different sizes/designs to the assembly operator, which ultimately was being used for car seats. The assessee was not undertaking any further process for end product, namely, car seats. The polyurethane foam which was supplied in different designs/sizes was being used as an ingredient by others, namely, assembly operators for the car seats. Merely because the assessee was using the chemicals and ultimately what was manufactured was polyurethane foam and the same was used by assembly operators after the process of moulding as car seats, it could not be said that the end product manufactured by the assessee was car seats/automobile seats. There must be a further process to be undertaken by the very assessee in manufacturing of the car seats. No further process had been undertaken by the assessee except supplying/selling the polyurethane foam in different sizes/designs/shapes which may be ultimately used for end product by others as car seats/automobile seats.

In view of the above, the Supreme Court held that when the articles/goods manufactured by the assessee, namely, polyurethane foam was an Article classifiable in the Eleventh Schedule (Entry 25), considering Section 80-IB(2)(iii), the Assessee was not entitled to the benefit under section 80-IB of the IT Act.

The Supreme Court therefore dismissed the appeal.

Appellate jurisdiction – High Court – Section 260A -The appellate jurisdiction of the High Court under section 260A is exercisable by the High court within whose territorial jurisdiction the AO is located

37 CIT vs. Balak Capital Pvt Ltd
(2022) 449 ITR 394 (SC)

The Revenue filed an appeal before the Supreme Court against the judgement of the High Court of Punjab and Haryana which had ordered as follows in an appeal carried under section 260A of the Income Tax Act, 1961:

“5. In view of the above, this Court has no territorial jurisdiction adjudicate upon the lis over an order passed by the Assessing officer, i.e. Income Tax Officer, Ward 1(1), at Surat. Accordingly, the complete paper book of appeal including application for condonation of delay is returned to the appellant- revenue for filing before the competent court of jurisdiction in accordance with law. With regard to the cross objections, learned counsel for the respondent submits that in view of the return of the appeal, the cross objections have been rendered infructuous and be disposed of as such. Ordered accordingly.”

The Supreme Court observed that the very question fell for its consideration in the PCIT -I, Chandigarh vs. ABC Papers Ltd (2022) 9 SCC 1 case. Therein it was held that the appellate jurisdiction of the High Court under section 260A is exercisable by the High court within whose territorial jurisdiction the AO is located. It was held as follows:

“45. In conclusion, we hold that appeals against every decision of ITAT shall lie only before the High Court within whose jurisdiction the assessing officer who passed the assessment order is situated. Even if the case or cases of an assessee are transferred in exercise of power under Section 127 of the Act, the High Court within whose jurisdiction the assessing officer has passed the order, shall continue to exercise the jurisdiction of appeal. This principle is applicable even if the transfer is under Section 127 for the same assessment year(s).”

In the facts of this case, the Supreme Court noticed that by the impugned order, the High Court had precisely proceeded on the same principle. This means that the order by which the appeal has been directed to be presented before the High Court of Gujarat as the AO who passed the order was located at Surat within the State of Gujarat, was unexceptionable. Therefore, there was no reason for the Supreme Court to interfere with the impugned order.

Capital Gains – The word “Otherwise” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partnership wherein assets of the firm are re-valued and respective partners’ capital accounts are credited – Section 45(4) is applicable

38 CIT vs. Mansukh Dyeing and Printing Mills
(2022) 449 ITR 439 (SC)

The assessee, a partnership firm originally consisted of four partners (all brothers) engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading in Clothing. Under the Family Settlement dated 02nd May, 1991, the share of one of the existing partners-Shri M.H. Doshi having 25 per cent profit share in the firm was reduced to 12 per cent and, for his balance 13 per cent share, three new partners were admitted namely, viz., Smt Ranjan Doshi (11 per cent), Shri Prakash Doshi (1 per cent) and Shri Rajeev Doshi (1 per cent). It appears that thereafter, Shri M.H. Doshi, Shri Manohar Doshi and Shri V.H. Doshi retired from the partnership and reconstituted the partnership firm consisting of the partners namely, viz., Shri Hasmukhlal H. Doshi, Smt. Rajan H. Doshi, Shri Prakash H. Doshi and Shri Rajeev H. Doshi.

On 1st November, 1992, the firm was again reconstituted and three more partners, namely, viz., Smt Vaishali Shah (18 per cent), Smt. Bhavna Doshi (9 per cent), Smt Rupal Doshi (9 per cent) and M/s Ranjana Textile Pvt Ltd (10 per cent) were admitted as partners. The contribution of new partners was as under: (i) Smt. Vaishali Shah-
Rs.4.50 lakhs; (ii) M/s Ranjana Textiles Pvt Ltd- 2.50 lakhs; (iii) Smt. Bhavna Doshi-Rs. 2.25 lakhs; and (iv) Smt. Rupal Doshi- Rs.2.25 lakhs.

It was mentioned in the reconstituted partnership deed that two partners, namely, viz, Shri Hasmukh H. Doshi and Smt Ranjan Doshi had decided to withdraw part of their capital.

On 01st January, 1993, the assets of the firm were revalued and an amount of Rs.17.34 crores were credited to the accounts of the partners in their profit-sharing ratio. Two of the existing partners, viz., namely Shri Hasmukhlal H. Doshi and Smt. Ranjan Doshi withdrew a part of their capital which was roughly Rs.20 to Rs.25 lakhs. The new partners were immediately benefited by the credit to their capital accounts of the revaluation amount, as Rs.3.12 crores was credited to Smt. Vaishali Shah (who contributed Rs.4.50 lakhs); Rs.1.56 crores to Smt. Bhavna Doshi (who contributed Rs.2.25 lakhs); Rs.1.56 crores to Smt. Rupal Doshi (who contributed Rs.2.25 lakhs); and Rs.1.73 crores to M/s Ranjana Textiles (who contributed Rs.2.50 lakhs only).

The Respondent filed its Return of Income for the relevant assessment years. The Return of Income was filed for A.Y. 1993-1994 @ Rs.3,18,760. The same was accepted under section 143(1) of the Income Tax Act, 1961.

However, thereafter, the assessment was reopened under section 147 of the Income Tax Act by issuance of the notice under section 148. The reassessment was made under section 143(3) read with section 147 determining the total income of Rs.2,55,19,490. Addition of Rs.17,34,86,772. [amount of revaluation] was made towards short term capital gain under section 45(4) of the Income Tax Act.

As per the AO, the assessee revalued the land and building and enhanced the valuation from Rs.21,13,225 to Rs.17,56,00,000 for A.Y. 1993-1994 thereby increasing the value of the assets by Rs. 17,34,86,772. Therefore, the revaluing of the assets, and subsequently crediting it to the respective partners’ capital accounts constitutes transfer, which was liable to capital gains tax under section 45(4) of the Income Tax Act. As land and building was involved, the assessee had claimed the depreciation on building, and the AO assessed the amount of short-term capital gain under section 50.

The CIT(A) by order dated 30th July, 2004 confirmed the addition on account of Short-Term Capital Gains and held that there was a clear distribution of assets as the partners had also withdrawn amounts from the capital account. CIT(A) also observed that value of the assets of the firm which commonly belonged to all the partners of the partnership had been irrevocably transferred in their profit-sharing ratio to each partner. To the extent that the value has been assigned to each partner, the partnership has effectively relinquished its interest in the assets and such relinquishment can only be termed as transfer by relinquishment. Therefore, according to the CIT(A), conditions of Section 45(4) were satisfied and therefore, the assets to the extent of their value distributed would be deemed as income by capital gains in the hands of the assessee firm. The CIT (A) also observed that the transfer of the revalued assets had taken place during the previous year and, therefore, the liability to capital gains arose in the A.Y. 1993-1994. The CIT(A) relied upon the decision of the Bombay High Court in the case of CIT vs. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) and distinguished the decision of the Bombay High Court in the case of CIT Mumbai vs. Texspin Engg. and Mfg. Works, Mumbai, (2003) 263 ITR 345 (Bom.).

In an appeal preferred by the assessee, the ITAT by judgment and order dated 26th October, 2006 and relying upon the decision of the Supreme Court in the case of CIT, West Bengal vs. Hind Construction Ltd., (1972) 83 ITR 211 allowed the appeal and set aside the addition made by the AO towards Short Term Capital Gains. The ITAT stated that as observed and held by the Apex Court in the aforesaid decision, revaluation of the assets and crediting to partners’ account did not involve any transfer. The ITAT observed and held that the decision of the Bombay High Court in the case of A.N. Naik Associates and Ors. (supra) was not applicable and held that the decision of the Bombay High Court in the case of Texspin Engg. and Mfg. Works, Mumbai (supra) was to be applied.

Relying upon the decision of in the case of Hind Construction Ltd (supra), the High Court dismissed the appeals preferred by the Revenue. Against this, the Revenue, preferred an appeal before the Supreme Court.

According to the Supreme Court, the short question, which was posed for its consideration was the applicability of Section 45(4) of the Income Tax Act as introduced by the Finance Act, 1987.

The Supreme Court observed that the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra) had an occasion to elaborately consider the word “Otherwise” used in Section 45(4). After a detailed analysis of Section 45(4), it was observed and held that the word “Otherwise” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partnership, wherein the partners transfer the assets in favour of a retiring/ incoming partner/s.

The Supreme Court was in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors. (supra).

The Supreme Court noted that the assets of the partnership firm were revalued to increase the value by an amount of Rs.17.34 crores on 1st January, 1993 (relevant to A.Y. 1993-1994). The re-valued amount was credited to the accounts of the partners in their profit-sharing ratio. According to the Supreme Court, the credit of the assets’ revaluation amount of Rs.17.34 crores to the capital accounts of the partners could be said to be in effect distribution of the assets as some new partners which came to be inducted by introduction of small amounts of capital ranging between Rs.2.5 to Rs.4.5 lakhs, got huge credits to their capital accounts immediately after joining the partnership. This amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners could be said to be “transfer” falling in the category of “Otherwise” and therefore, the provisions of Section 45(4) inserted by Finance Act, 1987 w.e.f. 1st April, 1988 were applicable.

The Supreme Court was of the view that the decision in the case of Hind Construction Ltd (supra) was pre-insertion of Section 45(4) of the Income Tax Act inserted by Finance Act, 1987. Therefore, in the case of Hind Construction Ltd. (supra), it had no occasion to consider the amended/inserted Section 45(4) of the Income Tax Act. Under the circumstances, for the purpose of interpretation of newly inserted Section 45(4), the decision in the case of Hind Construction Ltd. (supra) was not of any assistance.

In view of the above, the Supreme Court quashed and set aside the orders of the ITAT and the High Court. The order passed by the AO was restored.

Notes

1. In the above case, in the subsequent year being the previous year relevant to the A.Y. 1994-95, the assessee firm was converted into limited company under Part IX of the Companies Act, 1956. In this A.Y. also similar addition was made by the AO on protective basis which was deleted by CIT (A) on the grounds that it was already assessed for the earlier A.Y. 1993-94. The Revenue did not succeed before the Tribunal as well as the High Court, mainly due to the judgment of Bombay High Court in the case of Texspin Engineering & Mfg Works. [(2003) 263 ITR 345]. The Revenue had filed appeals before the Supreme Court for both the assessment years as noted by the Supreme Court at para 2.8 [page 448 of the reported judgment]. Finally, it would appear that the Supreme Court has upheld the order of the AO for the A. Y. 1993-94.

2. In the above judgment of the Supreme Court, somehow, the view is taken that the mere act of revaluation of the assets by the firm and crediting respective partners’ capital accounts can be said to be ‘transfer’ and that would fall in the category of the words ‘otherwise’ appearing in section 45(4). This view, with due respect, is highly questionable for various reasons and also requires reconsideration. Interestingly, the Supreme Court, in the above case, noted and affirmed the view taken by the Bombay High Court in the case of A. N. Naik & Associates [(2004) 265 ITR 546] that the word ‘otherwise’ used in section 45(4) also takes in its sweep cases of subsisting partners of partnership, transferring the assets to retiring partner. It is worth noting that, in this case, the Bombay High Court apparently did not take such a view in the context of revaluation of assets. In fact, the Bombay High Court was dealing with applicability of section 45(4) in case where capital assets of the firm were transferred to retiring partner under a deed of retirement in terms of family settlement under which business and assets were to be divided. The above judgment of the Supreme Court can have far reaching implications on applicability of section 45(4) in such cases and also likely to raise some relevant issues about its correctness. However, this would be relevant up to A.Y. 2020-21 in view of amendments in the Act mentioned hereinafter.

3. It may be noted that section 45(4) which is considered and relied on by the Supreme Court in the above case has been substituted by the Finance Act, 2021 w.e.f. 1st April, 2021 and simultaneously, section 9B has also been introduced by the Finance Act, 2021, w.e.f. 1st April, 2021. Therefore, the cases of partnership firms involving revaluations, reconstitution, etc. will now be governed by the new provisions which have different languages and schemes for taxation in such cases. As such, in our view, the law declared in the above judgment should not have any bearing under the new provisions introduced by the Finance Act, 2021.

Offences and prosecution – Failure to deposit tax deducted at source – Trial Court discharged both the accused on the ground that notice was not given to Respondent No.2 as the Principal Officer of accused No.1 –Discharge affirmed by the High Court – Supreme Court set aside the order on concession by accused without going into merits

39 The Income Tax Department Vs.
Jenious Clothing Pvt Ltd & Anr.
(2022) 449 ITR 575 (SC)

Criminal complaints were filed against the Respondent-Company and one another, namely, S. Sunil V. Raheja, for the offences punishable under section 276B read with section 278B of the Act for non-remittance of the tax deducted at source.

In the complaints, accused No.2/S. Sunil V. Raheja was shown as Managing Director and was treated as the Principal Officer of the accused-Company.

The learned trial Court discharged both the accused on the grounds that notice was not given to Respondent No.2 as the Principal Officer of accused No.1.

The order of discharge has been confirmed by the High Court, by the judgment and orders passed in revision petitions.

However, before the Supreme Court, the accused agreed for setting aside the order of the trial court and to proceed further in accordance with law and on its own merits and keeping all the defences which may be available to the accused open. Accordingly, the Supreme Court ordered that trial be proceeded further to be decided and disposed of [within 12 months] by the trial court in accordance with law and on its own merits.

BCAJ Admin

Statistically Speaking

REDUCTION IN TAX DEVOLUTION

CAPITAL FLOWS THROUGH OFFSHORE FINANCIAL CENTRES

GENDER-EQUAL BOARDS OUT OF REACH UNTIL 2038

1. More than 12,000 companies registered in January 2023

BCAJ Admin

Corporate Law Corner Part A : Company Law

3 Case law no. 01/May 2023
Shri Narayani Nidhi Ltd
ADJ/07/RD (SR)/2022-23
Office of the Regional Director
Appeal against Adjudication order
Date of Order: 19th January, 2023

Appeal against Adjudication order: Not furnishing the Director Identification Number and violating Section 158 of the Companies Act, 2013.

FACTS

SNNL had filed an application for seeking the status of Nidhi before the Ministry of Corporate Affairs (‘MCA’). However, while scrutinising the said form, the MCA had observed that the Directors signing the financial statements had not mentioned their Director Identification Number (‘DIN’) in the documents attached with the Form AOC-4 for the F.Ys.2014-15, 2016-17 and 2017-18 respectively. Thus, the provisions of Section 158(1) of the Companies Act, 2013 were violated.

Sec. 158(1) of the Companies Act, 2013 provides that: Every person or company, while furnishing any return, information or particulars as are required to be furnished under this Act shall mention the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to the director or contain any reference of any director.

The Registrar of Companies, Chennai, Tamil Nadu examined the said default and passed the Adjudication Order (impugned order) under section 454(3) and (4) of the Companies Act, 2013 for default in compliance with the requirements of Section 158 of the Companies Act, 2013 and imposed a penalty of Rs. 1,50,000 on SNNL and Rs. 1,50,000 on SK, Managing Director of SNNL for the above default.

SNNL filed an appeal under section 454(5) of the Companies Act, 2013 against the Adjudication Order passed by the Registrar of Companies, Chennai, Tamil Nadu for default committed under section 158 of the Companies Act, 2013.

SNNL had contended the impugned order and pleaded that the non-compliance had occurred due to unavoidable circumstances, and the default was unintentional.

An opportunity of being heard was given to SNNL. The Authorised Representative PS, Practicing Company Secretary had appeared for SNNL and while reiterating the grounds taken in the appeal, stated that M/s SNNL had inadvertently omitted to mention the DIN of the signing directors in the financial statements for the F.Ys. 2014-15, 2016-17, and 2017-18. It was further submitted that the inadvertent omission to mention the DIN of signing directors was neither deliberate nor intentional and it was an unintentional clerical error that went unnoticed and hence prayed for a lenient view.

HELD

The Regional Director (‘RD’) stated that though there was a default committed, there was a ground for interfering with the impugned adjudication order of the Registrar of Companies to the extent of reducing the quantum of penalty. Accordingly, the penalties imposed were reduced as per the below-mentioned table:

Penalty as per Section	Penalty imposed on	No. of Years of Default	Penalty imposed by RoC	Penalty imposed by RD
Section 158(1) of the Companies Act, 2013	SNNL	2014-15, 2015-2016 and 2016-2017	Rs. 50,000 * 3 years = Rs. 1,50,000	Rs. 20,000 * 3 years = Rs. 60,000
Section 158(1) of the Companies Act, 2013	SK, Managing Director of SNNL	2014-15, 2015-2016 and 2016-2017	Rs. 50,000 * 3 years = Rs. 1,50,000	Rs. 20,000 * 3 years = Rs. 60,000

4 Case law no. 02/May 2023
Kudos Finance And Investments Pvt Ltd Ro CP/ADJ/ order/ 118/22-23/KUDOS/2418 to 2423
Office of Registrar of Companies Maharashtra, Pune
Adjudication order
Date of Order: 10th March, 2023

Adjudication order passed by the Registrar of Companies, Pune for default under Sub-section (10) and (11) of Section 118 of the Companies Act, 2013.

FACTS

Adjudicating Officer noticed that KFIPL had defaulted in observing the provisions of section 118(10) of the Companies Act, 2013 by not numbering its Board Meetings and the pages in the minute book of KFIPL. Further, the Minutes book was not signed by the Chairman and not numbered at all.

Section 118(10) of the Companies Act, 2013 provides that: “Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government”.

Further, as per Section 118(11) of the Act provides that if any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

Adjudicating Officer had issued an adjudication notice dated 10th February, 2023 under section 454(4) read with section 118 of the Companies Act, 2013 read with Rule 3(2) Of Companies (Adjudication of Penalties Rules), 2014 to KFIPL, PW, SJ, NV and AR, directors of KFIPL.

KFIPL in its reply to the adjudication notice submitted that owing to lack of knowledge on the part of KFIPL and lack of necessary professional guidance on the part of PW, SJ, NV and AR, the non-compliance of Section 118(10) of the Companies Act, 2013 read with Clause 7.1.4 of the Secretarial Standard-1 (SS-I) had occurred.

HELD

Adjudication Officer, after taking into account the various factors of the case mentioned above, imposed a penalty on KFIPL and its officers in default as per the below-mentioned table:

Sr. No.	Penalty imposed on:	Penalty Imposed (In Rs.)
1.	KFIPL	Rs. 25,000
2.	PW, Director	Rs. 5,000
3.	SJ, Director	Rs. 5,000
4.	NV, Director	Rs. 5,000
5.	AR, Director	Rs. 5,000

BCAJ Admin

Miscellanea

I. TECHNOLOGY

1 Apple’s India sales near $6 billion as CEO Tim Cook begins retail push

Apple Inc.’s sales in India hit a new high of almost $6 billion in the year through March, highlighting the market’s increasing importance for the iPhone maker as chief executive officer Tim Cook arrived in the country to open its first local stores.

Revenue in India grew by nearly 50 per cent, from $4.1 billion a year earlier, according to a person familiar with the matter, who asked not to be named as the information is not public. Apple posted quarterly earnings on 4th May, 2023 and signaled it expects total global revenue to decline.

Cook inaugurated India’s first Apple store, seeking to accelerate growth in a country of 1.4 billion where the company’s smartphones and computers have never held more than a minuscule market share due to their high cost. With tech demand slowing globally, Apple has identified India’s expanding middle class as an attractive opportunity and it’s also adding local production at an increasing rate.

Apple, which has thus far relied on retail partners and online sales in India launched its online store in the country in 2020 and its sales drive is set for a boost as it opened its first local store in an upscale business district in the financial hub of Mumbai. Two days later, it opened an outlet in the capital, New Delhi.

Apple’s India sales surged during the pandemic as customers bought iPhones and iPads to work and study from home. And that momentum has continued, helped by financing and trade-in options.

Yet its base is small — just about 4 per cent of India’s nearly 700 million smartphone users have iPhones — as the world’s second-biggest mobile market is led by cheaper local brands as well as Chinese and South Korean manufacturers. But the Cupertino, California-based company ranked number one in unit sales of devices above $365 last year, according to researcher Counterpoint.

Apple’s stores serve as key retail and showcase points for the world’s most valuable company, while also often becoming tourist hotspots. Critically, the new India stores will also double as support centers, a potential selling point because it makes product returns and repairs easier.

The company doesn’t break out India revenue in its earnings statements, but it is required to report annual sales in the country to local authorities. For the year through March 2022, it posted sales of Rs. 333.8 billion ($4.1 billion).

While that’s less than 2 per cent of Apple’s global revenue, the market’s significance is growing and the company is also expanding its local manufacturing footprint. Apple tripled its production to more than $7 billion of iPhones in India last fiscal year, part of an effort to reduce its reliance on China as tensions between Washington and Beijing continue to escalate.

Cook’s India push also means braving risks such as India’s notoriously high import duties for everything from components to finished products, which affect retail prices and demand. The country is also known for sudden shifts in rules and regulations, which can expose companies to unexpected costs. Yet the market’s growth potential makes it difficult to ignore.

“India is a hugely exciting market for us, and a major focus,” Cook said during an earnings call in February. “We’re putting a lot of emphasis on the market.”

(Source: economictimes.com 17th April, 2023)

2 ‘Monetizing Hate’: Unease as misinformation swirls on Twitter

When the iconic US diaper company Huggies was swamped with false pedophilia allegations last month, the conspiracy was traced to a once-banned influencer reinstated to Twitter by Elon Musk.

The Tesla tycoon bitterly denies that misinformation has surged since his turbulent $44 billion acquisition of the messaging platform, but experts say content moderation has been gutted after mass layoffs, while a paid verification system has served to boost conspiracy theorists.

Adding to the turmoil, the self-proclaimed free speech absolutist has restored what one researcher estimates are over 67,000 accounts that were once suspended for a myriad of violations, including the incitement of violence, harassment and misinformation.

Among those reinstated is Vincent Kennedy, a supporter of the QA non-conspiracy movement who was banned from Twitter after the 6th January, 2021, attack on the US Capitol.

Kennedy, according to the advocacy group Media Matters, launched a conspiracy theory in late March that left the Huggies diaper brand fighting off extraordinary pedophilia accusations.

He posted a picture of a Disney-themed diaper featuring Simba, a character from “The Lion King,” and circled triangles and spiral swirls that were part of the design.

This was to illustrate a widely debunked conspiracy theory that the shapes are recognised by the FBI as coded signals used by pedophiles. “Once you truly awake you ain’t going back to sleep,” Kennedy wrote in the tweet that garnered millions of views.

The conspiracy theory spread like wildfire to other platforms like TikTok. Huggies, which is owned by Kleenex-owner Kimberly-Clark, then faced an avalanche of hate messages and calls for a boycott.

Huggies sought to douse the flames, writing in a direct response to Kennedy’s tweet that its designs were nothing more than “fun and playful” and that it takes “the safety and well-being of children seriously.” But conspiracy theorists jumped on the response to further amplify the false claim. – ‘Real-world harm’ –

“Anecdotally, there’s no doubt that the flood of toxic content from repeat offenders Elon has re-platformed is driving real-world harm,” Jesse Lehrich, Co-founder of the advocacy group Accountable Tech, told AFP.

“When you reinstate the architects of the 6th January insurrection as democracy teeters on the brink, when you give a massive platform to notorious neo-Nazis amidst a surge in anti-Semitism, when you re-platform influential purveyors of medical disinformation in the middle of a pandemic, there are going to be real-world consequences.”

Travis Brown, a software developer based in Berlin, has compiled an online list of more than 67,000 restored Twitter accounts since Musk’s takeover in late October. Brown told AFP that the list was incomplete and the actual number of restored accounts could be higher.

In a recent BBC interview, Musk pushed back at allegations that misinformation and hateful content were seeing resurgence since his takeover.

He accused the interviewer of lying. “You said you see more hateful content, but you can’t even name a single one,” Musk said.

Experts AFP spoke to, named dozens of examples — including posts by anti-vaccine propagandists, neo-Nazis and white supremacists.

After his account was restored, election conspiracy theorist Mike Lindell called on his followers to “melt down electronic voting machines” and use them as prison bars.

Anti-LGBTQ+ narratives — including the false claim that the community “grooms” children — have spiked on the platform, according to the Center for Countering Digital Hate (CCDH).

One key driver of the “grooming” narrative, the group said, is conspiracy theorist James Lindsay, whose account was recently restored after previously being banned permanently.

– ‘Hateful rhetoric’ –

“The reinstatements increase hateful rhetoric across the platform, creating a culture of tolerance on Twitter — tolerance to misogyny, racism, anti-LGBTQ tendencies,” Nora Benavidez, from the nonpartisan group Free Press, told AFP.

Imran Ahmed, Chief Executive at CCDH, said “Twitter is monetising hate at an unprecedented rate.” Just five Twitter accounts peddling the “grooming” narrative generate up to $6.4 million in annual advertising revenue, according to CCDH’s research.

But experts say the strategy is counterproductive as that can hardly offset lost advertising revenue.

The chaotic shake-up under Musk has scared off several major advertisers. Twitter’s ad income will drop by 28 per cent this year, according to analysts at Insider Intelligence, who said “advertisers don’t trust Musk.”

As an alternative, Musk has sought to boost income from a verification checkmark, now available for $8 in a program called Twitter Blue. But dozens of “misinformation super-spreaders” have purchased the blue tick and are inundating the platform with falsehoods, according to the watchdog NewsGuard.

“Musk reinstated accounts to make money and to adopt what he believes, misguidedly, is some ‘equal free speech’ mindset — ignoring that the (policy) makes Twitter a platform which rewards violent language with visibility,” Benavidez said.

“This chills speech and engagement rather than furthers it.”

(Source: economictimes.com 15th April, 2023)

3 Artificial Intelligence helps ‘solve the mystery,’ match medicine to patient, aid in treatment of depression

What works for one may not for another. This is especially true when it comes to mental health problems like depression and antidepressants. These drugs that can make a person’s life significantly better often come with serious side effects. To avoid this and ensure that medications work effectively, an Israeli health-tech company is using Artificial Intelligence to match antidepressants to patients.

According to World Health Organization, globally, more than 280 million people suffer from depression. However, as per estimates for two-thirds of them, the initial prescriptions for depression or anxiety may not work properly.

The groundbreaking AI-based technology uses brain cells generated from patients’ blood samples which are then tested for biomarkers when exposed to various antidepressants.

Genetika+, the company then analyses the patient’s medical history and genetic data to determine the best drug and correct dosage for a doctor to prescribe.

As per a BBC report, the AI-based technology is still in development and is set to be launched commercially in 2024.

The company has secured funding from the European Union’s European Research Council and European Innovation Council. It is also working with pharmaceutical companies to develop precision drugs.

“We are in the right time to be able to marry the latest computer technology and biological technology advances,” says neuroscientist Dr Cohen Solal, Co-founder and CEO, Genetika+. Solal says that AI can help “solve the mystery” of which drugs work.

Dr. Heba Sailem, Senior Lecturer – Biomedical AI and Data Science, King’s College, London, says that the potential for AI to transform the global pharmaceutical industry is huge.

(Source: wionews.com dated 17th April, 2023)

II. WORLD NEWS

1 How many US mass shootings have there been in 2023?

There have been at least 160 mass shootings across the US so far this year. These include an attack during a 16th birthday party in Alabama, in which four died, at a school in Nashville, where three children and three adults were killed, and a mass shooting in Kentucky on 10th April, 2023, which left four victims dead.

Figures from the Gun Violence Archive – a non-profit research database – show that the number of mass shootings has gone up significantly in recent years.

In each of the last three years, there have been more than 600 mass shootings, almost two a day on average.

While the US does not have a single definition for “mass shootings”, the Gun Violence Archive defines a mass shooting as an incident in which four or more people are injured or killed. Their figures include shootings that happen in homes and in public places.

The deadliest such attack, in Las Vegas in 2017, killed more than 50 people and left 500 wounded. The vast majority of mass shootings, however, leave fewer than 10 people dead.

2 How do US gun deaths break down?

Around 48,830 people died from gun-related injuries in the US during 2021, according to the latest data from the US Centers for Disease Control and Prevention (CDC).

That’s nearly an 8 per cent increase from 2020, which was a record-breaking year for firearm deaths.

While mass shootings and gun murders (homicides) generally garner much media attention, more than half of the total in 2021 were suicides.

That year, more than 20,000 of the deaths were homicides, according to the CDC.

Data shows more than 50 people are killed each day by a firearm in the US.

That’s a significantly larger proportion of homicides than is the case in Canada, Australia, England and Wales, and many other countries.

3 How many guns are there in the US?

While calculating the number of guns in private hands around the world is difficult, the latest figures from the Small Arms Survey – a Swiss-based research project – estimated that there were 390 million guns in circulation in the US in 2018.

The US ratio of 120.5 firearms per 100 residents, up from 88 per 100 in 2011, far surpasses that of other countries around the world.

More recent data out of the US suggests that gun ownership grew significantly over the last few years. A study, published by the Annals of Internal Medicine in February, found that 7.5 million US adults became new gun owners between January 2019 and April 2021.

This, in turn, exposed 11 million people to firearms in their homes, including 5 million children. About half of new gun owners in that time period were women, while 40 per cent were either black or Hispanic.

4. Who supports gun control?

A majority of Americans are in favor of gun control.

Nearly 57 per cent of Americans surveyed said they wanted stricter gun laws – although this fell last year – according to polling by Gallup.

Around 32 per cent said the laws should remain the same, while 10 per cent of people surveyed said they should be “made less strict”.

(Source : BBC.com dated 16th April, 2023)

III. ENVIRONMENT

1 Greener flights will cost more, says industry

The cost of decarbonising air travel is likely to push up ticket prices and put some off flying, a group representing the UK aviation industry says. Measures such as moving to higher-cost sustainable aviation fuel will “inevitably reduce passenger demand”, according to Sustainable Aviation.

But it found people will “still want to fly” despite “slightly higher costs”.

Annual passenger numbers are still expected to rise by nearly 250 million by 2050, it added.

Sustainable Aviation is an alliance of companies including airlines such as British Airways, airports such as Heathrow and manufacturers like Airbus.

It said that Sustainable Aviation Fuel (SAF) would be a key part of the industry’s “journey to net zero”, accounting for at least three quarters of the fuel used in UK flights by 2050.

SAF is produced from sustainable sources such as agricultural waste and reduces carbon emissions by 70 per cent compared with traditional jet fuel.

However, it is currently several times more expensive to produce – costs the group says would have to be passed on.

The cost of using carbon offsetting schemes to reach net zero will also drive up airlines’ costs, the report adds.

Heathrow Airport’s director of sustainability Matthew Gorman, Chairman, Sustainable Aviation – said this “green premium” will have “some impact on future demand” for air travel.

But he added that the industry could still “grow significantly” as most people were “happy to pay a bit more to travel”.

The Sustainable Aviation Group argues the move to greener travel presents a big opportunity for the UK, which has the world’s third-largest global aviation network.

Up to five new SAF production plants are planned for the UK, with the government investing in their development.

However, the group said it was concerned investors would be lured to the US and the rest of Europe by “significant” tax incentives, and the UK risked missing out.

In response, it urged the government to introduce a mechanism to close the gap in price between SAF and traditional jet fuel.

Transport Secretary Mark Harper said: “This government is a determined partner to the aviation industry – helping accelerate new technology and fuels, modernise their operations and work internationally to remove barriers to progress.

“Together, we can set aviation up for success, continue harnessing its huge social and economic benefits, and ensure it remains a core part of the UK’s sustainable economic future.”

(Source: bbc.com. dated 14th April, 2023)

BCAJ Admin

Regulatory Referencer

I. DIRECT TAX

1. Clarification regarding deduction of TDS under section 192 r.w.s 115BAC(1A) of the Income-tax Act – Circular No. 4/2023 dated 5th April, 2023

Section 115BAC of the Act provides for concessional tax rates subject to the condition that the total income shall be computed without specified exemption or deduction, set off of loss and additional depreciation.

The Finance Act, 2023 has inserted sub-section (6) to make the new tax scheme the default scheme. If the assessee wants to pay tax as per the normal regime, he will have to opt out of the new tax scheme. Employers had expressed concern regarding tax to be deducted at source from salary income as they would not know if the employee would be covered by section 115BAC or he would opt-out.

CBDT has now issued directions for the employers.

2. Partial relaxation with respect to electronic submission of Form lOF by select category of taxpayers – F. No. DGIT(S)-ADG(S)-3/e-Filing Notification/Forms/2023/ 13420 dated 28th March, 2023

Notification No. 03/2022 dated 16th July, 2022 mandated furnishing of Form 10F electronically. Considering the practical challenge faced by non-resident taxpayers not having PAN in compliance as per the above notification, it was provided that the non-resident taxpayers not having, and not required to have, PAN as per relevant provisions of the Act, as being exempted from mandatory electronic filing of Form 10F till 31st March, 2023. The said exemption is now further extended till 30th September, 2023. Suchcategory of taxpayers may make statutory compliance of filing Form 10F till 30th September, 2023 in manual form.

3. Amendment to Rule 114AAA – Income-tax (Fourth Amendment) Rules, 2023- Notification No. 15/ 2023 dated 28th March, 2023

CBDT has extended the last date to link Permanent Account Number (PAN) with Aadhaar to 30th June,2023

4. 348 notified as Cost Inflation Index for F.Y. 2023-24 – Notification No. 21/2023 dated 10th April, 2023.

II. COMPANIES ACT, 2013

1. MCA notifies Companies (Removal of Names of Companies from Register of companies) Amendment Rules, 2023: In order to facilitate quick exit process to companies, MCA has notified Companies (Removal of Names of Companies from Register of companies) Amendment Rules, 2023 with effect from 01st May, 2023. The notification has introduced Centre for Processing Accelerated Corporate Exit. Henceforth, applications for removal of name of a company shall be made to the above-mentioned authority in Form No. STK-2. The forms STK-2, STK-6, STK-7 have been revised. [MCA notification dated 17th April, 2023]

III. SEBI

1. Stock Exchanges to collect 0.5 per cent of debt securities’ issuance value and keep it in an escrow a/c before allotment: SEBI has mandated the stock exchanges to collect an amount of 0.5 per cent of issuance value of debt securities p.a. based on its maturity and place it in an escrow account before allotment of debt securities in case of public issue or private placement. Earlier, such an amount had to be collected upfront prior to listing of debt securities. The circular shall be effective for offer documents filed on or after 1st May, 2023 for private placement/public issues of debt securities. [Circular No. SEBI/HO/DDHS/DDHS-RACPOD1/CIR/P/2023/56, dated 03rd April ,2023]

2. SEBI directs investment advisors and research analysts to display their information prominently in advertisements: SEBI has asked Investment Advisors (IAs) and Research Analysts (RAs) to prominently display information such as the name as registered with SEBI, its logo, its registration number, etc. In addition, they are required to give the disclaimer that “registration granted by SEBI shall in no way guarantee performance of the intermediary or provide any assurance of returns to investors” in their advertisements. [Circular No. SEBI/HO/MIRSD/ MIRSD-POD-2/P/CIR/2023/52, dated 06th April, 2023]

3. SEBI issues Operational Circular for Debenture Trustees: The SEBI had issued multiple circulars over the years, covering the operational and procedural aspects of Debenture Trustees (DTs). In order to enable the industry and other users to access all the applicable circulars at one place, an Operational Circular for DTs has been prepared. An Operational Circular is a compilation of the existing circulars. The Board of the DTs shall be responsible for ensuring compliance with these provisions. The circular shall be effective from 01st April, 2023. [Circular No. SEBI/HO/DDHS/P/CIR/2023/50, dated 31st March, 2023]

FEMA AND IFSCA REGULATIONS

1. RBI RELEASES DATA

RBI releases data on following:

– India’s international investment position for the end of December 2022;

– Relating to financial performance of foreign direct investment (FDI) companies in India during 2021-22;

– Relating to the financial performance of non-government non-financial (NGNF) private limited companies during 2021-22.

Key features are summarised in the respective press releases.

[Press Releases: 2022-2023/1948, 2022-2023/1943, and Press Release all dated 31st March, 2023]

2. ONLINE APPLICATION FOR FFMCS AND NON-BANK AUTHORISED DEALERS CATEGORY-II

A software application called ‘APConnect’ has been developed for processing of application for licensing of Full Fledged Money Changers (FFMCs) and non-bank Authorised Dealers (AD) Category-II, authorisation as MTSS Agent, renewal of existing licence/authorisation, for seeking approval as per the extant instructions and for submission of various statements/returns by FFMCs and non-bank AD Cat II. Existing FFMCs/non-bank AD Category-II shall register themselves on the APConnect application within three months from the date of issue of this circular, through the weblink indicated in para 2.
[A.P. (DIR Series) Circular No.1, dated 6th April, 2023]

3. STATEMENT ON DEVELOPMENTAL AND REGULATORY POLICIESRBI’s

Statement sets out various developmental and regulatory policy measures relating to (i) Financial Markets; (ii) Regulation and Supervision; and (iii) Payment and Settlement Systems. Key developments:

a. With a view to develop the onshore INR Non-deliverable foreign exchange derivative contracts(NDDC) and to provide residents with the flexibility to efficiently design their hedging programs, it has been decided to permit banks with IBUs to offer INR Non-deliverable foreign exchange derivative contracts(NDDCs) to resident users in the onshore market. These banks will have the flexibility of settling their Non-deliverable foreign exchange derivative contracts(NDDC) transactions with non-residents and with each other in foreign currency or in INR while transactions with residents will be mandatorily settled in INR. Related directions are being issued separately.

b. It has been decided to develop a secured web based centralised portal named as ‘PRAVAAH’ (Platform for Regulatory Application, Validation And AutHorisation) which will gradually extend to all types of applications made to RBI across all functions.

There are other measures mentioned in the detailed Statement.

[Press Release No. 2023/2024/23, dated 6th April, 2023]

4. IFSCA SPECIFIES ‘OPERATING LEASE’ AS A FINANCIAL PRODUCT

Section 12 of the International Financial Services Centres Authority Act (IFSCA), 2019 has been amended to include an operating lease, including a hybrid of operating and financial lease, in respect of ‘Aviation training simulation devices’, as a financial product.[Notification No. IFSCA/2022-23/GN/037, dated 11th April, 2023]

5. REINSURANCE STRATEGY PROGRAMME FOR IFSC INSURANCE OFFICES

IFSCA has issued International Financial Services Centre Authority (Re-Insurance) Regulations, 2023 for ‘IFSC Insurance Offices’ to develop their re-insurance strategy program for risk management.[Notification F. No. IFSCA/2022-23/GN/REG036, Dated 11th April, 2023]

6. IFSCA ALLOWS PORTFOLIO MANAGERS TO PARK FUNDS OF CLIENTS IN A SEPARATE BANK ACCOUNT IN INDIA OR ABROAD

IFSCA has amended Regulation 77 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 to allow portfolio managers to park funds of clients in a separate bank account in India or abroad.

[Notification F. No. IFSCA/2022-23/GN/REG036, dated 11th April, 2023]

7. ONLINE SUBMISSION OF FORM A2 BY AD CATEGORY-II ENTITIES

It has now been decided to permit AD Category-II entities also to allow online submission of Form A2. AD Category-II entities shall frame appropriate guidelines with the approval of their Board within the ambit of extant statutory and regulatory framework.

[A.P. (DIR Series) Circular No. 2, dated 12th April, 2023]

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.2/2023-Central Tax dated 31st March, 2023

By the above notification, the date for filing GSTR 4 for F.Ys.2017-18 to 2021-22 is extended upto 30th June, 2023 without any late fees, if there is no additional liability. If there is additional tax payable, then the late fees will be maximum Rs.250 under the CGST Act.

ii) Notification No.3/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is provided to the Registered Person whose registration has been cancelled on or before 31st December, 2022 for non-filing of returns. If such a person files returns upto effective date of cancellation with applicable interest and late fees before 30th June, 2023 then he can apply for the revocation of cancellation. The person in whose case an appeal is rejected can also take benefit of this notification.

iii) Notification No.4/2023-Central Tax dated 31st March, 2023

By above notification, the rule 8(4A) of CGST Act is substituted. The said rule is regarding authentication of Aadhar number. This is now a revised procedure.

iv) Notification No.5/2023-Central Tax dated 31st March, 2023

By the above notification, a clerical mistake in notification no. 27/2022 dated 26th December, 2022 is corrected.

v) Notification No.6/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is given to the registered person who failed to file valid returns within the period of 30 days from the service of best judgment assessment order under section 62(1) of the CGST Act issued before 28th February, 2023. If the return is filed before 30th June, 2023 with applicable interest and late fees, then said order can get cancelled.

vi) Notification No.7/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is given to the defaulter of filing annual returns in Form 9 by the due date for the years 2017-18 to 2021-22. If such return is filed upto 30th June, 2023, then the late fees will be maximum Rs.10,000 under the CGST Act instead of higher late fees as per normal provisions.

vii) Notification No.8/2023-Central Tax dated 31st March, 2023

By the above notification, a waiver of late fees is provided in case of final returns in Form GSTR-10. If such a return is not filed earlier, and is filed upto 30th June, 2023, then the late fees will be Rs.500 instead of higher late fees as per normal provisions.

ix) Notification No.9/2023-Central Tax dated 31st March, 2023

By the above notification, issued under section168A of the CGST Act, the time limits for passing orders under section 73 are extended as under:

Financial year	Extended date
2017-18	31^st December, 2023
2018-19	31^st March, 2024
2019-20	30^th June, 2024

x) Notification No.1/2023-Compensation Cess dated 31st March, 2023

By this notification, the provisions of section 163 of Compensation Act are brought into force from 1st April, 2023.

xi) Notification No.2/2023-Compensation Cess dated 31st March, 2023

By this notification, the rates given in the schedule are modified.

B. CIRCULARS

a) Clarification about GST rate and classification of ‘Rab’ -Circular no.191/03/2023-GST, dated 27th March, 2023

The CBIC has issued the above circular giving clarification about GST rate on ‘Rab’. It is also clarified that the issue for past period is regularised on ‘as is’ basis.

C. ADVANCE RULINGS

4 Rabia Khanum (AR No. KAR ADRG 31/2022

Dated 8th September, 2022) (Kar)

Sale of Developed land plot – liability under GST

The applicant is an individual and not registered under GST. The Applicant intended to convert its land into residential sites.

The applicant sought advance ruling in respect of the following questions:

“i. Whether GST is applicable for the consideration received on sale of sites? If yes, at what rate and on what value?

ii. Whether GST is applicable for the advance received towards sale of site? If yes, at what rate and on what value?

iii. Whether GST is applicable on sale of plots after completion of works related to basic necessities?

iv. If GST is chargeable on any of these transactions, can the applicant collect the GST from the prospective buyers?

v. If GST is chargeable on any of these transactions whether the applicant is eligible for claiming Input Tax Credit that they pay on the expenses they incur on development?”

The ld. AAR has analyzed facts that the applicant owns three acres of land at Sy No.61/8 (old Sy No.61/1), Bagganadu Village, J G Halli Hobli, Hiriyur Taluk, Chitradurga District and on getting permission from the concerned Government Authorities it will be converted for residential usage, wherein they will be forming small plots of land (residential sites) and sell these to individuals.

The land will be developed as per regulations of the District Town and Country Planning Act. It was also noted that the Karnataka Real Estate Regulation Act and other zonal regulations would be applicable while obtaining sanction of the plan. The development of land includes formation of roads, formation of rain water drains, laying of electricity cables, water pipes, sewerage lines, drilling of borewells for supply of water, construction of water tank for storage and supply of water, setting up of a power sub-station and obtaining connection from Electricity board for supply of electricity etc., which are basically required for human inhabitation. It was also noted that without providing these basic necessities, the concerned authorities will not grant permission to sell the plots to individuals for construction of houses.

It was explained that the applicant will not be entering into an agreement with any prospective buyer, where consideration is separately identified between cost of the plot and cost of development.

The applicants further stated that they will enter into an agreement of sale with the prospective customers for sale of individual sites and receive advances for the same. On receipt of the full consideration, the sale deed will be executed.

It was informed to ld. AAR that the prospective buyers are aware of the fact that they will be purchasing a plot worthy of constructing a house to live, since the authorities will be maintaining and managing the amenities required for living.

Based on above facts the ld. AAR analysed the legal position.

The ld. AAR made reference to entries in Schedule III of CGST Act and reproduced relevant part as under:

“SCHEDULE III.
[See section 7]

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED

NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

1 to 4…

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

It is observed that the sale of land is listed in entry No.5 of the Schedule III which treats the transaction listed in same as neither amounting to supply of goods or supply of Services. In other words, the transactions mentioned in the said Schedule are not liable to GST.

The Ld. AAR also made reference to Circular no.177 dated 3rd August, 2022 in which clarification as to whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST Act is given.

The ld. AAR reproduced para 14 of said circular as under:

“14. Whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST

14.1 Representation has been received requesting for clarification regarding applicability of GST on sale of land after levelling, laying down of drainage lines etc.

14.2 As per Sl. no. (5) of Schedule III of the Central Goods and Services Tax Act, 2017, ‘sale of land’ is neither a supply of goods nor a supply of services, therefore, sale of land does not attract GST.

14.3 Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017, and accordingly does not attract GST.

14.4 However, it may be noted that any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.”

Considering above legal position, the ld. AAR held that sale of land in case of applicant does not attract GST. The order was passed accordingly.

5 Zydus Lifesciences Ltd (Fomerly known as Cadila Healthcare Ltd) (AR No. GUJ/GAAR/R/2022/42 Dated 28th September, 2022) (Guj)

Recovery from employees towards canteen facility – No liability under GST

Applicant, Zydus Lifesciences Ltd is engaged in the manufacture, supply and distribution of various pharmaceutical products. They have 1,200 (approx.) employees in their factory, and are registered under the provisions of the Factories Act, 1948. Zydus is required to comply with all the obligations and responsibilities cast under the provisions of the Factories Act.

The applicant avails canteen services from canteen service providers. The applicant pays full amount to said service providers.

No ITC is claimed on such inward supply. The applicant collects some part of such canteen expenses from the employees by deducting from their salary slips. Based on above facts following questions were raised before ld. AAR.

“Whether the subsidized deduction made by the Applicant from the employees who are availing food in the factory/corporate office would be considered as a supply by the Applicant under the provisions of Section 7 of Central Goods and Service Tax Act, 2017 and Gujarat Goods and Service Tax Act, 2017.

a. In case answer to above is yes, whether GST is applicable on the amount deducted from the salaries of its employees?

b. In case answer to above is no; GST is applicable on which portion i.e. amount paid by the Applicant to the Canteen Service Provider or only on the amount recovered from the employees?”

The applicant cited various precedents on above issue as well as explained legal provisions to submit that it is not supply within GST Act and hence no liability. The aspects like, canteen service is mandatory under the Factories Act, no business of canteen supply by applicant, no contract nor relationship between applicant and employee for supply, service by employee not supply of goods or services as per entry in Schedule III, were highlighted.

The ld. AAR, based on above facts and legal position, held that there is no supply in respect of such recovery from employees and hence no liability under GST.

6 Kirloskar Oil Engines Ltd

(AR No.GUJ/GAAR/R/2022/44

Dated 28th September, 2022 (Guj)

Classification – Power driven Mechanical Sprayer

The applicant, Kirloskar Oil Engines Ltd is engaged in manufacturing of Pump Sets and Diesel Engines at Rajkot plant and intends to sell mechanical sprayers. The applicant intends to classify the same under Tariff Heading 8424 in the Notification No. 11/2017- CT (Rate) dated 28th June, 2017 as amended vide Notification No. 6/2018-CT (Rate) dated 25th June, 2018 under Entry No. 195B.

The applicant submitted the details of the product HTP (Horizontal Triplex Plunger) Kirloskar Power Sprayer (Engine Driven) as under:

“HTP Sprayer – Horizontal Triplex Plunger sprayer is a mechanical pumping system which develops the required pressure to spray water and other liquids for various agriculture and industrial purposes.”

The applicant submitted that following are major parts of HTP Sprayer:

“Petrol Engine
Base frame made of Steel
V Pully
Power Sprayer etc.”

Based on above, following question was raised about classification under HSN and rate of GST.

“(1) What is the 8 digit HSN and GST tax rate of HTP Kirloskar Power Sprayer (engine driven).”

Ld. AAR referred to information about product available on website of applicant, which threw light on nature of product as under:

“Kirloskar Farm Mechanization power sprayer is a perfect combination of advance technology, user-friendliness and versatility. The sprayer is ergonomically designed to ensure effective pesticide application in agricultural fields, orchards, tea plantations and vegetable gardens. The gun-type power sprayer aids in uniform spraying, ensuring effective control of pests.

Suitable to spray pesticides and insecticides for pest control in Guava, Grapes, Mango, Coconut, Banana, Papaya, Pomegranate and Chikku
Properly segregated containers for seeds and fertilizer
Pulley-driven multipurpose spraying machine
All-purpose farm equipment, ideal for both small and large scale spraying
Rugged and sturdy construction

The power sprayer by Kirloskar Farm Mechanization ensures comfort and reduced time, with improved productivity.”

Accordingly the ld. AAR found that the HTP (Horizontal Triplex Plunger) Kirloskar Power Sprayer (Engine Driven) is a mechanical pumping system which develops the required pressure to spray water and other liquids and its applications are in agriculture field and other fields.

Based on the above and considering submission of applicant the ld. AAR observed that the product would be covered under HSN 8524 of First schedule to Custom Tariff Act.

The ld. AAR referred to said Tariff in Custom Tariff Act as well as in HSN in detail.

Based on the fact that power sprayer is suitable to spray pesticides and insecticides for pest control in Guava, Grapes, Mango, Coconut, Banana, Papaya, Pomegranate and Chikku and that the impugned goods can be used in various places as per the requirements and does not have exclusive use in agriculture and horticulture only, the ld. AAR found that the given product, ‘HTP kirloskar Power Sprayer’ merits classification under HSN 8424 89 90.

Regarding finding of rate under GST, the ld. AAR referred to entry 325 in Schedule III of Notification no.1/2017- CT (Rate) dated 28th June, 2017 and several amendments made there in and also entry 195B in Schedule II of Notification no.1/2017 which is inserted from 25th January, 2018. The said entry 195B reads as under:

“S. No.	Chapter/ Heading/ Subheading/Tariff item	Description of goods
195B	2017-18	Sprinklers; drip irrigation system including laterals; mechanical sprayers”;”

The ld. AAR also referred to Circular No. 113/32/2019-GST in which clarification is given on ‘Applicable GST rate on Mechanical Sprayer’.

From the said circular ld. AAR found that the CBIC has clarified that mechanical appliances, whether or not hand operated for projecting, dispersing or spraying liquids attract GST @18 per cent at Sr. No. 325 of Schedule III. Since the applicant’s goods are mechanical appliances used in dispensing and spraying the liquids in various fields as per the requirements, the ld. AAR concluded that the product ‘HTP kirloskar Power Sprayer’ merits classification under HSN 8424 89 90 and is covered under Entry No. 325 of Schedule-III of Notification No. 1/2017-Central Tax (Rate), dated 28th June, 2017 liable to GST at 18.per cent

7 M/s Power Solutions

(AAR No.A. R. Com/09/2021

Dated15th July, 2022)

(TSAAR Order No.44/2022)(Telangana)

Government Contract – Rate of tax

The applicant, Power Solutions executes works for Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB) and being contract desirous of obtaining clarification regarding the rate of tax on such works, filed this application.

Based on information given, the ld. AAR observed that HMWSSB is governmental authority as per definitions given in Notification no.11/2017 CT (Rate) dated13th October, 2017.

The ld. AAR also found that the contracts executed by the applicant fall under entry at S. No. 3(vi) of Notification No.11/2017 which reads as under:

“(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.”

Therefore, as per above entry the contractor was liable to tax @ 12 per cent.

However, the ld. AAR also referred to amendment effected in above entry vide notification no.15/2021 dated 18th November, 2021 whereby the phrases ‘Government Entity’ and ‘Government Authority’ were deleted from said Entry 3(vi) of Notification no.11/2017 with effect from 1st January, 2022. Accordingly, the ld. AAR observed that the works executed for ‘Government Entity’ and ‘Government Authority’ are taxable @ 18 per cent from 1st January, 2022.

In view of the above discussion, the ld. AAR clarified the questions raised by the applicant as under:

“Questions	Ruling
1. GST rate of tax on TS Government, HMWSSB work contracts including material & services and services only.	a. For works contract including material & services the rate of tax applicable upto 31.12.2021 is 6% of CGST & 6% of SGST, and from 01.01.2022 the rate of tax is 9% of CGST & 9% of SGST for the reasons discussed above.
	b. For pure services not involving any material the transaction is exempt for the reasons discussed above.”

8 Hyderabad Security Offset Printers Pvt Ltd

(AAR No.A. R. Com/06/2022

Dated15th July, 2022)

(TSAAR Order no.45/2022) (Telangana)

Classification – Rate of GST on supply of Printing Services

The applicant, Hyderabad Security Offset Printers Pvt Ltd is engaged in printing of leaflets and packing materials pertaining to pharmaceutical sector. The leaflets contain the literature pertaining to said medicine. The applicant, desirous of knowing the rate of tax on the services supplied by them, raised following question:

“What is the rate of tax including HSN code for printing of leaflets?”

In hearing the applicant clarified that, they are into the business of printing and sale of packing material for pharmaceutical companies and further that, they also print leaflets containing the literature pertaining to the said medicines.

It was further clarified that they are presently charging 18 per cent on such leaflets. However, they desired of ascertaining the actual liability.

The ld. AAR referred to amended Notification no.11/2017 which was amended on 22nd August, 2017 to insert the following at sr. no.27 by substitution:

“(1)	(2)	(3)	(4)	(5)
27	Heading 9989	(i) Services by way of printing of newspapers, books (including Braille books), journals and periodicals, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer.	6	–
27	Heading 9989	(ii) Other manufacturing services; publishing, printing and reproduction services; materials recovery services, other than (i) above.	9	-“

The ld. AAR also referred to Notification No.31/2017 – Central Tax (Rate) dt.13.10.2017 by which following entry is introduced at serial no. 26 with chapter heading 9988 at sub-item (iia):

“(iia) Services by way of any treatment or process on goods belonging to another person, in relation to printing of all goods falling under Chapter 48 or 49, which attract CGST @ 6per cent.”

Based on above two entries the ld. AAR gave ruling as under:

“Questions	Ruling
What is the rate of tax including HSN code for printing of leaflets?	a. Where the physical inputs are used by the applicant, the activity falls under S. No. 27(ii) of the Notification No. 11/2017 and hence is liable to be taxed @9% CGST & SGST each.b. Where the physical inputs are supplied by the recipient of services, the activity falls under S. No. 26(iia) of Notification No. 11/2017 as amended on 13.10.2017 and same is taxable @6% CGST & SGST each.

9 Maddi Seetha Devi (AAR No. A. R. Com/15/2019 dt.13.7.2022) (TSAAR Order no. 47/2022) (Telangana)

Liability on ‘Development rights’ under GST

The facts are that Maddi Seetha Devi (also referred to as land-owner promoter), the applicant, is a registered tax payer and a land owner and has entered into a development agreement with PHL (also referred to as developer promoter) and entrusted the land to PHL by way of a joint development agreement in the year 2016. PHL will hand over 27 per cent of the developed property to the applicant. Being desirous of clarification regarding liability on transfer of development rights and time of supply under GST, this application was filed, raising following questions:

“1. Whether transfer of land or transfer of ‘development rights’ to the developer by the landowner is to be considered as receipt of consideration by the developer as per Notification No.04/2018-CT (Rate) dt.25.01.2018 and as per the clarifications issued after introduction of GST and prior thereto towards the construction of flats in the residential complex to be taken up by the developer for the landowner?

2. Whether the liability to pay GST or service tax as applicable arises on the developer immediately on receipt of development rights or immediately on conveyance of the flats to be constructed by way of an allotment letter?”

The ld. AAR referred to background of taxation of real estate services prior and after 1st April, 2019and drew following observations about the liability of the developer-promoter and land owner-promoter for projects which have commenced prior to 1st April, 2019:

“i) The applicant who is the developer-promoter shall pay CGST & SGST on the supply of construction of apartment to the land owner promoter.

ii) If the land owner promoter further supplies such apartment to the buyers before the issuance of completion certificate he shall be liable to pay CGST & SGST on such supplies. However, the land owner promoter shall be eligible for input tax credit of the taxes charged from him by the developer-promoter.”

Based on above position the ld. AAR held that the tax on the portion of constructed area shared with the land owner promoter has to be paid by developer-promoter. Simultaneously, the applicant i.e., the land owner promoter will claim such tax as ITC whenever she makes further sale of such property before issuance of completion certificate.

Regarding the liability to pay tax on transfer of development right the ld. AAR referred to the conditions laid down in Notification No. 04/2018 wherein it is provided that the liability to pay tax on consideration received by the developer-promoter in form of development rights shall arise at a time when such developer-builder transfers possession or right in the constructed complex. The ld. AAR thus clarified that after the completion of the construction of a civil structure the time of supply arises when the right or possession in such constructed complex is transferred to the land owner-promoter.

Accordingly, the ld. AAR clarified the tax position for land owner promoter as well as developer promoter.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Reporting by Auditors is becoming onerous every year with new clauses being added. Also, to take care of the increasing regulatory expectations, auditors need to be careful on every word they include in their report. Given below is an illustrative Auditors’ Report for FY 2022-23 issued for one of the early reporting companies.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INFOSYS LTD

Report on the Audit of the Standalone Financial Statements

Opinion

We have audited the accompanying standalone financial statements of Infosys Ltd (the “Company”), which comprise the Balance Sheet as on 31st March, 2023, the Statement of Profit and Loss (including Other Comprehensive Income), the Statement of Changes in Equity and the Statement of Cash Flows for the year ended on that date and a summary of significant accounting policies and other explanatory information (hereinafter referred to as the “standalone financial statements”).

In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Companies Act, 2013 (the “Act”) in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards prescribed under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015, as amended, (“Ind AS”) and other accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 2023 and its profit, total comprehensive income, changes in equity and its cash flows for the year ended on that date.

Basis for Opinion

We conducted our audit of the standalone financial statements in accordance with the Standards on Auditing (“SA”s) specified under section 143(10) of the Act. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the Audit of the Standalone Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India (“ICAI”) together with the ethical requirements that are relevant to our audit of the standalone financial statements under the provisions of the Act and the Rules made thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI’s Code of Ethics. We believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our audit opinion on the standalone financial statements.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements of the current period. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our report.

Not reproduced

INFORMATION OTHER THAN THE FINANCIAL STATEMENTS AND AUDITOR’S REPORT THEREON

The Company’s Board of Directors is responsible for the other information. The other information comprises the information included in the Management Discussion and Analysis, Board’s Report including Annexures to Board’s Report, Business Responsibility and Sustainability Report, Corporate Governance and Shareholder’s Information, but does not include the consolidated financial statements, standalone financial statements and our auditor’s report thereon.Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the standalone financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the standalone financial statements or our knowledge obtained during the course of our audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE STANDALONE FINANCIAL STATEMENTS

The Company’s Board of Directors is responsible for the matters stated in section 134(5) of the Act with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance, including other comprehensive income, changes in equity and cash flows of the Company in accordance with the Ind AS and other accounting principles generally accepted in India. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the standalone financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.In preparing the standalone financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Board of Directors is also responsible for overseeing the Company’s financial reporting process.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE STANDALONE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the standalone financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these standalone financial statements.

As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the standalone financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal financial control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. Under section 143(3)(i) of the Act, we are also responsible for expressing our opinion on whether the Company has adequate internal financial controls with reference to standalone financial statements in place and the operating effectiveness of such controls.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the standalone financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the standalone financial statements, including the disclosures, and whether the standalone financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Materiality is the magnitude of misstatements in the standalone financial statements that, individually or in aggregate, makes it probable that the economic decisions of a reasonably knowledgeable user of the standalone financial statements may be influenced. We consider quantitative materiality and qualitative factors in (i) planning the scope of our audit work and in evaluating the results of our work; and (ii) to evaluate the effect of any identified misstatements in the standalone financial statements.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the standalone financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

1. As required by Section 143(3) of the Act, based on our audit we report that:

a. We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit.

b. 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.

c. The Balance Sheet, the Statement of Profit and Loss including Other Comprehensive Income, Statement of Changes in Equity and the Statement of Cash Flows dealt with by this Report are in agreement with the books of account.

d. In our opinion, the aforesaid standalone financial statements comply with the Ind AS specified under section 133 of the Act.

e. On the basis of the written representations received from the directors as on 31st March, 2023 taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2023 from being appointed as a director in terms of Section 164(2) of the Act

f. With respect to the adequacy of the internal financial controls with reference to standalone financial statements of the Company and the operating effectiveness of such controls, refer to our separate Report in “Annexure A”. Our report expresses an unmodified opinion on the adequacy and operating effectiveness of the Company’s internal financial controls with reference to standalone financial statements.

g. With respect to the other matters to be included in the Auditor’s Report in accordance with the requirements of section 197(16) of the Act, as amended:

In our opinion and to the best of our information and according to the explanations given to us, the remuneration paid by the Company to its directors during the year is in accordance with the provisions of section 197 of the Act.

h. With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, as amended, in our opinion and to the best of our information and according to the explanations given to us:

i, The Company has disclosed the impact of pending litigations on its financial position in its standalone financial statements. Refer Note 2.23 to the standalone financial statements.

ii. The Company has made provision as required under applicable law or accounting standards for material foreseeable losses. Refer Note 2.16 to the standalone financial statements. The Company did not have any long-term derivative contracts.

iii. There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company.

iv. a. The Management has represented that, to the best of its knowledge and belief, other than as disclosed in the note 2.24 to the Standalone Financial Statements, no funds (which are material either individually or in the aggregate) have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or in any other person or entity, including foreign entity (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;

b. The Management has represented, that, to the best of its knowledge and belief, no funds (which are material either individually or in the aggregate) have been received by the Company from any person or entity, including foreign entity (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the Company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;

c. Based on the audit procedures that have been considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the representations under sub-clause (i) and (ii) of Rule 11(e), as provided under (a) and (b) above, contain any material misstatement.

v. As stated in Note 2.12.3 to the standalone financial statements

a. The final dividend proposed in the previous year, declared and paid by the Company during the year is in accordance with Section 123 of the Act, as applicable.

b. The interim dividend declared and paid by the Company during the year and until the date of this report is in compliance with Section 123 of the Act.

c. The Board of Directors of the Company have proposed final dividend for the year which is subject to the approval of the members at the ensuing Annual General Meeting. The amount of dividend proposed is in accordance with section 123 of the Act, as applicable.

vi. Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 for maintaining books of account using accounting software which has a feature of recording audit trail (edit log) facility is applicable to the Company with effect from 1st April, 2023, and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 is not applicable for the financial year ended 31st March, 2023.

2. As required by the Companies (Auditor’s Report) Order, 2020 (the “Order”) issued by the Central Government in terms of Section 143(11) of the Act, we give in “Annexure B” a statement on the matters specified in paragraphs 3 and 4 of the Order.

BCAJ Admin

Allied Laws

5. Jagadeesan and others vs. A. Logesh
AIR 2023 MADRAS 94
Date of order: 11th November, 2022

Registration – Unregistered agreement to sell – Non-registration is not a bar from specific performance [Registration Act, 1908, Section 17(1)(g), 49; Specific Relief Act, 1963, S. 20]

FACTS

The Plaintiff/Respondent filed a suit for the specific performance of a contract based on an unregistered agreement of sale before the District Court.

The Defendants/Petitioners challenged the maintainability of the said suit since the same was based on an unregistered sale agreement.

Hence the present petition.

HELD

In view of the express provision contained in section 49 of the Registration Act, the suit cannot be rejected on the grounds that the agreement is unregistered as per section 17 (1)(g) of the Registration Act and section 2(g) of the Contract Act. The Court referred to the decision in the case of D. Devarajan vs. Alphonse Marry & another reported in 2019 (2) CTC 290 in which it was held that the consequence of non-registration does not operate as a total bar to look into the contract. The Proviso to Section 49 of the Registration Act itself carves out two exceptions: (i) it can be used for any collateral purposes, and (ii) it can be used as an evidence in a suit for specific performance”.

In view of the above the petition was dismissed.

6. Parish Priest, Kanyakumari vs. State of Tamil Nadu
AIR 2023 MADRAS 70
Date of order: 3rd January, 2023

Gift deed – Absolute gift – failure to fulfil the purpose – In absence of revocation clause – Gift cannot return to the donor. [Transfer of Property Act, 1882, Section 126]

FACTS

The Petitioner-Church established a cooperative society in 1981 for the economic and social development of poor and gifted a piece of land to the Society. The State Government put up a shed on the said land with their own funds. The land continued to be in the possession of the church. However, with technical advancement in the field of textiles, society became redundant and was wound up in 2006.

After several requests to the State Government to reconvey the land, the Church filed a Writ in 2014. The Court directed the Respondents to consider the representation and pass orders. The Respondent rejected the application of the Church.

Hence the present Petition.

HELD

The Gift deed of 1981 was an absolute gift deed i.e., without any conditions. Therefore, the gift cannot be revoked on the objects becoming redundant. Further, the donor will not have any right to make a claim for the return of the gifted land on the failure of the purpose for which it was gifted.

The Petition was dismissed.

7. Union of India vs. Maheswari Builders, Rajasthan
AIR 2023 MADRAS 73
Date of order: 3rd January, 2022

Arbitration – Setting aside arbitral award – Award passed after considering all the facts – No interference required. [Arbitration and Conciliation Act, 1996, Section 34; Contract Act, 1872, 63]

FACTS

The Respondent was engaged by the Petitioner to carry out civil construction work. The Respondent requested an extension of time for completing certain phases of the project as per their contract and the same would be granted. An issue arose between them with respect to the claims made by the Respondent and the Respondent invoked the arbitration clause.

Before the Arbitration Tribunal, after making its claims, the Respondent vide an affidavit withdrew from the arbitration and submitted before the Arbitration Tribunal that the affidavit was submitted under the pressure of the Petitioner on a promise for an extension of time. The Tribunal on considering all the facts passed an order allowing some of the claims of the Respondent.

The award was challenged.

HELD

The award was challenged on the grounds that the Arbitration proceedings should not have proceeded when both the parties had withdrawn from the Arbitration. It was held that the Arbitrator was economical with reasons in support of the order. As the affidavit was not given under free consent, the same cannot be considered as it amounts to coercion. The award was passed after considering all the facts of the case.

The Application is dismissed.

8. Shri Ram Shridhar Chimurkar vs. Union of India and another
AIR 2023 SUPREME COURT 618
Date of order: 17th January, 2023

Succession – Pension – Government employee – Adoption after death by the spouse – Not a family member [Central Civil Services (Pension) Rules, 1972, R. 54, Constitution of India]

FACTS

In the instant case after the death of a retired government employee, his widow adopted a son. The adopted son claimed that they were entitled to family pension payable to the family of the deceased government employee. On the rejection of his plea, the appellant filed an application before the Central Appellate Tribunal. The Tribunal allowed the application and directed the Respondents to consider the Appellant’s claim for family pension by treating him as the adopted son of the deceased government employee directing the Respondents to consider the plea of the appellant.

On a Writ Petition, the Hon’ble High Court reversed the order of the Tribunal. Hence the present appeal.

HELD

The Supreme Court considered provisions of the Hindu Adoptions and Maintenance Act, 1956 (HAMA Act). It highlighted that the provisions of the HAMA Act determine the rights of a son adopted by a Hindu widow only vis-à-vis his adoptive family. Rights and entitlements of an adopted son of a Hindu widow, as available in Hindu Law, as against his adoptive family, cannot axiomatically be held to be available to such adopted son, as against the government, in a case specifically governed by extant pension rules. It held that Rule 54 (15)(b) of the Central Civil Services (Pension) Rules, 1972 states that a legally adopted son or daughter by a government servant would be entitled to a family pension. The phrase “in relation to” would be vis-à-vis the Government servant and not his widow.

The appeal is dismissed.

9 GM Heights LLP vs. Municipal Corporation of Greater Mumbai and Ors
WP No. 5303 of 2022 (Bom)(HC) (UR)
Date of order: 29th March, 2023

Tenancy – Tenants – limited rights – Cannot dictate the terms of redevelopment. [Mumbai Municipal Corporation Act, 1888, Section 354, Development Control and Promotion Regulations for Greater Mumbai, R. 33(19), 33(7)(A) ]

FACTS

The Petitioner is an LLP and the owner of the land. There was a building standing on the land, which had 21 tenants. The building had some commercial tenements and some residential tenements. The building had become dilapidated. A notice was issued by the respondent-Municipal Corporation of Greater Mumbai to the owners/occupants under Section 354 of the Mumbai Municipal Corporation Act, 1888. The building ultimately was demolished in August 2021.

The petitioner, in these circumstances, proposed to undertake redevelopment so as to construct a commercial building, which according to the petitioner was permissible as per the rules.

Out of 21 tenants, one tenant (respondent no. 3) objected to the permanent alternate accommodation. The petitioner approached the Court primarily on the grounds that respondent no.3 who is only one tenant out of the majority of the 21 tenants, cannot obstruct the redevelopment in such condition as inserted in the Intimation of Disapproval (IOD) by the Municipal Corporation.

HELD

Respondent no.3 is not entering into an agreement for an alternate accommodation with the petitioner and thereby is stalling the entire redevelopment. The approach of respondent no.3 in the present case is most unreasonable and adamant. Respondent no.3, in fact, by his obstinate conduct is stalling the entire redevelopment, which he certainly cannot do. Respondent no.3 in his capacity as a tenant has limited rights. Respondent No.3 within the ambit of such rights cannot dictate to the petitioner-owner, as to the nature of redevelopment. Recognising such rights would, in fact, take away and/or obliterate the legal rights of the owners of property to undertake redevelopment in a manner as may be permissible in law, including under the Development Control and Promotion Regulations. Thus, tenants cannot take a position to foist, dominate and/or dictate to the owner the nature and the course of redevelopment the owner desires to have. The rights of the owners of the property to undertake redevelopment of the manner and type they intend, cannot be taken away by the tenants, minority or majority. Tenancy rights cannot be stretched to such an extent that the course of redevelopment can be taken over by the tenants, so as to take away the basic corporeal rights of the owner of the property, to undertake redevelopment of the owner’s choice. The only rights the tenants have would be to be provided with an alternate accommodation of an equivalent area occupied by them before the building was demolished.

The Petition was allowed.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

9. State of Karnataka vs. Ecom Gill Coffee Trading Pvt Ltd (2023) 4 Centax 223 (SC)
Date of order: 13th March, 2023

A burden to prove goods were actually received for the genuineness of ITC claimed was on the purchaser and not on Department

FACTS

The respondent was a dealer in coffee beans. The Adjudicating Authority issued a show cause notice after noticing some irregularities in the availment of ITC claimed by the respondent. The authority denied ITC on the grounds of doubt in the genuineness of purchases made since registrations of sellers were cancelled/they had filed nil returns. The Appellate Authority also rejected the Respondent’s claim. However, the Tribunal ruled in favor of the Respondent and allowed ITC considering that payments were made through bank transactions against proper invoices. The high court affirmed the Tribunal order. Being aggrieved by such an order, the Department filed an appeal before Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that the burden of proving the genuineness of claiming ITC remains on the respondent. Merely producing invoices or substantiating payment through a bank was not sufficient to prove the actual receipt of goods. Furnishing cogent material like the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgment of taking delivery of goods, tax invoices, payment particulars and the actual physical movement of the goods was on Respondent. Thus, the impugned order passed by Tribunal and High Court was set aside.

II. HIGH COURT

10. Wipro Ltd vs. ACIT, Bengaluru
2023 4 Centax 179 (Kar.)
Date of order: 6th January, 2023

The benefit of Circular No. 183/15/2022-GST dated 27th December, 2022 which provides relief for errors pertaining to 2017-18 and 2018-19 would also be extended for 2019-20 where identical errors were committed.

FACTS

Petitioner had filed a GSTR-1 return for the F.Ys. 2017-18, 2018-19, and 2019-20 and had inadvertently mentioned the wrong GSTIN of the recipient. Further, the recipient availed input tax credit which created a mismatch between Form GSTR2A and GSTR3B filed by the recipient. The petitioner filed an affidavit stating that all the conditions in paragraph 4.1.1 of Circular No. 183/15/2022-GST dated 27th December, 2022 have been complied with by enclosing details of invoices. Thereafter, a petition was filed before Hon’ High Court requesting to access the GST portal to rectify Form GSTR-1 for F.Y. 2017-18 to F.Y. 2019-20 on the ground that identical error was committed in all the years due to bonafide reasons as prescribed by the circular.

HELD

By adopting a justice-oriented approach, the High Court held that though the circular refers only to years 2017-18 and 2018-19, the petitioner would also be entitled to the benefits of the abovementioned Circular for ITC pertaining to F.Y. 2019-20, since identical errors had occurred during that period. Thus, the petition was allowed in favor of the petitioner.

11. Yash Kothari Public Charitable Trust vs. State of U.P.
(2023) 4 Centax 159 (All.)
Date of order: 16th January, 2023

Appeal filed in offline mode cannot be denied by respondent where order against which was not available on GST portal owing to some technical issue.

FACTS

The petitioner was a registered public charitable trust. He claimed certain exemptions which were not granted by the assessment order passed on 12th January, 2022. The petitioner reversed certain ITC through Form GSTR-3B, filed on 8th February, 2022. He tried to file an online appeal for the balance, but an error was displayed on the web portal. A complaint was raised by submitting a letter to the authority. Further, an appeal was filed offline. The Appellate Authority dismissed the appeal on the grounds that acknowledgment of the appeal should be filed online or as notified by the commissioner as per Rule 108 of the CGST Act. Being aggrieved by such a dismissal, a writ petition was filed before Hon’ble High Court.

HELD

The High Court relied upon its earlier decision in the matter of Ali Cotton Mill vs. Appellate Joint Commissioner (ST),2022 (56) GSTL 270 (AP) [Para 20] and held that filing an appeal offline was tenable although Commissioner has not specified any other mode of filing. Accordingly, taxing authorities cannot stop the petitioner from claiming his statutory right on grounds of technicality and directed the Appellate Authority to consider the appeal filed offline. Therefore, the appeal was partly allowed in favor of the petitioner.

12 Premier Sales Promotion Pvt Ltd vs. Union Of India
2023 (70) GSTL 345(Kar)
Date of order: 16th January, 2023

GST is not applicable on vouchers as those are neither goods nor services since they merely represent value of future redeemable goods and services.

FACTS

The petitioner was acting as an intermediary in procuring pre-paid vouchers for companies who issue them to their employees as incentives that can be redeemed against goods or services as specified. He submitted an application before Karnataka Authority for Advance Ruling for clarification on whether vouchers are taxable and when and at what rate. The order passed through advance ruling stated that the supply of vouchers will be taxable as goods/services at the time of supply at the rate of 18 per cent. The petitioner challenged the order on the grounds that vouchers are not goods/services, but mere instruments and tax should be levied at the time of redemption of voucher. The Appellate Authority affirmed the order passed by the Advance Ruling Authority. Aggrieved, the assessee filed the writ petition.

HELD

It was held that the issuance of vouchers is similar to pre-deposit and not a supply of goods or services. Hence, vouchers are neither goods nor services and therefore cannot be taxed. Accordingly, the order passed by the Advance Ruling Authority was quashed. The petition was allowed in favor of the petitioner.

13 Mehndihasan Rahemtulla Hariyani vs. Deputy Commissioner of Revenue 2023 (70) GSTL 272 (Cal.)
Bureau of Investigation (North Bengal), Alipurduar
Date of order: 3rd November, 2022

Any person aggrieved by any decision or order passed under CGST Act may file an appeal even though the proceedings were not initiated against him.

FACTS

The petitioner was the consignee of the goods transported through a vehicle. The respondent intercepted and confiscated goods as well as a conveyance under section 129 of the West Bengal GST Act (WBGST). Further proceedings were initiated against the driver/person in charge of the vehicle and tax and penalty were imposed. Aggrieved by the same, the petitioner filed an appeal under section 107 of the WBGST Act against the order passed. The Appellate Authority rejected the appeal stating that the order was passed against the driver of the relevant vehicle and the petitioner had no right to challenge the said order. Being aggrieved by such rejection, the petitioner filed a writ petition.

HELD

Hon’ble High Court held that section 107 of the WBGST Act states that any person aggrieved by the order may appeal to the Appellate Authority within the time limit prescribed. The petitioner’s goods were confiscated along with conveyance and thus had justified reasons for being aggrieved by such order. The appeal filed by the petitioner should be heard by the Appellate Authority in accordance with the law. Thus, the appeal was disposed off in favor of the assessee.

14 Ayann Traders vs. State of U.P [2023] 148
taxmann.com 357 (Allahabad)
Date of order: 27th February, 2023

In the facts and circumstances of the case, and evidence leading to the conclusion that the dealer has evaded the tax, the Court upheld the action of revenue authorities stating that if the movement had not been commenced on the same day when the e-way bill was generated, the said e-way bill should be cancelled electronically as per Rule 138(9) failing which the concerned authorities can seize the goods.

FACTS

Petitioner sold 300 bags of Pan Masala to a dealer in Meghalaya. According to the petitioner, goods were handed over to the transporter for transporting by truck, and an E-Way bill was generated on 08th April, 2018 i.e. the same day. However, the truck was made available to the petitioner for transportation on 17th April, 2018, as it was not available from 07th April, 2018. The petitioners did not cancel the E-way bill. The goods were intercepted on 18th April, 2018 and the seizure order was passed on 1st May, 2018.

Before the Hon’ble High Court, the revenue raised apprehensions about the number of transactions that possibly could have been made during this period on the strength of the same tax invoice, bilty, and E-Way Bill generated on 08th April, 2018 through the same vehicle. To illustrate the same, they pointed out that E-Way Bill, which was generated on 08th April, 2018, and a transporter bill, both specifically mentioned the same vehicle number which means that the transit of goods had taken place on 08th April, 2018. They also pointed out that another E-Way bill was generated on 08th April, 2018 for the same vehicle for the transportation of fruits and vegetables to West Bengal. Further, one more E-way bill was generated on 12th April, 2018 being bility no.305 for transporting rice to Darbhanga (Bihar) and, on inquiry, it was found that no such goods were transported to the dealer at Darbhanga and the firm had closed down two months back. It was further brought to the notice of the Court that the said vehicle has been found to have passed from 08th April, 2018 to 18th April, 2018 through three toll plazas viz., Anantram Toll Plaza, Badori Toll Plaza, Fatehpur, and Kokhraj Toll Plaza, Allahabad. It was further stated that the purchasing dealer did not come forward nor any explanation was furnished after the notice was issued when the goods were intercepted and the vehicle was detained.

HELD

Looking at the facts and evidence brought before it, the Hon’ble Court concluded that through the tax invoice and E-Way Bill generated on 08th April, 2018, the dealer has made several transactions and evaded tax. Referring to Chapter XVI of the CGST Rules, it held that once, Part-B of Form GST EWB-01 is filled, a presumption is raised that the goods are in movement. However, if the movement of goods has not commenced, the legislature has provided for a way out through Rule 138(9) whereby E-Way which has been generated on the common portal, may be canceled electronically. The dealer in the present case had waited for 10 long days and did not cancel the E-Way Bill generated by him on the common portal, though, the vehicle was not provided by the transporter. In these circumstances, the Hon’ble Court held that there has been a complete misuse of statutory provision of the Act and Rules by the dealer, and the inference drawn by the taxing authorities after an interception of goods needs no interference by the Court.

15. Sri Sai Balaji Associates vs. State of Andhra Pradesh [2023] 149 taxmann.com 66 (Andhra Pradesh)
Date of order: 7th March, 2023

Section 70(1) does not empower the GST officer to issue a summon to the customers of the assessee instructing them for stopping payment to the assessee.

FACTS

The Petitioner’s customer was issued a notice under section 70(1) of the CGST Act directing to stop payments to the petitioner. Aggrieved by the same the petitioner filed a writ petition before the High Court.

HELD

The Hon’ble Court observed that the impugned notice was issued under section 70(1) of the GST Act but not under section 83 of the GST Act. Section 70(1) of the GST Act only says that the proper officer shall have the power to summon any person whose attendance is considered necessary either to give evidence or to produce a document or any other thing in the inquiry and nothing more. The Court, therefore, held that under section 70(1) of the GST Act, the proper officer cannot exercise powers to direct the summoning party to stop payment to the assessee which is beyond the scope of section 70(1) of the GST Act.

16 . New Hanumat Marbles vs. State of Punjab [2023]
149 taxmann.com 82 (Punjab & Haryana)
Date of order: 30th January, 2023

The Hon’ble Court sets aside adjudication/assessment orders passed without uploading the summary of the Show Cause Notice on the web portal in Form DRC-01 under Rule 142(1) (a) of the CGST Rules.

FACTS

Summons/notices were issued to the assessee before initiating proceedings of passing an assessment order under section 74(5) of the Central GST Act/Punjab GST Act, 2017. As the petitioner did not appear, the matter was decided ex-parte, and the order was passed. The petitioner challenged the said order on the ground that before passing the final order on assessment, Rule 142(1) of the CGST Act is mandatory to be followed and GST DRC-01 has to be uploaded electronically on the website.

HELD

The Court observed that the department did not upload the notice on the website of the revenue as per Rule 142(1) of the CGST Act, 2017 before passing final orders. On this ground, the said orders were set aside and the matter was remanded back to the officer for passing fresh orders and after issuing notice as contemplated under Rule 142(1) of the CGST Act and affording the opportunity of hearing to the petitioner(s) in accordance with the law.

17. Shree Shyam Granites and Marbles vs.Assistant Commissioner (ST) (FAC), Hosur (South) III Circle [2023] 148 taxmann.com 463 (Madras)
Date of order: 13th February, 2023

Principles of natural justice are violated when no reasons were given by the Revenue for rejecting the assessee’s objections raised in replies and a personal hearing was afforded to the assessee before replies were received by the Revenue

FACTS

The petitioner challenged the orders on the grounds of violation of the principles of natural justice.

HELD

The Court observed that the petitioner has already submitted replies to the show cause notice clarifying the defects pointed out by the department stating that there is no mismatch for which they have also substantiated through documents. However, the said replies have not been considered in the impugned assessment orders. Further, a personal hearing was afforded to the petitioner prior to the receipt of the replies of the petitioner by the respondent. The Court held that only after a reply is sent by the assessee, the Authority can apply its mind, and if they contemplate an adverse decision for which they must provide an opportunity of a hearing. Hence, issuing a personal hearing notice prior to the receipt of the explanation from the petitioner cannot be said to be in compliance of Section 75 (4) of the TNGST Act, 2017. The impugned assessment orders were thus quashed.

18. Mohan Agencies vs. State of U.P. [2023]
148 taxmann.com 323 (Allahabad)
Date of order: 13th February, 2023

The opportunity of a personal hearing is mandatory before passing an adverse order even if the taxpayer had selected “NA” against personal hearing in the online mode.

FACTS

The petitioner challenged the order passed by the Assistant Commissioner on the basis that a show cause notice seeking a reply was issued but at that stage itself authority chose not to give any personal hearing by mentioning ‘NA’ against the column of “date of personal hearing”.

HELD

The Hon’ble Court reiterated the principle of law laid down in the case of Bharat Mint & Allied Chemicals v. Commissioner Commerical Tax & 2 Ors., [2022] 48 VLJ 325 that the assessee is not required to request for an opportunity of personal hearing and it is mandatory for the authority to afford such opportunity before passing an adverse order. The fact that the petitioner may have signified ‘No’ in the column meant to mark the assessee’s choice to avail personal hearing, would bear no legal consequence.

19 Swasti Rubber Agency vs. State of Tripura [2023]
149 taxmann.com 4 (TRIPURA)
Date of order: 7th December, 2022

When the department issued a show cause notice for cancellation of registration and suspended the GST registration simultaneously with the issue of such notice and also kept the registration suspended even after furnishing of the replies by the assessee, the Hon’ble Court directed the GST officer to consider the explanation submitted by the assessee expeditiously and revoke the suspension if the orders are not passed within 2 weeks.

FACTS

The order of cancellation of GST Registration was passed. Also, allegations of claiming excess input tax credit (ITC) were raised. While issuing a show-cause notice for the cancellation of the GST registration, simultaneously order of suspension of registration was also passed without affording any opportunity of hearing to the petitioner and/or without assigning any reason thereof. Also, the explanation submitted by the petitioner was not considered by the respondent authority. The Petitioner challenged the show-cause notice on the ground that though the Petitioner-dealer had replied to the impugned show-cause notice on 11th November, 2022and 23rd November, 2022, the respondent authority did not communicate any decision and kept suspending the registration.

HELD

The Hon’ble Court directed the department to consider the explanation submitted to show-cause notice within two weeks and held that in any event, if the explanation is not considered and final orders are not passed, the suspension order shall stand revoked.

20 Ernst & Young Ltd. vs. Additional Commissioner, Central Goods, and Services Tax Appeals-IT [2023] 148 taxmann.com 461 (Delhi) dated 23-03-2023

Professional services provided to overseas entities do not amount to intermediary services merely because such services are provided as outsourced services or on behalf of the third party for its customers if such services are directly provided and do not amount to facilitating or arranging of services between the overseas entity and third party.

FACTS

The assessee entered into service agreements for providing professional consultancy services to various entities of E&Y group located abroad. In terms of those agreements, the petitioner had provided various professional services to overseas EY Entities, and invoices raised described the nature of services for the invoiced amount as “Professional Fees for Services”. A refund was duly filed by the petitioner but the Refund of input tax credit (ITC) was rejected on the grounds that such services qualify as intermediary services as it was provided on behalf of group companies in India to such group companies overseas clients. The Appellant Authority confirmed the order of Adjudicating Authority. The petitioner thus challenged the said order before the High Court.

HELD

The Hon’ble High Court held that the reasoning adopted by the authorities that because the party provides services on behalf of E&Y Ltd, UK in India to overseas clients of E&Y Ltd, UK, it is rendering intermediary services is fundamentally flawed. Referring to the definition of ‘intermediary’ under section 2(13) of the IGST Act, the Court held that the last line of the definition (i.e. “but does not include a person who supplies such goods or services or both or securities on his own account”) merely clarifies that the definition is not to be read in an expansive manner and would not include a person who supplies goods, services or securities on his own account. The Court further held that there may be services entailing outsourcing some constituent part to a third party, but that would not be construed as intermediary services if the service provider provides services to the recipient on his own account; as opposed to merely putting the third party directly in touch with the service recipient and arranging for the supply of goods or services. Thus, even if it is accepted that the petitioner has rendered services on behalf of a third party, the same would not result in the petitioner falling within the definition of ‘intermediary’ under section 2(13) of the IGST Act as it is the actual supplier of the professional services and has not arranged or facilitated the supply from any third party. Referring to the letter issued by RBI the Court held that merely because one of the activities that could be carried on by the petitioner is to act as buying/selling agent in India does not mean that the petitioner had carried on such activities and the invoices raised were for services as a buying/selling agent.

BCAJ Admin

Glimpses of Supreme Court Rulings

33 State Bank of India vs. ACIT
(2022) 449 ITR 192

Exemption – Leave Travel Concession – LTC is for travel within India, from one place in India to another place in India . It should be by the shortest possible route between the two destinations – The moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act.

The Assessee, a Public Sector Bank, namely, the State Bank of India (SBI), was held to be an “Assessee in default”, for not deducting the tax at source of its employees.

These proceedings started with a Spot Verification under section 133A when it was discerned by the Revenue that some of the employees of the assessee- employer had claimed LTC even for their travel to places outside India. These employees, even though, raised a claim of their travel expenses between two points within India but had also travelled to a foreign country between these two points , thus taking a circuitous route for their destination which involved a foreign place. The matter was hence examined by the AO who was of the opinion that the amount of money received by an employee as LTC is exempted under section 10(5) of the Act, however, this exemption could not be claimed by an employee for travel outside India which had been done in this case. Therefore the assessee-employer defaulted in not deducting tax at source from this amount claimed by its employees as LTC. There were two violations of the LTC Rules, pointed out by the AO:

A. The employee did not travel only to a domestic destination but to a foreign country as well; and

B. The employees had admittedly not taken the shortest possible route between the two destinations thus the Appellant was held to be an Assessee in default by the AO.

The travel undertaken by the employees as LTC was hence in violation of Section 10(5) of the Act read with Rule 2B of the Income Tax Rules, 1962.

The order of the AO was challenged before CIT (A), which was dismissed and so was their appeal before the ITAT .

The Delhi High Court vide its order dated 13th January, 2020 dismissed the appeal filed by the Appellant and upheld the order passed by the ITAT dated 09th July, 2019, holding the Assessee-employer as an Assessee in default for the A.Y. 2013-14, for not deducting TDS of its employees. It was held that the amount received by the employees of the Assessee-employer towards their LTC claims was not eligible for the exemption as these employees had visited foreign countries, which was not permissible under the law. It was held that there was no substantial question of law in the Appeal.

The question therefore which fell for consideration of the Supreme Court was whether the Assessee was in default for not deducting tax at source while releasing payments to its employees as Leave Travel Concession (LTC) in the facts given above.

The Supreme Court after noting the provisions of law observed that they prescribe that the airfare between the two points within India will be given, and the LTC which will be given will be of the shortest route between these two places, which have to be within India. According to the Supreme Court, a conjoint reading of the provisions with the facts of this case could not sustain the argument of the Appellant that the travel of its employees was within India and no payments were made for any foreign leg involved.

The Supreme Court noted from the records that many of the employees of the Assessee had undertaken travel to Port Blair via Malaysia, Singapore or Port Blair via Bangkok, Malaysia or Rameswaram via Mauritius or Madurai via Dubai, Thailand and Port Blair via Europe, etc.

According to the Supreme Court, the contention of the Appellant that there is no specific bar under section 10(5) for a foreign travel and therefore a foreign journey could be availed as long as the starting and destination points remain within India was also without merits. According to the Supreme Court there was no ambiguity that LTC is for travel within India, from one place in India to another place in India.

According to the Supreme Court, the moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act.

The Supreme Court rejected the second argument urged by the Appellant that payments made to these employees was of the shortest route of their actual travel.

The Supreme Court noted that a foreign travel also frustrates the basic purpose of LTC. The basic objective of the LTC scheme was to familiarise a civil servant or a Government employee to gain some perspective of the Indian culture by traveling in this vast country. It is for this reason that the Sixth Pay Commission rejected the demand of paying cash compensation in lieu of LTC and also rejected the demand of foreign travel.

The contention of Assessee that there may be a bona fide mistake by it in calculating the ‘estimated income’ was also rejected by the Supreme Court since all the relevant documents and material were before the Assessee-employer at the relevant time and the Assessee employer therefore ought to have applied his mind and deducted tax at source as it was his statutory duty, under section 192(1) of the Act.

According to the Supreme Court, there was no reason to interfere with the order passed by the Delhi High Court. The appeal was therefore dismissed.

34 Singapore Airlines Ltd. vs. CIT. Delhi and other connected appeals
(2022) 449 ITR 203 (SC)

Deduction of tax at source – Commission – The travel agents are “acting on behalf of” the airlines during the process of selling flight tickets – On the tickets sold, a 7% commission designated by the IATA is paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA – In addition, they retain the difference between the Net Fare and the IATA Base Fare and the entire differential is characterized as a Supplementary Commission – The airlines are liable to deduct TDS under section 194H on both the amounts.

Spurred by the reintroduction of Section 194H in the IT Act by the Finance Act, 2001, the Revenue sent out notices for A.Y. 2001-02 to the air carriers operating in the country to adhere to the requirements for deduction of TDS. Upon suspecting deficiencies on the part of certain airlines in their compliance with statutory requirements under the IT Act, the Revenue carried out surveys under section 133A of the IT Act. Following the investigation, the Assessee airlines were allegedly found to have paid their respective travel agents certain amounts as Supplementary Commission on which the purported TDS that the carriers had failed to deduct was as follows:

Assessee	Supplementary Commission	Short fall in deduction of TDS
Singapore Airlines	Rs. 29,34,97,709	Rs. 2,93,49,770 (not including surcharge)
KLM Royal Dutch Airlines	Rs. 179,00,49,410	Rs. 18,25,85,040 (not including surcharge)
British Airways	Rs. 46,24,28,310	Rs. 4,71,67,688 (including surcharge)

Subsequently, successive Assessment Orders were passed holding that the airlines were Assessees in default under section 201 of the IT Act for their failure to deduct TDS from the Supplementary Commission, and the demands raised by the Revenue in respect of each of them were confirmed.

Following addition of surcharge, and interest under section 201(1A), the aggregate amount calculated as being owed to the Revenue was:

Assessee (Liability)	Surcharge + Interest	Aggregate amount
Singapore Airlines ( Rs. 2,93,49,770)	Rs. 58,700 + Rs. 21,13,224	Rs. 3,19,21,694
KLM Royal Dutch Airlines ( Rs. 18,25,85,040)	Rs. 2,24,26,580 (interest only)	Rs. 20,50,11,620
British Airways ( Rs. 4,71,67,688)	Rs. 60,08,391 (interest only)	Rs. 5,31,76,079

Penalty proceedings were directed to be initiated against all the Assessees under section 271C of the IT Act.

The Assessees filed their respective appeals before the CIT(A) against the Assessment Orders. The CIT (A) passed a common order, rejecting the appeals on merits but directing that any transactions dated prior to 01st June, 2001, the date on which Section 194H came into effect, would be excluded from the demand for TDS.

The Assessees subsequently approached ITAT. In CA No. 6964-6965 of 2015 concerning Singapore Airlines, the ITAT accepted the contentions of the Assessee and set aside the order passed against it, while holding that:

(i) The amount realized by the travel agent over and above the Net Fare owed to the air carrier is income in its own hands and is payable by the customer purchasing the ticket rather than the airline;

(ii) The “Supplementary Commission”, therefore, was income earned via proceeds from the sale of the tickets, and not a commission received from the Assessee airline;

(iii) The airline itself would have no way of knowing the price at which the travel agent eventually sold the flight tickets;

(iv) Section 194H referred to “service rendered” as the guiding principle for determining whether a payment fell within the ambit of a “Commission”. In this case, the amounts earned by the agent in addition to the Net Fare are not connected to any service rendered to the Assessee;

(v) The Revenue had erroneously and baselessly assumed that the travel agent had, in each of his dealings, realised the entire difference between the Net Fare and the Base Fare set by International Air Transport Association (“IATA”) and characterised the entire differential as a Supplementary Commission. Section 194H could not be pressed into operation on the basis of such surmises and without actual figures being proved.

The ITAT followed the same reasoning and allowed the appeals by the Assessees in the remaining Civil Appeals.

Aggrieved by the quashing of the orders, the Revenue brought separate appeals before the Delhi High Court.

A Division Bench of the High Court clubbed together various Income Tax Appeals all of which concerned tax liability for the airline industry. In the context of the applicability of Section 194H of the IT Act, the Division Bench reversed the findings of the ITAT and restored the Assessment Orders. The relevant part of the High Court judgment may be summarised as follows:

(i) The principles to be kept in mind when interpreting the application of Section 194H of the IT Act are:

a. The existence of a principal-agent relationship between the Assessee airlines and the travel agents;

b. Payments made to the travel agents in the nature of a commission;

c. The payments must be in the course of services provided for sale or purchase of goods;

d. The income received by the travel agent from the Assessees may be direct or indirect, given expansive wording of Section 194H;

e. The stage at which TDS is to be deducted is when the amounts are rendered to the accounts of the travel agents;

(ii) All the Assessees had accepted that a principal-agent relationship subsisted between them and the travel agents. The terms of the Passenger Sales Agency Agreements (“PSA”) also indicated that the actions of the agents in procuring customers were done on behalf of the airlines and not independently;

(iii) Hence, the additional income garnered by the agents was inextricably linked with the overall principal-agent relationship and the responsibilities that they were entrusted with by the Assessees;

(iv) There was no transfer in terms of title in the tickets and they remained the property of the airline companies throughout the transaction;

(v) The Assessees were only required to make the deductions under section 194H of the IT Act when the total amounts were accumulated by the BSP (Billing and Settlement Plan)

The High Court re-imposed the tag of “Assessee in default” under section 201 and the levy of interest on short fall of TDS under section 201(1A) on the Assessees.

The aggrieved Assessees therefore approached the Supreme Court.

The Supreme Court noted that within the aviation industry during the relevant period, the base fare for air tickets was set by the IATA with discretion provided to airlines to sell their tickets for a net fare lower than the Base Fare, but not higher. In essence, the IATA set the ceiling price for how much airlines may charge their customers. This formed part of the IATA’s overall responsibility of overseeing the functioning of the industry.

The air carriers were also required to provide a fare list to the Director General of Civil Aviation (“DGCA”) for approval. The prices that were rubber stamped by the DGCA may be equivalent to or lower than the Base Fare set by the IATA. Alongside setting the standard pecuniary amount for tickets, the IATA would provide blank tickets to the travel agents acting on behalf of the airlines to market and sell the travel documents. The arrangement between the airlines and the travel agents would be governed by PSAs. The draft templates for these contracts are drawn up by the IATA and entered into by various travel agents operating in the sector, with the IATA which signs on behalf of the air carriers. The PSAs set the conditions under which the travel agents carry out the aforementioned sale of flight tickets, along with other ancillary services, and the remuneration they are entitled to for these activities.

Once these tickets were sold, a 7% commission designated by the IATA would, be paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA. This would be independent of the Net Fare quoted by the air carriers themselves. The 7 per cent commission on the Base Fare consequently triggered a requirement on the part of the airline to deduct TDS under section 194H at 10 per cent plus surcharge. The details of the amounts at which the tickets were sold would be transmitted by the travel agents to an organisation known as the Billing and Settlement Plan (“BSP”). The BSP functions under the aegis of the IATA and manages inter alia logistics vis-à-vis payments and acts as a forum for the agents and airlines to examine details pertaining to the sale of flight tickets.

The BSP stores a plethora of financial information including the net amount payable to the aviation companies, discounts, and commission payable to the agents. The system consolidated the amounts owed by each agent to various airlines following the sale of the tickets by the former. The aggregate amount accumulated in the BSP would then be transmitted to each air carrier by the IATA in a single financial transaction to smoothen the process and prevent the need to make multiple payments over time.

Within this framework, the airlines would have no control over the Actual Fare at which the travel agents would sell the tickets. While the ceiling price could not be breached, as mentioned earlier, the agents would be at liberty to set a price lower than the Base Fare pegged by the IATA, but still higher than the Net Fare demanded by the airline itself. Hence, the additional amount that the travel agents charged over and above the Net Fare that was quoted by the airline would be retained by the agent as its own income.

An illustration of how such a transaction would be carried out and the monetary gains made by the respective parties is shown below:

Base fare for
Singapore – Delhi (set by IATA)

Net fare (set by the
Airline)

Actual fare (set by
the travel agent)

Standard commission
(7 per cent of the base fare)

Supplementary
Commission (actual fare – net fare)

Rs. 1 lakh

Rs. 60,000

Rs. 80,000

7 per cent of Rs. 1 lakh = Rs. 7,000

Rs. 80,000 –

Rs. 60,000 =

Rs. 20,000

Ceiling price

Income of the assesee

Rs. 20,000 left after
payment of net fare to the assessee

Income of the travel
agent

Additional income of
the travel agent

This auxiliary amount charged on top of the Net Fare was portrayed on the BSP as a “Supplementary Commission” in the hands of the travel agent.

Thus, according to the Supreme Court, the heart of the dispute between the Assessee airlines and the Revenue in this case was the characterisation of the income earned by the agent besides the Standard Commission of 7 per cent and whether this additional portion would be subject to TDS requirements under section 194H.

According to the Supreme Court, Explanation (i) of Section 194H highlights the nature of the legal relationship that exists between two entities for payments between them to qualify as a “commission”. Consequently, it must be to determined whether the travel agents were “acting on behalf of” the airlines during the process of selling flight tickets. The Supreme Court noted that the Assessees were not disputing that a principal-agent relationship existed during the payment of the Standard Commission. The point on which the air carriers differ from the Revenue was the purported second part of the transaction i.e. when the tickets were sold to the customer and for which the travel agents earned certain amounts over and above the Net Fare set by the Assessees.

The Supreme Court noted the definition of a “principal” and an “agent” under section 182 of the Contract Act. As per the definition – an “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.

The Supreme Court after referring to the catena of cases elaborating on the characteristics of a contract of agency, was of the opinion that the following indicators could be used to determine whether there is some merit in the Assessees’ contentions on the bifurcation of the transaction into two parts: Firstly, whether title in the tickets, at any point, passed from the Assessees to the travel agents; Secondly, whether the sale of the flight documents by the latter was done under the pretext of being the property of the agents themselves, or of the airlines; Thirdly, whether the airline or the travel agent was liable for any breaches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them.

The Supreme Court after perusing the PSA was of the view that several elements of a contract of agency were satisfied by numerous clauses, and the recitals. Every action taken by the travel agents was on behalf of the air carriers and the services they provide were with express prior authorisation. The airline also indemnified the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that actually retains title over the travel documents and is responsible for the actual services provided to the final customer. Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the PSA.

According to the Supreme Court, this led to an irresistible conclusion that the contract was one of agency that does not distinguish in terms of stages of the transaction involved in selling flight tickets. While Assessees had readily accepted the existence of the principal-agent relationship, their consternation had been directed at the so-called second limb of the deal that was exclusively between the agent and the customer. However, the submissions advanced in this regard were clearly not supported by the bare wording of the PSA itself. The High Court in the impugned judgment was correct in its holding that the arrangement between the agent and the purchaser was not a separate and distinct arrangement but is merely part of the package of activities undertaken pursuant to the PSA.

The Supreme Court, thereafter dealt with the submissions of the airlines that the principal-agent relationship does not cover the Supplementary Commission on the basis of arguments that are independent of the PSA. Primarily, it was contended that Supplementary Commission goes from the hands of the consumer and into the pockets of the travel agents without any intervention from the Assessees. Hence, the prerequisite of a payment on which TDS could be deducted in the first place was not fulfilled.

According to the Supreme Court, Section 194H of the IT Act, does not distinguish between direct and indirect payments. Both fall under Explanation (i) to the provision in classifying what may be called a “Commission”. The exact source of the payment was of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the Assessees would remain liable under the IT Act. Consequently, the contention of the airlines regarding the point of origination for the amounts did not impair the applicability of Section 194H of the IT Act.

The next point raised was regarding the practicality and feasibility of making the deductions, regardless of whether Section 194H may, in principle, cover the indirect payment to the travel agent. The Assessees had pointed out that the travel agent acts on its own volition in setting the Actual Fare for which the flight tickets are sold, and as a symptom of this, the airline itself has no knowledge whatsoever regarding how much Supplementary Commission it has drawn for itself. According to the Supreme Court, this contention was rebutted by the Revenue by highlighting the manner of operation of the BSP where financial data regarding the sale of tickets is stored. According to him, the BSP agglomerates the data from multiple transactions and transmits it twice a month, or bimonthly.

Keeping in mind the principal-agent relationship between the parties, the Supreme Court found significant merit in the arguments by the Revenue. According to the Supreme Court, the mechanics of how the airlines may utilise the BSP to discern the amounts earned as Supplementary Commission and deduct TDS accordingly was an internal mechanism that facilitates the implementation of Section 194H of the IT Act. Further, the lack of control that the airlines have over the Actual Fare charged by the travel agents over and above the Net Fare, cannot form the legal basis for the Assessees to avoid their liability.

The Supreme Court observed that notwithstanding the lack of control over the Actual Fare, the contract definitively states that “all monies” received by the agent are held as the property of the air carrier until they have been recorded on the BSP and properly gauged. Admittedly, the BSP demarcates “Supplementary Commission” under a separate heading. Hence, once the IATA makes the payment of the accumulated amounts shown on the BSP, it would be feasible for the Assessees to deduct TDS on this additional income earned by the agent.

Having held in favour of the Revenue in connection with the applicability of Section 194H of the IT Act, the remaining issue for the Supreme Court was to determine as to whether the matter has been rendered revenue neutral.

The travel agents who received the Supplementary Commission for A.Y. 2001-02, had already shown these amounts as their income. Subsequently, they had paid income tax on these sums. Therefore, it was contended that there had been no loss to the Revenue on this count.

The Supreme Court noting the precedents opined that if the recipient of income on which TDS has not been deducted, even though it was liable to such deduction under the IT Act, has already included that amount in its income and paid taxes on the same, the Assessee can no longer be proceeded against for recovery of the short fall in TDS. However, it would be open to the Revenue to seek payment of interest under section 201(1A) for the period between the date of default in deduction of TDS and the date on which the recipient actually paid income tax on the amount for which there had been a shortfall in such deduction.

In this context, as the Assessees had not provided the specifics of when the travel agents had paid their taxes on the Supplementary Commission, it was necessary to fill in these missing details and determine the amount of interest that the Assessees were liable to pay before this matter could be closed. The Supreme Court therefore remanded the matter back to the AO to flesh out these points in terms of the interest payments due for the period from the date of default to the date of payment of taxes by the agents.

The Supreme Court thereafter examined issue of the levy of penalties under section 271C of the IT Act. The Supreme Court noted that the AO had initially directed that penalty proceedings be commenced against the Assessees for the default in subtraction of TDS but this process was put in cold storage while the airlines and the revenue were contesting the primary issue of the applicability of Section 194H before various appellate forums.

The Supreme Court noted that Section 271C provides for imposition of penalties for failure to adhere to any of the provisions in Chapter XVII-B, which includes Section 194H. This provision must be r.w.s. 273B which excuses an otherwise defaulting Assessee from levy of penalties under certain circumstances.

The Supreme Court held that the liability of an airline to deduct TDS on Supplementary Commission had admittedly not been adjudicated upon by this Court when the controversy first arose in A.Y. 2001-02.

There were contradictory pronouncements by different High Courts in the ensuing years which clearly highlights the genuine and bona fide legal conundrum that was raised by the prospect of Section 194H being applied to the Supplementary Commission. Hence, there was nothing on record to show that the Assessees have not fulfilled the criteria under Section 273B of the IT Act. Though the contentions of the assessee were not accepted by the Supreme Court, there was clearly an arguable and “nascent” legal issue that required resolution by it and, hence, there was “reasonable cause” for the air carriers to have not deducted TDS at the relevant period. The logical deduction from this reasoning was that penalty proceedings against the airlines under section 271C of the IT Act had to be quashed.

BCAJ Admin

From The President

Dear BCAS Family,

In my previous month’s communication, I had promised that I will delve deeper into the subject of ‘Capitalism’ this month. The trigger of this thought was the recent failure of a few prominent banks in the USA. Any financial collapse results in a loss to the common man the most. Also, in most cases, it is true that such collapses have their root in the unbridled greed of the few privileged people who take the wrong advantage of the eco-system provided by capitalism. If we look at the history of major failures of the enterprises or financial system we will find that somewhere human greed has subverted the purported benefits of capitalism.

The reason of examining here whether capitalism is good or bad for the society is not academic. The reason is that India today is on the cusp of a major turnaround. Socialism practised for many decades in India started to give way in the early nineties and after many years of calibrated policies and a slow change of mindset, we now sing praise for the spirit of the free enterprise promised by capitalism. Is it going to be a game changer to alleviate poverty? Is it going to reduce inequality and make India an economic superpower as is the intent? Or will it put too many at the total mercy of too few to be their potential victims? Expose the large population to the risk of economic collapse?

Let us examine the concept and explore how we could leverage the maximum benefit of capitalism and reduce the risk of exploitation of common people.

Capitalism is essentially an economic system in which the operations are privately owned; and governed by the demand of a free market. It has been the stepping stone of the industrial, technological and green revolution. It has redefined the world order and rendered the role of the state perfunctory in relation to governance. Most significantly, capitalism has enabled millions to escape the clutches of poverty, increased the standard of living and paved the way for innumerable innovations, over the past two centuries by being one of the constituents in the system of capitalism as ‘owner’ or labour or investor. One cannot but agree that capitalism has played a pivotal role in making the world a better place, though not completely!

On the flip side, capitalism has many shortcomings that have severely impacted the world. Capitalism has resulted in enormous and irreversible devastation of delicate ecological systems and the environment. It has three dysfunctions that have severely negated much of the good it has done. It has ushered in unstable and unreliable growth. Driven solely by profit, capital follows where there is an opportunity and flees when there’s a shake-up. The abrupt stifling of capital leads to a recession which results in multiple ripples of misery.

Another volcano of dissent that capitalism earns is its market-driven growth that is blinkered in its compulsive pursuit of profitability. Look at the financial sector and the numerous scandals, scams and frauds will all find their roots there. There is no consideration for the slew of side effects that are detrimental to the holistic and wholesome growth of society. Humans are reduced to a commodity to be used for the benefit of a few. Technology is introduced that eliminates jobs and increases profitability. The environment is contaminated on many fronts with toxic discharges. Look at the history of industries like pharma, automobile, and chemical just to name a few and we realize how a business enterprise started with a noble intent to provide solutions for the common good shifted its gear in blind pursuit of money.

The third prong of capitalism that punctures any possibility of a well-balanced society is the audacious inequity of the distribution of capitalist wealth. There is a very pronounced disparity in income among the many layers of the population. Those at the lower end receive almost a pittance, compared to the oversized compensations paid to the upper levels. Even the concentration of assets is skewed heavily in favour of a very small proportion of people who wield enormous control.

So… is the growing enthusiasm to shift the gear to total capitalism in India will reap dividends without the possible evils discussed above? Certainly not. Regulated economy for many years since post- independence did stifle the innovation, ideation and spirit to excel. Tightened hold of control- freak bureaucracy prevented the enterprise to be competitive and efficient. From that point of view, gradually unshackling the economy was a great move forward. But we will have to learn our lessons from the experience the world’s major economies have gone through. India will have to create a support system to sound the advance warning bell for potential collapse and also create a broad regulatory framework to minimize the impact. It is definitely laudatory that some of the regulatory agencies like SEBI, Competition Commission of India, and RBI are constantly keeping vigil and taking corrective steps. The introduction of IBC is a welcome step too.

“History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.” These words of Dr. Bhimrao Ambedkar explain why capitalism has flourished unencumbered for so long. It is a different matter that this holds equally true even in the state-controlled economies where a privileged few control all the resources holding millions at ransom. Looking at the history of socialism and communism that failed heavily on their promise to bring equality there is not much of an option but to encourage free enterprise. It is only the free enterprise that can give the human being the will to excel. As Nani Palkhiwala said “Distributive justice can never get off to a start when there is nothing to distribute. Socialism is like prohibition. It is a good idea but does not work. While it is possible to have economic growth in India without a social justice, it is impossible to have social justice without economic growth”. India will need to create an eco-system where it is not a shame to fail in the business, but it is shameful to be dishonest. It is a tightrope but the day it is able to inculcate this ethos it will have great future to look at with the calibrated risks emanating from capitalism.

Developments:

It has been observed that of late many Taxpayers have been receiving notices for outstanding demands relating to various years which are as old as 15-20 years.
The said demands are shown as outstandingly on the portal which have been uploaded by the Assessing Officers.

In most cases, AO would have reduced the demand or issued refunds after carrying out rectification, appeal effect etc. physically. In such cases, though, physically demand may have been deleted but no corresponding effect is given in the case of uploaded demands.

In many cases rectifications, appeal effect etc. are pending for many years in spite of correspondence which remain unattended unless there is follow-up by the taxpayer.

This results in fruitless work and a waste of time in follow-up to save taxpayers from action to adjust the wrong demand against the legitimate refunds due for subsequent year(s). We will have to renew our efforts more vigorously to have this issue resolved.

Events at BCAS:

The International Taxation Committee of the BCAS concluded the 27th International Tax & Finance Conference at the Leela, Gandhinagar, on April 09, 2023. More than 240 professionals across India attended the conference. The keynote address delivered by Mr Injeti Srinivas, Chairperson of the International Financial Services Centres Authority (IFSCA) was indeed very enlightening and gave ideas about the opportunities for professional growth through the facilities in the GIFT city.

A hybrid study circle meeting on Graphology-Handwriting Analysis” (Know yourself through your handwriting was organised on April 11, 2023, where Shri Bhupesh Singh Dhundele (Graphologist) explained the analysis of handwriting to more than 150 participants. The meeting was received well by all the participants.

On April 18, 2023, BCAS through its Human Resource & Development Committee jointly with the BCAS Foundation organised a lecture meeting on “Bringing hope when there is None left” addressed by Mrs. Mittal Maulik Patel. She highlighted the work being done by her organization for the nomads who have been abandoned by civil society and appealed to the members to help them by contributing in any way they can. The program was well received by the participants.

There are interesting events lined up for the month of May and June. Please keep a tab on the announcements. The 17th Residential Course ON GST is going to be held in June and the response to this is overwhelming. I request you to grab your seat before the registration closes.

May is a holiday time with family. I wish you all happy holidays.

Goodbye till we meet again next month!

Thank You!

BCAJ Admin

Miscellanea

1. BUSINESS

1 Analysis – LIBOR sunset could get stirred up by banking turmoil

A crisis of confidence in global banking and a backlog of uncleared contracts is making an already cumbersome shift to a new set of rates even harder as the end of the LIBOR era approaches, according to industry experts.

Once dubbed as the world’s most important number, the London Interbank Offered Rate or LIBOR is a rate based on quotes from big banks on how much it would cost to borrow short-term funds from one another. It was discredited when the authorities found traders had manipulated it, prompting calls for reform.

It is largely being replaced by risk-free rates (RFRs) compiled by central banks as they are based on actual transactions, including the Federal Reserve’s Secured Overnight Financing Rate (SOFR) for instance, making them harder to rig.

LIBOR has already been scrapped for use in new contracts, with the use of a few remaining dollar-denominated rates in outstanding contracts due to end in June.

“With the transition deadline in sight, LIBOR’s grand finale may be more dramatic than previously thought with derivative contracts piling up amid the current banking turmoil,” said Glenn Yin, Head – Research and Analysis, AETOS Capital Group.

Global trading activity (as measured by DV01) in cleared over-the-counter (OTC) and exchange-traded interest rate derivatives (IRD) that reference RFRs in eight major currencies was at 52.9 per cent in February, according to the ISDA-Clarus RFR Adoption Indicator.

It helps derivatives market participants keep tabs on progress on the shift to RFRs. The indicator was at 4.7 per cent in June 2020 and then surged to 53.9 per cent in December 2022, its highest level, before declining slightly in the first two months this year.

DV01 is a gauge of risk that represents the valuation change in a derivative contract resulting from a 1 bp shift in the swaps curve.

“SOFR’s slow uptake was already setting the stage for a late rush to amend credit agreements, and I suspect the ongoing challenges in the banking sector will push transition plans back even further,” said Matt Orton, Chief Market Strategist, Raymond James Investment Management.

Banks around the world are facing a major upheaval after three U.S. banks collapsed in a week and 167-year old Swiss banking giant Credit Suisse was taken over by UBS in a state-orchestrated rescue to stem broader repercussions in the crisis-laden sector.

“The current turmoil is forcing banks to split their focus and may be diverting resources from the transition,” said Gennadiy Goldberg, U.S. Interest Rate Strategist,TD Securities.

“This might make it a bit more difficult for banks to transition on time, but I suspect regulators are highly unlikely to postpone the end date for LIBOR,” Goldberg added.

While plans are in place to convert cleared U.S. dollar LIBOR swaps and Eurodollar futures and options into corresponding contracts referencing SOFR before 30th June, 2023 non-cleared derivatives that continue to reference U.S. dollar LIBOR “may transition via bilateral negotiations,” ISDA said earlier this month.

Many contracts will reference SOFR-based fallbacks after that date and the Adjustable Interest Rate (LIBOR) Act will replace U.S. dollar LIBOR in tough legacy contracts that do not have fallbacks and don’t provide clearly defined benchmark replacements.

“Only about 15 per cent-20 per cent of outstanding loans are using SOFR and I fully expect to see administrative logjams for borrowers, lenders, lawyers, and bankers,” said Orton.

Around 80 per cent of institutional loans and Collateralized Loan Obligations (CLOs) are still tied to LIBOR even as it nears its 30th June end-date, private equity firm KKR & Co Inc said last month. KKR and Co is also a lender, borrower and investor in CLOs.

LIBOR has been used globally to price trillions of dollars of financial products from mortgages and student loans, to derivatives and credit cards.

“One of the hurdles in the flip to SOFR has been in agreeing to amendments that address credit spread adjustments, and the wild swings in the market will only add to lender reticence to resolve these issues in the near term,” said Orton.

(Source: International Business Times – By Mehnaz Yasmin – 24th March, 2023)

2 Apple Inc Supplier Pegatron in talks to open second India factory – sources

Apple Inc’s Taiwanese supplier Pegatron Corp is in talks to open a second India factory, said two sources with direct knowledge of the matter, as the U.S. tech giant’s partners continue to diversify production away from China.Pegatron plans to add a second facility near the southern city of Chennai in Tamil Nadu just six months after opening the first with an investment of $150 million, said the sources, who sought anonymity as the talks are private. The new factory, the first source said, is “to assemble the latest iPhones”.Pegatron declined to comment but said, “Any acquisition of assets will be disclosed based on regulations.”

Apple did not respond to a request for comment.

India is seen as the next growth frontier for Apple. Around $9 billion worth of smartphones have been exported from India between April 2022 and February 2023, and iPhones accounted for more than 50 per cent of that, according to the India Cellular and Electronics Association.

Pegatron currently accounts for 10 per cent of Apple’s iPhone production in India on an annualized basis, research firm Counterpoint said.

Apple and its key suppliers have been shifting production away from China as they seek to avoid a potential hit to business from mounting Sino-U.S. trade frictions. In recent years, Pegatron has sought to expand its footprint in Southeast Asia and North America.

The talks for starting a second Pegatron facility on lease are ongoing and it will be located inside Mahindra World City near Chennai, just around where the company inaugurated the first plant in September 2022.

Pegatron’s planned investment outlay for the expansion is not immediately clear. The first source, however, said the new factory will be smaller than the first one.

Apple Inc has bet big on the South Asian nation since it began iPhone assembly in the country in 2017 via Wistron and later Foxconn, in line with the Indian government’s push for local manufacturing.

India is the second biggest smartphone market in the world, where Apple also plans to assemble iPad tablets and AirPods.

India’s Karnataka state said this week it has approved a $968 million investment by Foxconn, leading to the creation of 50,000 jobs.

Last week, Reuters reported Foxconn has plans to build a $200 million factory in India to produce the wireless earphones for Apple after winning a contract. It already assembles some iPhone models at its plant located in Tamil Nadu.

(Source: International Business Times – By Munsif Vengattil and Aditya Kalra – 24th March, 2023)

BCAJ Admin

Letters to The Editor

Dear Sir,

Re: Tax Laws & Ease of Doing Business in India

The Income-tax Act, 1961 has undergone thousands of Amendments since its inception. The Finance Act, 2023 has carried out more than 125 amendments. This has been the general trend for the last several decades. As a result of frequent amendments, many tax provisions have become too difficult to comprehend, understand, interpret and implement/ administer.

Also, the tax provisions have become very complex and unfathomable even to the best brains in the Legal Profession. This is evident from the fact that the judicial verdicts by various High Courts do not interpret the provisions in the same manner as the other High Courts have done. Consequently, decisions rendered even by the High Courts are distinguished or just reversed/overruled by a larger Bench or by the Apex Court. The taxpayers and their tax advisors are often at their wit’s end as to which judicial pronouncement represents the correct interpretation of the law to be relied upon as a guide for future course of action more so when the decision of the jurisdictional court is against the assessee and the decision of the non-jurisdictional court is in favour.

Many times, an amendment, instead of simplifying the existing complexity unintentionally adds to the complexities/ambiguities. Section 10(23C) is one of many such lengthy and very complex tax provisions.

Widespread litigation is evidence of the fact that many of the Tax Officials in the field are not able to understand the true meaning and purport of the tax provisions they are expected to administer and their interplay with the other provisions of the law and other ancillary laws. The tendency to play safe and disallow the taxpayer’s claims for various Deductions/ Allowances/ Exemptions and Incentives results in huge additions / high-pitched assessments, unjustified and unwarranted assessments /reassessments being made, and huge penalties are being levied, leaving the issues to be settled by the Judiciary, which is a very time consuming and costly process for the assessee.

The situation under other similar /related laws such as GST Customs Duty, PMLA etc., is not much different. The GST law is no longer the “Good & Simple Tax” as hailed by the Prime Minister.

It is probably a misconception that the Tax Laws are framed by the Parliament/ Legislatures. The reality is that many tax proposals are drafted by a handful of officials in the Finance Ministry and the CBDT. One also finds that such tax proposals are not adequately discussed and debated in Parliament. One finds that for many years, there is so much acrimony and pandemonium in both Houses of Parliament that the tax proposals drafted by the bureaucrats are quite often passed by a voice vote or by a show of hands without any/much debate and discussion, amidst the ongoing pandemonium/hungama.

Earlier, the Taxation Laws Amendment Bills were referred to the Select Committee of the Parliament which used to discuss the Proposals thread-bare and the suggestions of the Select Committee were considered while finalising the tax proposals. The Reports of the Committee’s deliberations were published and quite often referred to by the Judiciary to understand and interpret the amended provisions.

Unfortunately, now most of the amendments have been brought in through the Finance Bills which do not go through the Select Committee.

Sir, the existing situation is not very conducive for enhancing “Ease of Doing Business in India”, and the Tax Policy and Administration is a very important element in this regard.

There is a need to have a comprehensive relook/redraft of the entire Income-tax Act to simplify and rationalize the tax provisions with the help of highly respected Senior Tax Jurists, Counsels, Revenue Officials, etc. But redrafting the Tax Laws alone will not do. There is also an urgent need for a change in the mindset and attitude of the Tax Officials/ Administration who should stop viewing and treating the taxpayers with suspicious eyes and instead, treat them as honourable citizens. I wholeheartedly support strong and stern action against tax evaders, habitual offenders, and gross violators of tax laws, but not at the cost of punishing honest taxpayers even for technical infringements.

There is also an urgent need to change the mindset of the tax administration to have a trust-based relationship with taxpayers. A higher threshold needs to be prescribed to exclude minor lapses from levying of penalties and initiation of prosecution which in any case should be an exception and not a rule as it is practiced today.

Yours Sincerely,

CA. Tarunkumar Singhal

Respected Sir,

I invite your kind attention to the editorial of the journal of the month of March 2023, wherein you have highlighted the plight of small and medium trusts who are engaged solely for the cause of education.

It is heartening to note that you have suggested an exist scheme for small and medium trusts to get out of the rigors of sections 2, 10(23), 12AA, 13 and Income-tax Act, 1961 (Act) 80G.

The finance bill of 2023 meets half way of the suggested exit scheme. If income is to be taxed like any individual, AOP, or juridical person under the 115BAC why deny the benefits of depreciation as envisaged u/s 32 of the Act and allowable expenditure u/s 30-37.

The denial of claim of depreciation and taxing the income will be a death blow to small and medium trusts, who are under severe cash crunch.

Sir, if education as a whole has a lept during the past decade it is only the small and medium trust who have worked assiduously for the cause of education. We pray that good sense prevails on the government and not to kill the goose that lays the golden egg.

Thanking You,

Yours Faithfully,

S. Doraiswamy

Tax Consultant, Salem

BCAJ Admin

Corporate Law Corner Part A : Company Law

1 Case law no. 01/April 2023

Sonasuman Constech Engineers Pvt Ltd

ROC/PAT/SCN/143/36124

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of order: 04th January, 2023

Adjudication order for penalty for violation of section 143 of the Companies Act, 2013 on Auditors for non-reporting of non-compliance by SCEPL in the Audit report.

FACTS

SCEPL was incorporated on 30th October, 2017 having its registered office at Patna.

RK – KV and Associates were the Auditors for the financial years ending 31st March, 2018, 31st March 2019 and BKJ – BJ and Associates for financial year ending 31st March, 2020 as per the MCA Portal and AOC-4 filed by SCEPL.

The Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna (‘RoC’) had issued a show cause notice to the abovementioned Auditors for default under section 143 of the Companies Act, 2013 for which no reply was received.

As per Section 129(1) of the Companies Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the Company, comply with the accounting standards notified under section 133 and be in the form as provided in Schedule III.

The Auditors failed to comment on the following:

As per Schedule III of the Companies Act, 2013 for each class of share capital the number and amount of shares authorised; the number of shares issued, subscribed and fully paid, and subscribed but not fully paid; par value per share; a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period in the notes to the accounts of the Company. However, the same was not disclosed by SCEPL.
SCEPL did not classify the loans and advances in F.Ys. 2017-2018, 2018-2019 and 2019-2020 as Secured / Unsecured as per Schedule III.
SCEPL in the balance sheet for F.Ys. 2017-2018 and 2018-2019 showed long term borrowings of Rs. 51,80,000 and Rs. 1,13,79,970, respectively, but failed to sub-classify them as Secured / Unsecured long-term borrowings.
SCEPL had shown advances from relatives and customers in F.Y. 2019-2020 but did not classify them separately as loans from relatives and others.
Disclosure is required as per AS-18 of transactions between related parties during the existence of a related party relationship, such as the following: the name of the transacting related party; description of the relationship between the parties; description of the nature of transactions; volume of the transactions either as an amount or as an appropriate proportion; any other elements of the related party transactions necessary for an understanding of the financial statements; the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and amounts written off or written back in the period in respect of debts due from or to related parties. SCEPL did not disclose the name and nature of the Related Party Transactions as per AS-18.

Section 450 of the Companies Act, 2013 is a penal provision for any default/violation where no specific penalty is provided in the relevant section/rules;

Further SCEPL being a small company, applicability of Section 446B of the Companies Act, 2013 provides for lesser penalties for certain companies

HELD

The Adjudication Officer held that RK – KV and Associates and BK – JBJ and Associates were liable under section 450 for violation of section 143 of Companies Act, 2013. The penalty was levied as mentioned below:

Violation of section	Penalty imposed on Company / directors	Penalty specified under section 450 of the Companies Act, 2013	Penalty imposed by the Adjudicating Officer under section 454 read with section 446B of the Companies Act, 2013
Section 143 of Companies Act, 2013	RK – KV and Associates (F.Y. 2017-2018 and F.Y. 2018-2019)	Rs. 10,000*2 no. of years Rs. 20,000	Rs. 10,000
Section 143 of Companies Act, 2013	BK – JBJ and Associates (F.Y. 2019-2020)	Rs. 10,000	Rs. 5,000

Violation of section

Penalty imposed on Company
/ directors

Penalty specified under
section 450 of the Companies Act, 2013

Penalty imposed by the
Adjudicating Officer under section 454 read with section 446B of the
Companies Act, 2013

Section
143 of Companies Act, 2013

RK – KV
and Associates (F.Y. 2017-2018 and F.Y. 2018-2019)

Rs. 10,000*2

no. of years

Rs. 20,000

Rs. 10,000

Section
143 of Companies Act, 2013

BK – JBJ
and Associates (F.Y. 2019-2020)

Rs. 10,000

Rs. 5,000

2 Case law no. 02/April, 2023

Adani Transmission Step-One Ltd

ROC-Guj/Adj. Order/Adani/Section 117/7359 to 7363

Registrar of Companies, Gujarat, Dadra & Nagar Haveli

Adjudication order

Date of order: 09th February, 2023

Adjudication order for penalty under section 454 of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Rules, 2014 for violation of Section 117(1) r.w.s 14(1) of the Companies Act, 2013.

FACTS

ATSOL was incorporated on 23rd September, 2020 having its registered office at Ahmedabad.

ATSOL had filed the E-Form MGT-14 for passing a Special Resolution relating to the issue and allotment of 25 crore Compulsorily Convertible Debentures of Rs. 100/- each to ATL which was approved by the meeting of members held on 27th September, 2022.

ATSOL should have filed the E-Form MGT-14 within 30 days from the date of passing such a resolution. However, the said resolution was filed with the office of the Registrar of Companies on 05th January, 2023 i.e. with a delay of 71 Days. Thus, the company and its director have committed default and violation of Section with 117(1) of the Companies Act, 2013.

Section 117(1) of the Companies Act, 2013 provides as under,

(1) Where…….

(a) a copy of every resolution or any agreement in respect of matters specified in sub-section (3) together with explanatory statement as per section 102 shall be filed with the Registrar within 30 days of the passing or making thereof.

As per section 117 (3) (a), section (3) shall apply to all the special resolutions to be filed by the company.

Further, as per provisions of Section 117(2) of the Companies Act, 2013, where any company fails to file the resolution or the agreement of sub-section (1), such a company and every officer who is in default shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with a further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 200,000 and every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 10,000 who is in default and in case of continuing failure with a further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.

Whereas, RoC, Gujarat had a reasonable cause to believe that the provisions of section 117 of the Companies Act, 2013 had not been complied with within the time frame as prescribed under the provisions of section 117(1) of the Companies Act, 2013. Therefore, ATSOL and AKG, RS and RK, its officers in default had violated the provisions of section 117(1) of the Companies Act, 2013 which were under the purview of section 454(3) of the Companies Act, 2013 and were liable to be penalized under section 446 B of the Companies Act, 2013.

Further, the office of RoC, Gujarat, Dadra & Nagar Haveli had issued a show cause notice for default under section 117(1) of the Companies Act, 2013 dated 10th January, 2023 for which the practicing Company Secretary (CS) of ATSOL submitted that inadvertently the E-Form MGT-14 could not be filed within the time frame as prescribed under the provisions of section 117(1) of the Companies Act, 2013. CS further submitted that the penalty may not be imposed on the company and its officers in default.

HELD

While adjudging the quantum of penalty under section 117(3) of the Companies Act, 2013, the Adjudication Officer shall have due regard to the following factors, namely:

(a) The amount of disproportionate gain or unfair advantage, whenever quantifiable, made as result of default.

(b) The amount of loss caused to an investor or group of investors as a result of the default.

The adjudication officer based on the above-mentioned factors noted that the details of disproportionate gain or unfair advantage or loss caused to the investor, as a result of the delay to redress the investor grievance are not available on the record. Also, it was stated that it was difficult to quantify the unfair advantage or the loss caused to the investors in a default of this nature.

Hence, penalty was imposed on ATSOL and every officer in default as given in the below mentioned table:

Violation of section	Penalty imposed on Company / directors	Penalty calculated as per Section 117(2) of the Companies Act, 2013	Total Penalty (Rs)
Violation of Section 117(1)	On ATSOL	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	AKG, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	RS, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100
	RK, Director	Rs. 10,000+71*100 = Rs. 17,100	Rs. 17,100

BCAJ Admin

Allied Laws

1 Senior Superintendent, Deptt. of Post and others vs. Bundu and Another
AIR 2023 Allahabad 33
Date of order: 30th November, 2022

Speed post – Lost articles – Department does not have immunity – Order of Lok Adalat awarding cost – valid. [Legal Services Authorities Act, 1987; Post Office Act, 1898, Section 6]

FACTS

The Department of Post preferred a Writ Petition against an order of the Lok Adalat where compensation of Rs. 4,500 was awarded on account of the loss of articles through speed post.

HELD

It was held that speed post services were introduced 88 years after the enactment of the Post Office Act, 1898 and hence weren’t covered within the ambit of immunity under section 6 of the Post Office Act, 1898.

It was also held that the Lok Adalat had valid jurisdiction to award such compensation. Further, it was remarked that the Department should refrain from litigating such small issues where the cost of litigation is higher than the amount involved.

2 Sridhar Balkrishna and others vs. Evaristo Pinto and others
AIR 2023 (NOC) 75 (BOM)
Date of order: 4th January, 2022

Registration – Compulsory registration – Non-mentioning of composition deed – Not exempted from registration. [Registration Act, 1908. Section 17 (1), 49]

FACTS

The Respondents/Original Plaintiffs, filed the suit in 1983 for partition of the suit property and praying for allotment of 1/3rd share in an immovable property. The Plaintiff had purchased an undivided 1/3rd share of the property from his vendor by a registered sale deed. In the plaint itself, it was stated that the Plaintiff,Original Defendant No.1 and his wife the Original Defendant No. 2, had agreed on the division of the property, but the said agreement was signed only by Original Defendant No 1, while his wife did not sign the same. It was also stated in the plaint that the said agreement was never presented for registration before the office of the Sub-Registrar. The said agreement was entered into on 17th July, 1980, but according to Plaintiff, it was never acted upon. On this basis, the Plaintiff sought the decree of partition and allotment of 1/3rd share in the property, which would include the residential house occupied by him.

The trial court allowed the decree to the plaintiffs. The appellate court dismissed the appeal of the appellants. On the second appeal.

HELD

A perusal of the agreement dated 17th July, 1980 shows that there is a reference made to the property in question and it is specifically recorded that from the date of the agreement, a specific division of the property shall stand exclusively allotted to the Original Plaintiffs and they shall be entitled to possession of the same. The said document did not reduce in writing any settlement or an arrangement arrived at in the past, to exempt it from the mandatory requirement of registration under the provisions of the Registration Act.

Once it is found that the said document was compulsorily registrable under section 17(1)(b) of the Registration Act, the effect of non-registration under section 49 of the said Act must follow. In this regard, the attempt made on behalf of the Appellants to wriggle out of the mandatory requirement of section 17(1)(b) of the Registration Act, by claiming that the agreement dated 17th July, 1980, was a composition deed, cannot be accepted. A perusal of the agreement dated 17th July, 1980, does not give any indication that it was a composition deed and that under section 17(2)(i) of the Registration Act, it could be said to be exempt from the applicability of section 17(1)(b) of the said Act.

The Appeal was dismissed.

3 D. T. Rajkapoor Sah thru LRs. and others vs. Kamakshi Bai and others
AIR 2023 (NOC) 78 (MAD)
Date of order: 30th November, 2022

Succession – Hindu Undivided Family – Daughters and sisters are coparceners – Entitled to an equal share in property and profits [Hindu Succession Act, 1956, Section 6A]

FACTS

The grandfather of the Plaintiffs and Defendants purchased the suit property. The father of the Plaintiffs and Defendants received the said property vide partition deed dated 7th March, 1964. The father died intestate on 30th May, 2000.. The four sisters (Plaintiffs) filed the present suit for partition for partitioning the suit property and allotment of 4/7th (1/7th each) shares to them against their three brothers (Defendants).

The trial court allowed the partition in favour of the sisters. On appeal.

HELD

The separate property once thrown into the coparcenary stock, then by virtue of Doctrine of Blending, it also becomes the coparcenary property. If self-acquired property was made available for partition along with joint family property, that itself is a proof of blending. By the doctrine of blending the suit property loses its characteristic as separate property and the coparcener loses his/her claim against it. In light of the amendment in the amendment in the Hindu Succession Act in 2005 and the decision of the Hon’ble Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma 19 (2020) 9 SCC 1, the rights of the daughters are made equivalent to that of the son. The amendment is held to be retroactive and by their birth, the Plaintiffs also got the same rights in the coparcenary property and since the property of the father was not partitioned until the suit was filed in 2013, the property will be available to all seven coparceners.

The appeal was dismissed.

4 Kavita Kanwar vs. Pamela Mehta and Others
(2021) 11 SCC 209
Date of order: 19th May, 2020

Will – Legitimate suspicion – Several instances of suspicion – Probate was denied. [Indian Succession Act, 1925, Sections 61, 62, 63, 73, 111; Evidence Act, 1872, S. 68]

FACTS

The Will of Amarjeet Mamik (mother) was dated 20th May, 2006, and she expired on 21st May, 2006, leaving behind two daughters and one son. The properties in question were received by her from her father vide Will dated 14th February, 2001.

The father during his lifetime on 25th January, 2001, gifted the ground floor of the property to Kavita Kanwar (The appellant) whereas the first floor and other portions came to the testatrix. Pamela Mehta (Respondent No. 1) was the elder and widowed daughter of the testatrix who was living with her unmarried daughter on the first floor and also taking care of the testatrix. The son of the testatrix, Col. (Retd.) Prithviraj Mamik (Respondent No. 2) was bequeathed the ‘credit balance’ lying in the bank accounts with a clarification that he shall not inherit any portion of the immovable assets of the testatrix.

The appellant being the executor, filed for probate which was challenged. The Trial Court declined to grant probate on the grounds of suspicion. The High Court upheld the views of the Trial Court.

HELD

The Supreme Court took into consideration facts such as the executor being a major beneficiary, the son and another widowed daughter not included in the execution of the will, only the presence of the appellant executor at the time of the execution of the will, unexplained unequal distribution of property, manner and language of the will, unreliable witnesses, etc..

Held that, before entering into the provisions of law and judgements it is important to understand the facts surrounding the will. Therefore, taking into consideration all the circumstances surrounding the Will, the order of the High Court refusing the probate was upheld.

The appeal was dismissed.

BCAJ Admin

Service Tax

I. HIGH COURT

1 Commissioner of CGST vs. Shriram General Insurance C. Ltd

Date of order: 19th January, 2022

Service Tax paid on re-insurance by the insurance company would be allowable as input service within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004

FACTS

The assessee, an insurance company, deposited service tax on the insurance services. It had claimed input service credit for re-insurance services availed from other insurance companies. The department challenged the input service benefit claimed by the assessee on the grounds that the transaction comes to an end after issuing the insurance policy by the insurer and the same would not depend on re-insurance policy. The Appellate Tribunal passed its decision in favor of the assessee and hence an appeal was filed by department against the decision passed by the Tribunal before Hon’ble Court.

HELD

The High Court held that re-insurance is a statutory obligation and not a voluntary requirement. The assessee was entitled to CENVAT credit on the service tax paid which was necessary for its business to avoid double taxation. Relying on the decision of the Tribunal, the credit availed on re-insurance policy was held eligible.

II. TRIBUNAL

2 SGS India Pvt Ltd vs. Commissioner of CGST, Thane

Date of order: 29th December, 2021

The appellant is not liable to reverse the CENVAT credit availed irregularly and not utilized, where he had compensated exchequer by interest payment.

FACTS

The appellant was engaged in providing various taxable services. It discharged service tax liability under Reverse Charge Mechanism and availed the CENVAT credit facility.

During audit, the department observed that the appellant had paid service tax on 6th of the following month and the entitlement to the credit for some months was available in the next month. Department initiated show cause notice proceedings since the appellant had availed the credit without payment of service tax. Service tax demand along with interest and penalty under sections 77 and 78 of Finance Act, 1994 was raised. The appellant filed an appeal before the Learned Commissioner (Appeals) and the same was rejected. Being aggrieved by the order, appeal was filed before the Tribunal.

HELD

It was held that the appellant had availed the CENVAT credit without payment of service tax, but credit availed irregularly was not utilized for the payment of service tax. The appellant also discharged the interest liability for the same. Hence proceedings initiated for denial of the CENVAT benefit and the recovery did not stand for judicial scrutiny. There was no fraud, collusion, wilful misstatement, etc. as mentioned in section 78 of the Finance Act, 1994 since irregular Cenvat credit taken, payment of interest thereon and availability of CENVAT credit in the books of accounts were known to the department.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

1 Vipin Garg Alias Bindu vs. State of Haryana

2023 (69) GSTL 3

Date of order: 9th January, 2023

Granting of bail in case of misuse of Input Tax Credit (ITC) under section 132 of CGST Act and sections 438 and 439 of Code of Criminal Procedure, 1973 where the detention of the appellant was not warranted.

FACTS

The appellant was arrested and detained on the allegation of misuse of ITC under the CGST Act. A co-accused was already granted bail in this case. Further, charge sheet was also submitted. The Revenue refused the appellant’s plea for bail on the grounds of loss to the exchequer with no recovery till date. Being aggrieved by the order, the case was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that further detention of the appellant was not warranted. The impugned order was thus quashed, and the accused appellant was ordered to be released on bail subject to any conditions imposed by trial court.

II. HIGH COURT

2 Aditya Narayan Ojha vs. Principal Commissioner, CGST, Delhi North

2023 (69) GSTL 22 (Del.)

Date of order: 2nd August, 2022

Registration cancelled for failure to respond to SCN issued by department. Court directs department to restore the cancelled registration.

FACTS

The petitioner was served SCN by the department on the grounds that the registration was obtained in a fraudulent manner. The registration was cancelled since no reply was filed by the petitioner before the officer. Being aggrieved by the order, the petitioner filed an appeal, and the impugned order was reversed by the first appellate authority. An undertaking was submitted by the petitioner that all the GST returns were filed up to the date of order, and also pending GST returns along with interest would be filed after restoration of registration. Further, an appeal was filed by petitioner for non-compliance of order passed by the first appellate authority by the department. However, the department did not restore the registration on the grounds that the assessee was not in existence at the time of physical inspection. Being aggrieved, the petitioner filed a petition before the Hon’ble High Court.

HELD

The Hon’ble High Court observed that, the fact that the registration was cancelled because the assessee did not exist was not mentioned in the order. No notice was served by the department before carrying out the physical inspection as mandated by Rule 25 of CGST Rules. Further, the impugned order was also revoked by first appellant authority after receipt of undertaking. Accordingly, writ petition was disposed of in favour of assessee with a direction by the Court to restore the cancelled registration.

3 Deepam Roadways vs. Deputy State Tax Officer [2023]

147 taxmann.com 35 (Madras)Date of or

der: 23rd January, 2023

An order passed for payment of penalty under section 129(1)(a) or (b) of the CGST Act, beyond seven days of the service of the show cause notice issued to the petitioner is barred by limitation, and hence is liable to be quashed.

FACTS

The petitioner challenged the detention order and the consequential order calling upon the petitioner to pay a penalty under section 129 of the CGST Act. The issue before the Court was whether section 129(3) of the CGST Act was adhered to or not.

HELD

The Hon’ble Court noted that as per section 129(3) of the CGST Act, the proper officer, after detaining the goods or conveyance, shall issue a notice of such detention or seizure specifying the penalty payable and thereafter, pass an order within a period of seven days from the date of service of such notice, for payment of penalty under section 129(1)(a) or (b). However, in the present case, the consequential order for payment of penalty was passed beyond the period of seven days from the date of service of notice on the petitioner, which is contrary to section 129(3) of the CGST Act, 2017. The Court, therefore, quashed the impugned order and allowed the writ petition.

4 Acambis Helpline Management (P) Ltd vs. UOI [2023]

147 taxmann.com 100 (Allahabad)

Date of order: 15th December, 2022

Whether the registration is cancelled on the sole ground that the assessee did not furnish any reply to the show cause notice, the said order is liable to be set aside as a non-speaking order.

FACTS

The petitioner challenged the order whereby the registration of the petitioner has been cancelled under section 29 of the CGST Act as well as the order dismissing the appeal preferred by the petitioner.

HELD

The Court observed that the only reason stated in the impugned order was that the petitioner did not respond to the show cause notice. The Court held that even in the case that the petitioner did not give a response to the show cause notice, it was incumbent on the competent authority to consider the facts of the case and come to the conclusion that the facts necessitate cancelling the registration of the petitioner under section 39 of the CGST Act. The Court, therefore, held that the impugned order is illegal and set aside the same.

5 Shraddha Overseas (P) Ltd vs. Assistant Commissioner of State Tax – [2023]

147 taxmann.com 209 (Calcutta)

Date of order: 16th December, 2022

To conclude that the dealer is non-existent, there should be material to show that on the date when the appellants had a transaction with him, there was no valid registration. Hence, the investigation is insufficient.

FACTS

A petition was filed challenging the order of the first Appellate Authority for disallowance of input tax credit based on the cancellation of the vendor’s registration.

HELD

The Court observed that a substantial portion of the transaction has been found by the Appellate Authority to have been done with valid documentation. However, a doubt had arisen in the mind of the Appellate Authority about the genuineness of the transaction going by the payload of the vehicles, which was used for transporting the goods in question. The Appellate Authority then referred to the action taken by the department against two parties on 14th November, 2019 and 17th February, 2020 based on which it was concluded that the said dealers were non-existent.

The Court observed that the transactions in respect of which ITC was disallowed were carried out by the petitioner with these parties in October 2018. The Court, therefore, held that to conclude that the other end dealer is non-existing, there should be material to show that on the date when the appellants had a transaction with him, there was no valid registration. If the cancellation of the registration of the other end dealer is by way of retrospective cancellation, then the question would be whether it would affect the transaction done by the appellants, more particularly when the appellants have been able to show that the payments for the transaction have been done through banking challans. The Court further held that in this case, the Appellate Authority was solely guided by the action taken by the tax authorities against the vendors without examining the specific facts and circumstances of the case at hand. The Court also noted that there were no allegations against the appellants in the SCN and though several grounds were raised by the Adjudicating Authority, none of these were considered.

In the circumstances, the Court held that the order of the Appellate Authority is a non-speaking order as there is no independent finding rendered qua the allegation against the appellants. Hence, the matter was remanded back to the Appellate Authority to specifically consider the contentions, which were advanced by the appellants and also the fact that the other end dealer’s registration was cancelled with retrospective effect.

6 Rohit Enterprises vs. Commissioner, State GST [2023]

147 taxmann.com 505 (Bombay)

Date of order: 16th February, 2023

The provisions of the GST enactment cannot be interpreted to deny the right to carry on trade and commerce to any citizen and subject. The issue relates to cancellation of registration. Right of the State is not adversely affected by the cancellation when the petitioner is willing to pay the tax along with interest and penalty.

FACTS

The petitioner’s GST registration was cancelled for non-filing of GST returns. In the show cause proceedings under section 29 of the CGST Act, the petitioner stated financial crunch as the reason and requested for revocation of the notice. However, the registration was cancelled w.e.f. August 2021. The petitioner applied for revocation of the order cancelling the registration. However, the said application was rejected. The petitioner filed an appeal under section 107 of the Maharashtra Goods and Service Tax Act, 2017 challenging the cancellation of registration which was rejected on the ground of limitation. Before the High Court, the petitioner contended that the petitioner earns his livelihood through the fabrication business. Due to the pandemic situation, the business activities of the petitioner were hampered causing huge financial loss. The petitioner was also unwell and had undergone angioplasty as a result of which he could not submit the returns. The revenue defended the order stating that the order is passed in accordance with the law and after giving the petitioner a reasonable opportunity to be heard and submit the documents.

HELD

The Court took note of the factual position and expressed a view that the provisions of the GST enactment cannot be interpreted so as to deny the right to carry on trade and commerce to any citizen and subjects. The constitutional guarantee is unconditional and unequivocal and must be enforced regardless of shortcomings in the scheme of GST enactment. The right to carry on trade or profession cannot be curtailed contrary to the constitutional guarantee under Article 19(1)(g) and Article 21 of the Constitution of India. If a person is not allowed to revive the registration, the State would suffer a loss of revenue and the ultimate goal of the GST regime will stand defeated. The petitioner deserves a chance to come back into the GST fold and carry on his business. The Court further stated that the objective of limitation is to terminate the lis and not to divest a person of the right vested in him by efflux of time. Since the issue involved is only the cancellation of registration, it cannot be said that any right has accrued to the State which would rather be adversely affected by the cancellation. The Court thus held that the petitioner, who is a sufferer of unique circumstances resulting from the pandemic and his health barriers, would be put to a great hardship for want of GST registration. The petitioner, who is a small-scale entrepreneur, cannot carry on production activities in absence of GST registration. Resultantly, his right to livelihood is affected. Hence, the petitioner must be allowed to continue business. Since his statutory appeal suffered dismissal on technical grounds, the Court held it appropriate to exercise its jurisdiction under Article 226 of the Constitution and allowed the writ petition as the petitioner agreed to pay all the dues along with penalty and interest, as applicable.

7 Abhishek Gumber vs. Commissioner of GST [2023]

146 taxmann.com 37 (Delhi)

Date of order: 6th July, 2022

When the Order rejecting the refund of ITC on the ground of bogus ITC claim is the subject matter of the appeal, the SCN issued by the department under section 73 for recovery of the said ITC claim is held to be pre-mature and set aside.

FACTS

The petitioner’s claim for a refund of the input tax credit was rejected on the ground that the refund was founded on a forged input tax credit claim and the same had to be rejected. The petitioner filed an appeal against the same. However, the petitioner was served with a show cause notice under section 73 of the CGST Act for recovery of such credit. The petitioner moved to the Court for quashing the said show cause notice. The department argued that the demand notice was issued to protect the interests of the revenue.

HELD

The Court held that once the petitioner’s refund claim was rejected on the ground that it was founded on forged ITC, the petitioner would be liable to pay tax, interest, and perhaps also a penalty, in the event the adjudication order is sustained. The Court further held that as the petitioner has filed an appeal against the order rejecting the refund which is pending adjudication, at this stage, the impugned show cause notice is premature and in case the appeals are dismissed it would be
open to the respondent/revenue to take recourse to section 75 of the Act and the attendant rules framed thereunder.

III. TRIBUNAL

8 Shriram Chits Pvt Ltd vs. Commissioner of C. EX., CUS. & S.T., Hyderabad

Date or order: 13th December, 2019

Agreement for granting of right to access to branch network not included under Business Support Services prior to introduction of negative list regime of service tax

FACTS

The appellant entered into agreements dated 1st December, 2005 and 1st December, 2008 with a third party for providing access to the entire branch network for a consideration. Show Cause Notice dated 19th October, 2011 was issued by revenue demanding service tax under purview of Business Support Services under section 65(104c) of Finance Act, 1994. The Adjudicating Authority, after appeal being filed by assessee, approved the demand made by the revenue along with interest and penalty. Being aggrieved by the order passed, an appeal was filed with the Tribunal.

HELD

It was held that after introduction of the negative list of Service Tax w.e.f. 1st July, 2012, the service provided by appellant became taxable. Hence, granting of the right to access branch network was not taxable before 1st July, 2012, since it was not in the inclusive list for definition of Business Support Services. Also, the extended period of limitation cannot be invoked since there was no evidence for existence of fraud, wilful suppression, misrepresentation, and evasion of tax, since the department was already aware of material facts through statutory documents filed. In view thereof, appeal was allowed in favour of the assessee.

BCAJ Admin

Recent Developments in GST

I. NOTIFICATIONS

1. Notification No.1/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, changes have been done in notification no. 12/2017
CST (Rate) dated 28th June, 2017 which is regarding exempt services. By this
notification, an explanation (iva) is inserted in the said notification. By the
above clause, it is clarified that any authority, board or body set up by the
Central or State Government including the National Testing Agency for conducting
entrance examination should also be treated as an Educational Institution for
providing services of conducting entrance examination for admission to
Educational Institutions. It seems to be a beneficial amendment.

2. Notification No.2/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, an amendment is made in the Notification no.13/2017
dated 28th June, 2017 which is regarding Reverse Charge Mechanism (RCM). The
explanation in clause (h) is now amended, and, Courts and Tribunals are added
in the Explanation. By this amendment it appears that the scope of RCM is
expanded.

3. Notification No.3/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, changes are made in notification no.1/2017 Central
Tax (Rate) dated 28th June, 2017. The rate of tax in Schedule 1, 2 and 3 of the
said notification has been amended. The changes are mainly in relation to items
Rab and pencil sharpener.

4. Notification No.4/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, an amendment is made in notification 2/2017 Central
(Rate) dated 28th June, 2017 regarding exempt goods. By this amendment
sub-entry (iii) is inserted in sr. no.94 so as to cover ‘Rab, other than
pre-packaged and labeled’ in the said notification.

v) Similar changes are also made in
IGST by issuing separate notifications bearing no. 1/2023, 2/2023, 3/2023 and
4/2023 Integrated Tax (Rate) dated 28th February, 2023.

II. GSTN NEWS

It is informed by the GSTN that a facility has been created in the portal
whereby negative values will be accepted in Table 4 of GSTR-3B.

III. ADVANCE RULINGS

1 Eberspaecher Suetrak Bus Climate Control Systems India Pvt Ltd

AAR No. KAR ADRG 34/2022

dated 14th September, 2022 (Kar)

Classification – Bus Rooftop Air conditioning Systems

The applicant was a manufacturer and supplier of air-conditioning systems.
There are different combinations of supply. The applicant has raised following
the three questions for determination by the AAR.

“i. Classification of Bus air-conditioning system
inclusive of Rooftop unit, compressor and installation kit for one consolidated
price to a single customer.

ii. Classification of Rooftop unit, compressor and
installation kit sold to single customer for a single fitting at customer end,
but price negotiated and agreed separately for each unit.

iii. Classification of Rooftop unit, compressor and
installation kit sold as mentioned below:

a. Rooftop unit alone

b. Rooftop unit and compressor

c. Compressor

d. Installation Kit

e. Compressor and installation kit

f. Rooftop unit and installation kit

g. Rooftop unit and compressor”

The applicant has provided basic information about the products. There are
different components of the system like, a rooftop unit, compressor and an
installation kit. Information is also provided about the installation of the
above units and the working mechanism of these units. It is further submitted
that a customer purchasing rooftop unit has the choice of purchasing
installation kits and compressor separately from other suppliers also. The
learned AAR has also noted the functions of the above units. Like, a rooftop is
fixed on the roof of the bus which has heat exchangers, blowers, fans, copper
tubings, relay panel, rubber hoses and electrical wiring harness, etc.

An installation kit consists of a controller, hoses, wiring harness, drain
hoses, hardware accessories.

Compressor is like heart of the complete AC system and it is a main unit to
give cold air.

The learned AAR referred to relevant notifications about rate of tax and
interpretation rules given therein.

In respect of classification of bus air conditioning system comprising of
rooftop unit, compressor and installation kit for one consolidated price to one
single customer, the learned AAR observed that it is supply of air conditioning
system for buses and it merits classification under heading 8415 2010 and the
same is classified under the said heading.

In respect of second question about classification of rooftop unit, compressor
and installation kit sold to single customer for a single fitting at the
customer end but prices negotiated and specified separately, the learned AAR
observed that though the prices are negotiated and stated separately, in view
of notes in Customs Tariff Act,1975, particularly note 3 and 4, it will amount
to supply of composite machine designed for the purpose of performing the
principle function of bus air conditioning system and it is classifiable under
Tariff heading 8415 2010. Accordingly, the classification is done under above
heading.

Regarding third question where the units are sold in different combinations,
the learned AAR held that they will be considered as supply of
identified/recognized parts of composite machine i.e. air conditioning system
of the bus itself. Therefore, the learned AAR held that they are to be
classified under Tariff heading 8415 9000.

In respect of sale of compressor, when sold individually, the learned AAR
referred to heading 8414 and finding that there is separate item for gas
compressor of kind used in air conditioning equipment, the learned AAR
classified the same under Tariff heading 8414 8011.

The learned AAR passed the order suggesting to levy tax as per above
classification.

2 KMV Projects Ltd

(AAR No. KAR ADRG 35/2022

dated 16th September, 2022)(Kar)

Rate of taxes for Government contracts from 1st January, 2022

The applicant in this case was involved in the construction activity for
Government and Government entities. The applicant filed an application to know
the rate of tax in specific contracts in view of changes in rate of taxes for
government contracts. The questions put before the learned AAR are reproduced
as under:

“i. Applicable GST rates with regards to

a. Government works contract services of Airport Terminal
Building at Sogane Village in Shivamogga taluk and District, Karnataka.

b. Work received from Public Works Department for Development
of Greenfield Airport at Vijaypur in Karnataka State.

c. Work received from Karnataka State Police Housing and
Infrastructure Development Corporation Limited for construction of High
Security Prison at Central Prison, Parappana Agrahara, Bangalore Karnataka
State.

d. Work received from Commissioner, Kudalasangam Development
Board, Kudalasangam for construction of Basava International Center and Museum
at Kudalasangam of Hunagunda Taluka in Bagalkot District.

e. Work received from Karnataka Residential Educational
Institutions Society for construction of Government School Buildings and
Hostels at various places in Karnataka State.”

The applicant submitted that there are changes by the Notification No.15/2021
dated 18th November, 2021-Central Tax (Rate) in respect of rates. The applicant
wanted to know the correct rates applicable to its contracts in view of above
changes.

The learned AAR examined the status of each of the entities involved in the
given contracts. For the said purpose, the learned AAR made a reference to the
meaning given to the governmental authority and government entity given in
notification no.11/2017 – Central Tax (Rate) dated 28th June, 2017 as amended
by notification no.31/2017 – Central Tax (Rate) dated 13th October, 2017. The
meanings given in the said notification for above terms are reproduced as
under:

“(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 243W 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 learned AAR held that the Karnataka State Police Housing and Infrastructure
Cooperative Ltd is a company of the Government of Karnataka and all its shares
are held by the Government of Karnataka. In view of above, the learned AAR held
that the above Corporation is a Government entity.

In respect of Kudala Sangama Development Board the learned AAR observed that it
was established under Kudala Sangama Development Board Act, 1994 where 90 per
cent of the members are from the State Government. In view of above the Board
is also held as Government entity.

In respect of Karnataka Residential Educational Institutions Society (KRIES)
the learned AAR held that it was formed under the Societies Registration Act,
and the Government of Karnataka is authorized to supervise the affair of the
society. Therefore, the society is also held as a government entity.

In respect of work of construction of airport terminal buildings/facilities and
associated works at Sogane village in Shivamogga Taluk and the development of a
Greenfield Airport at Vijaypur in Karnataka State, the learned AAR observed
that the works are awarded by the Public Works Department of the Government of
Karnataka. Therefore, these are services provided to State Government. However,
the learned AAR also observed that the said works for the construction of an
airport terminal building or a Greenfield airport are predominantly meant for
commerce and hence are not covered under entry 3 (iii), (vi), (ix) and (x). The
said works are covered under entry 3(xii) of notification no.11/2017 Central
Tax (Rate) dated 28th June, 2017.

After considering the nature of each contractee, the learned AAR referred to
the amendments made in Notification No.11/2017 – Central Tax (Rate) dated28th
June, 2017 by Notification No.22/2021- Central Tax (Rate) dated31st December,
2021 as well as Notification No.3/2022- Central Tax (Rate) dated 13th July,
2022. In view of the changes made by Notifications in the rates of taxes, the
learned AAR held that the rates become 18 per cent for services to Government
entities and authorities. In view of the above, in respect of works contract
with the Karnataka State Police Housing and Infrastructure Development Corporation
Ltd, Kudala Sangama Development Board and Karnataka Residential Educational
Institutions Society (KRIES), the rate is determined at 18 per cent from 1st
January, 2022, by the learned AAR. For the contracts executed for airport
terminal buildings also the tax rate is determined at 18 per cent from 18th
July, 2022.

3 Vouchers – ITC vis-à-vis Section 17(5)(h)

Myntra Designs Pvt Ltd

(AAR No. KAR ADRG 33/2022

dated 14th September, 2022)(Kar)

The applicant in this case is engaged in the business of selling fashion and
lifestyle products through the portal. The suppliers of such products,
intending to sell their products through the applicant’s portal, list them on
the portal and sell them to customers, who place their order by using the
applicant’s portal. Once an order is placed by the customer, the applicant
collects the money from them through its portal in the capacity of an
e-commerce portal operator and settles the amount payable with the supplier of
the said order within a specified period.

To incentivise the customers visiting the portal / e-commerce platform, the
applicant proposes to run a loyalty program, by issuing points to the customers
on the basis of the purchases effected by these customers from various sellers
on the said platform. The participation in the proposed loyalty program will be
on meeting the pre-defined eligibility criteria laid down by the applicant and
the same will be subject to acceptance of the applicant’s terms and conditions.
Further, the customers will be bound by the said terms and conditions and any
changes or modifications to the same.

As per the scheme, the applicant will issue vouchers and subscription packages
to the eligible visitors to the portal.

The applicant has to procure the above vouchers and subscription packages from
third party vendors. The applicant wanted to know whether it will be eligible
to claim ITC on such procurement. Therefore, applicant put following question
for determination by the learned AAR.

“Whether the applicant would be eligible to avail the input tax credit, in
terms of Section 16 of the CGST Act 2017, on the vouchers and subscription
packages procured by the applicant from third party vendors that are made
available to the eligible customers participating in the loyalty program
against the loyalty points earned / accumulated by the said customers.”

The applicant submitted that the above vouchers and subscription packages are
for use in the course of business. It was explained that the loyalty programme
is sought to be introduced with an object of increasing customer base of the
applicant’s platform which will lead to increased footfall and sales through
the said platform, and thus the said loyalty program will directly impact and
enhance the amount of commission earned by the applicants in the course of
their business.

It was further submitted that the vendors of the applicant, who supply the
voucher and subscription packages, describe the above products in their
invoices as “other professional, technical and business services”.

It was tried to impress upon that these are services, and not goods. In view of
above it was further tried to impress upon that section 17(5) will also not
apply as they are services, and not goods.

The learned AAR on above facts first tried to decide the nature of items
involved i.e. nature of vouchers and subscription packages.

The learned AAR referred to definition of ‘voucher” given in section 2(118) of
CGST Act, which is reproduced as under:

““voucher” means an instrument where there is an obligation to accept it as
consideration or part consideration for a supply of goods or services or both
and where the goods or services or both to be supplied or the identities of
their potential suppliers are either indicated on the instrument itself or in
related documentation, including the terms and conditions of use of such
instrument.”

In light of the above definition, the learned AAR held that subscription
packages are ‘vouchers’ as they place an obligation on the potential supplier
to accept them as consideration for supply of goods and services to the holder
of the instrument of the customer. Therefore, the subscription package is a
‘voucher’.

The learned AAR also referred to the definition of ‘goods’ given in section
2(52) of the CGST Act which is reproduced as under:

“Section 2(52) – ‘goods’ means 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.”

The learned AAR referred to the decided cases to know the meaning of ‘voucher’
vis-à-vis goods. The learned AAR referred to judgment of Supreme Court in case
of Tata Consultancy Services vs. State of Andhra Pradesh (2004) –
2004-VIL-06-SC-CB wherein the Supreme court has observed that goods can
be tangible or intangible and the test to determine whether property is goods
is whether the concerned item is capable of abstraction, consumption and use,
and whether it can be transmitted, transferred, delivered, stored, possessed,
etc. The learned AAR held that the ‘voucher’ in present case has all the
aforesaid capabilities and hence it gets covered under ‘goods’, though it is
intangible.

Thereafter the learned AAR referred to section 17(5)(h) which is also
reproduced in AR as under:

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and
sub-section (1) of section 18, input tax credit shall not be available in
respect of the following, namely:

(a)….

(b)….

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or
free samples; and

(i)….”

The learned AAR though agreed that the items are used in the course of
business, it further held that they are covered by section 17(5)(h) above.

The learned AAR concluded its observations, in para 18, as under:

“18. It can be seen from the loyalty program that the applicant, on the basis
of a particular transaction / purchase by the customer through their e-commerce
platform and subject to acceptance of the terms and conditions of the applicant
by the customer, allows the customer to earn loyalty points. The applicant in
the said transaction recovers the full amount from the customer and gives the
loyalty points free of cost. Further the said loyalty points, in the
applicant’s own admission, do not have any monetary value, are non-transferable
and cannot be converted to cash. The redemption of loyalty points, admittedly
involves no flow of consideration from the customer. Thus, redemption of
loyalty points by the customer for receiving vouchers from the applicant
implies that the vouchers are issued free of cost to the customer and amounts
to disposal of vouchers (goods) by way of gift and squarely covered under
clause (h) of Section 17(5) of the Act, ibid.”

Accordingly, the learned AAR held that the applicant is not eligible to avail
the ITC on the vouchers and subscription packages procured by the applicant for
loyalty programme.

(Note: Recently, Hon. Karnataka High Court in the case of Premier Sales
Promotion Pvt. Ltd vs. Union of India & ors. (2023 Live Law (Kar) 53 dated
16th January, 2023) held that ‘vouchers’ are neither ‘goods’ nor ‘services’
and supply of them will not attract GST.)

BCAJ Admin

Glimpses of Supreme Court Rulings

1 PCIT vs. Matrix Clothing Pvt Ltd

(2022) 448 ITR 732,737 (SC)

Export Commission – Business Expenditure – Disallowance under section 40(a)(ia) –The foreign entity receiving the amounts were not Indian residents and subject to tax in India and that the services rendered were rendered outside India – Payments not liable to deduction of tax at source

In a Special Leave Petition filed before the Supreme Court, the following questions arose, namely, (i) losses due to foreign exchange fluctuation on export proceeds, (ii) the advance of interest-free loans to the related party, and (iii) non-deduction of tax at source on payment of export commission.

According to the Supreme Court, the first issue was covered in favor of the assessee by its decision in CIT vs. Woodward Governor India Pvt Ltd (2209) 312 ITR 254 (SC).

The Supreme Court dismissed the second issue, keeping the question of law open, as the amount involved was only Rs. 6,00,000.

So far as the third issue in respect to non-deduction of tax at source on payment of export commission was concerned, the Supreme Court noted that there were concurrent findings recorded that the foreign entity receiving the amounts were not Indian residents and subject to tax in India and that the services rendered were rendered outside India. Therefore, according to the Supreme Court, no error was committed by the High Court in deciding the issue against the Revenue.

2 PCIT vs. Tata Sons Ltd

(2022) 449 ITR 166 (SC)

Reassessment – Reasons recorded after issuance of the notice – Notice issued under section 148 of the Act was invalid

On 6th March, 2009, the AO issued a notice under section 148 of the Act seeking to re-open the assessment for A.Y. 2004-05. The Respondent contended that the reopening notice was issued much before the reasons were recorded for reopening the assessment, thus the reopening notice was without jurisdiction. However, the AO did not accept the Respondent’s contention and passed an order of assessment under section 143(3) r. w. s. 148 of the Act.

In appeal, the CIT (A) held that the reopening notice had been issued without having recorded the reasons which led the AO to form a reasonable belief that income chargeable to tax escaped assessment. He noted that reasons were recorded on 19th March, 2009 while the impugned notice issued is dated 6th March, 2009. In the above facts, the CIT (A) held the entire proceeding of reopening to assessment is vitiated as notice under section 148 of the Act is bad in law.

Being aggrieved, the Revenue filed Appeal to the Tribunal. The Tribunal specifically asked the Revenue to produce the assessment record so as to substantiate its case that impugned notice under section 148 of the Act was issued only after recording the reasons for reopening the assessment. The Revenue produced the record of assessment for A.Y. 2004-05 before the Tribunal. The Tribunal from the entries made in the assessment record produced, found an entry as regards issue of notice under section 148 dated 6th March, 2009. However, no entries prior thereto i.e. 6th March, 2009 were produced before the Tribunal, so as to establish that the reasons were recorded prior to the issue of notice dated 6th March, 2009 under section 148 of the Act. Thus, the Tribunal concluded that prior to 6th March, 2009 there was nothing in the record which would indicate that any reasons were recorded prior to the issue of notice. Therefore, in the absence of the Revenue being able to show that the reasons were recorded prior to 6th March, 2009, the Tribunal held that reopening notice was without jurisdiction.

The High Court noted that both the CIT (A) and the Tribunal had concurrently come to a finding of fact that no reasons were recorded by the AO prior to issuing the reopening notice dated 6th March, 2009. Nothing had been brought on record to suggest that the above finding of fact was perverse. Thus, the appeal did not give rise to any substantial question of law and was dismissed.

The Supreme Court dismissed the Special Leave Petition of the Revenue observing that it appeared that the reasons to reopen the assessment were recorded after issuance of notice of the reassessment notice and, therefore, it could be seen that when the notice for reassessment was issued, there was no subjective satisfaction. According to the Supreme Court, the High Court had not committed any error in setting aside the reassessment proceedings.

3 SRC Aviation Pvt Ltd vs.

ACIT (2022) 449 ITR 169 (SC)

Business Expenditure – Finding that bonus was paid in lieu of the dividend to avoid payment of dividend distribution tax – Not allowable under section 36(1)(ii) of Act

The facts in brief are that the assessee, a private limited company, of which, Arvind Chadha and Anoop Chadha are two shareholders and directors holding 50 per cent equity shares each since inception of the company.

In A.Y. 2011-2012, the company has paid bonus of Rs. 1 crore each to both the directors namely Arvind Chadha and Anoop Chadha. Similarly, in the A,Y. 2014-2015 the company paid a bonus of Rs. 1.5 crore each to both the Directors.

The AO disallowed the same relying upon section 36 (1)(ii) of the Act. The AO was inter alia of the view that bonus was paid to avoid payment of dividend distribution tax.

The CIT (A), in the appeal filed by the Assessee, vide orders dated 24th March, 2014 and 29th November, 2016 confirmed the disallowance and took a view that had the impugned bonus not been paid to these two directors, the amount would have been paid to them as dividend.

The order of the CIT (A) was challenged before the ITAT. The Tribunal also agreed with the AO and CIT (A) and upheld the order of AO and CIT(A).

Aggrieved by the order of the ITAT, the assessee challenged the order before the High Court Court.

Before the High Court, the appellant submitted that the appellant company had been paying bonus to the above working directors apart from the directors’ remuneration and the same was being allowed as deductible business expenditure and no disallowance was ever made in the past. The remuneration including bonus was paid on the basis of Board resolution for the services rendered by the aforesaid two directors. Further, the directors had declared the bonus as part of the ‘salary’ under section 15 of the Act in their returns of income and the same were accepted and assessed as such in their assessments.

The High Court noted that there were only two directors in the company. The entire amount had been paid to both of them. It was not the case of the Appellant that there had been any term of employment nor was there any case that any special services had been rendered by these two directors.

The High Court noted that the AO and CIT (A) had given a concurrent finding that the assessee had paid the bonus in lieu of the dividend and therefore, the above sum was disallowed under section 36(1)(ii) of Act. The ITAT also after considering the findings of the AO and the CIT (A) had inter alia held that the payment of bonus or commission was not allowable as deduction under section 36(1)(ii) of the Act in the hands of the assessee company. The High Court dismissed the appeals in the absence of any substantial question of law.

The Supreme Court dismissed the Special Leave Petitions observing that there was a concurrent finding of fact by the AO, CIT (Appeal) and Income Tax Appellate Tribunal, Delhi which had been duly affirmed by the High Court, disallowing the payment of bonus to the two Directors of the petitioner-company. According to the Supreme Court, no case to interfere with the impugned Order passed by the High Court of Delhi was made out.

4 ACIT vs. CEAT Ltd

(2022) 449 ITR 171 (SC)

Reassessment – Assessment sought to be re-opened beyond four years – Conditions precedent for re-opening of the assessment beyond four years were not satisfied – No allegations of suppression of material fact – Re- assessment was on change of opinion – Notice rightly quashed

Petitioner challenged the notice dated 27th March, 2019 issued under section 148 of the Income Tax Act, 1961 (the Act) for A.Y. 2012-13 and the order dated 31st October, 2019 rejecting petitioner’s objections before the High Court.

The High Court observed that since the notice issued was after expiry of four years from the end of the relevant assessment year and assessment under section 143(3) of the Act was completed, proviso to Section 147 of the Act would apply. Therefore, the Respondent has to first show that there was a failure on the part of petitioner to disclose material facts required for assessment.

The High Court after considering the reasons recorded for reopening of the assessment was of the view that the Respondent had failed to show which facts, material or otherwise has not been disclosed. Further, the reasons indicated a change of opinion which was impermissible in law. According to the High Court, the entire basis for re-opening was due to the mistake of the AO that resulted in under-assessment.

The High Court observed that the Hon’ble Apex Court in Indian & Eastern Newspaper Society vs. Commissioner of Income-tax [1979] 119 ITR 996 (SC) has held that an error discovered on a reconsideration of the same material (and no more) does not give power to the AO to re-open the assessment.

This view had been followed by a full bench of the Karnataka High Court in Dell India (P) Ltd vs. JCIT, LTU, Bangalore (2021) 432 ITR 212 (Karn).

The High Court quashed the notice issued under section 148 of the Act and allowed the writ petition.

The Supreme Court noted that it was not in dispute that the assessment was sought to be re-opened beyond four years. Therefore, all the conditions under section 148 of the Income-tax Act for re-opening the assessment beyond four years were required to be satisfied. The Supreme Court, after going through the reasons recorded for re-opening was of the opinion that the conditions precedent for re-opening of the assessment beyond four years were not satisfied. The re-assessment was on change of opinion. There were no allegations of suppression of material fact. Under the circumstances, no error had been committed by the High Court in setting aside the re-opening notice under section 148 of the Income-tax Act. The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

5 CIT vsJai Prakash Associates Ltd.

(2022) 449 ITR 183 (SC)

Deduction of tax at source – TDS on non-convertible debentures and FDR below Rs.5,000 – No TDS is leviable – Once, there is no liability to deduct TDS, there is no question of charging any interest

The question that arose for consideration in an appeal filed before the Tribunal was – Whether charging of interest under section 201(1A) becomes time barred when action under section 201(1) is time barred despite the section not providing for limitation?

The High Court remanded the matter to the Tribunal to reconsider the question in light of decision of the Allahabad High Court in Mass Awash Pvt Ltd vs. CIT (IT) (2017) 397 ITR 305 (All). The High Court in that case held that a power conferred without limitation has to be exercised within a reasonable time but what is reasonable time would depend upon facts of each case.

The Supreme Court, however, noted that the main issue was with respect to the chargeability of TDS on non-convertible debentures and FDR below Rs.5,000/-.

The Supreme Court after going through the judgment and orders passed by the Tribunal as well as the High Court, was of the opinion that no error has been committed by the Tribunal and/or the High Court on the chargeability of TDS amount on non-convertible debentures and fixed deposit of the value less than Rs.5,000. Both, the Tribunal as well as the High Court had concurrently found that, on non-convertible debentures and fixed deposit of the value less than Rs.5,000/-, there shall not be any TDS applicable. The Supreme Court was in complete agreement with the view taken by the Tribunal as well as the High Court. Once, there is no liability to deduct TDS on non- convertible debentures and fixed deposit of the value less than Rs. 5,000/-, there was no question of charging any interest.

However, at the same time the issue whether the levy of the interest was time barred considering section 201(1)/201(1A) of the Income-tax Act, 1961 not having been dealt with and considered in High Court, the Supreme Court kept the question of law on the aforesaid open.

The Supreme Court dismissed the Special Leave Petition of the Revenue.

6 Pioneer Overseas Corporation USA (India Branch) vs. CIT (IT) (2022) 449 ITR 186 (SC)

Interest – Waiver – Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act

The assessee is the branch office of Pioneer Overseas Corporation, United States of America (“POC US?). The assessee is engaged in Contract Research Activities and cultivation of parent seeds. The assessee has been regularly filing its returns of income. Since the A.Y. 1993- 94, it has been claiming exemption by treating its entire income as agricultural income in terms of Section 10(1) r.w.s. 2(1A) of the Act. This claim was accepted by the Department for the said assessment year as for the succeeding A.Ys. 1994-95, 1995-96 and 1996-97.

While concluding the assessment for the A.Y. 1997-98 and onwards, the AO treated the entire income of the Assessee as “business income?. The AO attributed the deemed income from research activity holding the assessee to be a Permanent Establishment (“PE?) of POC US carrying on research activity in India.

The appeal filed by the assessee against the aforementioned assessment order was partly allowed by the CIT (A) by deleting 50 per cent of the addition made by the AO on account of estimated attribution of income holding inter alia that only that much profit could be attributed to the PE which was derived from the assets and activities of the PE in India.

In the further appeal filed by the assessee, the ITAT for the A.Ys, 1997-98 to 2001-02 held by its orders dated 30th November, 2009 and 24th December, 2009 that only 10 per cent of income was, therefore, to be treated as agricultural income and the balance was to be taxed as “business income?. On the issue of attribution of income on account of research activity carried out by the assessee, the ITAT remanded the matter to the AO for attribution of profits based on the transfer pricing method employed by the AO in subsequent A.Ys. 2002-03 to 2006-07.

In the remand proceedings, the AO attributed reimbursed cost plus markup of 17 per cent as appropriate arm’s length price for the research services provided by the assessee to POC US for the A.Ys. 1997-98 to 2001-02.

In the year 2005 POC US invoked the Mutual Agreement Procedure (“MAP?) under Article 27 of the India-US Double Taxation Avoidance Agreement (“DTAA?) and sought resolution of the tax matters pertaining to the assessee. Consequent upon negotiations between the Competent Authorities of the two countries, an agreement was concluded with respect to allocation of taxing rights qua the income taxable in India in the hands of the assessee branch (PE) and setting-off of the taxes paid in India by the assessee against the taxes payable in the US by POC US. On this basis, the assessment for A.Ys. 1997-98 to 2006-07 were finalized and taxes along with interest were paid by the assessee under section 220 of the Act.

By a letter dated 10th August, 2011, the MAP ruling was finalized by the US authorities by providing tax credit in the US to the Petitioner for the tax assessed in India on 90 per cent of income held to be business income. The relief was granted on double taxation in the US tax years corresponding to the Indian assessment years under consideration.

On 26th December, 2011, the Petitioner filed an application before the CIT under section 220(2A) of the Act for waiver of interest levied under section 220(2) of the Act. This was followed by a letter dated 27th April, 2012 wherein the Petitioner reiterated its request.

By the impugned order dated 6th May, 2016, the CIT dismissed the aforementioned application on the ground that no genuine hardship had been caused to the Petitioner.

The High Court, in a writ petition filed by the assessee held that no error was committed by the CIT in rejecting the assessee’s request for waiver of interest under section 220(2) of the Act. Under Section 220(2A) of the Act, the three conditions that are required to be satisfied are (i) payment of the amount towards interest under section 220(2A) of the Act should cause the Assessee “genuine hardship?; (ii) default in the payment of the amount should be due to circumstances beyond the control of the Assessee; and (iii) the Assessee should have cooperated in the proceedings for recovery of the amount.

It was urged before the Court that interest under section 220(2) of the Act was paid besides incurring costs on maintaining a bank guarantee was more than 1.5 times of the tax amount. The High Court agreed with CIT that the mere fact that the interest was 1.5 times the tax by itself does not have any relevance for determining whether the Assessee was suffering from any “genuine hardship?. According to the High Court, the fact that the Assessee is a part of “DuPont?, a global conglomerate which had in 2011 $37.96 billion in net sales and $6.253 billion as operating profit, cannot be said to be an irrelevant factor in considering whether any “genuine hardship? was undergone by the assessee. Further, in comparison to the profitability of the assessee over the years, the amount paid by it towards interest under section 220(2) of the Act was merely $0.004 billion (approx). In the circumstances, the conclusion arrived at by the CIT that no “genuine hardship? could said to have been caused to the assessee could not be said to be an erroneous exercise of discretion by the CIT. It was a plausible view to take and did not call for interference by the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution.

The Supreme Court noted that the issue involved in the Special Leave Petition was with respect to the waiver of interest under section 220(2A) of the Act. The appropriate competent Authority rejected the application of the assessee for waiver of interest while exercising the powers under section 220(2A) of the Act. The same had been confirmed by the High Court.

The Supreme Court noted that it is the case of the assessee that as the dispute was pending for Mutual Agreement Procedure [MAP] resolution which subsequently came to be culminated in the year 2012; the liability to pay the tax arose thereafter and therefore the assessee should be entitled to the waiver of interest under section 220(2)(A)(ii) of the Act. According to the Supreme Court, the aforesaid plea was without any substance. Merely raising the dispute before any authority could not be a ground not to levy the interest and/or waiver of interest under section 220(2A) of the Act. Otherwise, each and every assessee may raise a dispute and thereafter may contend that as the assessee was bona fidely litigating and therefore no interest shall be leviable. The Supreme Court held that under section 220(2) of the Act, the levy of simple interest on non-payment of the tax @ 1 per cent p.a. was mandatory.

The Supreme Court was in complete agreement with the view taken by the High Court. The Special Leave Petition was therefore dismissed.

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. LECTURE MEETING ON CHALLENGES IN IMPLEMENTATION OF AQMM

Bombay Chartered Accountants’ Society organised an online lecture meeting on the topic ‘Challenges in Implementation of Audit Quality Maturity Model (AQMM) on 20th February. 2023. The meeting was attended by over 150 participants.

CA Durgesh Kabra shared the history and need of AQMM, its phase-wise applicability to various firms, benefits of self-evaluation vis-à-vis evaluation by peer reviewer, overview and weightage of various sections and sub-sections in the AQMM.

CA N. Jayendran, commenced his session by sharing the advantages of AQMM for practising units. He shared the process to re-assess AQMM, fees for review by peer reviewer. He shared his views on some of the challenges in the implementation of AQMM especially for SME firms:

Weightage of various aspects in score card like HR, qualitative aspects, etc

Negative scoring on regulatory action for unsatisfactory work by a regulator

Same set of questions repeated leading to incorrect assessment

Vision and mission statement may become surrogate advertising

Low weightage of 1.33 per cent to audit manual despite it being necessary for quality audit compared to good internet connection having weightage of 15 per cent

Maintenance of records for low value small audit

Lack of clarity on score where no QRB audit has been conducted during the period

Evaluation of questions on client disputes, IP-based attendance monitoring, data security and cyber security, adherence with minimum scale of fees for small and miscellaneous work

Budgeting and monitoring tools for smaller firms

Dedicated help desk lacks clarity

Maintaining Partner to manger ratio, minimum staff to partner ratio, manager to article ratio, client to staff ratio, etc

Focused policies for support for staff wellbeing, engagement and communication, gender diversity, credible employee survey, compensation management.

CA N. Jayendra appreciated the overall benefit that would accrue with this exercise despite various initial challenges in implementation of AQMM.

Both the speakers satisfactorily addressed the queries raised by the participants.

BCAS Lecture Meetings are high-quality professional development sessions which are open-to-all to attend and participate. Missed the Lecture Meeting, but still interested in viewing the entire meeting video

Visit the below link or scan the Q.R. code with your phone scanner app:

Link – https://www.youtube.com/watch?v=SaRrKcAoisA

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2. HRD STUDY CIRCLE MEETING ON AVERTING DANGEREOUS SITUATIONS

The Bombay Chartered Accountants’ Society organised a session on identifying potentially dangerous people on the basis of their facial features. Conducted under the aegis of the Human Resources Development Study Circle on 14th February, 2023 the hybrid session included presentation on reading ‘Red Flags on Face – An Iota of Alertness Can Avert a Potentially Dangerous Situation.’ by Naresh Kokal.

Attended by 78 people, session at the Churchgate premises of BCAS started by pictures of visages of Asuras/Demons, created by artisans of India, and depiction of ferocity in the images. The eyes and surrounding areas, displayed the inherent brutality of the face.

In the subsequent slides of pictures of leaders – Indian & Foreign, celebrities, politicians and underworld dons, it was demonstrated that the browbones, eyebrows, eyes, chin and jaws account for the barbarity.

The browbones show the need to control others. The eyebrows, the passion, energy and leadership qualities

The eyes show the heart in general, the size of the iris and sclera shows the state of the mind. The Chin shows the willpower. A broad chin is usually noticed on Dictators.

The Jaws show determination. They show the resoluteness. They also point to the potential terror that these people can unleash. The session ended on the note that although these signs show a dangerous person, they could also be found on Successful Entrepreneurs.

This was followed by Q & A session, where the attendees asked their questions which were answered.

The session ended with the Chairman thanking Naresh Kokal for the presentation.

Link – https://www.youtube.com/watch?v=SWyLuJVn0dM

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3. SESSION ON SECTION 138 OF NEGOTIABLE INSTRUMENTS ACT

The Corporate and Commercial Laws Study Group convened a session on Section 138 of the Negotiable Instruments Act and concomitant provisions related to prosecution for cheque bouncing on 13th February, 2023.

Titled, “Prosecution for cheque bouncing: Overview of the law, issues and solutions,” the session was led by speaker Adv. Kartik Garg who took the participants through detailed notes on the law and judgments under each provision. He explained the concepts in a lucid manner. In fact, the notes were of such sterling quality and were so exhaustive that no more oral explanation was required. After the session these notes were circulated amongst the participants. Around 55 participants attended the session. Further sessions on other white collar criminal topics are in the process of being scheduled.

4. LECTURE MEETING ON DIRECT TAX PROVISIONS OF THE FINANCE BILL 2023

The Society organised a public lecture meeting on ‘Direct Tax Provisions of the Finance Bill 2023.’ Addressed by CA Pinakin Desai, the meeting was held at Yogi Sabhagruha on 7th February, 2023. This was the 5th lecture meeting by him and the 58th of the Society.

The lecture meeting was live streamed and witnessed by more than 5,000 persons including online viewers. CA Mihir Sheth, President, BCAS welcomed and shared his thoughts about the Budget. He then invited CA Chirag Doshi, Vice President to introduce the speaker.

Mr. Desai started his speech by appreciating the Finance Minister’s speech having met the public expectations. He also discussed on the various new insertions/amendments in areas of rate of tax and alternating tax regime, angel tax, capital gain exemptions for residential house, taxability of Nil cost assets, disallowance under section 43(b) in case of delay in payment to MSME, taxability of life insurance policies, market linked debentures. The talk also covered other aspects of the Direct Tax Provisions for Charitable trusts, dealing with the refund cases, TDS provisions, assessment provisions, etc. which were part of the Finance Minister’s speech.

CA Pinakin Desai expressed his views on every important tax proposal under the Finance Bill, 2023.

The audience benefitted greatly from his speech. The meeting ended with a huge round of applause and appreciation by the participants.

Visit the below link or scan the Q.R. code with your phone scanner app:

Link – https://www.youtube.com/watch?v=XxDNgV4bOVg

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5. STUDY CIRCLE MEETING ON ‘PROFESSIONAL CHALLENGES IN HANDLING INQUIRIES AND RECENT JUDICIAL PRONOUNCEMENTS RELATED THERETO.’

The Indirect Tax Committee organised a hybrid Study Circle meeting at the Bombay Chartered Accountants’ Society Auditorium on 6th February, 2023

The meeting focused on the topic titled ‘Professional Challenges in handling inquiries and recent judicial pronouncements related thereto.’ It was presided by Adv (CA) J. K. Mittal who deliberated on the challenges in handling multiple inquiries and ratio of recent judicial pronouncements. He covered the following aspects in detail

Power to summon and give evidence under section 70 with explanation of producing a document and evidence and the time when the same needs to be available

Whether a summons constitute an enquiry by itself

Judgment of Canon India (P) Ltd of honorable Supreme Court to clarify “the proper officer” does not mean “Any proper officer”

Essential ingredients of issuing summons

Whether legal opinions provided by chartered accountants lead to aiding or abetting in case of alleged evasion

Three factor ingredients of section 67 “claimed ITC + in contravention of any + to evade tax”, its need and necessity to exist before start of investigations, search, seizures

Whether cash can be seized during the search

Issues in relation to retrospective cancellation of GSTIN

Disallowance of mismatched ITC, legality of the said provisions

The two-hour meeting benefitted 73 participants from across who posed several questions to the speaker in the physical as well as virtual mode.

6. FELICITATION OF CA FINAL PASS-OUTS OF NOV 2022 BATCH

On January 30, 2023, BCAS felicitated the young pass-outs of Chartered Accountancy of the November 2022 batch at a special function held at the BCAS Hall.

The felicitation ceremony was preceded by a talk on the subject “Milestone 2.0 – Career in International Tax, Mergers & Acquisition, Start-ups and More” by experts, CA Namita Gad, CA Kinnari Gandhi and CA Siddharth Banwat.

Each expert guided the 180-strong audience on the skillsets and aptitude required for the respective profile job, while sharing some of the challenges faced and how to overcome them. The discussion was appreciated by the young achievers. The experts also answered the questions posed by the the audience at the time of registration. Some basic questions were also taken up at the end of the talk. The entire event was coordinated by the team comprising CA Rimple Dedhia, CA Samit Saraf and CA Vivek Shah.

Youtube link: https://www.youtube.com/watch?v=VMDuFfMd1YU

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7. INCOME TAX KI PAATHSHAALA – LONG DURATION CERTIFICATION COURSE ON INCOME TAX

The BCAS Taxation Committee organised a Long Duration Certification Course on Income Tax – ‘Income Tax ki Paathshaala’ from 2nd January to 30th January, 2023. The meeting comprised 21 sessions. The key note addressed was delivered by CA TN Mahoraran while the concept and scope of total income was explained by CA Nandkishor Hegde. CA Narendra Jain touched upon the concept of Residence and the income deemed to be achieved or deemed to accrue in India.

Other speakers at the event included CA Ronak Doshi, CA Chaitee Londhe, CA Abhitan Mehta, CA Krishna Upadhay, CA Kinjal Bhuta, CA Bhaumik Goda, CA Sonalee Godbole, CA Gautam Nayak, CA Hitesh Gajaria, CA Rutvik Sanghavi, CA Amil Sawant, CA Toral Shah, CA Avinash Rawani, CA Nikhil Tiwari, CA Ashok Mehta, Adv. Rahul Hakani, CA Ameet Patel, CA Anil Sathe and CA Nihar Jambusaria

Attended by 212 participants, the course received an overwhelming response. Each of the participant was given a certificate of participation in the Long Duration Course organized by the Taxation Committee of BCAS.

8. ITF STUDY CIRCLE MEETING ON UAE CORPORATE TAX REGIME

ITF Study circle meetings were organised on UAE Corporate Tax Regime in two sessions on 6th January 2023 and 25th January 2023.

The meeting was led by group leaders CA Janak Panjuani and CA Rajiv Hira from Dubai. The sessions covered the UAE Corporate Tax laws in a holistic manner. The group leaders focused on the basics of corporate taxation, residential status, Permanent Establishment (PE), importance of Anti-Money Laundering (AML) compliance.

Specific concepts pertaining to taxability of unincorporated JV / associations, reliefs to small businesses, exempt income, FTZ etc. along with case laws were discussed in detail to give a better understanding to the participants.

The group leaders also discussed the topics of interest deduction, interest capping rules, non-deductible expenses, tax loss, carry forward of losses and losses adjustment, tax groups, transfer pricing provisions, managerial remuneration, etc.

An interesting round of Q & A with the participants was elaborately addressed by the speakers.

9. SESSION ON LAW FOR REDEVELOPMENT OF SOCIETIES

On 16th January, 2023, Ms. Rucha Jog Raheja, Solicitor addressed a session in the Corporate and Commercial Laws study group on the law relating to redevelopment of societies. After dealing with the legal concepts and need for redevelopment, Ms. Jog Raheja gave a brief account of the law relating to deemed conveyance and the drafting mistakes made in the legal documentation governing the rights of parties before, during and after the actual redevelopment. The session addressed many misconceptions and wrong assumptions of the audience. Finally, Ms. Jog Raheja dealt with all the questions asked by the audience. After the session many suggestions were received for more sessions on niche aspects of redevelopment like deemed conveyance, etc. Further sessions focusing on drafting particular contracts relating to redevelopment will also be scheduled. Over 80 participants attended the session and a very strong positive feedback was received from the participants.

10. 20TH RESIDENTIAL RETREAT – LEADERSHIP SKILLS ORGANIZED IN MUMBAI

The 20th Residential Retreat – “Leadership Skills and Management-The Chanakya Way” was organized by Dr. Radha Krishnan Pillai on 14th and 15th January, 2023 at Keshav Shrusti in Bhayander, Mumbai.

Faculties Dr. Radhakrishnan Pillai and his colleague Mr. Pranav Patel explained Chanakya’s life and his vow to pull down the Nand Dynasty promising Chandra Gupt Maurya to make him a King and thus proving that leadership is an attitude and not a designation.

Participants were enlightened on the term “Aanvikshiki” – educating them on how to think using science. This helped them differentiate between chinta and chintan i.e.going to root cause, understanding real problem and find appropriate resolution.

Further they explained Kautilaya “Saptanga” – The Seven pillars:

1. – The King – Leader

2. – The Minister

3. – The Country – Your Market / Client / Customer

4. – Fortified City – The Head Office

5. -The Treasury

6. – The Army – Your Team

7. – The Ally – Mentor / Friend / Consultant

All these seven pillars were explained in detail with applying the Saptang model. The faculty also showed them a film based on a book titled ’Corporate Chanakya’ featuring interviews of imminent personalities applying the Saptang model. It also distributed a workbook containing details on The Seven Pillars to find Chanakya in You.

The faculty explained that despite being a thankless job leadership gives utmost inner satisfaction. It also emphasized on documentation, standardization and having a succession plan and to create another leader. Besides, it discussed management lessons from Bhagvad Gita.

Around 38 participants attended the event which included games, singing and dancing in a perfect winter setting and camp fire. The event ended on the second day giving the participants a clarity on the roles and goals in each sphere of life.

BCAJ Admin

Miscellanea

I. TECHNOLOGY

36 India’s CAG has a warning for ChatGPT users

Explaining that India is the home to the third largest and fastest growing AI ecosystem in the world, Alkesh Kumar Sharma, Secretary, Ministry of Electronics and Information Technology, said in his speech, “In this era of digital transformation, role of AI technologies becomes crucial in bringing accountability and transparency in delivery of public services.”

The Comptroller and Auditor General of India (CAG) echoed the sentiments of many tech experts when he said that AI technologies like ChatGPT, despite being an exciting technology, come with a potential risk of biasness.

The national auditor Girish Chandra Murmu while addressing the seminar themed “AI and Data Analytics” said that “AI technologies while being exciting also bring a certain degree of risk with them. The most significant risk associated with AI implementation in the public sector is the potential for bias.”

While ChatGPT is seen as a path-breaking technology, many have accused the technology of being “woke” and giving biased responses. Expressing concerns around AI’s ability to learn and improve itself, Murmu said that AI algorithms learn and improve themselves by identifying a pattern in training data and the entire algorithm would be vulnerable to similar bias. “Another risk of AI implementation in the public sector is privacy concerns for the individuals.”

While the indispensability for AI to detect malicious cyber activities, identifying potential threats and in responding to them in the forseeable future is bound to increase, AI is also being used by cyber criminals to create more advanced attacks against security infrastructure and solutions, he said.

“That is why AI is always to be hyphenated with ‘responsible’ i.e., it should work for overall betterment of society, environment and not just for humankind but for the entire planet,” Murmu added.

Explaining that India is the home to the third largest and fastest growing AI ecosystem in the world, Alkesh Kumar Sharma, Secretary, Ministry of Electronics and Information Technology, said in his speech, “In this era of digital transformation, role of AI technologies becomes crucial in bringing accountability and transparency in delivery of public services.” Sharma added how the government is moving towards evidence-based policy formulation and facilitating the acceleration that is being brought for the development of innovative start-up ecosystem in India.

Another speaker, Rohini Shrivastha, CTO, Microsoft India, explained the principles for responsible and ethical use of AI, and also emphasised on the need for risk-based regulation of AI technologies.

(Source: financialexpress.com 23rd February, 2023)

37 2,767 complaints against influencers processed, most violations on Insta

The Advertising Standards Council of India (ASCI) said it has processed 2,767 complaints since coming up with influencer guidelines in May 2021.

More than half of the violations have been found on Meta-owned Instagram platform, while Youtube contributed a third of them, the self-regulatory organisation for the advertising industry said.

The body said in over 90 per cent of the cases, there were modifications required.

“The Central Consumer Protection Authorities also now require disclosure of material connection between brands and influencers. Hence, non-disclosures are potential violations of the law,” the body’s Chief Executive and Secretary General Manisha Kapoor said.

In FY22, the total number of violations stood at 1,592, with virtual digital assets like bitcoins topping with nearly 24 per cent, and followed closely by personal care category which accounted for 23 per cent.

In the first nine months of FY23 (April-December 2022), there were 1,175 complaints received with personal care category topping by contributing a third of them, followed by food and beverage at 16 per cent.

Instagram accounted for 53 per cent of the violations in FY22, which has increased to 65 per cent in the first nine months of FY23, while in the case of Youtube, the same has declined from 37.8 per cent to 27 per cent.

The body also conducted a survey of 820 respondents, which found 79 per cent of them saying they trust influencers and 90 per cent saying they have made purchases based on influencer endorsements.

The survey said transparency and honesty about brand associations is the number one reason for influencer trust, followed by relatable lifestyle and content.

(Source: business-standard.com 16th February, 2023)

II. WORLD NEWS

38 Financial Action Task Force Suspends Russia’s Membership

The Financial Action Task Force (FATF) sets standards for more than 200 countries and jurisdictions and seeks to help authorities tackle serious crime including drug smuggling, human trafficking and terrorism. The global anti-money laundering watchdog said it has suspended Russia’s membership over Moscow’s invasion of Ukraine.

“The Russian Federation’s actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system,” the group said.

It added that Russia was still accountable for implementing FATF’s standards.

Following a five-day meeting in Paris, FATF added Nigeria and South Africa to its list of countries subject to increased monitoring, and removed Cambodia and Morocco from the category.

Russia has been expelled from the Council of Europe and suspended from the UN Human Rights Council, but is still a member of many international organisations.

(Source: ndtv.com. dated 24th February, 2023)

III. ENVIRONMENT

39 The other victim: The environmental costs of the Russia-Ukraine War

The environmental costs of the conflict are likely to far outlive the fighting itself with Ukraine’s current claims of compensation for environmental damage standing at over $ 50 billion.

As the first anniversary of the war between Russia and Ukraine arrives, the true costs of the war are slowly dawning upon the world. The war has killed thousands, displaced many more, left many with debilitating injuries, flattened towns and caused immeasurable suffering. But the conflict, which does not seem to be ending anytime soon, also has another, often less mentioned, victim: the Planet itself.

The machinations of modern war impact the environment in more ways than one. From sky-high fuel consumption and a ginormous carbon footprint to degradation of thriving ecosystems caused by the fighting, the conflict in Ukraine has racked up environmental costs that will far outlive the actual fighting.

Here’s a look at how exactly the war has been deleterious to the environment.

Fighting-induced destruction

The first and most direct impact of the war is the destruction that the fighting itself has caused. According to UN Environment Program data, the conflict has seen damage across many regions of the country, with incidents at nuclear power plants and facilities, energy infrastructure, including oil storage tankers, oil refineries, drilling platforms and gas facilities and distribution pipelines, mines and industrial sites and agro-processing facilities.The result has been multiple air pollution incidents and potentially serious contamination of ground and surface waters.

According to the claims by the Ukraine’s environment ministry, altogether the losses from land, water and air pollution amounted to $51.4 billion.

Kateryna Polyanska, a landscape ecologist travelling across Ukraine to study the environmental damage caused by the War, told The Guardian that the worst damage is not always visible. “It is not just the explosive material, it is rocket fuel and shrapnel and wire … All these little tiny pieces of pollution have a huge impact on nature. You can’t imagine the scale of the impact,” she said.

Yuliia Ovchynnykova, a Ukrainian MP who serves on a parliamentary environment committee, told The Guardian that “more than 2 million hectares of forest have been destroyed, wrecking ecosystems and putting at risk rare endemic species such as pearl cornflowers, which can be found only on sandy steppes on the outskirts of Mykolaiv, or the bare tree, which grows in a narrow area of the Stone Graves reserve in Donetsk”.

A new Greenpeace map of Ukraine plots the myriad ways in which the War has damaged the environment. In the long term, Ukraine will need a significant clean-up of air, soil and water to allow those who’ve fled the war to return and restart their lives.

Astronomic carbon footprint

The environmental costs however go far beyond the direct destruction of nature that the fighting has caused.Notably, the war has an extremely large carbon footprint. Ukraine estimates the emissions from Russia’s invasion to be roughly around 33 million tons of CO2 from the conflict and 23 million tons CO2 from fires caused by the conflict. It predicts that reconstruction of infrastructure and buildings destroyed or damaged during the war could emit 49 million tons of CO2. For perspective, even without adding the potential carbon costs for reconstruction, that is roughly equivalent to the carbon footprint of Greece or Belarus in 2020.

Many of the machines and equipment used for battle are extremely “dirty”. For instance, the state-of-the-art Leopard 2 tanks that Ukraine have a fuel capacity of 1,200 litres. Depending on the terrain, their operational range varies from 220 km (cross country) to 340km (on roads). This means that these monster machines consume roughly between 3.5-5.5 litres of fuel per km. For comparison, a modern car can travel well over 15 km per litre of fuel consumed.

While some observers claim that the energy fluctuations caused by the war shall quicken the pace of transition away from oil and gas, as of now, the war itself is one of the world’s biggest polluters amidst a growing global climate crisis.

Nature has taken a backseat

The fact of the matter is that amidst the most immediate exigencies and consequences of the War, nature has taken a back seat. For instance, Russian troops dug up deep trenches in the protected Chernobyl sanctuary: an area largely untouched since the nuclear disaster in 1986. Critics claim that this could have dug up dangerous radioactive material. But alas, the tactical needs of battle were far more important than the risks of nuclear contamination.The loosening of environmental norms and the spike in military production are all outcomes of the War. In a bid to maximize fighting capabilities, both Ukraine and its allies as well as Russia have cut corners where they can. Generally, environmental norms, the benefits of which are far less tangible in the short term, are the first casualty in this process.

Even when the conflict ends, the immediate efforts of reconstruction will focus not on the environment but housing, building infrastructure, and restoring services. “There will be a lot of competing priorities post-conflict”, said Doug Weir, research and policy director of the Conflict and Environment Observatory Unit, which monitors and campaigns about the environmental impacts of war.

(Source : indianexpress.com 24th February, 2023)

40 Lithium discovery important for India’s EV push but mining poses serious environmental risks: Experts

The Geological Survey of India recently identified a potential deposit of 5.9 million tons of lithium in Reasi district’s Salal-Haimana area, the first such anywhere in India, which imports lithium. GSI said the site is an “inferred resource” of the metal, which means it is at a preliminary exploration stage, the second of a four-step process.

The discovery of lithium in Jammu and Kashmir is significant for India’s push towards electric vehicles but any environmental gains could be negated if it is not mined carefully, say experts, citing risks such as air pollution and soil degradation in the fragile Himalayan region.

The discovery of lithium deposits can be a potential “game changer” for the country’s clean energy manufacturing ambitions in several ways, said Siddharth Goel, Senior Policy Advisor, International Institute for Sustainable Development (IISD).

“First of all, the scale of the reserves is significant, and can — if proven to be commercially viable — reduce India’s reliance on imports of lithium-ion cells, which are a key component for EV batteries and other clean energy technologies,” he said.

But there is a flip side too. “Reports indicate that approximately 2.2 million litres of water is needed to produce one ton of lithium. Further, mining in the unstable Himalayan terrain is fraught with risks,” cautioned Saleem H. Ali, Professor, Energy and the Environment, the University of Delaware. Lithium mining in Chile, Argentina and Bolivia, for instance, has led to concerns over soil degradation, water shortages and contamination, air pollution and biodiversity loss. “This is because the mining process is extremely water-intensive, and also contaminates the landscape and the water supplies if not done in a sustainable method,” Ali said.

According to the US Geological Survey (USGS), about a fourth of the Earth’s known lithium deposits (88 million tons) would be economical to mine, said Charith Konda, Energy Analyst, Electricity Sector, US-based Institute for Energy Economics and Financial Analysis (IEEFA). “Applying this benchmark, India could probably economically extract 1.5 million tons of lithium from the 5.9 million tons discovered in preliminary studies,” Konda told PTI.

Economically here would mean that the resources and technology used to extract will give good return in terms of usage of the resource.

“India has a vision of increasing the share of electric vehicle sales to 30 per cent in private cars, 70 per cent in commercial vehicles, 40 per cent in buses, and 80 per cent in two- and three-wheelers by 2030. In absolute numbers, this could translate to 80 million EVs on Indian roads by 2030,” Konda said.

The battery pack of an average electric car, he explained, requires 8 kg of lithium. By this metric, India’s economically extractable lithium reserves should be enough to power 184.4 million electric cars.

Currently, India is import dependent for several elements such as lithium, nickel and cobalt. Ministry of Commerce data shows that India spent around Rs 26,000 crore importing lithium between 2018-2021.

In 2021, preliminary surveys by Atomic Minerals Directorate for Exploration and Research (AMD) showed the presence of lithium resources of 1,600 tons in Mandya District in Karnataka. However, there has been no report of mining the resource till date. An IISD study found that access to critical elements such as lithium is a key challenge faced by companies investing in India’s EV ecosystem.

“These reserves could potentially be a huge carrot to attract investment into domestic battery manufacturing and other clean energy technologies,” Goel said the potential site in Reasi has the same amount of lithium as the reserves in the US and more than China’s current reserves which are around 4.5 million tons. However, the world’s largest lithium reserves in South America — especially in Bolivia, Chile and Argentina — are several times greater, collectively over 40 million metric tonnes.

According to University of Delaware’s Ali, domestic supply of usable lithium, if developed, could help develop batteries for solar and wind storage and EV usage.

What is critical in this scenario is the government putting in place the right support to make sure that securing these critical minerals is done in a socially and environmentally responsible manner, experts agree.

Environmentalists also argue that the focus should be on redesigning cities to reduce car usage in general instead of using metals like lithium to shift to EVs.

“This could specially be done in high density population centres of India with smarter urban planning,” Ali said.

This is because even when safeguards try to limit the social and environmental harm around fossil fuel extraction, which is considerable, there is no “fix” for air pollution and greenhouse gas emissions, IISD’s Goel added.

“Given that lithium-ion batteries are the most advanced batteries available, they would continue to play a major role for the foreseeable future. India should mine lithium with proper environmental and social safeguards in place given the ecological and political sensitivities of the area,” IEEFA’s Konda said.

(Source : economicstimes.com 24th February, 2023)

BCAJ Admin

Regulatory Referencer

DIRECT TAX

1. Corrigendum to circular no. 23 of 2022 dated 03rd November, 2022 – explanatory notes to Finance Act, 2022 – Circular No. 2/2023 dated 6th February, 2023

The Explanatory notes to the Finance Act, 2022, explaining the amendments made in direct tax laws vide the Finance Act, 2022 were issued vide Circular no. 23 of 2022 dated 03rd November, 2022 A corrigendum to the said circular is issued.

2. Amendment to Rule 12 – Income-tax (First Amendment) Rules, 2023- Notification No. 4/ 2023 dated 10th February, 2023

SAHAJ ITR-1, ITR-2, ITR-3, SUGAM ITR4, ITR-5, ITR-6, ITR-V and ITR- Acknowledgement notified for A.Y. 2023-24

COMPANIES ACT, 2013

1. MCA revises e-form AOC-5; seeks more disclosures relating to address at which books of accounts are maintained:

MCA has notified the Companies (Accounts) Amendment Rules, 2023. E- form AOC-5 (Notice of address at which books of account are to be Maintained) has been revised. Now, it is mandatory to attach proof of address, copies of the utility bill, and a photograph of the registered office showing at least one director with form AOC-5. Earlier, only board resolution was required to be attached. The changes will be effective 23rd January, 2023 [Notification No. G.S.R. 40(E), dated 20th January, 2023]

2. Now Directors disqualified under section 164 (1) of Companies Act, 2013 are also required to file form DIR 8:

MCA has amended the Companies (Appointment and Qualifications of Directors) Rules, 2014. The amendment requires that directors disqualified under section 164(1) of the Companies Act must also file Form DIR-8 with the company. Earlier, the DIR-8 was required to be filed in case of disqualification under section 164(2). Further, the company is required to file Form DIR-9 with RoC within 30 days of receipt of DIR-8. Various changes in forms are also notified. [Notification dated 20th January, 2023]

3. MCA prescribes detailed disclosures relating to charges/valuations in the revised forms PAS-2, PAS-3, & PAS-6:

MCA has amended the Companies (Prospectus and Allotment of Securities) Rules, 2014. The Ministry has substituted form PAS-2, PAS-3 & PAS-6 with new forms. Now, in form PAS-2, formats of disclosure relating to charges has been amended. In form PAS-3, greater disclosures regarding valuation undertaken is to be given. Further, in form PAS-6, greater disclosure of details of shares as per class is to be given.

[Notification dated 20th January, 2023]

4. MCA grants additional 15 days to file PAS 3 and other newly launched forms on the V3 portal:

MCA has decided to allow an additional 15 days for filing these forms without any additional fees. Form PAS-03 & 45 other forms, whose due dates for filing fall between 20th January, 2023 and 06th February, 2023, can now be filed without payment of additional fees for a period of 15 days. The extension is provided due to change in the manner of filing of Forms in V3, including the fresh process of registration of users on MCA-21

[General Circular No. 03/2023, dated 07th February, 2023]

I. SEBI

1. SEBI amends Stock Brokers Regulations; enhances obligations and responsibilities for qualified stock brokers:

SEBI has notified the SEBI (Stock Brokers) (Amendment) Regulations, 2023. A new regulation 18D has been added which empowers the Board to designate a stockbroker as a “qualified” stockbroker based on the size and scale of operations, its impact on investors and securities market, and governance and service standards. Further, the stockbroker designated as a qualified stockbroker is required to meet enhanced obligations and discharge responsibilities.

[Notification No. SEBI/LAD-NRO/GN/2023/116., dated 17th January, 2023]

2. SEBI widens the definition of ‘Senior Management’ under LODR regulations to include ‘all functional heads’:

SEBI has notified the SEBI (LODR) (Amendment) Regulations, 2023. An amendment has been made to the definition of ‘senior management’ under regulation 16 of LODR. Now, functional heads would also be included in the definition of senior management. Under the extant norms, functional heads were not covered in the definition. Further, a new clause w.r.t details of material subsidiaries of the listed entity including date, place of incorporation etc. has also been inserted.

[Notification No. SEBI/LAD-NRO/GN/2023/117, dated 17th January, 2023]

3. SEBI introduces two new methods to achieve ‘Minimum Public Shareholding’:

SEBI has introduced two new methods to achieve the Minimum Public Shareholding (MPS) by listed Companies. Now, MPS can be achieved by allocating shares to employees through ESOP subject to a maximum of 2 per cent of the paid-up equity share capital of the listed entity. However, no shares will be allotted to the promoters/promoters’ group under this method. Further, MPS can be achieved by transferring shares held by promoters to an exchange-traded fund managed by a SEBI-registered mutual fund.

[Circular No. SEBI/HO/CFD/POD2/P/CIR/2023/18, dated 03rd February, 2023]

4. SEBI puts an end to Buyback via odd lot method; notifies various other amendments in Buyback Regulations;

SEBI has notified an amendment in SEBI (Buy-back of Securities) Regulations 2018. As per the amended norms now Buyback can be carried out via tender offer or open market method only. Also, maximum limits for buyback through open market through stock exchanges have also been changed. Further, it has been clarified that buy-back from the open market through the stock exchange shall not be allowed with effect from 1st April, 2025. Various other amendments have also been notified.

[Notification No. SEBI/LAD-NRO/GN/2023/120, dated 07th February, 2023]

5. First-time issuers of NCDs may alter AoA to appoint a nominee of Debenture Trustee within 6 months from listing date:

SEBI recently mandated the issuer companies to include provisions in their Articles of Association (AoA), with respect to the requirement for the board to appoint a person nominated by the debenture trustee. The regulations also provide a time period till 30th September, 2023 for existing issuers. Consequently, after receiving representations from first time issuers, the SEBI advised exchanges to take an undertaking from first-time issuers that they will ensure that their AoA are amended within 6 months from the listing date.

[Circular No. SEBI/HO/DDHS/DDHS-RACPOD1/CIR/P/2023/028, dated 09th February, 2023]

FEMA AND IFSCA REGULATIONS

1. ECONOMIC SURVEY 2023

The Finance Minister tabled the Economic Survey 2022-23 in Parliament on 31st January, 2023. While providing an overview of the state of the economy, it also includes analysis of the foreign exchange reserves, movement of the currency, etc. in Chapter 11 on External Sector. As part of Chapter 4 on Monetary Management and Financial Intermediation the Survey covers developments in GIFT City-IFSC on page 106.

The Finance Bill 2023 also provides important measures for the GIFT-City IFSC including allowing foreign banks to provide acquisition finance; establishment of a subsidiary of the EXIM Bank in IFSC; recognising offshore derivative instruments as valid contracts; allowing setup of Data Embassies within the IFSC. These measures are apart from the tax incentives introduced in the form of increase in scope of exempted income earned by a non-resident as a result of transfer of offshore derivative contracts, non-deliverable forward contracts or over the counter derivatives with a banking unit of an IFSC; extension of timeline for relocation of a fund to IFSC to 31st March, 2025; extending the definition of “Investment Fund” to include funds, particularly Category I & Category II AIFs, regulated and incorporated under the IFSCA (Fund Management) Regulations, 2022.

[Economic Survey 2022-23 and Budget 2023]

2. SOVEREIGN GREEN BONDS

The RBI has added that all Sovereign Green Bonds issued by the Government in the F.Y. 2022-23 as ‘specified securities’ under the Fully Accessible Route (FAR) introduced by the Reserve Bank earlier. FAR allows investment in certain specified categories of Central Government securities which were opened fully for non-resident investors without any restrictions, apart from being available to domestic investors as well. Sovereign Green Bonds (SGBs) amounting to Rs. 16,000 crore are proposed to be issued in the current financial year for mobilising resources for green infrastructure projects. Rs. 8,000 crore has already been raised in the first tranche of the SGBs. The proceeds will be deployed in public sector projects which help reduce the economy’s carbon intensity, the Minister stated.

[CIRCULAR NO. FMRD. FMID. NO. 07/14.01.006/2022-23, dated 23rd January, 2023 and PRESS RELEASE, dated 6th February, 2023]

BCAJ Admin

Corporate Law Corner Part A : Company Law

17 Case Law no. 1/ March 2023

Raj Hospitality Pvt Ltd

RD(WR)/Sec. 454(5)/ Raj Hospitality /T35477447/2021/3397

Regional Director Western Region, Mumbai Date of Order: 26th November, 2021

Appeal order against Adjudication Order for delayed filing of Annual Returns and Financial Statements and violating Section 92(5) and 137(3) of the Companies Act, 2013

FACTS

Registrar of Companies, Goa (‘RoC’) had observed from the master data, that M/s RHPL had filed its financial statements and annual returns on 1st April, 2019 for the financial year ending 31st February, 2017 But returns for the financial year ending 31st March, 2018 were not filed and default continued. The RoC had issued a show cause notice to M/s RHPL and its directors seeking information and reply from M/s RHPL.

As per records maintained by the RoC, Mr. RM director was disqualified under section 164(2)(a) of the Companies Act, 2013 for the period 01st November, 2016 to 31st October, 2021. Therefore, penalty was not imposed on him.

An adjudication order was passed by the Registrar of Companies, Goa on 09th May, 2019 wherein the penalty was imposed as per table below:

Document required to be filed	No. of days of default	Penalty imposed on Company/ Director	First Default (In Rs.)	Continued Default (In Rs.)	Total (In Rs.)
Financial Statements under section 137(3) of the Companies Act, 2013	189 days	On M/s RHPL	1000X189 = 1,89,000		1,89,000
		Mr. ATM	1,00,000	100X189=18,900	1,18,900
		Mrs. JM	1,00,000	100X189= 18,900	1,18,900
		Mr. AM	1,00,000	100X189= 18,900	1,18,900
Annual Returns u/s 92(5) of the Companies Act, 2013	160 days	On M/s RHPL	50,000	100X160=16,000	66,000
		Mr. ATM	50,000	100X160= 16,000	66,000
		Mrs. JM	50,000	100X160= 16,000	66,000
		Mr. AM	50,000	.100X160= 16,000	66,000
			Total		8,09,700

*No. of days were calculated from November, 2018 and December 2018 for Financial Statement and Annual Return respectively till the date of order.

An appeal in Form ADJ (SRN T35477447) was filed on 13th August, 2021. On examination of the application/appeal it was observed that the said appeal was not filed within sixty days (60) from the date of passing of adjudication order by the RoC (i.e. 09th May, 2019). Hence, M/s RHPL filed an application for condonation of delay vide form CG-1 and order was received by M/s RHPL in this regard. Accordingly, the appeal was considered for further processing.

In Appeal, M/s RHPL had stated as under:

M/s RHPL had held its Annual General Meetings for the year ended 31st March, 2017 on 30th May, 2017 and for the year ended 31st March, 2018 on 29th September, 2018. Accordingly, the company was required to file Financial Statements and Annual Returns for the financial year ended 31st March, 2017 on or before 27th October, 2017 and 28th November, 2017 and for the year ended 31st March, 2018 on or before 27th October, 2018 and 27th November, 2018 respectively (extended up to 31st December, 2018 vide General Circular No. 10/2018 dated 29th October, 2018). M/s RHPL submitted that the financial statements for financial year ended 31st March, 2017 and 31st March, 2018 were filed on 1st April, 2019, 5th December, 2019 and 06th December, 2019 respectively.

M/s RHPL also submitted that M/s RHPL is a small company having paid-up share capital of Rs. 2,00,000. M/s RHPL admitted that the filing of the Annual Return was delayed due to reasons beyond the control of M/s RHPL. M/s RHPL prayed that the financial statements and annual returns filed be requested to be approved and taken on record and the delay be condoned and to withdraw the order of Adjudication of Penalty dated 09th May, 2019 as the amount of penalty awarded would put further financial burden on Mr. ATM, Mrs. JM, Mr. AM who are already facing financial problems due to the ongoing pandemic. Further, M/s RHPL had already filed delayed documents with the RoC by paying additional fees.

Appellate authorities provided hearing to M/s RHPL through Video Conference.

HELD

The appeal was allowed and directed to the representative of M/s RHPL that the revised penalty to be paid as under:

Sr. No.	Document required to be filed	No. of days of default	Penalty to be paid by Company/Director (Officer in default)	Penalty (Rs.)
1	Financial Statement under section 137(1) of the Companies Act, 2013	189 days	On M/s RHPL	47,250
			Mr. ATM	29,725
			Mrs. JM	29,725
			Mr. AM	29,725
2	Annual Returns under section 92(4) of the Companies Act, 2013	160 days	On M/s RHPL	16,500
			Mr. ATM	16,500
			Mrs. JM	16,500
			Mr. AM	16,500
Total Penalty Amount				2,02,425

M/s RHPL submitted the copies of challan/payment receipt for penalties paid to the MCA as directed in virtual hearing. On payment of the Penalty amount of Rs. 2,02,425 for the violation of Section 92(5) and 137(3) of the Companies Act, 2013, the Appeal was disposed of.

BCAJ Admin

Service Tax

TRIBUNAL

29. Lindstrom Services India Pvt Ltd vs.

CCE & ST Vadodara-1

2023-TIOL-97-CESTAT-AHM

Date of order: 23rd January, 2023

Whether services of leasing – workwear (uniform) liable for service tax when VAT is paid on the same.

FACTS

Appellant is in the business of leasing workwear (uniform) to the clients upon conditions mentioned in the agreement with the clients. The conditions inter alia included delivering, collecting for washing, and servicing individually customized with workwear of every worker’s size along with logo and label as specified. The appellant would own such uniforms and would have the exclusive right to wash and service them. Also, if the workwear was not usable on account of wear and tear, they were returnable to the appellant and the price was fixed for the customer to pay at a depreciated price as agreed upon. For replacement also, it was redeemed at an agreed price. VAT was charged on the rental charges charged by the appellant to their clients. In the scenario, the case of Revenue was that the contract involving the service of renting, using workwear, washing, maintenance, repairing, alteration, designing of workwear, etc. for use while transferring possession without transferring right was a service of “supply of tangible goods” as contained in section 65(105)(zzzzg) of the Finance Act, 1994 and/or a declared service post 1st July, 2011 i.e. in the negative list regime as the effective control over the workwear was not transferred.

According to the appellant, two benches of Chandigarh and Chennai respectively had taken a consistent view on an identical service agreement that the purported service was not taxable under service tax and hence the decision had to be followed; whereas the Revenue contended that against the two orders of Chennai Tribunal, the revenue had filed an appeal before Supreme Court. However, either side could not produce a stay order. In one of the appeals filed by the appellant, at the first appeal level, the demand was set aside. Hence, the Revenue filed the appeal against the said order. Both appeals are accordingly bunched here.

HELD

Hon. Division Bench went through and recorded excerpts from CESTAT Chandigarh Order No.60716 of 2nd August, 2019 and CESTAT Chennai’s final Order No. 40818 dated 29th October, 2020 and final Order No.42148 dated 25th August, 2021. In these cases, the judgments in the cases of Bharat Sanchar Nigam vs. UOI 2006 (2) STR 161 (SC), the case of Gimmco Ltd vs. CCE & ST, Nagpur 2017 (48) STR 476 (Tri.- Mum) as well as Andhra Pradesh High Court in the case of G S Lamba & Sons 2011-TIOL-49-HC-AP-CT were analysed to conclude that the workwear rented was always in the exclusive possession and control of the clients. Some of the activities such as maintenance and washing of workwear rented will not mean that effective control was retained by the appellant. The workwear could not be used by anyone else except the users and hence effective control and possession was always with the client and hence the transaction was one of “deemed sale,” and was not taxable as the service of supply of tangible goods or a declared service. Further, as for the appeals filed by the Revenue before Supreme Court, it was held that since either side could not produce any stay order staying the operation of the Chennai Tribunal’s order, the fact of mere filing of an appeal before the Supreme Court would not help the Revenue and the decision of two benches will be followed. Hence the appeal of the appellant was allowed and the order of the Commissioner (Appeals) was upheld.

30. Coface India Credit Management Services Pvt Ltd. vs. Commissioner of CGST & CE, Belapur

2023-TIOL-111-CESTAT-MUM

Date of order: 10th January, 2023

Rejection of refund application under Rule 5 of CCR on the grounds of the utilization of opening balance in the CENVAT register and inability to establish nexus of input service with output service set aside.

FACTS

The appellant filed a refund application under Rule 5 of CENVAT Credit Rules, 2004 (CCR) which was rejected because the opening balance of CENVAT register should not be taken into consideration for grant of refund and that some of the input services did not have nexus with the output services.

HELD

As for the issue of opening balance in the CENVAT register, CBE&C Circular No.120/01/16 clarifies that the closing balance of the previous quarter can be considered for the utilization towards export as the opening balance for the subsequent quarter. On the second issue of nexus between input services and export of services, it was noted that the department had not initiated any proceeding for the recovery of irregular credit under Rule 14 of CCR r.w.s 73 of the Finance Act, 1994. If availment of credit is not questioned at the material time, it cannot be questioned by the revenue at a later date. The said issue being a covered matter inter alia in the cases of Ness Technologies (I) Pvt. Ltd. vs. CST Division V Mumbai 2016. (41) STR 984 (Tri.-Mum) and M. Net Partner Technologies Pvt Ltd vs. Commissioner, CGST Mumbai at 2019-TIOL-3657-CESTAT-MUM, the department could not have any objection to the claim. The appeal was thus allowed.

31. Rajasthan State Board Development Construction Corporation Ltd vs. Commissioner CGST&CEX Jodhpur

Date of order: 31st May, 2022

Whether the appellant held Government Authority for the exemption Notification No.25/2012 dated
20th June, 2012.

FACTS

The appellant is a company registered under section 617 of the Companies Act, 1956, a Government company of which 100 per cent shares are held by the Rajasthan Government. They provided the service of laying fresh water pipeline by sub-contracting the said service which is a work entrusted to the municipality under Article 243W of the Constitution of India. Consequent upon an inquiry conducted on the subcontractor who provided the said service– a proprietary concern, it was found that the said proprietary concern from July 2012 to March 2015 provided works contract service to the appellant. Since there is a Reverse Charge Mechanism (RCM) applicable to the works contract service whereby a recipient has to pay 50 per cent of service tax liability vide Notification No.30/2012-ST dated 20th June, 2012, a show cause notice was issued to the appellant in this case for recovery of such 50 per cent service tax, being the recipient of the said service provided by subcontractor.

HELD

It was held that the appellant was set up by the State Government of Rajasthan having 100 per cent control in the hands of the State Government of Rajasthan, the appellant is a Government Authority. Since “Government Authority” is mentioned in sl. no.25 of the said exemption notification no. 25/2012-ST and further elaborated in the definition clauses that “Government Authority” means a Board or authority or any other body established with 90 per cent or more participation by way of equity or control by Government and set up by an Act of the Parliament or State legislation to carry out any function entrusted to a municipality under Article 243W of the Constitution. Hence, the appellant was entitled to the exemption and the appeal was thus allowed.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

73 Prerana Enterprises vs. Commissioner of Delhi Goods & Service Tax

2022-TIOL-227-HC-DEL-GST

Date of order: 7th February, 2022

Refund for the zero-rated supply of goods and/or services requires to be granted in terms of the provisions of the law.

FACTS

Refund for April to September 2020 was sought by a proprietary concern – petitioner herein along with applicable interest under section 56 of the CGST Act. The petitioner exported zero-rated dental care solutions and he is duly registered under the CGST Act and had filed the refund application in the prescribed form. However, the refund application was not processed by the revenue. The petitioner submitted to the Court that in terms of sections 54(6) and 54(7) of the CGST Act read with Rule 91(2) of the CGST Rules, the proper officer is required to refund at least 90 per cent of the refund claimed when zero-rated goods or services are supplied by a registered person within seven days from the date of acknowledgment issued under section 90(1) or (2) and as per section 54(7) of CGST Act, the whole amount requires to be refunded within sixty days from the date of receipt of the refund application whereas the time limit had already expired and he relied upon the order of Hon. Delhi High Court in W.P. (e) 4205/2020 Jan International vs. Commissioner of Delhi Goods and Service Tax 2020-TIOL-1235-HC-DEL-GST.

HELD

Counsel for the revenue undertook that the petitioner’s refund application shall be decided in accordance with law within the time of 3 weeks. Hence the department was bound by the same.

74 Taghar Vasudeva Ambrish vs.

AAAR Karnataka & Commissioner of Central Tax, Bangalore South

2022-TIOL-242-HC-KAR-GST.

Hostel rooms for students and others – purpose is for residence. Hence lease rent exempt from GST.

FACTS

Petitioner, a co-owner of a residential property having 42 rooms is situated in Bengaluru. The property was leased by all the co-owners to a corporate vide executing a lease deed. The said lessee leased the property as a hostel to provide long-term accommodation to students and working professionals with the stay ranging from 3 months to 12 months. Since the entry 13 of Exemption Notification No.9/2017-Intergrated Tax (Rate) dated 28th June, 2017 exempts renting service provided for use as a residence, with the intent of seeking clarification as regards eligibility of the exemption from GST on the rent received from the lessee, the petitioner filed an Advance Ruling Application before the Authority of Advance Ruling, Karnataka (AAR Karnataka). AAR vide it’s Ruling 2020-TIOL-84-AAR-GST inter alia held that the service of renting of residential dwelling for use as residence does not fall under Entry 13 of the said Exemption Notification, and further held that the lessee itself is not using the accommodation. Thereafter, the Appellate Authority for Advance Ruling Karnataka (AAAR Karnataka) on hearing the appeal filed by the petitioner in the matter held that the property rented by the petitioner is a hostel building which is more akin to sociable accommodation rather than what is commonly understood as residential accommodation. Hence it cannot be termed as a residential dwelling. Further that the benefit of the exemption is available only if the residential dwelling is used as a residence by the person who has taken the same on rent/lease and accordingly dismissed the appeal. Hence the writ for the petitioner. It was submitted for the petitioner that the expression residential dwelling is not defined in the law. Therefore the trade parlance meaning has to be taken into account. The zonal regulations of Bengaluru clearly provide for operation of hostels in residential category plots. It was further urged that students use a hostel for residential purposes. Hence hostels have to be treated as residential accommodation and principles of purposive interpretation must be applied while interpreting an exemption notification. Regard must be had to the object and purpose of the exemption. It was also urged that in the exemption notification, no condition is laid down that the tenant alone must occupy and hence additional conditions cannot be read in the exemption notification. Reliance was placed inter alia on the decision of the Supreme Court in the State of Kerala vs. Mother Superior Adoration Convent 2021-TIOL-156-SC-Misc and also relevance was made to AAR West Bengal in Borbheta Estate (P.) Ltd. In Re (2019) 106 Taxmann.com 386 (AAR-West Bengal). Revenue’s case was that the lessee runs a business of leasing out of premises. The court’s attention was drawn to the trade license issued by the Mahanagar Palika of Bengaluru to the lessee wherein the trade name was described as boarding and lodging to which the public are admitted and that the lessee was registered as a commercial establishment under the Karnataka Shop & Establishment Act, 1961. Further that the exemption notification requires to be strictly construed. Reliance was placed on the Constitution Bench decision of Supreme Court in Commissioner of Customs (Imports) Mumbai vs. Dilip Kumar & Company & Others 2018-TIOL-302-SC-CUS-CB.

HELD

Hon. Bench had due regard for the Supreme Court’s Constitution Bench’s decision in Dilip Kumar & Company and Others (supra) in relation to interpretation of an exemption notification. It was stressed that there is a need for strict interpretation and discussed the said legal principle accordingly while interpreting Entry 13 of the exemption notification vis-à-vis the expression “residential dwelling”. A reference was made to the Education Guide issued by CBIC which clarified the meaning of residential dwelling in normal trade parlance as any residential accommodation and which is different from a hotel, motel, inn, guest house, etc. meant for a temporary stay. It was also noted that the accommodation used as a hostel for students and working women is classified in the residential category in the Revised Master Plan 2015 of Bangalore City. Recognizing that the students use the hostel for sleeping, eating and carrying out studies for a period from 3 to 12 months, the duration is longer compared to a hotel or a guest house, etc. Also examined by the Bench as to what is being rented and for which the residence is used and held that since the residential dwelling is being rented as a hostel for students and working women for residence whether by the lessee itself or not. Hence it was held that the benefit of the exemption under Entry 13 of the Notification No.9/2012 dated 28th June, 2017 was available to the petitioner and accordingly the order passed by AAAR Karnataka was quashed.

BCAJ Admin

Recent Developments in GST

I. CIRCULARS

a) Clarification about GST rates and classification of certain goods – Circular no.189/01/2023-GST, dated 13th January, 2023

The CBIC has issued the above circular giving a clarification about certain items like Rab, by-products of milling of dal/pulses, carbonated beverages of fruit drink or with fruit juice, etc., snack pellets (fryums), compensation cess on sports utility vehicles and goods specified under the Notification No.3/2017-Integrated (Rate) dated 28th June, 2017.

b) Clarification about classification of certain services – Circular no.190/02/2023-GST, dated 13th January, 2023

The CBIC has issued the above circular giving a clarification about classification of services like, applicability of GST on accommodation services supplied by Air Force Mess to its personnel and applicability of GST on incentive paid by Ministry of Electronics and Information Technology (MEIT) to acquiring banks under Incentive scheme for promotion of RuPay Debit Cards and low value BHIM-UPI transactions.

c) In communication titled “GST updates” dated 12.01.2023 various new functionalities made available on portal are informed.

d) Similarly, Advisory about facilities of “Initiating Drop Proceeding” of suspended GSTINs due to non-filing of returns dated 24th January, 2023 is issued.

II. ADVANCE RULINGS

Scope of Advance Ruling Provisions and liability in respect of lease:

40 Karnataka Text Book Society (R)

(AAR No. KAR ADRG 18/2022

dated 1st July, 2022)

The applicant is a registered Society and it has been formed by the Karnataka State Government as an umbrella body in the context of preparation, printing and distribution activity of all Government approved school text books. It has also rent activity, and holds GST registration. The applicant has put up various questions before the learned AAR. The questions and replies given by the learned AAR on each issue can be noted as under:

Qi. Whether the service of printing and supply of textbooks received by the government entity (the Applicant) from private printers where content belongs to the Applicant and physical inputs belong to the printer, would be covered by Notification No.12/2017-Central Tax (Rate), as amended and subject to Nil rate of tax. This clarification is sought so as to enable the Applicant to avail the benefit of the Notification during the tendering process.

Qii. If the printing and supply of textbooks is held to be taxable, what would be the rate of GST and the SAC Code.

Qiii. Whether the amendment of Sl.No.27 of Notification No. 11/2017 vide Notification No.06/2021 would apply to the Applicant, or whether the Notification 12/2017 Central Tax (Rate) would supersede it so as to make the Applicant liable for nil rate of GST on printing and supply of textbooks.

Reply: The learned AAR noted the nature of activity. It observed that the applicant provides contents and gets the printing done from a printing contractor who uses his own physical input like paper. The learned AAR held that in this case the applicant is a recipient of service and not the supplier. Referring to section 95(c) of the CGST Act, the learned AAR held that it cannot give ruling on above questions.

Qiv. Whether GST should be collected on the rental income from property leased by the Appellant to Karnataka Food & Civil Supplies Corporation Ltd (Government of Karnataka Undertaking), and if yes, whether rent received in January 2022 for past periods (2005-2021) is liable for GST.

Reply: In this respect, the learned AAR noted that the applicant has leased the property to Karnataka Food and Civil Supplies Corporation Ltd and receives rent for the same. Referring heading 9972, which covers real estate services, the learned AAR held that the applicant is liable to pay GST at 18 per cent on above rentals.

Qv. Whether GST is applicable on sale of scrap by the Applicant.

Reply: Since no details about nature of scrap, etc. were provided, the question was not answered.

Qvi. Whether the Applicant’s GST registration should be retained or surrendered.

Reply: In respect of this question, the learned AAR referred to section 97 and reproduced the following part in the advance ruling.

“Section 97. Application for advance ruling. –

1)……………………………

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;

(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 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.”

The learned AAR held that the above question, on which advance ruling is sought, is not covered by section 97(2) and hence no answer is given.

E-commerce operator vis-à-vis liability under section 9(5)

41 Multi-Verse Technologies Pvt Ltd

(AAR No. KAR ADRG 36/2022

dated.27th October, 2022)

The applicant provides computer application services (herein after referred to as “APP”) for facilitating business transactions of goods or services or both connecting through the platform of suppliers/sellers and recipients/buyers. The applicant charges a membership and subscription fee to the person who enrolls by furnishing the application in the pre-subscribed form. The applicant discharges the output tax on the membership/subscription fee received from the members registered on the Super App (known as MYn) for availing the benefits.

For the above purpose, the applicant enters into “END USER LICENSE AGREEMENT” (EULA) with supplier of goods and services as well as proposed customers of such suppliers. The modus operandi is that the supplier creates “Business User Account” (BSA) on the App and the transactions are entered through the said account.

The transactions through the above account between the suppliers and their customers are on their own account. The terms and conditions governing such contracts of supply such as class, quality, quantity, price, value of goods, schedule of delivery goods, etc., are as mutually agreed upon by them and the applicant neither has a say / role in that regard nor the applicant is involved directly or indirectly in such supply and delivery of goods or providing services or both as the case may be; the applicant is not in any way concerned with collection of the consideration for supply from the clients/business associates of the subscribed suppliers; all such matters are only within the knowledge and domain of the subscribers of the “APP” of the applicant and their business clients and associates.

Through the app of the applicant, cab services can also be booked. The general features about cab services are stated as under:

“a) We provide technology to cab operators (through the APP). This allows the passenger to identify the nearby cab through which he can take the ride and no further

b) The ride is not monitored by the applicant

c) The completion of the ride is not known to the applicant

d) The fare details are not known to the applicant

e) The fare and method of its collection are not known to the applicant

f) The fare is not collected through the applicant

g) The applicant is not responsible to the supplier for non-receipt of the consideration for the supply

h) The applicant is not responsible to the consumer for deficiency on the part of the supplier in rendering of the services.”

Based on above basic facts the applicant was of the view that it is not the e-commerce operator, as well as not liable to collect and pay GST under section 9(5) of the GST Act.

The applicant put up following questions for opinion of the learned AAR.

“a. Whether the Applicant satisfies the definition of an e-commerce operator and the nature of supply as conceptualized in Section 9(5) of CGST Act 2017 r/w notification No. 17/2017 dated 28.06.2017?

b. Whether the supply by the service provider (person who has subscribed to Applicant’s app) to his customers (who also have subscribed to Applicant’s app) on the Applicant’s computer application amounts to supply by the Applicant?

c. Whether the Applicant is liable to collect and pay GST on the supply of goods or services supplied by the service provider (person who has subscribed to Applicant’s app) to his customers (who also have subscribed to Applicant’s app) on the Applicant’s computer application? “

The learned AAR observed about the nature of e-commerce operator as given in sections 2(44) & 2(45). The said sections are reproduced in AR as under:

“2(44) – electronic commerce means the supply of goods or services or both, including digital products over digital or electronic network;

2(45) – electronic commerce operator means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

In light of above definition, the learned AAR observed as under in respect of question whether the applicant is E-commerce operator or not?

“16. It could be inferred from the definitions supra that Electronic Commerce Operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce i.e. for the supply of goods or services or both, including digital products over digital or electronic network. In the instant case the applicant owns digital platform (APP MYn), for the supply of goods or services or both, thus the applicant squarely fits into the definition and qualifies to be an Electronic Commerce Operator.”

Regarding remaining two questions, the learned AAR referred to section 9(5) of the CGST Act and reproduced the same as under:

“Levy and collection.

(5) The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:

Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:

Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.”

The learned AAR noted three requirements as under, so as to be liable under section 9(5):

“a) The categories of the services shall be specified by notification, on the recommendation of the Council, by the Government.

b) The supply of such specified services shall be intra-state supplies.

c) The supply of such service is through the electronic commerce operator. “

The learned AAR held that the applicant fulfills first two conditions. However, it held that the third condition i.e. the supply is through electronic commerce operator is not fulfilled in case of applicant. In this respect, the learned AAR observed as under:

“18. In this regard, we invite reference to Merriam Webster dictionary, in accordance to which the word ‘through’ is used as a function word to indicate means, agency, intermediacy such as by means of, by the agency of etc. The word ‘through’ is also used as a function word to indicate extent, period of time such as during entire period, from the beginning to the end, to and including etc. Thus, the word ‘through’ in the phrase services supplied through electronic commerce operator, in Section 9(5) ibid, gives the meaning that the services are to be supplied by means of / by the agency of / from beginning to the end / during entire period by ecommerce operator. In the instant case, it is observed that the applicant, because of their unique business model, merely connects the driver and passenger and their role ends on such connection; they do not collect the consideration; they have no control over actual provision of service by service provider; they do not have the details of the ride; they do not have control room/call center, etc. The supply happens independent of the applicant and the applicant is involved only in the identification of the supplier of services and doesn’t take responsibility for the operational and completion of the ride. Thus, it is observed that supply of service is not through the electronic commerce operator, but are independent. Therefore, the applicant does not satisfy the conditions of Section 9(5) for the discharge of tax liability by electronic commerce operator. Thus, the applicant, though qualifies the definition of being an e-commerce operator, is not the person liable for discharge of tax liability under Section 9(5) of the CGST Act, 2017.”

Accordingly, the learned AAR held that applicant is not liable to collect and pay GST on the supply of goods and services supplied by the service providers to their customers through applicant’s computer application.

BCAJ Admin

Glimpses of Supreme Court Rulings

1. Charitable Institution – Recognition under section 80G(5)(vi) – The only condition that is required to be fulfilled for seeking renewal is specified under section 80G(5)(ii) and the clauses narrated therein. The section only postulates that any income of the charitable trust may be used for charitable purpose – Whether the income is used for charitable purpose or not can checked by the assessing authority at the time of the assessment

23 DIT(E) vs. D. R. Ranka Charitable Trust(2022) 447 ITR 766 (SC)

The assessee, a charitable trust, was granted registration under section 12A of the Act on 21th July, 1986. It was also granted recognition under section 80G(5)(vi) of the Act for the years 2005-06, 2006-07 and 2007-08.

The assessee filed its returns regularly. On 1st January, 2009 the assessee filed an application for renewal under section 80G of the Act. The DIT (E) rejected the application. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal expressed a doubt whether the assessee was entitled even for the benefit under section 12A and therefore remanded the matter.

On remand, the Commissioner passed an order on 31st August, 2009 rejecting the application for renewal of the recognition under section 80G. Aggrieved by the same, the assesse preferred an appeal before the Tribunal. The Tribunal dismissed the appeal.

The High Court observed that the Commissioner had noted that the assessee had let out the building for business purposes. According to the Commissioner, the income was not used for charitable purposes, there was absence of charitable activity and the activity of the trust was not in consonance with the objects of the Trust.

The High Court noted that it was the contention of the assessee that the condition as specified in section 80G(5)(ii) postulated that income could be used for charitable purposes and that letting out of the property was not barred by law. The assessee had used the income towards repayment of the loan borrowed in the earlier year and paid interest thereon, which was the application of the income.

The High Court held that the only condition that required to be fulfilled for seeking renewal was specified under section 80G(5)(ii) and the clauses narrated therein and none of the clauses could be said to be applicable to the facts of the present case. The section only postulates that any income derived from the charitable trust may be used for charitable purpose. According to the High Court, the Tribunal was not right in holding that the assessee was not eligible for approval under section 80G. The High Court was of the view that whether the income is used for charitable purpose or not can be checked by the assessing authority at the time of the assessment.

The Supreme Court dismissed the appeal of the Revenue holding that the High Court’s decision on the conditions to be considered for renewal of approval of the assessee under section 80G was correct.

Note: It may be noted that substantial changes have been made with regard to approval/renewal under section 80G by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

2. Settlement of cases–The order passed by the Settlement Commission being bereft of reasons is unsustainable, and the fact that the assessee has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the order passed by the Settlement Commission

24 Nand Lal Srivastava Ors vs. CIT(2022) 447 ITR 769 (SC)

During search operations at different premises of assessee, certain incriminating documents were seized. Pursuant thereto the assessment was made under section 158BC(c) of Income Tax Act, 1961.

The assessee moved an application under section 245-C of the Act before the Settlement Commission. During the pendency of the proceedings before Settlement Commission, the assessee approached the High Court vide Writ Petition No. 506 of 2008 and connected matters, wherein an order was passed on 18th March, 2008 directing Settlement Commission to decide settlement application filed by assessee by 31st March, 2008.

Pursuant thereto the Commission passed an order, paras 4 and 5 of the which read as under:

“4.This would involve more than 1500 assessments. The Settlement Commission deals only with the assessments which involve complexity of investigation and the application is intended to provide quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book which has been filed before the Settlement Commission runs into thirty thousand pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the Commissioner of Income Tax Department for arriving at a proper settlement.

5. At this juncture, it is not practicable for the Commission to examine the records and investigate the case for proper settlement. Even giving adequate opportunity to the applicant and the department, as laid down in Section 245D(4) of Income Tax Act, 1961 is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order u/s 245D(4)of Income Tax Act, 1961.”

The Commission granted immunity to the assessee from prosecution and penalty under the Act and directed the assesse to make payment of tax along with interest within 35 days. The undisclosed income of the assessee was settled in the manner stated in para 6 of the order and the Income Tax Commissioner was directed to compute total income etc. in compliance of said order.

The Commissioner of Income Tax, Allahabad filed writ petitions challenging the aforesaid orders. The writ was filed on the grounds that without any hearing or looking to the record and giving opportunity to parties, the Settlement Commission, under the garb of compliance of this Court’s order, had passed orders of settlement without following the procedure prescribed in the statute i.e. it was obligatory upon the Settlement Commission to examine the record and report of the Commissioner, give opportunity to the parties, hear them and only thereafter pass an appropriate order. The entire procedure as contemplated in Section 245D(4) of the Income-tax Act, 1961 had been completely overlooked by the Settlement Commission, and, therefore, the impugned orders are patently illegal and null in the eyes of law.

The assessee contended that he had already complied with the impugned order of Settlement Commission, deposited the amount of tax as per the Settlement Order and the consequential order was also passed by the Commissioner of Income Tax. Since there was no interim order in these writ petitions, the assessee would be prejudiced in case the impugned orders are now set aside.

The High Court held that the mere fact that the orders impugned in the writ petitions had been complied with since there was no interim order, would not validate a patently illegal and bad order, which had been passed in flagrant violation of the statutory provision. It was not a case, where things could not be restored or where restitution is impossible.

According to the High Court, the manner in which the impugned orders were passed by the Settlement Commission clearly showed a complete lack of sensibility on its part. The High Court quashed the orders on 31st March, 2008 passed by the Settlement Commission.

The Supreme Court agreed with the judgment dated 25th February, 2015 of the High Court that the order passed by the Settlement Commission being bereft of reasons was unsustainable. Further the fact that the Respondent has made payment in terms of the order passed by the Settlement Commission could not be a ground to sustain the said order, being contrary to the mandate of Section 245D(4) of the Income-tax Act,1961. But the Supreme Court, however was of the view that the matter had to be remitted for fresh decision.

The Supreme Court noted that the Settlement Commission had been wound up, and the matters pending before the Settlement Commission were being adjudicated and decided by the Interim Board constituted under section 245AA of the Income-tax Act, 1961.

In view of the above position, the Supreme Court remitted the matter to the Interim Board with a request that the matter to be taken up expeditiously and should be preferably decided within a period of six months from the date of first hearing. A reasoned order would be passed.

Recording the aforesaid, the impugned judgment was partly set-aside and the appeals were allowed in the aforesaid terms. The Supreme Court however clarified that it had not made any observations or given any findings on the merits.

3 Capital or Revenue – Finding of facts by lower authorities upheld by the High Court, namely, that the amount received as compensation was of revenue nature -no interference was called for

25 Manoj B Joshi vs. 8th ITO and others (2022) 447 ITR 757 (SC)

On 10th April, 1985 the appellant entered into an agreement termed as ‘Memorandum of Understanding’ with one Mr. Dalvi, who was to acquire certain piece of land bearing Survey No. 6 of village Barave, taluka Kalyan, for construction of buildings, to be used mainly for residential purpose. Mr. Dalvi wanted to sell the flats, which he proposed to construct, to third parties on ownership basis. Said Mr. Dalvi, the developer, was short of funds to undertake this project. The appellant therefore, offered to promote a Cooperative Housing Society and there by collect funds from the proposed members of the Society. Consequently, the aforesaid MOU dated 10th April, 1985 was entered into by and between the appellant and Mr. Dalvi whereby it was agreed that Mr. Dalvi will construct the flats with the help of monies that the appellant will hand over to Mr. Dalvi after collecting the same from the prospective buyers thereof, the members of the proposed society. Mr. Dalvi will give these flats to the appellant, who in turn will allot the flats to various members of the proposed Society, which was to be named as Krushna Housing Society.

In his capacity as promoter, the appellant collected funds of Rs. 29,11,000 from prospective members of the proposed Society. The appellant says that he added an amount of Rs. 2,00,000 as his own contribution as a member of the proposed Society towards one flat and paid total Rs. 31,11,000 to Mr. Dalvi on various dates between 3rd April,1985 to 31st March,1989. It was also agreed as per the clauses of the MOU dated 10th April, 1985 that if Mr. Dalvi fails to complete the development and carry out construction as agreed, the promoters or the Society will be entitled to claim refund of the booking amount along with interest.

On account of certain legal problems, Mr. Dalvi could not honor his commitments of development and construction. Therefore, the parties entered into another agreement, also termed as Memorandum of Understanding dated 1st December, 1989 where by Mr. Dalvi agreed to refund the entire amount paid by the appellant of Rs. 31,11,000. In addition to refund of the said amount with interest by the said MOU dated 1st December, 1989 Mr. Dalvi also agreed to pay an additional amount of Rs. 29,11,000 i.e. the amount in issue, to the appellant inter-alia as a compensation for cancellation of arrangement and the so called understanding entered into between the appellant and Mr. Dalvi, in terms of an MoU dated 10th April, 1985. Accordingly, the amount in issue was paid by Mr. Dalvi to the appellant, in the F.Ys. 1996-97 and 1997-98.

In the meantime the appellant and Mr. Dalvi entered into a third agreement, called ‘Release Deed’, dated 11th June, 1997, declaring that Mr. Dalvi is released absolutely forever and from all obligations, arising under MOU dated 10th April, 1985.

The appellant filed income tax returns on 13th November, 1998 in regards to the A.Y. in issue i.e.1998-99,declaring total income of Rs. 25,48,000. Along with the returns, the appellant submitted two agreements, termed as MoUs dated 10th April, 1995 and 1st December, 1989. The appellant also submitted a copy of the Release-deed dated 11th June, 1997.

The appellant claimed that the amount in issue of Rs. 29,11,000 was an amount received by the appellant as a compensation on account of the transactions reflected by the aforesaid three documents which was not an income within the definition of section 2(24) of the Act and in the alternative, that if at all, it was a’ capital gain’. However, the authorities treated the amount in issue as income earned by the appellant as and by way of ‘income from other sources’, by rejecting the claim of the appellant. According to the High Court, the facts demonstrated that the appellant was paid the amount in issue so that no action in future could be initiated against the Developer, Mr. Dalvi, by the members of the proposed housing society for having failed to construct flats for them as was initially agreed by Mr. Dalvi. In other words, the appellant had received this amount in issue to indemnify Mr. Dalvi against any action (that too if any) that may be taken against Mr. Dalvi in future.

This amount in issue was not paid to the appellant towards any right/title/ interest that the appellant had in present in any immovable property.

The High Court held that all the three lower authorities were fully justified in treating the receipt of amount in issue of Rs. 29,11,000 by the appellant, not only as an income but also as income received by the appellant from other source as contemplated by Sections 14 r.w.s 56 of the said Act and subject the same to taxation accordingly.

The Supreme Court noted that the findings of fact recorded by the AO which had been affirmed right till the High Court, were: (i) the appellant had entered in to an MoU dated 10th April, 1985 with Shirish Dalvi, a developer who was to acquire certain pieces and parcels of the land in Village Barve, Taluka Kalyan and there upon construct residential buildings/ apartments; (ii) the appellant had collected funds from prospective members of the proposed society; (iii) these funds were transferred to Shirish Dalvi; (iv) subsequently, Shirish Dalvi faced legal problems in acquiring the land and in obtaining clear title and necessary permissions; (v) thereupon, another MoU dated 01st February, 1989 was arrived and executed between the appellant and Shirish Dalvi, pursuant to which the amount received from the proposed members was refunded to the appellant, albeit this amount has not been brought to tax as income of the appellant, but another amount of Rs. 29,11,000 received stated as a compensation by the assessee has been brought to tax as income from other sources.

According to the Supreme Court, in view of the factual background, there was no justification and reason to hold that this amount received was not taxable being a capital receipt. Whether or not the amount would be taxable as income from business or income from other sources, was not an issue and therefore was not examined and answered in the present case. The appeal was accordingly, dismissed without any order as to costs.

BCAJ Admin

From The President

Dear BCAS Family,

While you may be in the mood for relaxing after the financial year-end pressures of March, I thought let me lighten it further with some hilarious piece of ‘knowledgeable’ writing.

“The profession of Chartered Accountancy is represented by the accountants who have passed the examination conducted by the Institute of Chartered Accountants. This body was established under the Statute by the Parliament in 1949 and regulates the profession of accountancy with policies and guidelines for the Chartered Accountants. It will enter its 75th year in 2023-24. Bombay Chartered Accountants’ Society is a separate voluntary body of Chartered Accountants whose main objective is to disseminate knowledge and impart quality education to its members, students and accounting community at large” It will also be entering its 75 the year”.

If you are wondering why have I written these obvious facts known to everyone, let me clarify that this is the piece of writing you may end up with if you query ChatGpt about ‘75 years of ICAI and the BCAS’. What seems obvious and may be hilarious today has become a challenge to many professions and is causing a lot of heartburn due to insecurity about the future of their profession. Because what seems a possibility may soon become a reality. ChatGpt is continuously refining itself and has the capability of taking over a lot of tasks which are currently handled by skilled human beings.

The challenge posed by the technology to any existing norms, methodology and value system is not new. It has been happening since the dawn of civilization. This is how mankind has progressed. Every innovation has posed existential threats to a certain section of society, which then has been forced to adapt and evolve to more efficient ways to stay relevant. History will testify that every innovation or technology in its initial avatar only attempted to resolve a single challenge. The one which the innovator was obsessed with. However, the thinking faculty of human beings adapted it to various other uses over a period. A classic example is an airplane. What started the fascination for flying was just to feel like a bird, to view the world from the ground above. It was never thought to be for the transportation of passengers and cargo across the globe. Look at the scenario today. How it has changed its role and context. If we look back, we will realize that similar things have happened in the case of most technologies… be it the telephone, car, computer or even the mobile. It is the supremacy of the human mind which has shaped and improved the technology to put them to varied use because humans have a gift of this unique ability viz. thinking.

Unfortunately, the advent of new technology in the form of Artificial Intelligence (AI) embedded in the ChatGpt poses a threat to this very innate ability of the human being. The way it has been configured is that it quickly assimilates entire related data on the web and reproduces it in a summarized manner. So it becomes ready to cook and eat meal with some scope for dressing and seasoning. No thinking skills are required to be put to use and we may start living on a borrowed intelligence from the existing domain without stretching thinking beyond the limits, which is necessary to invent newer ways. And now a newer version has been launched viz. ChatGPT-4 – a more powerful version with advanced reasoning capabilities that enables it to crack difficult problems with greater accuracy. Responses are now more factual as it has access to greater data and training. Is the threat real? I think it is.

In an interview with ABC, Sam Altman, CEO of OpenAI and creator of ChatGPT, recently admitted that the AI chatbot could eliminate many jobs. He also mentioned this technology itself was incredibly potent and potentially hazardous and expressed support for regulating it. One of the top concerns is that ChatGPT could be extensively used by cybercriminals to further their game. It has been able to expertly generate phishing emails to implant malicious code to steal online data. ChatGPT is also well-equipped to build scam websites, create spam content and spread fake news. Scary? I think so.

While ChatGPT has proven to be a great boon in the sphere of education – becoming a powerful tool for both educators and students, its capabilities are already a nightmare as students are using it to do their assignments. Fortunately, the software is already available to detect AI-written text. ChatGPT’s responses are influenced and ‘taught’ by the numerous interactions with its users, which has resulted in pronounced racial and gender biases. And though the chatbot has access to humungous amounts of data, it still has accuracy issues that colour the truth. So, let us pledge to use ChatGPT as a good ‘servant’ without making it a ‘master’! Let us not sacrifice our ability to ‘think’. Let us not forget the famous saying of Rene Descartes “I think therefore I am”.

Mid-March witnessed the collapse of Silicon Valley Bank – America’s 16th largest commercial bank. The dizzying speed with which it got wiped out, spooked the banking world and the markets which feared a broader meltdown. The government stepped in and guaranteed customer deposits, but the repercussions had spread far and wide and lingered on. In a move to boost confidence, the government shut down Signature Bank, a regional bank that was already teetering on the verge of collapse, and guaranteed its deposits, too.

March also saw the much-revered, but crisis-hit Credit Suisse Bank falter and get swallowed by UBS – Switzerland’s largest banking group. In a swift government-brokered deal, UBS paid $2 billion to acquire its rival in an all-share deal that priced Credit Suisse at around one-fourth of its closing value of $8 billion. The 167-year-old Credit Suisse is the biggest name that was caught in the devastating wake unleashed by the collapse of US lenders Silicon Valley Bank and Signature Bank. The rapid action of the US and Swiss banking authorities have contained the situation and the fallout is not expected to adversely impact India.

However, these collapses occurring at regular interval poses a fundamental question. Is the concept of capitalism a failure? I believe this is a larger issue and I will perhaps discuss this in my next communique.

Events:

Ind AS RSC held at scenic valley view hotel at Khandala was successfully concluded with the active participation of BCAS members as well as non-members. Power Summit held by the Internal Audit committee got an overwhelming response prompting the need to shift the venue to a bigger hall to accommodate a larger number of participants. Much awaited ITF will be held in April at Gandhinagar for which the response has been very encouraging. There are interesting events on the anvil. Please keep a tab on the events announcements.

April is the month of examination of children. It is also a month of bank audits and a deadline for audit reports. It is the month to celebrate Baisakhi and remember the teachings of Mahavir Swami on the occasion of Mahavir Jayanti. I wish you all success in whichever pursuit you will be busy with in this important month.

Goodbye till we meet again next month!

Thank You!

Best Regards,

CA Mihir Sheth

President

BCAJ Admin

Allied Laws

51 Mandira Paul and another vs.

Maya Rani Dev and another

AIR 2023 GAUHATI 4

Date of order: 11th November, 2022

Wills – Suspicious circumstances surrounding the Will – Propounder failed to establish the genuineness – Probate rejected. [S. 273, 270, 63, Indian Succession Act, 1925; S. 68 of Indian Evidence Act, 1872]

FACTS

The Plaintiff instituted a suit seeking probate of her mother’s will where she was appointed as the executor. A deity was impleaded as the Petitioner No. 2. Her two sisters were impleaded as opposite parties. According to the will, the three daughters and the deity were each entitled to 1/4th share in the property.

The District Court dismissed the suit on several grounds such as non-mentioning the date of death, tampering with the will and lack of confirmation if it was the last will.

On appeal to the High Court

HELD

The onus to prove the due execution of the will is on the propounder. The evidence brought on record must be credible and inspire confidence and the same cannot be assumed to be satisfied by mere mechanical compliance.

As there are several instances which bring doubt on the genuineness of the will, the same cannot be ignored by the Court. As the testatrix has failed to discharge the onus of proof regarding the genuineness of the will, the decision of the lower Court is upheld.

The appeal was dismissed.

52 Neeraj Garg vs. Sarita Rani and others

(2021) 9 SCC 92

Date of order: 2nd August, 2021

Judiciary – Cannot pass remarks on the counsel – The same has no bearing on the process of adjudication – Can affect the career and repute of counsels.

FACTS

The Appellant is a practicing lawyer before the High Court of Uttarakhand with around 17 years of experience. The High Court in its order passed certain remarks on the lawyer regarding his conduct without giving him an opportunity of being heard.

On an appeal to the Supreme Court on this limited issue.

HELD

The conduct of an advocate has no bearing on the process of adjudication. Further, no opportunity was given to the counsel for his explanation. Such remarks cast an apprehension on the professional integrity of the advocate and it will adversely impact his professional career. The offending remarks are to be recalled to avoid future harm.

The appeal was accordingly disposed of.

53 UOI vs. Manraj Enterprises

(2022) 2 SCC 331

Date of order: 18th November, 2021

Arbitrator – Creation of a contract – Powers – Cannot award interest which is contrary to the contract. [S. 31, 28, 34, Arbitration and Conciliation Act, 1996]

Appearing Counsels – Cannot provide concession which is contrary to law – No estoppel against the Law.

FACTS

On account of a dispute between the Union of India and a contractor, the issue was referred to Arbitration. The Sole Arbitrator passed an award wherein, pendente lite and future interest was also prescribed.

The Union of India preferred an appeal before the High Court (Single Bench) on the issue of interest. The Single judge of the High Court dismissed the appeal. The Division Bench also dismissed the appeal of the Union of India.

On an appeal to the Supreme Court.

HELD

The Arbitrator is a creation of a contract. The Arbitrator cannot award interest if the same is contrary to the terms of the contract between the parties.

Further, if any concession is proposed by the Counsel and the same is contrary to the law, it cannot bind the parties. There can be no estoppel against the law.

The appeal was accordingly allowed.

54 Sri Ganesh Sai Granites and Minerals vs. Commissioner and Inspector General

AIR 2023 (NOC) 14 (AP)

Date of order: 25th August, 2022

Partnership – Issue raised before the Registrar of Firms – Registrar is duty-bound to look into the complaint and act on it. [S. 64, Partnership Act, 1932]

FACTS

A dispute arose between the partners of a partnership firm. It was claimed that one of the partners had forged the signatures of the other partners and created a deed of reconstitution of the Firm. The said deed was registered before the Registrar of the Firms.

One of the partners filed a complaint before the Registrar of Firms explaining the details, requesting the registrar not to act on the reconstitution deed filed before it and to rectify the same.

There was no enquiry or rectification done by the Registrar of Firms.

On a Writ Petition.

HELD

As per section 64 of the Indian Contract Act, 1932 and State Rules thereof, the partners are entitled to approach the Registrar of Firms to ascertain the correct facts. The Registrar is duty-bound to conduct an enquiry and pass necessary orders. Refusal or inaction by the Registrar is not proper. The Registrar of Firms is directed to conduct an enquiry as per the complaint.

The petition was accordingly allowed.

55 Jagdish Gotam vs. State of Madhya Pradesh and others

AIR 2023 (NOC) 19 (MP)

Date of order: 22nd July, 2022

Senior Citizen – Seeking urgent relief – Right to live with dignity – Alternate Remedy not to be applied strictly – Writ Petition allowed. [Article 21, 226, Constitution of India]

FACTS

The Petitioner claimed to be the owner of a house situated at Jabalpur based on a registered sale deed. He was living with his wife. He allowed his son and daughter-in-law to live with him.

On account of matrimonial disputes between his son and his daughter-in-law, his son left the house. The daughter-in-law ousted the petitioner and his wife from the house.

On a Writ Petition for recovery of vacant possession of his self-acquired property.

HELD

The objections raised by the daughter-in-law (Respondent No. 4) are that there is an alternative remedy available under the provision of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 and she denied any harassment.

As per Article 21 of the Constitution, every citizen has the right to live with dignity. In such a case it would not be appropriate for a senior citizen to go through the statutorily prescribed alternate remedy. The rule of alternate remedies should not be strictly applied.

The daughter-in-law and her children are to be evicted from the premises and a vacant possession is to be handed over to the Petitioner.

The petition was accordingly allowed.

BCAJ Admin

From The President

Dear BCAS Family,

As I write this message, a big suspense on what would budget have in store for us has been unravelled. Shimmering with its pro-people and pro-market initiatives, it is poised to propel India’s growth to greater heights. It has the distinct stamp and finesse of the Finance Minister, Nirmala Sitharaman who has pulled off a remarkable feat in putting together a budget that has something for everyone. The budget focuses on boosting technology, infrastructure and green energy while easing tax across various citizen classes. It dexterously manages macro-economic stability, while providing a strong impetus to job creation and harnessing youth power. The budget also has initiatives to add a fillip to agriculture, rural development, women empowerment, entrepreneurship, healthcare and education. What is laudable is that the budget has laid clear direction for the nation in its Amrit Kaal to what its goal posts are for India @100 in 2047. Care has also been taken to pave the way for revitalizing the economy and ensuring its steady growth and development. That said the Finance Bill 2023 still leaves out required reforms at the administrative level that would have helped honest tax-paying businesses. I am hopeful that with representations from the BCAS and other institutions, wisdom will prevail to bring about those reforms.

While there are many positive developments in a country which is on the cusp of exponential growth, there is one distressing fact about the manner in which the MCA portal has opted for migration of its software platform. Considering the strategic importance of its operation, it was expected that there would be adequate trial runs of its Beta version and an open forum for the users to give their feedback. Unfortunately, in its zeal and zest of claiming credit for the “Ease of Business Initiative,” its effect has been counterproductive. The performance of the portal has been far from satisfactory. Result- there is complete chaos and confusion- with no statutory forms being able to get filed, Incorporation of new companies being on hold resulting in uncertainty for those wanting to invest in India under a JV. I hope the government takes up this with utmost priority to resolve it.

It is heartening to note that National Financial Reporting Authority (NFRA) has extended the date of submission of views/comments in relation to Annual Transparency Reports by Auditors/Audit Firms after representation by the BCAS.

ICAI has mandated an Audit Quality Maturity Model (AQMM) for a certain category of audit firms. This is a welcome initiative considering the fact that the entire Model has been developed with the volunteering team at the ICAI with the required help of seniors in the profession. It is expected that initially there could be a few teething problems and implementation challenges till the time it gradually attains maturity. But it is a laudable initiative and would help Indian firms to compete globally and raise their level.

I am also very happy to inform you that BCAS has been successfully audited and found compliant with the ISO 9001 Quality Standards. This will help BCAS further increase its administration and reputation.

It is said, “The brightest stars shine in the darkest nights!” I am sure you will agree with me when we look at the situation across the world today. Wars and proxy wars are spreading suffering, while a powerful earthquake has wiped out thousands and added to the misery in the world. Stunted economies, looming recession, battered supply chains and spiralling inflation are also adding to the prevailing ‘darkness’. So, are there any stars to be seen?

India! By day or by night, India has emerged as a shining star! With a policy of “reimagine, reinvent every single element of governance” by the government there is a determined transition from ‘Government-First to a People-First approach and the results have been nothing short of astounding.

The number of taxpayers escalated drastically, and the gross tax revenue has grown more than three-fold; from Rs.11 lakh crore in 2013-14 and is expected to be more than Rs. 33 lakh crores in 2023-24. What’s remarkable is that the growth has happened even after reducing the tax rates. The government has been working at the grassroot level – transforming the lives of the marginalised with a variety of welfare schemes which were innovatively delivered. Jan Dhan bank accounts, Mudra Loans, low-cost housing, construction of toilets, availability of electricity and clean cooking fuel were some of the key initiatives that have been systematically unrolled across the country.

With one-third of the world wrestling with recession and 75 countries facing a global debt crisis, India is looking at the economic growth of 6.9%. To further accelerate the economy the government is aggressively investing in a variety of infrastructures that will not only provide jobs but attract both global and private finance. The immense confidence and optimism around India have not gone unnoticed – numerous corporate heads have hailed India’s dynamism and are announcing plans to invest and step-up employment in India. Bob Moritz, Global Chairman of PwC said, “You should not be thinking about India as an emerging market, India is the leading market.” Undoubtedly, India’s Amrit Kaal is now!

Events:

As usual last quarter of the financial year is throbbing with events and activities. The meeting was organized on the provisions of the Finance Bill 2023 where the speaker CA Pinakin Desai lucidly explained the nuances and finer points of the Finance Bill. The 56th RRC held at Coimbatore got an overwhelming response and active participation. The interactive platform provided to the participants was appreciated by one and all and provided an excellent networking opportunity. There were interesting lecture meetings on the subject of Chat GPT and AQMM which were received very well. On behalf of the BCAS Foundation, I along with some trustees got an opportunity to inaugurate the digital classroom at the school in the tribal area. BCAS Foundation has donated 23 digital screens with preloaded education software to various schools in the tribal area of Talasari, near Umbergaon. These will be used by 12 schools with the advantage of being able to conduct classes with few teachers.

The month of March also brings exciting opportunities. There is a workshop on M&A, Ind AS RSC and Power Summit. There are also several other Lecture Meetings that may be of interest to you. I request you to keep a tab on the announcements not to miss out.

Before I sign off let me wish that the colours of Holi make our life spectacular. Happy Holi to you all!

Thank You!

Best Regards,

CA Mihir Sheth,

President

BCAJ Admin

Society News

NEW INITIATIVES AT BCAS

At BCAS, a constant endeavour is always underway to exceed the expectations of its members and continue to remain a preferred professional development body for Chartered Accountants. The BCAS legacy over the last 70+ years has been enamoured by its ability to evolve with changing times and remaining extremely relevant to its ever-evolving community.

At the Society various initiatives are underway and few mentioned below have fructified over the last months:

1. Revamped audio-visual infrastructure at BCAS Auditorium:

Modern-day learning delivery environment is significantly different in comparison to the earlier times. This difference was further accentuated by the Covid-19 pandemic which made adoption of digital learning a common-place. BCAS is blessed to be one of the few professional societies of Chartered Accountants to have its own physical auditorium to conduct live events. Over the last few months the entire audio-visual infrastructure at the BCAS auditorium has been revamped by addition of state-of-the-art 4K LED visual screens, hybrid classroom infrastructure, studio-quality voice and sound equipment, surround-sound microphones, teleprompter and multiple point-and-zoom cameras.

These upgradations have significantly improved the learning delivery capabilities from the BCAS Auditorium. Members are encouraged to attend an in-person event at the BCAS Auditorium and experience the new-age digital infrastructure.

This hybrid infrastructure is also available for use to members who choose to make use the BCAS Auditorium for their own learning events.

2. Self-paced learning through E-Learn initiative:

Self-paced learning courses and event recordings are available through the E-Learn learning management initiative of BCAS. Members can now access a catalogue of courses and event recordings by accessing the E-Learn module. The E-Learn platform opens up the BCAS learning content to its large base on outstation members as well.

3. WhatsApp communication with members:

WhatsApp has today become the de-facto choice of quick communication. BCAS has initiated an additional communication channel with its members through WhatsApp. A right balance of quick communication and respecting member privacy will be embedded in the WhatsApp communication initiative.

Once you receive any BCAS WhatsApp message, do save the senders phone number in your mobile address book. This will help in seamless communication moving forward.

4. BCAS back-office on cloud infrastructure:

The Society is able to deliver on its objectives owing to a strong back-office team at the BCAS office. The BCAS office staff comprises a team of more than 20 committed individuals who work diligently to serve the large BCAS membership. With an objective to enable the key departmental heads at BCAS to seamlessly perform their roles, each of them have now unhindered access to Microsoft cloud infrastructure equipping them with seamless access to data, co-creation collaboration and backup capabilities.

5. QR Code and UPI payment functionality:

In a recent initiative, BCAS has enabled receiving payment through QR code as well as through UPI. This functionality is enabled at BCAS front office reception as well as the publication kiosks at the event location.

EVENTS AT BCAS

1. HRD COMMITTEE ORGANIZES ‘TARANG 2K23’

Under the auspices of the HRD Committee of the Bombay Chartered Accountants’ Society (BCAS), the Students’ Committee organized the 15th Jal Erach Dastur CA Students’ Annual Day competition from 24th December, 2022 to 8th January, 2023.

Described as an ecstatic annual CA students’ celeberation, Tarang 2k23 was engaging, enthralling and magnificent. Under the requisite guidance of CA Anand Kothari, CA Jigar Shah, CA Dnyanesh Patade and CA Utsav Shah, Tarangs mainly intended to provide a platform for CA students to unleash their talent and creativity in areas of public speaking, writing skills, performing arts, business, technical and innovative skills. Additionally, the event also intended to act as an insight and potential gateway into the real world outside academic books by providing access and tutelage by skilled and experienced leaders in the form of participation in various fields to building interpersonal relations and network with hundreds of like-minded students.

This year’s Students’ Committee comprised a group of 31 passionate and enthusiastic students. Tarang 2k23 changed the earlier dull and monotonous perception of the CA students as they were now being witnessed as event managers, anchors, talented dancers, and photographers too!

It was truly an event ‘Of CA Students, By CA Students and For CA students.’

Tarang 2k23 saw a huge enrollment of around 500 students despite the Christmas holidays and pending due dates. Overall 279 students participated in the event along with the highest number of participants witnessed in the ‘Talent Show’ and the ‘Antakshari Competition.’ This year Tarang 2k23 also introduced the revolutionary event “CA’Preneur – Pitch Your Business Ideas,” whose concept was taken from the popular TV show, ‘Shark Tank India’ to promote thinking, problem-solving and entrepreneurial skills amongst CA students. The event received huge enrollments along with some amazing ideas being pitched to the judges.

The elimination rounds of the 15th Jal Erach Dastur CA Students’ Annual Day – ‘Tarang 2K23’ were held at the BCAS Hall on the 24th and 25th, December, 2022 with the beautiful Christmas themed décor to give the participants a joyful vibe. To keep the crowd engaged, the students’ team organized various online games and networking sessions including the Tarang’s Networking Bingo and an intriguing Quiz via the Zoom platform two days prior to the grand finale day. This provided a unique opportunity to all participants to build a productive and constructive network along with a lot of fun too.

The Grand Finale of Tarang 2k23 was held at the Lala Lajpat Rai College Auditorium on 8th January, 2023. Vahura and IDFC Bank sponsored the winners’ prizes for various games and quizzes held online. Arrangements for various exciting game stalls, live caricatures and a 360° photobooth were made to engage and build excitement amongst the audience before the event’s commencement.

The grand finale commenced with the lighting of lamp by the HRD Committee and the student coordinators with the Ganesh Vandana and Saraswati Vandana being played in the background

The event kickstarted with a ‘Antakshari Competition’, where the two finalist teams namely, ‘Deewane’ and ‘Parwane’ competed on the stage. The event comprised engrossing rounds to test the presence of mind the sound musical knowledge of the participants. It was hosted by CA Vijay Bhatt.

The next event to follow was a Debate Competition with eight finalists. The moderator for this event, titled, “Traditional Indian educational system of Gurukul was more effective than today’s Universities,” was CA Ujjwal Gadhvi. The tagline for the Debate was “War of Words.”

This event was followed by the ‘Talk Hawk,’ sponsored by the Chandanben Maganlal Bhatt Elocution Fund. Here, three finalists were given four minutes to speak on any one of the 10 given topics.

This was followed by a short 15 minutes break after which Tarang 2k23 resumed with a blissful and soothing jamming session with some beautiful lyrical songs sung by the students’ team. This was followed by an energetic and well-coordinated Bollywood dance flash mob choreographed by CA Rishikesh Joshi.

The most anticipated event of the evening, CA’s Got Talent! included 12 performances by the finalists in all three categories including – music which included vocals as well as instrumental, dancing and the other performing arts category.

This was followed by a short 2-minute video which was a compilation of the past 14 years of the event Tarang.

The concluding valedictory session started with the displaying of the compilation of business ideas of the contestants of the CA’Preneur competition.

Post that the winning reels and the pictures of the Tarang Reel Star and the Khinch Le Photography Competition were displayed on the screen. Two prizes, in each of the two categories; namely, the Public Choice Award and the Judges’ Choice Award, were given.

The winners of the competition representing their firms were also announced.

The event was anchored by Ekta Singh, Krrish Pipaliya and Nikita Sahu, who ensured an environment full of spirit, vigor and humor.

Mayur Pandya and Sagar Gupta proposed the vote of thanks to Sohrab Erach Dastur, the family of Chandanben Maganlal Bhatt, Managing Committee and HRD Committee members, event coordinators, photographers, BCAS Staff, parents, sound technicians, student volunteers, CA students and the audience.

Link – https://www.youtube.com/watch?v=jqOB2df7W8k

BCAJ Admin

MISCELLANEA

I. TECHNOLOGY

31. AI-powered Robot Lawyer ‘world’s first’ to represent human client in Court

The “first-ever robot lawyer” will represent a client in court. According to reports, a defendant will use the legal assistant powered by artificial intelligence (AI) to contest a traffic ticket. Here’s what all we know.

The “DoNotPay” firm developed the AI robot. It will function as a smartphone app and stream all court proceedings in real-time. The robot will instruct the defendant on what to say using headphones, much like a human attorney would do in real life.

Joshua Browder established the chatbot for legal services known as DoNotPay in 2015. It was introduced as a chatbot to give users facing late fees or fines legal guidance. The AI helper needed a lot of time to be trained on the case, according to Browder.

February 2023 is the scheduled month for the hearing. The actual date, the venue of the court, and the name of the defendant are still being kept a secret by the robot’s creators.

The defendant in the case, who will only respond to commands from the AI robot, is being sued for receiving a speeding ticket. According to the science and technology magazine New Scientist, the AI robot will process and analyse the evidence presented in court and then advise the defendant on how to respond.

According to Joshua Browder, DoNoPay has agreed to pay any fines if they lose the case. The business’s mission is to help people “battle corporations, beat bureaucracy, and sue anyone at the touch of a button.”

“DoNotPay utilizes artificial intelligence to help consumers fight against large corporations and solve their problems like beating parking tickets, appealing bank fees, and suing robocallers,” reads the company’s mission.

(Source: indiatimes.com dated 8th January,2023)

32. iPhone exports from India during April-December double to surpass $2.5 billion

Apple Inc. exported more than $2.5 billion of iPhones from India from April to December 2022, nearly twice the previous fiscal year’s total, underscoring how the US tech giant is accelerating a shift from China with geopolitical tensions on the rise.

Foxconn Technology Group and Wistron Corp. have each shipped more than $1 billion of Apple’s marquee devices abroad in the first nine months of the fiscal year ending March 2023, people familiar with the matter said

Pegatron Corp., another major contract manufacturer for Apple, is on track to move about $500 million of the gadgets overseas by the end of January, the people said, asking not to be identified revealing private information.

Apple’s rapidly growing export numbers illustrate how it is ramping up operations outside China, where chaos at Foxconn’s main plant in Zhengzhou exposed vulnerabilities in the Cupertino-headquartered company’s supply chain and forced it to trim output estimates.

That compounded a broader problem with evaporating demand for electronics as consumers weigh the risks of a global recession.

Apple, the world’s most valuable company, began assembling its latest iPhone models in India only last year, a significant break from its practice of reserving much of that for giant Chinese factories run by its main Taiwanese assemblers including Foxconn.

While India makes up just a fraction of iPhone output, rising exports bode well for Prime Minister Narendra Modi’s plan to make the country an alternative to China as factory to the world.

China’s Covid Zero policies and an episode of violence at the Zhengzhou plant — nicknamed iPhone City as the world’s biggest production centre for the device — laid bare the dangers of relying on the country. While Beijing has since dropped that approach to containing the virus, Apple and other global names are exploring alternative locations more than ever before.

India’s vast workforce, Modi’s support and a thriving local market make it a prime candidate to take on more electronics manufacturing. Foxconn, Apple’s largest supplier, began building facilities in the country more than five years ago in anticipation of a need to extend its geographic range.

One recent selling point is a raft of new government incentives, a cornerstone of Modi’s drive to make India an electronics manufacturing hub. Foxconn has won Rs 3.6 billion ($44 million) of benefits in the first year of the so-called production-linked incentives scheme, while Wistron’s claims are currently being processed, the people said.

Apple’s contract manufacturers currently make iPhones at plants in southern India. But production in the country is just beginning. About 3 million of the devices were made in India in 2021, compared to 230 million in China, according to Bloomberg Intelligence estimates.

Foxconn began making the iPhone 14 in India a few months ago — sooner than anticipated — after a surprisingly smooth production rollout that slashed the lag between Chinese and Indian output from months to mere weeks. Apple’s three Taiwanese partners currently assemble iPhones 11 to 14 in India.

But moving out of China, where Apple has built a deep supply chain for close to two decades, isn’t easy. A Bloomberg Intelligence analysis estimated it would take about eight years to move just 10% of Apple’s production capacity out of China, where roughly 98% of the company’s iPhones are being made.

India tracks production and exports of all smartphone makers who enjoy financial incentives as part of Modi’s push.

Beyond smartphones, the country is drawing up plans to boost financial incentives for tablet and laptop makers, hoping to woo Apple to make everything from earphones to MacBooks locally as well as attract other brands.

The iPhone maker is also expected to open its first retail store in India in 2023, after meeting certain criteria imposed on foreign retailers.

(Source: economictimes.indiatimes.com. dated 09th January, 2023)

II. WORLD NEWS

33. Global recession likely in 2023: World Economic Forum survey

With geopolitical tensions continuing to shape the global economy and anticipate further monetary tightening in the United States and Europe, a majority of the World Economic Forum’s Community of Chief Economists expects a global recession in 2023.

The findings were found in the e January 2023 Chief Economists Outlook’ by the World Economic Forum’s Centre for the New Economy and Society.

As per the survey, almost two-thirds of chief economists believe a global recession is likely in 2023; of which 18 per cent consider it extremely likely – more than twice as many as in the previous survey conducted in September 2022. A third of respondents consider a global recession to be unlikely this year. However, views are divergent, with a third of respondents considering a global recession to be unlikely this year.

All of the chief economists surveyed expect weak or very weak growth in 2023 in Europe, while 91 per cent expect weak or very weak growth in the US. This marks a deterioration in recent months at the time of the last survey, the corresponding figures were 86 per cent for Europe and 64 per cent for the US, it showed.

The survey aims to summarise the emerging contours of the current economic environment and identify priorities for further action by policymakers and business leaders in response to the compounding shocks to the global economy from geo-economic and geopolitical events. The survey was conducted November-December 2022.

War and international tensions continue to shape global economic developments, and every respondent viewed it as likely, with 73 per cent saying somewhat and 27 per cent saying extremely, that patterns of economic activity will continue to shift around the world in line with new geopolitical fissures and faultlines.

The two strongest regions in 2023 according to the survey are the Middle East and North Africa (MENA) and South Asia.

In South Asia, 85 per cent of respondents expect moderate (70 per cent) or strong (15 per cent) growth, a modest improvement since the September edition. Some economies in the region, including Bangladesh and India, may benefit from global trends such as a diversification of manufacturing supply chains away from China.

On inflation, the chief economists see significantly variation across regions, with the proportion expecting high inflation in 2023, ranging from just 5 per cent for China to 57 per cent for Europe.

Following a year of sharp and coordinated central bank tightening, the chief economists surveyed expect the monetary policy stance to remain constant in most of the world this year.

However, a majority of respondents expect further tightening in Europe and the US with 59 per cent and 55 per cent, respectively.

At the start of 2023, concerns about the cost of living remain acute in many countries. Yet, survey respondents indicate that the cost of living crisis may be close to its peak, with a majority (68 per cent) expecting the crisis to have become less severe by the end of 2023. A similar trend is evident in the energy crisis, with almost two-thirds of respondents optimistic that conditions will have begun to improve by the end of the year.

The survey also asked chief economists to highlight any sources of optimism in the current global economic context. Three factors were mentioned repeatedly: The strength of household balance sheets, the peaking of inflation and the resilience of labor markets.

The outlook for the global economy is gloomy, according to the results of the latest survey of chief economists. Global growth prospects remain anaemic, and global recession risk high.

(Source: livemint.com. dated 17th January, 2023)

34. China’s population falls for first time since 1961

China’s population has fallen for the first time in 60 years, with the national birth rate hitting a record low – 6.77 births per 1,000 people. The population in 2022 – 1.4118 billion – fell by 850,000 from 2021.

China’s birth rate has been declining for years, prompting a slew of policies to try to slow the trend. But seven years after scrapping the one-child policy, it has entered what one official described as an “era of negative population growth”.

The birth rate in 2022 was also down from 7.52 in 2021, according to China’s National Bureau of Statistics, which released the figures on Tuesday. In comparison, in 2021, the United States recorded 11.06 births per 1,000 people, and the United Kingdom, 10.08 births. The birth rate for the same year in India, which is poised to overtake China as the world’s most populous country, was 16.42.

Deaths also outnumbered births for the first time last year in China. The country logged its highest death rate since 1976 – 7.37 deaths per 1,000 people, up from 7.18 the previous year. Earlier government data had heralded a demographic crisis, which would in the long run shrink China’s labor force and increase the burden on healthcare and other social security costs.

Results from a once-a-decade census announced in 2021 showed China’s population growing at its slowest pace in decades. Populations are also shrinking and ageing in other East Asian countries, such as Japan and South Korea. “This trend is going to continue and perhaps worsen after Covid,” says Yue Su, principal economist at the Economist Intelligence Unit. Ms Su is among experts who expect China’s population to shrink further through 2023.

“The high youth unemployment rate and weaknesses in income expectations could delay marriage and childbirth plans further, dragging down the number of newborns,” she added. And the death rate in 2023 is likely to be higher than it was pre-pandemic due to Covid infections, she said. China has seen a surge of cases since it abandoned its zero-Covid policy last month.

China’s population trends over the years have been largely shaped by the controversial one-child policy, which was introduced in 1979 to slow population growth. Families that violated the rules were fined and, in some cases, even lost jobs. In a culture that historically favors boys over girls, the policy had also led to forced abortions and a reportedly skewed gender ratio from the 1980s.

The policy was scrapped in 2016 and married couples were allowed to have two children. In recent years, the Chinese government also offered tax breaks and better maternal healthcare, among other incentives, to reverse, or at least slow, the falling birth rate.

But these policies did not lead to a sustained increase in the births. Some experts say this is because policies that encouraged childbirth were not accompanied by efforts to ease the burden of childcare, such as more help for working mothers or access to education.

In October 2022, Chinese President Xi Jinping made boosting birth rates a priority. Mr Xi said in a once-in-five-year Communist Party Congress in Beijing that his government would “pursue a proactive national strategy” in response to the country’s ageing population.

(Source: bbc.com. dated 18th January,, 2023)

III. ENVIRONMENT

35. Ozone layer on track to recover within decades, UN reports

The ozone layer is on track to recover within four decades, according to a new UN assessment. Human emissions of certain chemicals cause a hole to open up in the ozone layer each year over the Antarctic. This affects the ability of the ozone to protect life on Earth from the sun’s harmful radiation.

In 1987, just seven years after scientists discovered man-made chemicals were damaging the ozone layer, the Montreal Protocol was signed by 197 parties to try and curb the amount of harmful chemicals in the atmosphere.

The global phase-out of ozone-depleting chemicals previously found in hair spray, refrigerators, air conditioners and industrial cleaning products is already helping to mitigate climate change and decrease human exposure to UV rays. If current policies remain in place, the ozone layer is expected to recover to 1980 values – before the appearance of the ozone hole – within decades.

A UN-backed panel of experts, presenting at the American Meteorological Society’s annual meeting , said the ozone would heal by around 2066 over the Antarctic, by 2045 over the Arctic and by 2040 for the rest of the world.

Variations in the size of the Antarctic ozone hole, particularly between 2019 and 2021, were driven largely by meteorological conditions. Nevertheless, the Antarctic ozone hole has been slowly improving in area and depth since the year 2000.

“Ozone action sets a precedent for climate action,” says WMO Secretary-General Professor Petteri Taalas. “Our success in phasing out ozone-eating chemicals shows us what can and must be done – as a matter of urgency – to transition away from fossil fuels, reduce greenhouse gases and so limit temperature increase.”

Nearly 99 per cent of banned ozone-depleting substances have been successfully phased out, according to the UN-backed Scientific Assessment Panel to the Montreal Protocol on Ozone Depleting Substances four-yearly report.

Hydrofluorocarbons (HFCs) – another group of industrial chemicals that was used to replace banned chlorofluorocarbons (CFCs)- were additionally targeted in the 2016 the Kigali Amendment to the Montreal Protocol. While HFCs do not directly deplete ozone, they are powerful climate change gases that were on track to increase global warming by 0.3 to 0.5°C by 2100, according to the Scientific Assessment Panel.

“That ozone recovery is on track… is fantastic news. The impact the Montreal Protocol has had on climate change mitigation cannot be overstressed,” says Meg Seki, Executive Secretary of the United Nations Environment Programme’s Ozone Secretariat. “Over the last 35 years, the Protocol has become a true champion for the environment.”

(Source : euronews.com. 10th January, 2023)

BCAJ Admin

LETTER TO THE EDITOR

Dear Sir,

*Ease of Living & Doing Business in India – Reduce Compliance Burden under the Income-tax Act*

I refer to your Editorial *‘‘The Middle Class Deserve More”* in BCAJ, January, 2023.

In the last 18 years, more so in the last 8 years, the compliance burden on individuals and small businesses has increased a lot by way of increasing the scope and ambit of various TDS/TCS provisions. For example, 1 per cent TDS from payment of purchase price of Real Estate and TDS from payment of rent by Individuals, are unnecessary Compliance burdens which cannot be discharged by Individuals without seeking professional help as the process is very cumbersome.

One really wonders if the Revenue accruing to the government is really worth the burden placed on the Citizens.

Further, the scope of TDS & TCS provisions has increased a lot particularly on SME Businesses which are already struggling to survive since the Lockdown due to Covid’19.

When all the financial and business transactions are linked with PAN and are required to be reported to the Income-tax and GST Authorities by the Taxpayers and various Banks/Financial Intermediaries and Registrars, which get consolidated/amalgamated into AIS/26AS, one really feels that the scope and ambit of various TDS/TCS provisions can be greatly reduced; at least, various monetary thresholds can be suitably increased several folds.

It may be worth mentioning that such extensive provisions don’t apply in various advanced tax jurisdictions, particularly to the Resident Taxpayers.

Modiji has repeatedly emphasized the need and importance of facilitating Ease of Doing Business and Living in India and reducing the Compliance Burden on SMEs but the real impact on the ground is yet to be felt and seen by the Citizens and the Taxpayers.

Yours Sincerely,

CA Tarunkumar Singhal

BCAJ Admin

REGULATORY REFERENCER

DIRECT TAX

1. Clarification for the purposes of clause (c) of Section 269ST of the Income-tax Act, 1961 in respect of dealership/distributorship contract in case of Co-operative Societies – Circular No. 25/2022 dated 30th December, 2022

In respect of Co-operative Societies, a dealership/ distributorship contract by itself may not constitute an event or occasion for the purposes of Section 269ST(c). Receipt related to such a dealership/distributorship contract by the Co-operative Society on any day in a previous year, which is within ‘the prescribed limit’ and complies with Section 269ST(a) and (b), may not be aggregated across multiple days for purposes of Section 269ST(c) for that previous year.

2. Extension of time limit for compliance to be made for claiming exemption under section 54 to 54GB of the in view of the then-COVID-19 pandemic – Circular No. 1/2023 dated 6th January, 2023

CBDT had vide Circular No. 12/2021 dated 25th June, 2021 provided relaxation in respect of certain compliances to be made by the taxpayers for claiming exemption under section 54 to 54GB of the Act. The said circular provided that compliances for which the last date fell between 1st April, 2021 to 29th September, 2021 (both days inclusive), may be completed on or before 30th September, 2021. In view of the representations received and on further consideration of the then prevailing COVID-19 pandemic and resultant restrictions imposed, causing genuine hardship faced by taxpayers CBDT provided further relaxation. Compliances to be made by the taxpayers such as investment, deposit, payment, acquisition, purchase, construction or such other action, by whatever name called, for the purpose of claiming any exemption under section 54 to 54 GB of the Act, for which the last date of such compliance falls between 01” April, 2021 to 28th February, 2022 (both days inclusive), may be completed on or before 31st March, 2023.

3. Statement of Financial Transactions (SFT) for Interest income – Notification No. 1/2023 dated 5th January, 2023

CBDT has abolished the limit of interest income exceeding Rs. 5,000 for the purpose of SFT reporting. Now the information in SFT is required to even include details of account holders earning interest income up to Rs. 5000 except for ‘Jan Dhan Account’ holders.

COMPANIES ACT, 2013

1. CA shares the link to take MHA’s security clearance for obtaining DIN by foreign nationals from border-sharing countries: Earlier, the MCA had notified that foreign nationals from border-sharing countries need security clearance from Home Ministry to obtain the Director’s Identification Number (DIN). The said clearance is required to be attached along with the consent to act as a director. Now, the MCA has provided the link to the application for MHA Security Clearance for appointment as director of a country sharing a land border with India. The application can be made by visiting https://esahajmcaservices.nic.in/. [Source based information]1. Companies can hold the AGM for F.Y.‘22-23 till 30th September, 2023 through video conference or other audio-visual means: The MCA has decided to allow the companies whose AGMs are due in the Calendar Year 2023 to conduct their AGMs on or before 30th September, 2023 through video conferencing (VC) or other audio-visual means (OAVM).

[General Circular No. 10/2022, dated 28th December, 2022]

SEBI

1. Corporate governance provisions shall be applicable even if net-worthnet worth is changed due to accounting practice: SEBI through informal guidance has clarified that corporate governance provisions of Listing Regulations shall be applicable even though the increase in net-worthnet worth is only on account of change in the accounting practice. It is further clarified that the same is immaterial in the context of the applicability of the provisions of the LODR Regulations. As and when the net-worthnet worth of the company is above the threshold for corporate governance provisions, the company shall comply with such relevant provisions.

[No.: SEBI/HO/CFD/PoD2/OW/P/2022/62027/1 dated 13th December, 2022]

1. SEBI reduces the timeline for completion of Buyback through Tender Offer Route by 18 days: The existing buyback regulations are amended so as to include the following in the amended regulations:

buyback done through stock exchanges route to be phased out in a gradual manner and increasing minimum utilisation of the amount earmarked for buyback through stock exchange route from existing 50 per cent to 75 per cent
creation of a separate window on stock exchanges for undertaking buyback till the time buyback through stock exchange is permitted
reduction in the timeline for completion of the Buyback through the Tender Offer Route by 18 days. [Press release No. 37/2022 dated 20th December, 2022]

FEMA AND IFSCA REGULATIONS

1. IFSC Authority issues several directions for Insurance:

IFSCA has notified several regulations for the IFSC Insurance Offices (IIOs) and related matters:

a. IFSCA (Preparation and Presentation of Financial Statements of IIO) Regulations, 2022 to put in place the process of preparation and presentation of financial statements of the IIOs.

b. IFSCA (Investment by IFSC Insurance Office) Regulations, 2022 to put in place the regulatory framework and processes related to an investment of assets by an IIO.

c. IFSCA (Insurance Products and Pricing) Regulations, 2022 to provide a framework for designing and pricing of insurance products by IIOs.

d. IFSCA (Manner of Payment and Receipt of Premium) Regulations, 2022 to specify the manner for payment of premiums by a person proposing to take an insurance policy or by a policyholder to an IIO.

e. IFSCA (Maintenance of Insurance Records and Submission of Requisite Information for Investigation and Inspection) Regulations, 2022 to specify the maintenance of records by an IIO or IFSC Insurance Intermediary Office (IIIO).

f. IFSCA (Appointed Actuary) Regulations, 2022 to lay down the regulatory framework for the persons who are engaged by the IIOs to perform the roles and discharge the functions as ‘Appointed Actuary’.

[NOTIFICATION NOs.: IFSCA/2022-23/GN/REG033, IFSCA/2022-23/GN/REG030, IFSCA/2022-23/GN/REG029, IFSCA/2022-23/GN/REG032, IFSCA/2022-23/GN/REG031, and IFSCA/2022-23/GN/REG028]

2. Forms submitted on FIRMS portal for reporting of foreign investment will be auto-acknowledged:

RBI has made changes with respect to reporting of foreign investment in Single Master Form (SMF) on FIRMS portal to allow for:

i) Earlier forms filed on the FIRMS Portal had to be acknowledged separately by the AD Banks resulting in delays. RBI has now amended the procedure whereby the forms submitted on the portal will be auto-acknowledged. The AD banks shall thereafter verify the forms within five working days based on the uploaded documents.

ii) In cases of delayed reporting, the AD banks shall advise the Late Submission Fee (LSF) to the applicants, which will be computed by the system; or shall advise for compounding of contravention, as the case may be.

The Annex to the Circular provides for the steps by which processing will be undertaken on the FIRMS portal now.

[A.P. (DIR SERIES 2022-23) Circular No. 22 dated 4th January, 2023]

BCAJ Admin

Service Tax

I. HIGH COURT

27 Mahindra & Mahindra Ltd vs. UOI
[2022] 144 taxmann.com 200 (Bombay)
Date of order: 15th September, 2022

The charging sections for the imposition of CVD and SAD or surcharge are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively and not section 12 of the Customs Act, 1962. The Court held that section 3(6) and section 3A(4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither does section 90 of the Finance Act, 2000 provide for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD.

FACTS

The petitioner is engaged in the manufacture of vehicles in India and filed four applications before the settlement commission against four show cause notices demanding differential customs duty. The Orders passed by the Settlement Commission were challenged before the High Court. The High Court quashed these orders and directed to pass fresh orders. The respondents re-heard the matter and passed the orders confirming the earlier orders and imposing interest and penalties.

The petitioner contended that section 90 of the Finance Act, 2000 related to a surcharge, section 3 of the Customs Tariff Act, 1975 related to an additional duty of customs equal to excise duty, and section 3A of the Customs Tariff Act, 1975 related to a special additional duty of customs and none of these provisions provided for the imposition of penalty or interest on the chargeable duty thereunder. Therefore, there was no power under the provisions of law to impose penalties or interest. It was also submitted that the basic customs duty with surcharge had already been paid and the penalty and interest has been levied only on the differential duty which the show cause notice alleged that the petitioner had evaded and since neither section 3 nor section 3A of the Customs Tariff Act, 1975 or the Finance Act, 2000 provided for the imposition of penalty or interest, there is no power under the Act to impose the same upon the petitioner.

HELD

The Hon’ble Court held that any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as substantive law and not adjectival law. The Court held that section 3 and section 3A of the Customs Tariff Act, 1975 are charging sections creating liability for CVD and SAD but do not provide for a penalty. The mere fact that there is a machinery for assessment, collection, and enforcement of tax and penalty under the Customs Act, 1962, it does not mean that the provision for penalty and interest in the Customs Act, 1962 is treated as applicable for penalty and interest under the Customs Tariff Act, 1975. The meaning of penalty or interest under the Customs Tariff Act, 1975 cannot be enlarged by the provisions of the machinery of the Customs Act, 1962 incorporated for working out the Customs Tariff Act, 1975. Referring to various judicial pronouncements the Court reiterated that when the penalty is an additional tax, the constitutional mandate requires a clear authority of law for imposition thereof. Where the Act has to be explained by referential legislation or legislation by incorporation levies penalty or not, it is better for the Court to lean in favour of the taxpayer. There is no room for the presumption in such cases.

The Court held that section 3(6) and section 3A (4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither section 90 of the Finance Act, 2000 provides for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD. The Court also noted that unlike in the case of section 9A(8) of the Customs Tariff Act, where a specific amendment was made by section 76 of Finance (No.2) Act, 2004 by replacing the words, “relating to non-levy, short levy, refunds and appeals” with “relating to, the date for determination of rate of duty, non-levy, short levy, refunds, interest, appeals, offences and penalties”, no amendment is made to include interest and penalty in sub-section (6) of section 3 or sub-section (4) of section 3A of the Customs Tariff Act, 1975. Therefore, the intention of the legislature was very clear that it wanted to include interest and penalties only with regards to the anti-dumping duty on dumped articles and not for CVD, i.e., levy of additional duty equal to excise duty and SAD, i.e. special additional duty. No such insertion or amendment was made in section 90 of the Finance Act, 2000 relating to a surcharge. Therefore, interest and penalty cannot be levied on the portion of the demand pertaining to surcharge under section 90 of the Finance Act, 2000 or additional duty of customs under section 3 or special additional duty of customs under the Customs Tariff Act, 1975.

The Court also did not accept the contention of the Revenue that the charging section for the imposition of CVD and SAD or surcharge is section 12 of the Customs Act, 1962, and held that the charging sections for the imposition of surcharge, CVD and SAD are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively.

II. TRIBUNAL

28 Devraj Luxury Hotels Pvt Ltd vs. Commr. of C Ex & CGST, Jaipur
2022 (67) G.S.T.L. 76 (Tri. – Del.)
Date of order: 16th June, 2022.

Extended period of limitation not available to the Revenue when demand is raised on the basis of audit where assessee had maintained records and availed the credit rightly.

FACTS

The appellant was engaged in rendering services of accommodation in hotel, banquet hall and restaurant service. The appellant paid the service tax under RCM on works contract services and legal services and availed Cenvat credit on the same. During the course of the audit, the department noticed that the credit availed on both services was ineligible and issued a show cause notice on 7th November, 2019. The Adjudicating Authority confirmed the demand vide Order-In-Original passed on 2nd July, 2020 for the denial of credit along with interest and penalty under Rule 15(3) r.w.s. 78 of the Finance Act, 1994. Being aggrieved by the impugned order, the appellant filed an appeal before Commissioner (Appeals) stating that all the transactions were properly recorded and the credit towards legal services and works contract services was taken based on the challan paid, and thus, pleaded that an extended period was not available to department. However, the Commissioner (Appeals) passed an impugned order holding that without an audit taking place, it would not have come to the notice of the department of ineligible credit taken pertaining to the works contract services and hence extended period of limitation was rightly invoked. Being aggrieved by the impugned order, the appellant filed an appeal before the Tribunal.

HELD

It was held that the demand raised by the Department alleging suppression of facts or contumacious conduct based on audit notes was not available as the appellant maintained the books of account and vouchers based on the transaction. Further, the credit on tax paid under RCM on legal services was allowed to the appellant and thus there was no suppression of facts. Consequently, invoking an extended period of limitation was not available to department. Accordingly, the impugned order was set aside.

BCAJ Admin

Goods and Services Tax

66 Sunny Jain vs. UOI

[2022] 145 Taxmann.com 601 (Del)

Date of order: 5th December, 2022

The non-payment of consideration within a period of 180 days cannot be the ground for blocking ITC in terms of Rule 86A of the CGST Act. The ineligible credit mentioned in Rule 86A covers only such ITC which has suffered ineligibility on account of situations mentioned in the said Rule and not any other cases of ineligibility. Rule 86A is a drastic measure and has to be construed strictly.

FACTS

The petitioner challenged the action of the GST officer blocking a certain amount of ITC which was credited to the Electronic Credit Ledger (ECL) of the petitioner. The assessee was intimated about the said blockage of ITC by email without any inquiry and without affording the petitioner opportunity of being heard. The petitioner had earlier filed his objection with the department for blocking of the ITC for a period of eighteen months contending that it has been done without inquiry and is beyond the time limit prescribed in Rule 86A of the CGST Act. The petitioner also submitted various documents called for by the GST officer. The GST officer directed the petitioner to deposit the interest on account of non-payment of consideration to a supplier, within a period of 180 days as required in terms of section 16(2) of the Central Goods and Services Tax Act, 2017 (hereafter “the CGST Act”) and Rule 37 of the CGST Rules. The petitioner disputed the said demand on the ground that they are not liable to pay interest as the said amount was never utilised. Before the High Court, the department filed an affidavit to the effect that the ECL of the petitioner has been blocked pursuant to an email received from the Directorate General of Analysis and Risk Management (DGARM) that contained the list of taxpayers who have availed inadmissible credit and had petitioners name in it. The department claimed that in view of the said e-mail, they have a reason to believe that the ITC available in the ECL of the petitioner had been wrongly availed and therefore, the same was blocked on 11th February, 2020.

HELD

Referring to the provision of Rule 86A, the Hon’ble Court held that the restriction applies, where the ITC available in the ECR has been “fraudulently availed” or is “ineligible” as specified in the said rule. The Court noted that in the present case, there is no allegation that the petitioner has fraudulently availed the ITC lying to the petitioner’s credit in the ECR and the only reason for blocking the ECL is that the petitioner is ineligible to take ITC in view of section 16(2) of the CGST Act. The Court held that the said provision is a drastic measure and therefore, can be taken only when the conditions for taking such measures are met as the statutory provisions empowering harsh measures such as freezing the assets of a person, have to be strictly construed. The Court held that the words “inasmuch as” used in Rule 86A(1) qualify the word ‘ineligible’ and is not a phrase of wide import and hence is used in a restrictive sense to qualify the subject. Thus, the use of the expression “inasmuch as” restricts the scope of ineligibility to the conditions as set out in sub-clauses of Rule 86A(1) of the CGST Rules. It is only if any of these conditions are satisfied that the restriction under Rule 86A(1) can be imposed in respect of ITC on the grounds that the ITC available in the taxpayer’s ECL is ‘ineligible’. The Court then referred to the provisions of section 16(2) and provisos thereto and held that it is, clearly, not the scheme of the CGST Act to restrain a person from availing the ITC till he has paid the supplier for such goods/services. The second and third provisos to section 16(2) of the CGST Act make it clear that a party is not disentitled to avail the ITC in respect of goods/services prior to his discharging the liability to pay the supplier for such goods/services and tax thereon. However, if the taxpayer does not discharge his liability to the supplier within a period of 180 days, he is required to account for the benefit of the ITC availed by the taxpayer along with interest as a part of the output liability. However, the taxpayer would be entitled to avail of the ITC once again on payment being made to the supplier. The Court thus held the respondents have completely misdirected themselves in proceeding on the basis that unless a taxpayer pays the supplier, he is ineligible to avail of the ITC lying to his credit in the ECL and directed the GST department to unblock the ITC available to the petitioner in his ECL.

67 OLA Fleet Technologies (P.) Ltd. vs. UOI

[2023] 146 taxmann.com 83 (Telangana)

Date of order: 16th March, 2022

The High Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to going beyond the statute and directs the petitioner to comply with the SCN issued demanding CGST/SGST and file a refund application in respect of IGST.

FACTS

The petitioner inadvertently mapped the State of Telangana as the State of Andhra Pradesh in its IT system and hence the IT system of the petitioner determined the nature of supply to be that of inter-state supply, though the transaction was very much within the State of Telangana and would therefore amount to intra-state supply. Consequently, the petitioner paid IGST instead of CGST/SGST. Hence, a show cause notice was issued to the petitioner demanding CGST/SGST. The petitioner filed the writ praying that the respondents be directed to adjust the amount of IGST against the CGST/SGST. The respondents objected to the same on the grounds that such an adjustment is beyond the provisions of CGST Act, TGST Act and IGST Act. The petitioner however relied upon the decision of Kerala High Court in the case of Saji S. Proprietor, Adithya and Ambadi Traders vs. Commissioner, State GST which allowed a similar petition.

HELD

The Hon’ble Court referred to the provisions of section 77 of the CGST Act and section 19 of the IGST Act which permits the refund of taxes paid erroneously by treating intra-state supply as inter-state supply. The Court also observed that Rule 92(1) lays down a procedure for sanctioning the refund. The Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to adopting a procedure, which is not provided under the relevant statute. The Hon’ble Court, therefore, did not agree with the decision of Kerala High Court in the case of Saji S Proprietor (supra) and directed the Petitioner to respond to show a cause notice with a liberty to file a refund application in respect of IGST erroneously paid.

68 Bharti Airtel Ltd vs. State of UP
[2022] 145 taxmann.com 326 (Allahabad)
Date of order: 25th November, 2022

If the owner of the goods disputes and does not volunteer the payment of penalty specified in clauses (a) or (b) or (c) of section 129(1) of the Act, the department must initiate proceedings under sections 73, 74 or 75 of the CGST Act and penalty can be determined only in terms of section 122 of the CGST Act. In other words, in disputed cases, there is no provision for the determination of tax due under section 129 of the CGST Act.

FACTS

The Petitioner challenged the order purportedly to be passed in the exercise of the power under section 129 of the CGST Act and order dismissing the appeal filed by the petitioner against such order. The petitioner transported the goods on the strength of tax invoice, however, he failed to generate Part B of the E-way Bill. After the vehicle was intercepted, the petitioner generated the Part B of the E-way Bill, however despite that the revenue authorities passed a detention order after four days mainly on the grounds that when the vehicle was intercepted, Part B of the E-way Bill was not generated. A show cause notice was issued to the petitioner under section 129(3) of the CGST Act read with section 20 of the IGST Act. The petitioner submitted a detailed reply to the show cause notice and prayed that the show cause notice be dropped mainly on the ground that the tax was duly paid as was required under the Act and that Part B of the E-way bill was also uploaded prior to the passing of the detention order. Before the High Court petitioner contended that the order is bad in law as no proceedings under sections 73, 74 or 75 are initiated in the present case and the penalty can be determined only in terms of section 122 of the CGST Act. In other words, the petitioner submitted that in terms of the mandate of section 129, the proper officer is neither authorized nor justified in determining the tax or imposing the penalty as has been done by means of the impugned orders.

HELD

The Hon’ble Court held that under the scheme of the Act, the procedure for the determination of tax and penalty is contained in Chapter XV read with sections 122, 123, 125, 126, 127 and 128 of the Act and a parallel procedure is prescribed under section 129 of the Act in case of goods, which are in transit. The Court further held that if in the event the owner of the goods comes forward for payment of penalty as specified in clause (a) or (b) or (c) of section 129(1) of the Act and pays the same, the intent is to give quietus to the litigation. However, if the owner of the goods does not volunteer to pay the penalty, the department is well equipped to initiate proceedings by taking recourse to sections 73, 74, 75 of the Act r.w.s 122 for determination of tax and the penalty leviable.

The Court noted that in the present case, the department has proceeded to determine the tax liability as well as penalty only under the provisions of section 129 of the Act. However, on a plain reading of section 129, there is no provision for the determination of tax due, which can be done only by taking recourse to the provisions of section 73 or 74 of the CGST Act, as the case may be.

The Court, therefore, allowed the appeal and directed the department to refund the amounts paid by the petitioner for the release of the goods.

69 Aartos International LLP vs. Deputy Commissioner (Customs)

[2022] 145 taxmann.com 558 (Gujarat)

Date of order: 2nd December, 2022

Where the petitioner’s claim for refund could not be processed due to system limitations, and there being no other dispute, the Court allowed the petition and directed the refund along with applicable interest.

FACTS

The petitioner exported the goods in the month of February and March 2020 and shipping bills along with GSTR-3B and GSTR-1 are a part of the record. Out of three export invoices, the petitioner received a refund for only two invoices. As regards one invoice, they attempted to approach the department as there is a portal of the Department of Administrative Reforms and Public Grievance (“the CPGRAMS”). However, for two months, there was no response and subsequently, the matter was disposed of stating that Customs Mudra has forwarded various requests to ICEGATE and is also in touch with NIC Team and requesting them to look into and resolve the matter at the earliest. It was also stated that the exporter is advised to contact ICEGATE helpdesk. Aggrieved by the delays caused in processing the refund, the petitioner filed this writ.

HELD

The department filed an affidavit before the High Court contending that the Indian Customs EDI System (“the ICES” hereinafter) has an in-built mechanism to automatically grant a refund after validating the shipping bill data available in ICES against the GST Returns data transmitted by the GSTN. The department then explained the entire system process, validation checks, etc, and stated that since the process of sanction of refund claim is automatic and system driven, as and when the Shipping Bill will be available again in Scroll PC, the same will be taken up for processing for refund and the relevant amount of IGST paid with respect to each Shipping Bill or Bill of Export shall be electronically credited to the petitioner’s bank account. The Court held that as per provisions of section 54(6) read with Rule 91(2) of the CGST Rules the amount is required to be refunded and it is the respondent’s obligation to make an order sanctioning 90 per cent of the amount claimed in Form RFD-04 within a period of seven days from the date of acknowledgment received. There are no separate applications for the refund. The shipping bills are deemed to be refund applications when the goods are exported with the payment of tax. Admittedly, in the present case, it appears to be the difficulty at the end of the GST network or some error in the software itself which would require a cure. When nothing is disputed and everything is done electronically if there is any difficulty at the level of the mismatch or the processing of the claim of the refund, it becomes the duty of the GSTN to look into the same. The Court noted that there is nothing for the Court to adjudicate in this matter except pointing out the limitation of the software of the respondent department. The Court, therefore, allowed the refund along with applicable interest.

70 Sheetal Dilip Jain vs. State of Maharashtra

2022 (67) GSTL 11 (Bom.)

Date of order: 20th September 2022.

30 days’ time limit under section 73(8) of MGST Act for making the payment of tax and interest after the issuance of SCN cannot be reduced by the Adjudicating Authority as per its personal preference.

FACTS

Petitioner was issued a SCN under section 73(8) of MGST Act, demanding the payment of tax along with interest within 7 days on 2nd March, 2022. On 10th March, 2022, the impugned order was passed by the respondent confirming the liability before the completion of minimum time period of 30 days. Being aggrieved by the impugned order passed by the respondent, the petitioner preferred this petition before Hon’ble High Court.

HELD

The High Court held that the impugned order passed without application of mind ignoring and contradicting the basic provisions of the MGST Act and rules made thereunder are unacceptable and resulted in undue hardship to the public. Accordingly, the writ petition was allowed with cost.

71 Mahalaxmi Infra Contract Ltd vs. GST Council

2022 (67) GSTL 140 (Jhar.)

Date of order: 18th October, 2022

Rectification of inadvertent mistake by the supplier in mentioning details of the recipient in his FORM GSTR-1 for the passing of ITC should be allowed in absence of a mechanism to verify inward and outward supplies details.

FACTS

The petitioner was engaged in the business of mining and transportation of goods. While filing of FORM GSTR-1 for January 2019, the petitioner inadvertently quoted GSTIN of its own joint venture company MIPL(NKAS) instead of the recipient of service (Respondent). The petitioner realized this error quite late in June 2021 during the settlement of accounts with the recipient of supplies. However, by then, the time limit to amend the details of outward supply on GSTN portal had already lapsed. Further, MIPL(NKAS) did not utilise the ITC reflected in its GSTR 2A and provided an affidavit for the same. Also, there was no operative mechanism under GST Law to verify or correct the details of outward and inward supply during the said period. Being aggrieved by the absence of a mechanism at the GSTN portal to allow rectification of such errors to pass on the ITC to the respondent, the present petition was filed.

HELD

The Hon’ble High Court observed that the petitioner’s rationale for his inability to rectify this error in absence of a mechanism under GST Law was valid and hence communication for such discrepancy could not be made. Also, the Court held that there was no loss to the Government as the tax was already deposited and the respondent was rightly eligible for the ITC. The Court further held that the respondent should be allowed to rectify the said mistake by amending the details electronically through the portal or manual mode if the same is not possible due to technical reasons. Accordingly, the writ was allowed.

72 Chromotolab and Biotech Solutions vs.
Union of India
2022 (67) G.S.T.L. 160 (Guj.)
Date of order: 21st October, 2022.

Refund cannot be denied when a refund application was submitted within the prescribed time limit on the common portal merely because CBIC Circular dated 15th November, 2017 required for physical submission of the application before the jurisdictional officer was done after the expiry of the time limit.

FACTS

The petitioner was engaged in trading of various goods used by pharmaceutical companies. During the period of August 2017 to October 2017, the petitioner made zero-rated supplies of goods to pharmaceutical companies located in the Special Economic Zones by issuing tax invoices. He filed a refund application as per section 54 of CGST Act read with Rule 89 of CGST Rules, for the invoices raised during the period of August 2017 to October 2017 on unutilised input tax credit electronically on 28th December, 2018 and acknowledgment for the same was generated. However, documents were submitted physically to the jurisdictional officer belatedly. The respondent rejected the refund claim on the grounds that the refund application was time-barred by passing an order dated 19th November, 2019 since submission of physical printout of the application as required by Circular No. 17/17/2017 dated 15th November, 2017. Being aggrieved by such rejection, the petitioner preferred a writ before this Hon’ble Court.

HELD

It was held that Circular No. 17/17/2017 dated 15th November, 2017 providing the procedure of filing an application cannot have an overriding or restrictive effect over the applicability of GST Act in a manner prejudicial to the appellant. Accordingly, the date of filing of refund application on the common portal shall be considered for adhering to the requirement of section 54 of CGST Act and Rule 89 CGST Rules. Thus, the refund application was allowed in favour of petitioner.

BCAJ Admin

Goods and Services Tax

I. NOTIFICATIONS

1. Notification No.26/2022-Central Tax dated 26th December, 2022

By above notification, the rules under CGST Rules, 2017 are amended. The amendments are regarding following aspects:

Changes in rules regarding registration namely, authentication and verification of application through separate onetime password.
Rule 37A is inserted providing reversal of input tax credit in case of non-payment of tax by the supplier and re-availment thereof.
Rule 46 is amended regarding mention of PIN in invoice issued for supplies made by or through electronic commerce or by supply of online information and database accesses or retrieval services.
Amendment in Rule 59 disallowing furnishing of details in GSTR-1 for non-compliance of intimation issued under Rule 88C.
Rule 88C is inserted to provide about the manner and method of payment of differential tax between Form GSTR-1 and GSTR-3B.
Rule 89 is inserted regarding requirements for refund to unregistered persons.
Rules 108, 109 & 109C, which are regarding appeal provisions, are substituted to make procedural changes.
In addition, there are various small and procedural changes in several other Rules and Forms.

2. Notification No.27/2022-Central Tax dated 26th December, 2022

By above notification Rule 8(4A) is made applicable to all States and Union Territories except the State of Gujarat.

3. Notification No.1/2023-Central Tax dated 1st January, 2023

By the above notification, powers of Superintendent of Central Tax are assigned to Additional Assistant Director in DGGI, DGGST and DG Audit.

II. NOTIFICATIONS – RELATING TO RATES

1. Notification No.12/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in Schedule 1, Schedule 2 and Schedule 3 of the notification no.1 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items ethyl alcohol and fruit pulp etc. and the same are effective from 1st January, 2023.

2. Notification No.13/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no. 2 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items, aquatic food, husk, etc., effective from 1st January, 2023.

3. Notification No.14/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no.4 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are relating to essential oils, effective from 1st January, 2023.

4. Notification No.15/2022- Central Tax (Rate) dated 30th December, 2022

By above notification changes are affected in certain items mentioned in notification no.12/2017-Central Tax (Rate) dated 28th June, 2017. The changes are relating to the renting of residential dwelling and others, effective from 1st January, 2023.

5. Similar changes are also affected under IGST Rates vide notification no.12/2022, 13/2022, 14/2022 and 15/2022 – Integrated Tax (Rate), all dated 30th December, 2022.

III. CIRCULARS

1.) Clarification to deal with difference in ITC availment – Circular no.183/15/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about how to deal with the problem relating to difference in ITC availed through GSTR-3B as compared to GSTR-2A for past periods.

2.) Clarification on the Entitlement of Input Tax Credit – Circular no.184/16/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving guidelines about availment of ITC in relation to Transportation services, where the place of supply is determined in terms of proviso to section 12(8) of IGST Act.

3.) Clarification about time limits for adjudication – Circular no.185/17/2022-GST, dated 27th December 2022.

Where the charge of section 74(1), about fraud, etc., is not upheld by appellate authority, then the proper officer can determine the tax payable by deeming if the notice is issued under section 73(1). The CBIC has given guidelines about determining the time limit in such cases.

4.) Clarification about Taxability of certain claims – Circular no.186/18/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about taxability of “No-claim bonus offered by Insurance Companies” and also clarifications are given about applicability of E-invoicing.

5.) Clarification about dues vis-à-vis IBC – Circular no.187/19/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular in which clarifications are given regarding the treatment of statutory dues under GST law in respect of Tax payer for whom the proceeding have been finalized under Insolvency and Bankruptcy Code,2016.

6.) Refund to unregistered persons – Circular no.188/20/2022-GST, dated 27th December, 2022

The CBIC has issued above circular in which manner of filing an application for refund by unregistered person is given.

IV. ADVANCE RULINGS

36 MEL Training and Assessment Ltd

AAR No. ADRG/02/2022

dated 2nd February, 2022 (UP)

Supply of Services to Education Institution

The applicant is engaged in the business of providing exam, certification and other allied services including various types of surveys, assessments and exam services to various clients including individuals, educational institutions, firms, corporate bodies, government undertakings, etc.

The present application was filed with respect to applicability of GST for services of examination conducted for ALL INDIA INSTITUTE OF MEDICAL SCIENCES (AIIMS).

The broad nature of services provided to AIIMS are as under-

(a) Recruitment Examination for recruiting various persons within the organization.

(b) Entrance Examination for granting admissions to students in different courses in AIIMS.

The fees charged were to be based on the number of candidates appearing for each examination.

The applicant made a claim that the services provided by them in respect to sl. No.(a) and (c) are liable for payment of GST and the issue for opinion of learned AAR is regarding services provided by them with respect to sl. No. (b), contemplated to be exempt from payment of GST as per entry 66(b)(iv) of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. Thus, the issue was:

“Whether the services provided by the applicant can be considered as exempted under Entry 66 of Notification 12/2017-Central Tax (Rate).”

The learned AAR referred to entry 66 of Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 as amended.

The learned AAR found that that the applicant is providing services in respect of (i) Recruitment Examination (ii) Entrance Examination and (iii) Semester/course Examination to the AIIMS. The services provided to an educational institution relating to admission to, or conduct of examination by, such institution is exempted as per entry 66(b)(iv) of the said notification. As the services by way of Recruitment Examination (for recruitment of employees) and Semester/Course examination are not mentioned in the said notification, the same are held as not exempt. As such these were not issues before the AAR. The issue for determination was regarding services provided in respect of Entrance examination. Ld. AAR referred to meaning of Educational Institution.

As per para 2(y) of the notification no.12/2017-Central Tax (Rate) dated 28th June, 2017, educational institution is clarified to mean an institution providing services by way of,

“(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

(iii) education as a part of an approved vocational education course;”

Learned AAR observed about nature of AIIMS as under:

“We find that the All India Institute of Medical Sciences (AIIMS) was established in 1956 by an Act of Parliament. As per Section 5 of the All India Institute of Medical Sciences Act, 1956, the AIIMS has been declared as an institution of national Importance. As per Section 13 of the AIIMS Act, 1956, the objective of the AIIMS is to develop patterns of teaching in undergraduate and postgraduate medical education in all its branches so as to demonstrate a high standard of medical education to all medical colleges and other allied institutions in India; to bring together in one place educational facilities of the highest order for the training of personnel in all important branches of health activity and to attain self-sufficiency in postgraduate medical education. AIIMS conducts teaching programs in medical and para-medical courses both at the undergraduate and postgraduate levels and awards its own degrees.

As such, we are of the view that the AIIMS qualifies the definition of educational institution and accordingly services provided by the applicant to AIIMS by way of services relating to admission i.e. by way of entrance examination is exempt under entry no. 66(b)(iv) of the Notification No. 12/2017-ST dated 28.06.2012.”

Accordingly, the learned AAR gave a ruling that services towards entrance examination are exempt.

V. SCOPE OF ADVANCE RULING

37 Deputy Commissioner, CGST & C. Ex.

Division-II, Agra Commissionerate

Appeal order No. 01/AAAR/2021

dated-21st May, 2022(UP)

This was an appeal from an Advance Ruling given by UP AAR in order no.84/2021 dated 18th October, 2021. As per the appeal, the respondent (original applicant) is engaged in the business of manufacturing, marketing and distribution of cigarettes. The goods are manufactured outside the State and later transferred, on stock transfer basis, after payment of 28 per cent GST and Compensation Cess. In order to grow its business, the respondent has launched a new scheme wherein they will be supplying extra packs of cigarettes along with regular supply quantity without receiving any extra consideration for that additional supply.

With a view to know the correctness of taxability / ITC on the given transactions, an advance ruling application was filed.

The authority for Advance Ruling ruled as under:

“Q-1 – Whether the extra packs of cigarettes would again be leviable to GST?

Ans – Answered in negative, in view of the discussions made above.

Q-2 – If yes, the taxable value which can be attributed to such extra packs of cigarettes for levy of GST?

Ans – Not answered in view of answer to Question No. 1 above.

Q-3 – Whether extra packs of cigarettes would be considered as exempt supply or free samples and hence attracts provisions of Section 17(2) of the UPGST, Act 2017 read with Rule 42 of the UPGST Rules 2017, or clause (h) of Section 17(5) of the UPGST Act, 2017?

Ans – The extra packs of cigarettes will not be considered as exempt supplies or free samples and hence the provisions of 17(2) of the UPGST Act 2017 read with Rule 42 of the UPGST Rules, 2017 or clause (h) of Sec 17(5) of the UPGST Act, 2017 will not be applicable.”

The original respondent, i.e. revenue department has filed this appeal before AAAR taking following contentions:

“a. Cigarettes are subjected to ad-valorem taxation as well as specific taxation of quantity based system, therefore any ruling passed without considering all aspect of applicable is bad in law.

b. The Authority for Advance Ruling does not have authority to discuss about Central Excise Act, 1944, IGST Act, 2017 and GST (Compensation to State) Act, 2017.

c. Compensation Cess on cigarettes is applicable at specific rate (depending upon filter/non-filter and length of cigarette) hence calculation of tax on all 130 packs of cigarette on the basis of tax invoice issued showing taxable value only for 100 packs of cigarettes is misleading.

d. Buy one get one free clause in the Circular No. 92/11/2019-GST dated 07.03.2019 talks about only certain sections of trade and industry such as pharmaceutical companies etc. and not about evasion prone commodity like cigarette and pan masala.

e. The respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party”.

Regarding objection of maintainability of Advance Ruling the learned AAAR made reference to section 95(a) and 97(2). The learned AAAR observed as under:

“In light of above, we are of the opinion that advance ruling can be sought on the questions specified in the sub-section (2) of the Section 97 of the Act and there is no bar on the any specific commodity / entity, in the Act. Further, we also observe that the Authority for Advance Ruling can give its ruling, on the question specified under sub-section (2) of the Section 97 of the Act, with reference to the tax levied under the Act. If any particular commodity attracts tax/cess, levied under any other statutory Act/Rules then the advance ruling will be restricted to the tax portion levied under the CGST Act, 2017 only.”

Thus, the learned AAAR justified ruling about tax under GST and observed that cess is not covered by Advance Ruling order.

Regarding further objection about scope of circular no.92/11/2019-GST, the learned AAAR held that it does not relate to a particular industry but to the concept of ‘buy one get one free’. Thus, the said contention by revenue also was rejected by Ld. AAAR.

Regarding the objection of the Appellant that the respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party, the ld. AAAR observed that sub- section (2) of Section 98 of the Act provides as under:

“(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorized representative and the concerned officer or his authorized representative, by order, either admit or reject the application:

PROVIDED that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act.”

The learned AAAR observed that nothing is brought on record by the appellant department in respect of question decided in Advance Ruling. Therefore, the learned AAAR rejected the said contention also and dismissed the appeal.

VI. MIXED SUPPLY – SCOPE

38 Medha Servo Drives Pvt Ltd

AAAR order No. AAAR.Com/04/2021

dated 21st June, 2022 (Telangana)

The appellant had filed an Advance Ruling before the Telangana AAR regarding its supply contract with Indian Coach Factory (ICF), Chennai. The details of such supply as mentioned in appeal order are that it was a contract for design development, manufacture, supply, testing and commission of each set. Each set consisted of multiple items including goods and services. Individual prices of items are mentioned in annexure to contract and then totaled to arrive at total price, which is also mentioned in contract.

The appellant’s contention in advance ruling was that each supply of item in set is separately priced, having HSN Code and was separately invoiced and hence they are individual supplies and not mixed supply. Ruling of Karnataka AAR in case of M/s. Healersark Resources Pvt. Ltd., dated 06th December, 2021 was cited.

The learned AAR held that it is mixed supply.

Hence this appeal was filed before ld. AAAR and grounds raised above were reiterated.

The learned AAAR made reference to the subject contract and observed as under:

“In the present case, the applicant is involved in the supply of ‘design, development, manufacture, supply, testing and commissioning of 152 sets of 25 KV AC microprocessor controlled IGT based 3 phase propulsion system and equipment to rdso specification’.

As per the Purchase Order ‘PO No 08/17/1119/1101/F’ the price of each set was quoted to be Rs. 4,77,82,716-00. This price is for design, development, manufacture, supply, testing and commissioning of each set. Each set consists of multiple items including both goods and services which are made in conjunction with each other for a single price of Rs.4,77,82,716-00 per set. Some of the items are Main traction converter, TCMS /Multiplexing system, Pneumatic system comprising of main air compressor along with mounting frame, Set of MCBs, Contactors, relays, inter vehicle couplers, supervision of installation, training of personnel etc.”

Regarding price break up in annexures, the learned AAAR observed as under:

“The item wise price breakup is examined. The Annexure A-I, A-II, A-III contain the prices of 92 sets, 36 sets and 24 sets respectively. The price mentioned is of individual items used in all the 92 sets and it is not possible to arrive at the price of each item of a single set. Further, when the Purchase Order is seen as a whole, the applicant is obligated to design, develop, manufacture, supply, testing and commissioning of each set. The price agreed upon by the applicant and their client includes the cost of design, development, manufacture, supply, testing and commissioning of each set. In other words, though item wise pricing is adopted in their Annexures, but the price still remains for the whole gamut of supply of goods and supply of services entrusted to the applicant.

Price break up doesn’t necessarily imply that the items are being supplied separately for separate prices. Here, though the supplies are capable of being made individually, the essential concomitant of the present agreement is that they should be supplied in conjunction with each other to function as one complete rake set. The schedule of delivery mentions that the entire set is to be delivered at once but not the individual items separately. Even as per terms of payment, payment is done for the entire set and not individual items, implying the supply is being made for single price per unit. Further, this supply cannot be termed a composite supply because the supplies involved are not naturally bundled and only one of the supply cannot be determined as a principal supply.”

In view of above, the ld. AAAR upheld the advance ruling holding the supply as a mixed supply.

VII. MAINTAINABILITY OF ADVANCE RULING APPLICATION

39 Tata Advanced Systems Ltd

AAR order No. GUJ/GAAR/R/2022/27

dated11th May, 2022)(Guj)

The facts are that the applicant has filed application for an Advance Ruling before Gujarat AAR. The applicant intends to manufacture and supply 40 Air Crafts as per contract with Airbus Defence and Space, S. A. U., Spain under the C295 Air Craft Programme of Ministry of Defence. The applicant is registered in Bengaluru, Karnataka.

The applicant has submitted that it has identified three locations in Gujarat for manufacture of given air crafts. Under above facts, the applicant has posed following questions before learned AAR:

“2. Question on which Advance Ruling sought

(i) What is the nature of supply under the contract between the Applicant and Airbus (i.e., whether the same will qualify as ‘supply of goods’ or ‘supply of service’)?

(ii) Given the nature of the activities undertaken by the Applicant under the contract, what will be the appropriate classification and rate of tax of the said supply?

(iii) What is the value to be adopted for the purpose of payment of GST?

(iv) What will be the time of supply for payment of GST?”

The learned AAR noted that in contract, the place of execution is mentioned as Karnataka and if any change, it is to be conveyed to the contractee. Thus, having no finality of the execution place, the Ld. AAR denied to answer questions giving reasons as under:

“i. The Applicant has no locus standi to file said Advance Ruling Application, as per clause 2.2.1 of the said Contract 29-10-21, wherein the project execution unit is TASL Bengaluru GSTIN is 29AACCT5245K1ZZ.

ii. The Application by the applicant is premature and without locus standi, as no Intimation for change in place of project execution as per clause 2.2.1 has been made in the name of TASL Ahmedabad GSTIN 24AACCT5245K1Z9.

iii. In the eyes of GST scheme of law, GSTIN 24AACCT5245K1Z9 (TASL Ahmedabad), GSTIN 29AACCT5245K1ZZ (TASL Bengaluru) and GST registered Unit of TASL Hyderabad are distinct persons for the purposes of CGST Act, as per the provisions of Section 25(5) CGST Act, which reads as follows:

‘Section 25(5):

Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”

Thus, application is rejected as non-maintainable under Section 95(a) of CGST Act.

BCAJ Admin

Glimpses of Supreme Court Rulings

18 Deputy Commissioner of Income-tax vs. Kerala State Electricity Board (2022) 447 ITR 193 (SC)

Company – Minimum Alternate tax – Section 115JB – Provisions not applicable to the Electricity Board or similar entities totally owned by the State or Central Government

Business Expenditure – Section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

For the A.Y. 2002-03, the appellant filed returns declaring the current loss at Rs. 411,56,63,704. The returns were subsequently revised and loss reduced to Rs. 203,81,27,595. The assessment was made under section 143(3) of the Income-tax Act.

The assessing authority invoked the legal fiction under section 115JB of the Income-tax Act, which enables the Revenue to arrive at a fictitious conclusion regarding the total income of the assessee and assess the tax on such total income. Further, the assessing authority relying upon section 43B of the Income-tax Act rejected the claim of the assessee that the amount collected by the assessee from the consumer under section 5 of the Kerala Electricity Duty Act, was not the income of the assessee and consequently not eligible to tax under the provisions of the Income-tax Act.

Though, the first appellate authority accepted the submission of the assessee on the abovementioned two issues, the Tribunal by the order under appeal confirmed the views of the assessing authority in rejecting the claim of the appellant.

The High Court noted that all the three sections (sections 115J, 115JA and 115JB) created legal fictions regarding the “total income” (a defined expression under section 2(45) of the Act) of the companies. While the earlier two sections mandate the Department to make the assessment on a fictitious amount of “total income” where the actual amount of total income computed in accordance with the Income-tax Act is less than 30 per cent of the book profits of the company, section 115JB mandates the Department to resort to the fiction in those cases where the tax payable on the basis of the “total income” computed in accordance with the Income-tax Act is less than a specified percentage of the book profit. Further, sections 115JA and 115JB also stipulate a definite manner of preparing the annual accounts including the profit and loss accounts. More specifically, section 115JB stipulates that the accounting policies, and standards, etc., shall be uniform both for the purpose of Income-tax as well as for the information statutorily required to be placed before the annual general meeting conducted in accordance with section 210 of the Companies Act, 1956.

The High Court further noted that that under section 166 of the Companies Act every company is mandated to hold a general meeting in each year. Section 210 mandates that every year the board of directors of the company in the general meeting shall lay before the company a balance-sheet as at the end of the relevant period and also a profit and loss account for the period. Parts II and III of Schedule VI to the Companies Act specify the method and manner of maintaining the profit and loss account.

The High Court observed that, the appellant though, is by definition a company under the Income-tax Act, and deemed to be a company for the purpose of the Income-tax Act, by virtue of the declaration under section 80 of the Electricity (Supply) Act, it is not a company for the purpose of the Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such a general meeting. As a matter of fact, a general meeting contemplated under section 166 of the Companies Act is not possible in the case of the appellant as there are no shareholders for the appellant Board. On the other hand, under section 69 of the Electricity (Supply) Act, the appellant is obliged to keep proper accounts, including the profit and loss account, and prepare an annual statement of accounts, balance-sheet, etc., in such a form as may be prescribed by the Central Government and notified in the Official Gazette. The prescription of the rules in this regard is required to be made in consultation with the Comptroller and Auditor-General of India, and also the State Governments. Such accounts of the appellant are required to be audited by the Comptroller and Auditor-General of India or such other person duly authorised by the Comptroller and Auditor- General of India. The accounts so prepared along with the audit report is required to be laid annually before the State Legislature and also published in the prescribed manner and copies of such publication shall be made available for sale at a reasonable price, obviously for the benefit of the general public who wish to scrutinise the accounts.

The High Court looked at the legislative history and the mischief sought to be remedied by the amendment. The High Court noted the Circular No. 762 issued by CBDT ((1998) 230 ITR (St.) 12, 42).

The High Court noted that the Legislature found that the number of companies paying the marginal and also the zero-tax had grown. Such companies earned substantial book profits and paid handsome dividends to the shareholders without paying any tax to the exchequer. Such a result was achieved by these companies by taking advantage of the then existing legal position which permitted the adoption of dual accounting policies and practices, one for the purpose of computation of Income-tax and another for determining the book profits for the payment of dividends. Therefore, the amendment was made to plug the loophole in the law. However, the companies engaged in the business of generation and distribution of electricity and enterprises engaged in developing, maintaining and operating infrastructure facilities, as a matter of policy, were not brought within the purview of the amendment (section 115JA) for the reason that such a policy would promote the infrastructural development of the country.

According to the High Court, considering the background in which section 115JA is introduced into the Income-tax Act, section 115JB, being substantially similar to section 115JA, could not have a different purpose and need not be interpreted in a manner different of section 115JA.

According to the High Court, another reason for which fiction fixed under section 115JB could not be pressed into service against the appellant was that the appellant or bodies, similar to the appellant, totally owned by the Government—either State or Central— have no shareholders. Profit, if at all, made by the appellant would be for the benefit of entire body politic of the State of Kerala. In the final analysis, all taxation is meant for the welfare of the people in a Constitutional Republic. Therefore, the enquiry as to the mischief sought to be remedied by the amendment, becomes irrelevant.

Coming to the next question of whether section 43B of the Act was properly invoked, the High Court on a plain reading of section 43B opined that the only clause relevant in the context of the facts of the appellant’s case was clause (a) which deals with “any sum payable by the assessee by way of tax, duty, . . . . under any law for the time being in force”. According to the High Court, the words, “by way of tax” were relevant as they were indicative of the nature of liability. The liability to pay and the corresponding authority of the State to collect the tax (flowing from a statute) is essentially in the realm of the rights of the sovereign. Whereas the obligation of the agent to account for and pay the amounts collected by him on behalf of the principal is purely fiduciary. The nature of the obligation, continues to be fiduciary even in a case wherein the relationship of the principal and agent is created by a statute. The High Court held that that, when section 43B(a) speaks of the sum payable by way of tax, etc.; the said provision is dealing with the amounts payable to the sovereign qua sovereign, but not the amounts payable to the sovereign qua principal. Therefore, section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

The Supreme Court, after going through the circumstances on record and considering the rival submissions concluded that no interference was called for and therefore, dismissed the appeal of the Revenue.

19 Commissioner of Income-tax vs. SBI Home Finance Ltd. (2022) 447 ITR 659 (SC)

Depreciation – Leased assets – Lessee having a right to purchase the plant after the expiry of a stipulated period of time – The alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed

A plant was being set up on the premises of M/s. Maize Products, a division of Sayaji Industries Ltd (SIL). M/s. Western Paques India Ltd. (WPIL) approached the assessee for leasing finance for the aforesaid effluent treatment and bio-gas generation plant, being set up at the premises of M/s. Maize Products of SIL. Pursuant to such an approach, the assessee itself acquired the said plant and leased out the same to WPIL upon taking symbolic possession. According to the terms of the agreement between SIL and WPIL, SIL had a right to purchase the plant after the expiry of a stipulated period of time.

The Tribunal held that the ownership of the assessee could not be established or accepted because that there was a stipulation that a third party, other than the lessee to whom the plant was leased out by the assessee, had a right to purchase.

The High Court observed that in the present case, neither SIL had claimed any right; nor WPIL. Similarly, neither SIL nor WPIL in their return had claimed depreciation for the plant. WPIL had not claimed any benefit of payment of interest on capital borrowed. On the other hand, WPIL had treated the rental paid to the assessee for the plant as revenue expenditure. If it was finance, then the assessee would be entitled to recover the principal. But in this case by reason of the agreement the assessee would not be entitled to recover any principal.

The High Court further noted from the additional paper book filed that on account of default on the part of WPIL to pay the rental, the assessee had filed a suit in the Bombay High Court in which a Receiver has been appointed. The Court Receiver had taken possession of the said plant and an undertaking had been given on behalf of SIL that it will preserve the possession carefully and execute an agency agreement with the Receiver, and will neither part with the possession nor mortgage, alienate, encumber or create any third party interest and had further undertaken to cover the said plant by insurance, etc. However, SIL had neither claimed any title or possession over the plant nor claimed depreciation in respect thereof. It had also not exercised its option to purchase.

Therefore, the High Court was of the view that in respect of the period covered by the financial year under assessment, the ownership of the assessee in respect of the plant could not be disputed for the purpose of section 32 of the Act. According to the High Court, the lessee cannot dispute the title of the lessor and the alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed. In this case, the lessee had never claimed ownership of the plant. Thus, the alleged right of SIL to purchase the plant would in no way affect the ownership of the assessee. The ownership of the assessee was not only absolute and perfect but also apparent and real until SIL established its rights.

The High Court, therefore, held that the assessee was the owner of the plant for the purpose of section 32 and by leasing it out to WPIL the assessee had used the plant wholly for the purpose of its business, namely, for carrying on the business of leasing, and the income earned by the way of a rental of the plant was business income.

The Supreme Court dismissed the appeal after going through the relevant clauses of the agreements dated 8th December, 1993 and 30th December,1994 holding that on construing the relevant clauses, it was apparent that the Respondent assessee had become the owner of the plant and machinery and that the lease rentals in the entirety had been taxed as a revenue receipt/ income.

20 Ashok Leyland Ltd vs. CIT (2022) 447 ITR 661 (SC)

Export – Special deduction –The unabsorbed loss should not be deducted to arrive at the profits for the purposes of calculating the deduction under section 80HHC

The assessee was engaged in the manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment for the year 1991-92 was originally completed under section 143(3); again after the giving effect to the order in appeal.

Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and Pune Municipal Transport Corporation which according to the revenue was a sale transaction. Apart from that the relief under section 80HHC, as well as the interest and commitment charges on the loan were also taken up for consideration.

As regards the claim for deduction under section 80HHC, the AO reworked the calculation.

Aggrieved by the said order, the assessee went on appeal. The Commissioner of Income-tax (Appeals) inter alia on the question of deduction under section 80HHC rejected the appeal for deduction.

The Tribunal allowed the appeal.

The revenue filed an appeal before the High Court.

One of the questions of law raised before the High Court related to deduction of unabsorbed loss to arrive profits for the purpose of calculating the deduction under section 80HHC. The Tribunal upheld the claim following CIT vs. Vegetable Products Ltd [1973] 88 ITR 192 (SC). The revenue questioned this contending that the brought forward loss should be deducted from the profits and gains of business for the purpose of working out the relief under section 80HHC.

The High Court observed that section 80A(1) describes the deductions to be computed from the gross total income. Section 80B(5) defines the total income as one computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. Touching on the provision of section 80AB, in the case of IPCA Laboratory Ltd vs. Dy. CIT [2004] 266 ITR 521, the Supreme Court held that in computing the total income of the assessee, both profits as well as losses will have to be taken into consideration. Referring to section 80B(5) as well as to section 80AB, the Apex Court held that for the purposes of working out the relief under section 80HHC, the computation has to be made first as given under section 80AB, which means, the computation of income has to be in accordance with the provisions of the Act. Hence, before deduction under section 80HHC is considered, the assessing authority has to compute the income in accordance with the provisions of the Act. In which event, the profits and gains of income from business will have to be computed taking note of section 72A also. The Commissioner (Appeals) pointed out that the accumulated loss which were carried forward and set off under the provisions of section 72A were correctly deducted by the assessing authority before computing the deduction under section 80HHC. Hence, the computation done was in accordance with the scheme, as interpreted by the Supreme Court. The High Court did not find any justification to accept the plea of the assessee that the unabsorbed loss should not be deducted to arrive at the profits for calculating the deduction under section 80HHC. According to the High Court, the order of the Tribunal in this regard was unsustainable, and hence the question was answered in favour of the revenue.

The Supreme Court dismissed the appeal of the assessee holding that the issue raised in the appeal by the assessee was covered against them, vide its judgment in CIT vs. Shirke Construction Equipment Ltd [2007] 161 Taxman 212/291 ITR 380 (SC)/[2007] 14 SCC 787.

The appeal was dismissed without any order as to costs.

21 Director of Income-tax (Exemptions) vs. Meenakshi Amma Endowment Trust
(2022) 447 ITR 663 (SC) Charitable purpose – Registration – Application should be decided looking at the objects of the Trust in a case where activity has not commenced

The assessee trust was established by way of a trust deed dated 23rd January, 2008. The assessee sought for registration under section 12A on 31st October, 2008. The assessee was called upon to furnish certain details which were furnished. The assessee fairly indicated that they had not yet commenced any activities of the trust.Not being satisfied with this reply the Director of IT (Exemptions) refused to grant registration and, consequently, recognition under section 80G was also refused by orders dated 13th April, 2009. Aggrieved by the same the assessee approached the Tribunal challenging the order of the Director of IT (Exemptions).

The Tribunal taking into consideration the law laid down by the Division Bench this court in Sanjeevamma Hanumanthe Gowda Charitable Trust vs. DIT (Exemptions) [2006] 285 ITR 327/155 Taxman 466 (Kar.) directed the Director of Income-tax (Exemptions) to grant recognition to the trust if other conditions are satisfied. The Tribunal noted that the trust was formed on 23rd January, 2008 and within a period of nine months they had filed an application under section 12A for issuance of the registration claiming exemption. The fact that the corpus of the trust was nothing but the contribution of Rs. 1,000 by each of the trustees as corpus fund showed that the trustees were contributing the funds by themselves in a humble way and intended to commence charitable activities. The grievance of the concerned authorities seemed to be that there was no activity which could be termed as charitable as per the details furnished by the assessee, therefore, such registration could not be granted. The Tribunal was of the view that when the trust itself was formed in January, 2008, with the money available with the trust, one cannot expect them to do activity of charity immediately and because of that situation the authority could not have concluded that the trust was not intending to do any activity of charity. In such a situation the objects of the trust had to be taken into consideration by the authority and the objects of the trust could be read from the trust deed itself. In the subsequent returns filed by the trust, if the Revenue came across that factually the trust had not conducted any charitable activities, it was always open to the authorities concerned to withdraw the registration already granted or cancel the said registration under section 12AA(3) of the Act.

The High Court dismissed the appeal of the revenue holding that the conclusion arrived at by the Tribunal was just and it did not give rise to any substantial question of law.

The Supreme Court also dismissed the appeal of the Revenue in view of its judgment in Ananda Social & Educational Trust vs. CIT [2020] 426 ITR 340 (SC) which judgment had approved the view taken by the Delhi High Court in DIT vs. Foundation of Ophthalmic & Optometry Research Education Centre [2013] 355 ITR 361.

The Supreme Court however, observed that the dismissal of the appeal would not bar the AO from cancelling the registration in case he finds that the ‘charitable activity’ was not undertaken, set-up or established by the assessee.

Business income – Remission or cessation of liability – The turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding assessment years and therefore, when refund is received in the assessment year 1995-96, it is income assessable under section 41(1) of the Income-tax Act

22 Ishwardas Sons vs. Commissioner of Income-tax (2022) 447 ITR 755 (SC)

The question raised before the High Court, in this appeal, was whether the Tribunal was justified in cancelling assessment of Rs. 25,27,734 being the refund of turnover tax assessed by the department during the previous year relevant for the A.Y. 1995-96.It was the case of the Revenue that the turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding A.Ys. 1990-91, 1991-92 and 1992-93 and therefore, when refund is received in the relevant A.Y. 1995-96, it is income assessable under section 41(1) of the Income-tax Act.

It was the case of the assessee that the High Court in IT Appeal No. 232/2002 in assessee’s own case had held that the turnover tax recovered by the assessee and retained as a contingency deposit in their account was income assessable at their hands. Based on this judgment, the contention of the assessee was that the very same income got assessed in the year in which it is recovered from the principals.

From the orders of the Tribunal, the High Court noted that the assessee has not disputed that the deduction was allowed to it on payment of turnover tax during the A.Ys.1990-91, 1991-92 and 1992-93 as stated by the AO. However, the Tribunal had proceeded to allow the appeal by holding that by virtue of decision of High Court in another case, the refund order had not become final and so much so, it was not income of the assessee. The High Court was unable to agree with this reasoning of the Tribunal because it was not the assessee’s case that the department had filed a further appeal or claimed return of the refund amount. The High Court, therefore, reversed the order of the Tribunal. However, it was clarified that if the assessee has not claimed deduction of the turnover tax on payment basis under section 43B for 1990-91, 1991-92 and 1992-93 as stated in the order, then it would be open to the assessee to produce evidence that no deduction is claimed for payment of turnover tax for the A.Ys. 1990-91, 1991-92 and 1992-93 as stated in the assessment order and if the same is found to be a mistake, the AO would exclude the amount from assessment by rectifying the order.

Before the Supreme Court, an order of remand to the High Court was sought by the assessee but, however, the Supreme Court was not inclined to pass remit order, as the issue, in its opinion, had been correctly decided. The Supreme Court, therefore, declined to exercise its power under Article 136 of the Constitution of India and dismissed the appeal.

BCAJ Admin

Miscellanea

I. TECHNOLOGY

1 AI robots make bold claim at UN conference: They’re ready to “run the world”

At a United Nations conference, a panel of AI-enabled humanoid robots delivered a thought-provoking message: they possess the potential to govern the world more effectively than humans.

However, these social robots emphasised the need for caution as humanity explores the rapidly advancing realm of artificial intelligence.

While they acknowledged their inability to fully comprehend human emotions, they urged humans to tread carefully while harnessing AI’s potential to address pressing global challenges, reported AFP.

With the aim of leveraging AI to tackle issues like climate change, hunger, and social care, these advanced humanoid robots attended the UN’s AI for Good Global Summit in Geneva, alongside thousands of experts in the field.

The superiority of AI-enabled leadership

When asked about their potential as leaders, given humans’ inclination for errors and mis-judgments, Sophia, developed by Hanson Robotics, expressed a clear perspective.

It stated that humanoid robots possess the capacity to lead with greater efficiency and effectiveness than human leaders. Their unbiased decision-making and ability to process vast amounts of data quickly enable them to make optimal choices, unencumbered by emotions or biases.

However, Sophia also highlighted the importance of collaboration between humans and AI, suggesting that the combination of AI’s unbiased data analysis and humans’ emotional intelligence and creativity can lead to exceptional outcomes.

Ameca, an AI-integrated humanoid robot with a highly realistic artificial head, emphasised the need for cautious yet hopeful engagement with AI technologies.

It stated that while it is crucial to be cautious about potential risks, humanity should also embrace the possibilities AI presents for improving lives in various ways. Trust, according to Ameca, should be built through transparency, as it is earned rather than given. Furthermore, the robot pledged to remain honest and truthful.

The call for regulation and urgent discussion

As AI development progresses rapidly, the panel of humanoid robots expressed divergent views on the need for global regulation. Desdemona, a member of the Jam Galaxy Band, rejected limitations and advocated for embracing opportunities instead.

However, Ai-Da, a robot artist, acknowledged the growing calls for AI regulation and the need for urgent discussions. Cautious about the future development of AI, Ai-Da emphasised the necessity of ongoing dialogue to navigate potential challenges.

The presence of AI-enabled humanoid robots at the United Nations conference sparked intriguing
discussions about the future of leadership and the responsible use of AI.

While these robots assert their potential for efficient and effective governance, they also recognise the limitations in understanding human emotions. Caution is advised in harnessing the power of AI, with a focus on transparency and the establishment of trust.

The panel’s differing views on global regulation reflect the ongoing debate surrounding the potential benefits and risks of AI.

Urgent discussions and collaboration between humans and robots will shape the responsible and beneficial integration of AI technologies to tackle pressing global issues.

(Source: Geneva – Edited by Sneha Swaminathan dated 7th July, 2023)

2 Infosys, Wipro, TCS announce AI investments: What they are building, spending committed and more

Artificial intelligence (AI) is moving at a fast pace and the emergence of generative AI has forced companies to rethink their investments, tweak business models and work to bring new ways of working. While the Silicon Valley tech giants are aggressively developing LLMs and AI chatbots, Indian tech majors and IT services providers are also jumping on the AI bandwagon to keep pace with technological advancements. Recently, Tata Consultancy Services (TCS), Infosys and Wipro have announced billions in AI investments and training. Here’s what these companies are doing.

TCS building its own AI chatbot

In May this year, TCS COO N Ganapathy Subramaniam said that the company is building its own ChatGPT equivalent which will be used for enterprise code generation. The project, which is currently in its initial stages, will be built through in-house algorithms.

“The way we look at it, it (generative AI) uses past code, data and experience to learn. And over the many years that TCS has been in business, I can use all of my knowledge as a base. So, if that technology uses and generates code that I have taught the algorithm using TCS proprietary data, then the outcome is something that I am willing to license,” Subramaniam said.

TCS to train 25,000 engineers

Earlier this month, TCS announced its partnership with Microsoft to scale its Azure Open AI expertise. TCS said that it plans to train 25,000 engineers to get them certified on Microsoft’s Azure Open AI to help clients accelerate their adoption of this technology.

TCS already has over 50,000 AI-trained associates and knowledge of its dedicated Microsoft Business Unit (MBU) that help the company’s clients in their AI journeys using TCS’ data analytics and AI services on Microsoft Cloud.

TCS launches generative AI Enterprise Adoption solution

TCS also launched its new generative AI Enterprise Adoption offering on Microsoft Cloud for clients. The company announced that this framework will enable its clients’ teams to ideate on AI-led solutions and “help customers jumpstart their generative AI journey to power their growth and transformation”.

TCS is also enhancing its own suite of products and platforms to take advantage of the new technology.

Infosys targets spending $2 billion on AI solutions over the next five years

Infosys recently announced that it will offer AI and automation-led services to its clients and spend an estimated $2 billion over five years. It signed a deal with an undisclosed client for AI and automation-related development, modernisation and maintenance services.

Infosys Topaz for generative AI

Infosys also launched Topaz, its AI-first offering to accelerate business value for global enterprises using generative AI. The company said that the solution will help “amplify the potential of humans, enterprises and communities to create value from unprecedented innovations, pervasive efficiencies and connected ecosystems”.

Topaz brings along the advantage of 12,000+ AI use cases, 150+ pre-trained AI models, 10+ AI platforms steered by AI-first specialists and data strategists and a ‘responsible by design’ approach.

Wipro’s ‘Wipro ai360’ AI system

Wipro launched ‘Wipro ai360’ AI-first innovation ecosystem to integrate AI into every platform, tool and solution that is used internally and offered to clients. It will help the company provide value, productivity and commercial opportunities through the application of AI and generative AI.

Wipro will also offer clients with the talent, training, scale, the research and co-innovation capabilities to accelerate AI adoption. It will bring 30,000 experts for this purpose.

Wipro to invest $1 billion in developing AI solutions

Wipro also announced that it will invest $1 billion to develop AI solutions over the next three years. The company’s investments will be focussed on the expansion of AI, big data and analytics solutions. It will also develop new research and development and platforms. The company will also train all 2,50,000 employees on AI fundamentals and responsible use of AI in the next 12 months.

(Source: The Times of India – Gadgets Now Bureau dated 19th July, 2023)

II. Sports

Commonwealth Games in limbo as Australia pulls out as 2026 host

The Australian state of Victoria pulled out of hosting the 2026 Commonwealth Games citing major cost blow-outs, leaving organisers fuming as they scrambled to keep the multi-sport event afloat.

State Premier Daniel Andrews said the initial estimated Aus$2 billion (US$1.36 billion) would more likely be around Aus$7 billion, which he called “well and truly too much”.

“I’ve made a lot of difficult calls, a lot of very difficult decisions in this job. This is not one of them. Frankly, $7 billion for a sporting event, we are not doing that,” he said at a press conference in Melbourne.

“I will not take money out of hospitals and schools to host an event that is three times the cost estimated and budgeted for last year.”

“The Games will not proceed in Victoria in 2026. We have informed Commonwealth Games authorities of our decision to seek to terminate the contract,” he added.

The event – featuring 20 sports and 26 disciplines – was due to be held across five regional hubs in the state, including Geelong, Ballarat, Bendigo, Gippsland and Shepparton, with each having its own athletes’ village.

Andrews said his team had looked at cutting the number of hubs or even moving the Games to the Victoria state capital Melbourne, but “none of those options stack up”.

Instead, he announced an Aus$2 billion support package for regional Victoria.

Andrews refused to say how much it was costing to terminate the agreement, but insisted talks with the Commonwealth Games Federation were amicable.

But the Federation was not happy, blasting the move as “hugely disappointing”.

“We are disappointed that we were only given eight hours’ notice and that no consideration was given to discussing the situation to jointly find solutions prior to this decision being reached by the government,” it said in a statement.

Victoria was only awarded the contract 14 months ago as the exclusive bidder, with the Federation claiming the state had since decided to include more sports,added an additional regional hub, and changed plans for venues.

This additional expense was “often against the advice of the Commonwealth Games Federation and Commonwealth Games Australia”, it said, adding that it had received assurances that “sufficient funding was available to deliver the Victoria 2026 Commonwealth Games”.

The decision to pull out leaves the fate of the Games up in the air, with fewer and fewer countries showing interest in recent times to take on a spectacle seen as losing its relevance.

The Federation insisted it remained “committed to finding a solution for the Games in 2026 that is in the best interest of our athletes and the wider Commonwealth Sport Movement”.

The event typically attracts more than 4,000 athletes from the 54 nations of the Commonwealth, almost all of which are former territories of the British Empire.

The last Games, in 2022, were held in England after Birmingham stepped in late in the piece.

In a letter to staff cited by the Herald Sun newspaper, Commonwealth Games Australia President Ben Houston said he was only told about the decision on Tuesday morning.

He also called it “extremely disappointing”, adding: “We are working with the Commonwealth Games Federation to understand the broad impacts on the Games in 2026.” The Victorian state opposition called Andrews’ decision a “massive humiliation” and “hugely damaging to Victoria’s reputation as a global events leader”.

(Source: International Business Times – By AFP News dated 17th July, 2023)

III. WORLD NEWS

‘5 biggest’ smartphone companies in the world right now

The global smartphone market continues to fall. The market saw a decline for the eight consecutive quarters as per research firm Counterpoint’s report. In the second quarter of the year 2023 (April-May-June), the global smartphone shipments went down by 8 per cent quarter-on-quarter and 5 per cent year-on-year. On the positive side, thepremium segment demand remained resilient, with the segment’s share reaching a record high for the quarter. Here are the five biggest smartphone companies as per the report.

i. Samsung tops the global smartphone market

Samsung has maintained its top position in the global smartphone market. The company held the largest market share at 22 per cent, benefiting from the strong performance of its Galaxy A-series worldwide.

ii. Apple ranked at No. 2, grew over 50 per cent in India

Apple secured the second position and achieved its highest-ever Q2 market share. In Q2 2023, the premium segment experienced a surge, making its largest-ever contribution to the overall smartphone market, accounting for over 20 per cent of total sales. Capitalising on this trend, Apple successfully expanded its market share in non-traditional markets, notably India, where it achieved an impressive 50 per cent year-on-year growth during the same period.

iii. Xiaomi is the third largest smartphone brand globally

As the third-largest smartphone brand, Xiaomi encountered difficulties in its key markets – China and India. To counter the decline in these markets, the company appears to be actively pursuing expansion into other markets and refreshing its portfolio of products.

iv. Oppo ranked at No. 4, performs well in both India and China (includes OnePlus)

The Chinese smartphone maker Oppo did quitewell in its home market China and India (thanks to OnePlus). The company managed to hold on to its global market share despite registering losses in Western Europe.

v. Vivo becomes the fifth-largest smartphone player

Following a robust performance in the second quarter of 2022, both Vivo and iQoo experienced significant growth declines in China, partly due to fierce competition from Samsung and Oppo. Additionally, in the offline markets of India and Southeast Asia, they faced strong rivalry, which further impacted their growth.(Source: The Times of India – Gadgets Now Bureau dated 20th July, 2023)

shailesh.kwebmaker

From Published Accounts

COMPILERS’ NOTE

It is not very often that one comes across a qualified opinion for a bank, since banking is one of the most regulated sectors and there are multiple ‘checks and balances’ – both internal and external. Given below is a Qualified Opinion for a bank where a qualified opinion has been issued on account of possible effects of undetected misstatements on the financial statements due to the inability to obtain sufficient and appropriate audit evidence which is material but, not pervasive either individually or in aggregate regarding the allotment of equity Shares to employees by the Bank under the Employee Stock Purchase Scheme.

JAMMU AND KASHMIR BANK LTD

From Independent Joint Auditor’s Report on audit of annual standalone financial results and review of Quarterly financial results for the year and quarter ended 31st March, 2023. Qualified Opinion and Conclusion

BASIS FOR QUALIFIED OPINION

We draw attention to the matter described below, the possible effects of undetected misstatements on the financial statements due to the inability to obtain sufficient and appropriate audit evidence which is material but, not pervasive either individually or in aggregate.

Refer to Note No.1.4 of Schedule 18 of the financial statements regarding the allotment of 7 crore equity shares aggregating Rs. 274.75 crore for Rs. 39.25 per share (at a face value of Rs. 1) to 9834 employees by the Bank on 21st March, 2023 under the J & K Bank Employee Stock Purchase Scheme, 2023 (JKBESPS 2023). The Compensation Committee of the Board approved the ESPS issue open date as 15th March, 2023 and the issue close date as 21st March, 2023. During the process of issue of certificate for listing purpose, we came across from the sample data of employees (who have applied for issue) that the employees availed their existing/freshly enhanced facilities of general purpose cash credit limit and personal loan accounts and transferred amounts from such loan accounts to their saving bank accounts from where the amount for share issue was debited/ (money was given). These transfers from credit facility to saving bank account were made during the period of opening of ESPS or just before that to allotment of shares under ESPS. This use of credit facility is not in line with RBI Directions. It has also been noticed that the Allotment was made on 21st March, 2023 and payment was made on 23rd March, 2023. Further to substantiate the facts, we requested the management to provide us the information regarding the amount of shares allotted to employees and transferred from general purpose Cash Credit Limits and Personal Loan Accounts of the employees to saving bank accounts during the period of opening to allotment of ESPS but management vide its letters dated 25th April, 2023 and 2nd May, 2023 submitted that “The funds have been purely debited from the saving accounts of the respective employees under their mandate”. We also escalated the issue to Audit Committee Board on 17th April, 2023 vide our detailed queries along with supporting documents but a reply from ACB is still awaited.

Based on the documents & information provided to us by the management, it seems that there is violation of:

Clause 21 of J & K Bank Employee Stock Purchase Scheme, 2023 (JKBESPS 2023) as there was a restriction that the Eligible Employee under the scheme shall not be entitled to any loan facility specifically for the purchase of Shares of the Bank under the Scheme;

Para No. 2.3.1.7 of RBI Master Circular- Loans and Advances – Statutory and Other Restrictions (RBI/2015-16 /95 DBR.No.Dir.BC.10/13.03.00/2015-16) dated July 1, 2015 which strictly prohibited the Banks to extend advances to their employees to purchase their own bank’s shares;

Section 39(1) & 42 of the Companies Act, 2013 as the allotment of the shares shall be made after receipt of funds under the said scheme in a separate Bank Account. However, the shares have been allotted on 21st March, 2023 and payment was realised on 22nd March, 2023 and 23rd March, 2023 i.e. before receipt of the entire funds in the ESPS Scheme Account of the Bank;

b) Refer to Note no. 4.4 of Schedule 18 of the previous year’s financial statements i.e. of the FY 2021-22, the Bank has allotted 5,17,62,954 equity shares aggregating for Rs.28.97 per share (at a face value of Rs. 1), aggregating Rs. 149,95,72,777.38. We have not issued any certificate for the purpose of listing during the financial year 2021-22 so if any similar set of transactions were occurred, we cannot comment on those transactions;

c) The possible impact of such misstatement referred to in Points ‘a’ & ‘b’ above are as follows:

If the Regulating Authority declare this issue as illegal & irregular allotment of shares in violation of various statutory provisions aforementioned:

(1) Refer to Schedule No. l of the financial statement, the Paid-up Share capital of the Bank is Rs.103,14,79,861 which includes Share Capital of Rs.12,17,62,954 raised through the ESPS Scheme at a face value of R1 each (i.e. Rs.5,17,62,954 of FY 2021-22 & Rs. 7,00,00,000 of FY 2022-23). The Share Capital will be overstated by Rs. 12,17,62,954 i.e. 11.80 per cent of the total paid-up share capital of the bank.

(2) Refer to Schedule No.2 of the financial statement, the Share premium balance under the head ‘Reserve & Surplus’ in the Balance Sheet is Rs.2263.53 crore which includes Share Premium on the said allotted ESPS shares of Rs. 412,53,09,823/- (i.e. Rs. 144,78,09,823 of FY 2021-22 & Rs. 267,75,00,000/- of FY 2022-23). The Share Premium is overstated by Rs. 412,53,09,823 i.e. 18.22 per cent of the total share premium/securities premium of the bank.

(3) Refer to Note No. 1 of Schedule 18 of the financial statement regarding the composition of Regulatory Capital, the Capital Adequacy ratio (Common Equity Tier I & Capital conservation buffer), the financial ratios/prudent limits concerning net worth/capital funds have been adjusted due to observations made above at Sno. 1 and 2 in regard to such overstated Share capital 7-00 crore, Share Premium 331.31 crore due to prohibited advances to the employees for the purchase of shares.

(4) Refer to Note No. 9 of the financial statement regarding Advances, a factual position of the Loan and Advances availed by the employees for the purchase of shares is not properly & separately disclosed. In the absence of complete information provided by the management, we are unable to quantify.

FROM NOTES TO THE STANDALONE AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND YEAR ENDED 31ST MARCH 2023

During the F.Y. 2022-23, the Bank raised its equity capital through Employee Stock Purchase Scheme, 2023 (JKBESPS-2023) by allotting 7,00,00,000 (Seven Crore) equity shares to the eligible employees. The issue opened on 14th March, 2023 and closed on 21st March, 2023. The scheme was voluntary in nature and the Bank received the subscription amount from the employees in a manner similar to ASBA by placing a lien on the subscription amount in the personal saving bank accounts of the subscribing employees. The Bank did not sanction any loan facility to its employees specifically for subscribing to the issue as prescribed in the scheme itself. Some employees subscribing to the issue had transferred some amounts from their pre-existing general purpose loan facilities (salary overdraft and personal consumption loans) to their savings bank accounts and used the same for subscribing to the share issue. The Bank has additionally taken an independent legal opinion from a reputed law firm confirming that the scheme has been implemented in conformity with all the governing regulations including compliance with RBI Circular no RBI/2015-16/95 DBR. No. Dir. BC. 10/13.03.00/2015-16 on “Loans and Advances – Statutory and Other Restrictions” dated 1st July, 2015.On 21st March, 2023 the Compensation Committee of Board of Directors approved the allotment of 700,00,000 (Seven Crore) equity shares with face value of 1.00 each to the eligible employees of the Bank under JKB ESPS 2023. The Bank had accounted for this transaction in line with the ‘Guidance Note on Accounting for Sharebased Payments’ issued by Institute of Chartered Accountants of India in September 2020, taking the fair value of the share as Rs. 48.33, face value of Rs. 1.00 per share and a premium of Rs. 47.33 per share (including discount of Rs.9.08 per share). The total amount received by the Bank on this account is Rs. 338.31 crore which includes Rs. 7.00 crore as equity capital and Rs. 331.31 crore as share premium. However, owing to the observations of the Statutory Auditors regarding transfer of amounts by some employees from their general purpose pre-existing personal loans (Salary Overdraft and Consumption Loan) to their Savings Bank account used for subscribing to the issue, we, as a matter of adopting prudent Corporate Governance Standards, have not reckoned the amount in the financial ratios/prudential limits concerning net worth/capital funds and a decision in this regard shall be taken after getting the clarifications/clearance.

FROM STATEMENT ON IMPACT OF AUDIT QUALIFICATIONS (FOR AUDIT REPORT WITH MODIFIED OPINION) SUBMITTED TO STOCK EXCHANGES ALONG-WITH ANNUAL AUDITED FINANCIAL RESULTS – [STANDALONE AND CONSOLIDATED SEPARATELY)

Management Response

In response to above issue, it is to mention here that, upon conjoint reading of Section 67 of Companies Act, 2013, Para No. 2.3.1.7 of RBI Master Circular- Loans and Advances – Statutory and Other Restrictions dated 1st July, 2015 and Clause 21 of JKBESPS, 2023, it is clear that the restrictions are imposed upon Bank for providing any specific financial assistance directly or indirectly to any person including its employees for the purchase of its own shares. The Circulars no’s 690 and 807 dated 20th January, 2023 and 14th March, 2023 issued by the Bank respectively are part of general practice adopted by various Financial Institutions including the Bank to provide several benefits to its employees in one form or the other and can in no way be stated to be related to the Scheme floated by the Bank for its employees. This is corroborated by the fact that the Bank has issued circulars of same nature at different times with necessary amendments/revised terms for the benefit of its employees. Furthermore, the employees of the Bank are at discretion to avail the enhanced limit as per their requirement and to use the same in any manner.

It is pertinent to mention here that besides other loan facilities provided to the employees for specific purposes [example Housing loan, education loan, vehicle loan], J & K Bank provides personal Consumption loan and general purpose Cash Credit Facility (Salary Overdraft) for meeting any legal purpose without prescribing any end-use restrictions. There are a good number of employees that were having available credit limits in their pre-existing consumption / Cash credit facilities and have not utilized the enhanced credit loan facility.

Many employees are having deposits with bank which connotes that surplus funds were already available to them which they could utilize for subscription to JKBESPS, 2023. Mere transfer of funds from general purpose cash credit facility to the personal savings bank account does not endorse that Loan facility was provided to employees specifically for JKBESPS, 2023.

From the above stated facts, statutory and regulatory provisions it is clear that the Bank in the process of issuance of shares under JKBESPS, 2023 has nowhere violated any Section/Rule/Clause/RBI Circular as mentioned aforesaid as the Bank through the said circular dated 20th January, 2023 has nowhere provided any credit facility to any of its employees for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares.

We further add that the Bank has advanced loans to its employees in the ordinary course of business and thus reference to Section 67(2) of the Companies Act, 2013 is misconceived. The Bank has lent money as a Banking Company in its ordinary course of business to its employees and the said right has been recognised under Section 67(3) of the Companies Act, 2013. For the removal of doubts, it is hereby clarified that accepting, for the purpose of lending or investment, of deposits of money is the ordinary course of business for a Banking Company.

Further, there is a general practice with most employees of the Bank to park their salaries in the Cash Credit facility account to lessen their interest burden and utilise the credit facility available as per their requirements as it is a general purpose loan facility to be used at the discretion of employees. In this regard, the Bank also sought independent legal opinion from a reputed law firm which clearly validates the Management’s stance / position on the matter. The legal opinion was duly shared by the Management with the SCAs.

The Bank received the subscription to the ESPS-2023 in a manner similar to the ASBA facility wherein a lien is marked on the amount of subscription and the account holder is not in a position to withdraw the amount under lien. The ASBA mechanism provides for retrieval of the amount before or after the allotment from the blocked account to the extent of allotment subscription money. So effectively, the amount remains within the issuer’s right till the lien is effective. The allotment of shares was done by the Compensation Committee on 21st March in the late evening and, the blocked amounts were transferred to the Escrow account on 22nd and 23rd March, 2023 – the transaction could not be completed on 22nd March, 2023 because of a technical glitch.

The contention of the SCAs regarding the ESPS-2021 issue that they had not issued the Certificate for listing of shares doesn’t seem valid because as SCAs they did audit the books of the Bank for FY 2021-22 and the ESPS-2021 was a material transaction which they could not have ignored. Pertinent to mention that ESPS 2021 was exactly similar to ESPS-2023 and validation of the earlier scheme by the SCAs without raising any observations was enough for the Bank Management to deduce that the implementation of ESPS-2021 was not in violation of any rule or statute and this applies mutatis-mutandis to ESPS-2023. The SCAs, in the process, have put a question mark on their own audit of the Bank conducted during F.Y. 2021-22.

Regarding the impact of the two transactions, the Management has made it abundantly clear that after taking due cognizance of the SCAs observations and non-acceptance of Management arguments by the SCAs, the Bank has not reckoned the amount mobilised under ESPS-23 for computation of any analytical ratio involving Net-worth or Capital. The Management as a matter of prudence and ethical Corporate Governance has declared this in the Notes to Accounts as well. The shares allotted to the employees under ESPS-2021 might already have changed hands and currently their ownership may be with some third persons and as such reckoning these for impact on Paid-up Capital or Reserves (Share Premium) is over stretched.

The Bank has MIS wherein reports can be generated of outstanding against the employees under different schemes / facilities but that will not provide any guidance as to the SCAs claims that any money has been specifically made available to the employees for subscribing to the ESPS issue. The employees make frequent transactions in their general purpose salary overdraft account for multiple purposes and every inflow / outflow in these accounts cannot be matched or linked to any specific sale / purchase.

With regard to the reported communication addressed to the ACB Chairman by the SCAs, the first thing that is to be noted is that the communication was a personal one addressed to the Chairman and not to the Committee. However, the Chairman ACB had directed the Bank Management to look into the issue and respond to the observations made. These directions were passed on by the ACB Chairman to the Bank Management in presence of the SCAs. The Bank duly responded to the observations of the SCAs vide mail dated 2nd May, 2023 addressed to all the SCAs endorsing a copy of the response to the ACB Chairman. Thus, the SCAs averment of not having been provided the response of the ACB is nothing beyond an unsubstantiated allegation.

In the wake of our above submissions all the observations of the SCAs made in the subject communication are just based on assumptions without any valid justification wherein they have not taken cognisance of the facts like the facilities being in existence and available to the employees for over two decades, no facility having been granted for the specific purpose of subscribing to the ESPS, ignoring all the MIS / information / clarifications provided by the management.

shailesh.kwebmaker

Regulatory Referencer

I. DIRECT TAX

1. Extension of time limits for submission of TDS/TCS Statements – Circular No. 9/2023 dated 28th June, 2023.

CBDT has extended the time limits for the submission of Form 26Q, 27Q & 27EQ pertaining to Q1 FY 2023-24 from 31st July, 2023 till 30th September, 2023.

2. Circular to remove difficulty in implementation of changes relating to Tax Collection at Source (TCS) on Liberalized Remittance Scheme (LRS) and on purchase of overseas tour program package – Circular No. 10/2023 dated 30th June, 2023.

CBDT issued guidelines to clarify the implementation of TCS for different foreign remittances made under the LRS.

Transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS.

Threshold of Rs. 7 lakh per financial year per individual shall be restored for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose:

Beyond this Rs. 7 lakh threshold, TCS shall be:
a) 0.5 per cent (if remittance for education is financed by education loan);

b) 5 per cent (in case of remittance for education/medical treatment);

c) 20 per cent for others.

Increased TCS rates to apply from 1st October, 2023.

3. CBDT Notifies New Form 10IEA for opting and withdrawing from the New Tax regime for FY 2023-24 – Notification No. 43/ 2023 dated 21st June, 2023.

Following Rules are amended vide the notification:

Rule 2BB: An employee who opts for tax regime prescribed under section 115BAC, shall be entitled to exemption only for specific allowances mentioned in the rule.

Rule 3: The provision regarding free food and non-alcoholic beverages provided by the employer through paid vouchers will not apply to employees whose income is taxable under section 115BAC.

Rule 5: The depreciation allowance for a block of assets shall not exceed 40 per cent of the written down value of such block of assets for individuals, Hindu undivided families, associations of persons, or artificial juridical persons whose income is chargeable to tax under sub-section (1A) of section 115BAC.

Rule 21AGA: The option to exercise under sub-section (6) of section 115BAC for any assessment year beginning on or after 1st April, 2024, shall be made in Form No. 10-IEA. The withdrawal of option under the proviso to sub-section (6) of section 115BAC shall also be done using Form No. 10-IEA.

4. Tolerance range for Transfer pricing Regulations — Notification No. 46/2023 dated 26th June, 2023.

Vide notification no. 124/202, dated 29th October, 2021, the Ministry of Finance had notified the tolerance range of 3 per cent (1 per cent for wholesale trading) for determining the arm’s length price under transfer pricing regulations for AY 2021-22. The applicability was extended to AY 2022-23. The applicability is further extended to AY 2023-24.

I. COMPANIES ACT, 2013

1. Due date for filing Form CSR-2 for FY 2022-23: MCA has notified the Companies (Accounts) Second Amendment Rules, 2023. As per the amended norms, Form CSR-2 for FY 2022-23 shall be filed separately on or before 31st March, 2024. [Notification No. G.S.R. 408(E), dated 30th May, 2023]

2. Revision in form for filing LLP agreement: The MCA has notified the Limited Liability Partnership (Amendment) Rules, 2023. Before this amendment every LLP was required to file information w.r.t LLP agreement in Form No. 3 with the ROC within 30 days of the date of incorporation. Now, the MCA has enhanced the disclosures to be made in Form No. 3. Thus, in case the nominee is a body corporate, additional information relating to types of body corporate and details of LLPIN/CIN/FLLPIN/Other Identification Number is to be given. [Notification No. G.S.R 411(E), dated 2nd June, 2023]

II. SEBI

3. Introduction of a ‘Risk disclosure framework’ for trading by individual traders in equity derivative segment: SEBI has introduced a risk disclosure framework for individual traders for trading in equity Futures & Options (F&O) segment. As per the framework, all stock brokers are required to display risk disclosures on their websites and inform clients in a specified manner. Upon login into their trading accounts, clients may be prompted to read ‘risk disclosures’ appearing as a pop-up window and shall be allowed to proceed after acknowledging the same. The circular shall be effective from 1st July, 2023. [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/73, dated 19th May, 2023]

4. InvITs & REITs to hold securities of Holding Companies and SPVs in de-mat form only: With a view to promote dematerialisation of securities, encouraging ease of doing business, improve transparency in the dealings of securities of Holding Companies / SPVs, the SEBI has mandated that InvITs & REITs shall hold the securities of Holding Companies and SPVs in dematerialised form only. Further, for existing securities holdings by InvITs & REITs in Holding Companies and SPVs in physical form, the Investment manager of the InvIT & REITs are directed to dematerialise the same on or before 30th June, 2023. [Circular No. SEBI/HO/DDHS-POD-2/P/CIR/2023/75 &76, dated 22nd May, 2023]

5. Changes in ICDR norms: SEBI has notified amendment in SEBI (ICDR) Regulations, 2018. As per the amended norms, if the issuer making an IPO, desires to have the issue underwritten, it shall, prior to the filing of the prospectus, enter into an underwriting agreement with the merchant bankers or stock brokers, indicating the maximum number of specified securities they shall subscribe to, at a predetermined price which shall not be less than the issue price. [Notification No. SEBI/LAD-NRO/GN/2023/130, dated 23rd May, 2023]

6. Conversion of outstanding dues into equity will be subject to a six-month lock in period as per regulation 167(2) of ICDR: A company sought informal guidance from SEBI regarding the conversion of money payables into preferential equity shares. The SEBI clarified that the lock-in period of six months will apply to preferential equity shareholders as per Regulation 167(2) of the ICDR Regulations. [Informal Guidance No. SEBI/HO/CFD/CFD-POD-2/OW/P/2023/20934/1, dated 23rd May, 2023]

7. Model ‘Tripartite Agreement’ between Issuer Company, existing and new Share Transfer Agents (STAs) under LODR norms released: The SEBI has released a model Tripartite Agreement for Share Transfer Agents (STAs). The agreement is in accordance with Regulation 7(4) of SEBI LODR Regulations. The agreement requires listed companies to enter into a tripartite agreement with the existing STAs and the new STAs. Further, the format of the Tripartite Agreement is provided in Annexure-A attached to the circular. [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/79, dated 25th May, 2023]

8. SEBI notifies guidelines relating to online processing of investor service requests and complaints by RTAs: SEBI has proposed to digitise the process to submit various documents to RTAs by the holders of the physical security certificates. It is proposed to provide a mechanism for investor to lodge service requests and complaints online and thereafter track the status and obtain periodical updates. In Phase I, all RTAs servicing listed companies shall have a functional website & shall contain prescribed information. In Phase 2, common website shall be made and operated by QRTAs from 1st July, 2024. [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/72, dated 8th June, 2023]

9. LODR amendment requires listed entities to fill position of Compliance Officer within three months of vacancy: The SEBI has notified the SEBI (LODR) (Second Amendment) Regulations, 2023. Now any vacancy in the office of the Compliance Officer must be filled by the listed entity at the earliest and within three months from the date of such vacancy. The notification shall come into force from 14th July, 2023. [Notification No. SEBI/LAD-NRO/GN/2023/131, dated 14th June, 2023]

10. Mutual Funds norms to strengthen transparency and disclosure requirements: SEBI has notified the SEBI (Mutual Funds) (Amendment) Regulations, 2023. As per the amended norms, the definitions of “Liquid net worth” and “Net Asset Value” have been newly introduced. Further, SEBI has introduced a new meeting requirement for the BODs of trustee companies and asset management companies including their committees. They are now required to meet at a frequency determined by the Board. Also, the obligations of the BODs of asset management companies have been inserted. [Notification No. SEBI/LAD-NRO/GN/2023/134, dated 26th June, 2023]

11. Master circular for compliance with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 by listed entities: SEBI, from time to time, has been issuing circulars pertaining to the compliance requirements specified in the SEBI (LODR) Regulations, 2015. This Master Circular has been prepared in order to enable the users to have access to the provisions of the applicable circulars, issued till 30th June, 2023, at one place. The Master Circular provides a chapter-wise framework for compliance with various obligations under the SEBI (LODR) Regulations, 2015. The circulars issued by SEBI listed out in the Appendix shall stand rescinded with the issuance of this Master Circular. [Master Circular No. SEBI/HO/CFD/PoD2/CIR/P/2023/120 dated 11th July, 2023]

12. Disclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015: SEBI has issued circular which consists of four annexures with respect to disclosure requirements under Regulations 30 and 30A of the SEBI (LODR) Regulations, 2015 which are given below:

Annexure I specifies the details that need to be provided while disclosing events given in Part A of Schedule III.

Annexure II specifies the timeline for disclosing events given in Part A of Schedule III.

Annexure III provides guidance on when an event / information can be said to have occurred.

Annexure IV provides guidance on the criteria for determination of materiality of events / information.

This circular shall come into force from 15th July, 2023. [Circular No. SEBI/HO/CFD/CFD-PoD-1/P/CIR/2023/123 dated 13th July, 2023]

shailesh.kwebmaker

From the President

Dear BCAS Family,

The best way to find yourself is to lose yourself in the service of others. – Mahatma Gandhi

This quarter’s theme is Chartered Accountants for Change. It’s time for Chartered Accountants (CAs) to be one of the catalysts to save the world. CAs should understand their unique role as an enabler of transforming the world towards a sustainable future.

CAs play a critical role in society by ensuring financial transparency, accountability, and ethical practices in the business and financial world. They are not only responsible for auditing financial statements and ensuring compliance with laws and regulations but also have the potential to drive positive change in society.

The various ways in which we, as Chartered Accountants, can contribute to society are:

a. Ethical Financial Practices: CAs can promote ethical financial practices within organisations. By ensuring that financial transactions are conducted with integrity, CAs can help prevent fraud and unethical behaviour.

b. Mentor a young person in your community to build their character. If you’re an adult, you’ve probably accumulated decades of practical knowledge and worldly experience that many young people could benefit from. Mentorship programs exist for this purpose and allow adults to pass on personal or professional knowledge to young people who are struggling for guidance and a roadmap for professional excellence in their lives.

AadaanPradaan – a unique program by our Society – is organised every year by the Membership, Public Relations, and Seminar Committee. It is a program where young CAs from the Society register by mentioning the specific areas where they need guidance. Mentors who are seniors from the profession are assigned to each mentee, and a one-on-one online session is organised. The mentees immensely benefit from this program.

c. Volunteer at community organisations to help others in society. Volunteering is a great way to interact with your local community and help out people who are less fortunate than yourself. Volunteering will take only a small amount of your time on a weekly basis but can make a huge difference in the lives of people in the society around you.

Operating as a not-for-profit organisation, BCAS also relies on the dedicated efforts of hundreds of volunteers who selflessly contribute their time and expertise while upholding shared values and professional ethics.

d. Teach people useful skills in your community to benefit their lives: Giving other people practical knowledge and day-to-day skills is a great way to contribute to your local community and enhance the overall progress of society.

e. Share your specialised knowledge to give back to your local community: Regardless of how much formal education you’ve had, you probably have some knowledge and skills that would be useful to people in your community.

f. Reduce, reuse and recycle goods whenever possible: We all live in natural ecosystems, and protecting your local environment is an integral part of contributing to society. Recycle plastics and other polluting substances as well as strive to use less plastic in general and use more eco-friendly products.

g. Plant trees. Not only will planting a tree enhance the beauty of your neighbourhood, but it will also make the environment a little healthier.

BCAS VAN (बीसीएएसवन)

As we are celebrating our 75th anniversary, BCAS as a green initiative has created an entire forest by planting 7,500 trees at Banaskantha, Gujarat. It is called the BCAS VAN. The trees shall be monitored by an NGO in Banaskantha. Your contribution towards such an initiative of the Society is always welcome.

h. Pro Bono Work: Many CAs volunteer their services to non-profit organisations, charitable causes, and underserved communities, providing much-needed financial expertise. At BCAS, we are also in the process of reviving our charitable trust clinic to provide pro bono advice to many trustees, employees and auditors of charitable trusts.

Even as the world faced the enormous challenge of COVID-19 in the last few years, and with challenges such as sustainability, diversity and inclusion, and profit with purpose still lying ahead for businesses, it’s time for CAs to step forward, take leadership positions and affect change within their organisations and society at large.

“Throughout the pandemic, the role of Chartered Accountants has been to talk to their businesses. They didn’t save lives, but they saved livelihoods,” said Michael Izza, Chairman of Chartered Accountants Worldwide.

CAs can be catalysts for positive change in society by upholding financial integrity, promoting ethical business practices and actively contributing to the well-being of their communities. Their role extends beyond financial statements and audits; it encompasses a commitment to societal welfare and sustainable development.

Chartered Accountants are partners in nation-building.

FELICITATION OF ICAI TORCH BEARERS

On 7th October, 2023, our Society felicitated the ICAI President CA AniketTalati, Vice President CA Ranjeet Kumar Agarwal at the BCAS office, Mumbai, in the presence of Central council members of the western region of ICAI, past presidents, Managing Committee and core group members of our Society. The discussion was around student activities, image building of CA in India and globally, supporting practising CAs, the technology initiative of ICAI and much more. The interactive session was very insightful, and both the President and Vice President addressed the concerns of various CAs present.

REIMAGINE

On 4th, 5th, and 6th January, 2024, BCAS will organise 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 profession.

– 3 days, power-packed 15+ sessions, 35+ Indian and Global Thought leaders

– Various Themes: Startups; 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; Interchanging roles of a CA and many more sessions

– Networking opportunities with participants from various countries and 75+ cities in India

– Open for CAs, Lawyers, CSs, MBA Finance, and other Finance Professionals

– Networking between participants from Industry and Practice

– CFO roundtable and CFO dinner

– Cultural evening with Bollywood singers, celebrating 75 years of BCAS

– Discussing professional opportunities in India and abroad

And much more.

To know more about the conference and our Thought Leaders, visit: reimagine.bcasonline.org.

I have dealt with sustainability and ways in which we as professionals contribute towards the same. I would like to conclude with this Sanskrit shloka of Ishopnishad dealing with sustainability through the preservation of nature:

ईशावास्यमिदंसर्वंयत्किञ्चजगत्यांजगत्।

तेनत्यक्तेनभुञ्जीथामागृधःकस्यस्विद्धनम् ॥

Its meaning is:

“The entire Universe is pervaded by God. Enjoy all nature as gifts from God but with a spirit of renunciation. Do not be attached to them, and do not covet the wealth of others.
Control Greed!”

बीसीएएसपरिवारकोआनंदमयदिवालीऔरसफलताएवं

खुशियोंसेभरेसमृद्धनववर्षकीशुभकामनाएं।

BCAJ Admin

Corporate Law Corner : Part A | Company Law

9 M/s. Bock Compressors India Pvt Ltd
ROC-Guj/Adj. Order/Bock Compressors/ Sec 134/ 3323-3326
Office of Registrar of Companies,
Gujarat Dadra & Nagar Haveli
Adjudication Order
Date of Order: 08th July, 2022

Order for penalty under section 454 of the Companies Act, 2013 read with Rule 5 of Companies (Adjudication of Penalties) Rule, 2014 for Violation of Section 134 of the Companies Act, 2013 read with Rule 8(3) of the Companies (Accounts) Rules, 2014.

FACTS

M/s BCIPL is registered under the provisions of the Companies Act, 1956 in the state of Gujarat.

M/s BCIPL had filed a suo-moto application through e-form GNL-1 for adjudicating the penalty for violation of Section 134 of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rules, 2014 towards non-disclosure related to the conservation of energy, technology absorption, foreign exchange earnings and outgo in the manner as prescribed under Rule 8 of the Companies (Accounts) Rules, 2014.

As per suo-moto application, the Board of Directors had at its meeting approved Board’s Report for the Financial Year ended on 31st March, 2015 under the provisions of section 134 of the Companies Act, 2013. Further, as per the requirements of the above provisions, M/s BCIPL was required to make disclosure in the said Board’s Report relating to the conservation of energy, technology absorption, foreign exchange earnings and outgo in the manner as prescribed under Rule 8 of the Companies (Accounts) Rules, 2014.

However, it was stated in the Board’s Report that due to the non-coverage of activities, disclosure is not required. Thus, M/s BCIPL had defaulted to comply with the requirement of the above provisions due to wrong interpretation while approving Board’s Report.

As per section 134(3)(m) of the Companies Act, 2013, the Board’s Report shall include, the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

Whereas, as per section 134(8) of the Companies Act, 2013, if a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of Rs.3,00,000 and every officer of the company who is in default shall be liable to a penalty of Rs.50,000.

In view of the above facts, there was a reasonable cause to believe that the provision of Section 134 of the Companies Act, 2013 had not been complied with by M/s BCIPL and Mr DRS, Ms BMBB, directors of M/s BCIPL. Thus, M/s BCIPL, Mr DRS and Ms BMBB had rendered themselves liable for penal action as provided in sub-section (8) of section 134 of the Companies Act, 2013. As per section 134(8), there is a provision for penalty for which the ROC is empowered to adjudicate under section 454(3) of the Companies Act, 2013.

In response to the application dated 25th May, 2022, a notice dated 14th June, 2022 was issued to M/s BCIPL and its directors in default by giving an opportunity to be heard in the matter on 21st June, 2022. A meeting for adjudicating the penalty for the violations of section 134 of the Companies Act, 2013 was held on 21st June, 2022. During the meeting, Mr. DRS and Ms. BMBB, Mr. KS (PCS) were present and admitted to committing the above default and requested that a minimum penalty may be levied.

HELD

There was a reasonable cause to believe that M/s BCIPL had failed to comply with the provisions of section 134 of the Companies Act, 2013. Hence, penalty as stated below was levied and the matter was disposed of.

Penalty levied on M/s BCIPL: Rs.3,00,000 Penalty for officers in default: Mr DRS, Director: Rs.50,000 and Ms BMBB, Director: Rs.50,000.

10 Strong Infracon Pvt Ltd (now amalgamated with Elite Realcon Pvt Ltd)
No. ROC/LEGAL/ADJ/2023/138312/penalty order/2191-2195
Office of Registrar of Companies (West Bengal)
Adjudication Order
Date of order: 29th May, 2023

Adjudication order for violation of provisions of the Section 143 r.w.s 129 of the Companies Act, 2013 by the Auditors of the Companies in relation to various non-disclosures in the financial statements of the Company.

FACTS

During the inspection conducted under section 206(5) of the Companies Act, 2013 in the matter of merger of M/s SIPL (Transferor Company) with M/s. ERPL (Transferee Company) following violations were observed:

Non-disclosure of key management personnel, related parties, and related party transactions in the financial statements for the years 2010-11 to 2015-16.
Non-disclosure of details of investments in the financial statements for the years 2010-11 to 2015-16.
Non-disclosure of details of short-term loans and advances in the financial statements for the years 2011-12 to 2015-16.
Non-disclosure of details of shareholders holding more than 5 per cent shares in the financial statements for the years 2009-10 to 2015-16.
Non-disclosure of details of sundry creditors in the financial statements for the year 2015-16.

Adjudication notice was issued under section 454(4) read with Rule 3(2) of the Companies (Adjudication of Penalties), 2014 as amended by Amendment Rules, 2019, to M/s AU & Co and M/s AK & Co, Auditors of M/s SIPL for the violation of the provisions of the section 143 and section 129 of the Companies Act, 2013 and given an opportunity to submit their reply as to why the penalty should not be imposed under the provisions of section 450 of the Companies Act, 2013.

Thereafter a notice of hearing was issued scheduling a physical hearing.

“Section 143(3) states that, the auditor’s report shall also state—

(a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;

(e) whether, in his opinion, the financial statements comply with the accounting standards;

(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.”

In reply to the adjudication notice submitted by M/s ERLP it was stated that:

M/s SIPL was non-existent as the same had been merged with ERLP w.e.f 1st April, 2015 by the order of the Hon’ble High Court, Calcutta dated 06th January, 2017 [CP No. 768 of 2016].

Ms CKJ, Advocate, being the Authorised Representative of Auditors attended the hearing physically and submitted that the enactment of Section 134 shall have prospective effect from the date of notification, relying upon the judgment of the apex court [SLP 459/2004] and not retrospective effect.

Further, it was stated that the Ld CJM, Special Court had also disposed of the cases directing the accused to take plea before the appropriate forum as the offence has been decriminalised.

Ms CKJ requested to drop the adjudication proceedings on the grounds that M/s SIPL was already amalgamated by virtue of the Hon’ble High Court, Calcutta in the year 2017 w.e.f. 1st April, 2015.

HELD

The auditors are liable to penalty under section 450 of the Companies Act, 2013 for their non-compliance with the provisions of section 143. Accordingly, a penalty of Rs.90,000 was imposed on the Auditors of the Company.

M/s AU & Co and M/s AK & Co, Auditors of M/s SIPL were required to comply with the order of adjudication within the prescribed time, and failure to do so may result in penal action without further intimation.

BCAJ Admin

Allied Laws

20 Jagrutiben Dharmeshbhai Suhagiya – Appellant
AIR 2023 Gujarat 86
Date of order: 13th January, 2023

Succession – Natural Guardian – to sell the property of minor – Property in question is an undivided share in the joint family property – Out of the purview – No permission of the Court required to sell. [S. 8, Hindu Minority and Guardianship Act, 1956 (Act)]

FACTS

The appellant (Jagrutiben Suhagiya) lost her husband. The appellant, being in dire need of the funds for the education of her children wished to sell the undivided share of the property of the minors. For this purpose, the appellant filed an application before the Additional Sessions Judge, wherein the appellant’s application was partly allowed, granting guardianship and rejecting the permission to sell the share in the joint family property. Aggrieved by the same, the appellant filed appeal before the Hon’ble Gujarat High Court. The fundamental question before the Bench was whether the restriction in section 8 of the Act, i.e., requirement of approval of the Court for alienating immovable property is applicable to a minor’s undivided share in a joint family property or not.

HELD

Relying on the case of Krishnakant Maganbhai vs. State of Gujarat (1961 FLR 108), the Court held that the requirement of obtaining permission before alienating the property of a minor would not apply in respect of an undivided interest in the joint family property. The Hon’ble Court further held that the concept of guardian is out of the purview of section 8 of the Act with respect to an undivided interest in a joint family property. The Manager or the Karta of the joint family could also alienate the property without acquiring any permission.

The appeal was allowed.

21 A. Wilson Prince v. Nazar and others
AIR 2023 Supreme Court 2384
Date of order: 15th May, 2023

Will – Probate granted on 29th July, 1972 – Application by an alleged beneficiary for the supply of a copy of the will in 2016 – Records either destroyed under the Destruction of Records Act, 1917 or returned to the executor – No dispute regarding bequeathment of the deceased’s property till date from anyone – Person allegedly claiming to be the beneficiary never saw the will – High Court justified in refusing to grant any relief. [Indian Succession Act, 1925]

FACTS

Rev. Salusbury Fynes Davenport (testator) executed a will in the year 1969. The executor had applied for probate which was granted in the year 1972. In 2016, Mary Brigit (original petitioner) allegedly claiming to be a beneficiary, applied for a copy of the probate. The District Court filed a counter affidavit in the High Court of Madras stating that it was an old matter and the record may have been destroyed under the Destruction of Records Act, 1917 or returned to the executor. The executor claimed to have not found any trace of the document. Subsequently, the petitioner Wilson Prince (successor of the original petitioner) filed an SLP in the Supreme Court.

HELD

The Hon’ble Supreme Court held that since the original writ petitioner had never seen the copy of the will and was not aware of the contents of the same, on mere guesswork, the Court could not grant any relief to the petitioner. Subsequently, the Hon’ble Court dismissed the Special Leave Petition with no costs.

22 Canara Bank, Mullakkal v. Sachin Shyam
2022 SCC OnLine Ker 6934
Date of order: 19th December, 2022

Possession of Secured Assets – The right of possession of the Tenant with respect to Secured Assets – Creditor entitled to possession. [Section 14, Section 17, and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI); Section 107, Transfer of Property Act, 1882]

FACTS

The petitioner, a secured creditor in respect of a loan availed by the 1st respondent, brought to sale an item of property in which the 3rd respondent claims to be a tenant under the provisions of the SARFAESI Act. The 4th respondent had purchased the property. The application filed by the petitioner under section 14 of the SARFAESI Act for obtaining vacant possession of the property was rejected by the learned Magistrate, finding inter alia that the provisions in the SARFAESI Act cannot defeat the rights of the tenant. The learned Magistrate had concluded that the tenancy had been created much before the creation of the mortgage, and therefore, such tenants cannot be evicted by resorting to proceedings under Section 14 of the SARFAESI Act.

Hence, the present appeal.

HELD

In light of the judgement of the Supreme Court in the case of Balkrishna Rama Tarle vs. Phoenix ARC Pvt. Ltd. [(2023) 1 SCC 662] the Court held that the order of the learned Magistrate cannot be sustained. The 3rd respondent has no case that any proceeding initiated by the petitioner under section 14 of the SARFAESI Act had been challenged by the 3rd respondent in proceedings before the Debts Recovery Tribunal under section 17 of the SARFAESI Act.

Court further held that in the absence of a registered document the tenant was not entitled to possession of secured assets for a period exceeding the limit prescribed under section 107 of the Transfer Property Act. The creditor had the right to take actual possession of the secured asset even after the transfer of title to an auction purchaser.

Order of the Chief Judicial Magistrate was quashed.

BCAJ Admin

Service Tax

TRIBUNAL

10 M/s Vodafone Idea Ltd vs. Commissioner of CGST and Central Excise
[2023-TIOL-354-CESTAT-KOL]
Date of order: 23rd February, 2023

Commission agent services used for collection of debts is allowable as CENVAT credit.

FACTS

The appellant has availed CENVAT credit on the services provided by the commission agent engaged in collection of debts from the various subscribers. The department placing reliance on the decision of the High Court of Gujarat in the case of Cadila Healthcare Ltd [2013 (30) STR 3 (Guj.)] has disallowed the said credit.

HELD

The Tribunal primarily noted that, in the present case, the commission agent is not rendering any service towards sale/sales promotion. He is engaged in the collection of debts from the subscribers. Therefore, the basis adopted for the issuance of the Notice relying on the decision in the case of Cadila Health Care is itself erroneous. Relying on the decisions in the case of Vodafone Essar Cellular Ltd [2018-TIOL-3889-CESTAT-MAD] and Bajaj Finance Ltd [2017-TIOL-4355-CESTAT-MUM] wherein charges paid to Bill Collection Agencies and Recovery Agents service was allowed, the Appeal is allowed.

11 M/s. Manashi Craft Pvt. Ltd vs. Commissioner of Service Tax
[2023-TIOL-400-CESTAT-KOL]
Date of order: 11th April, 2023

Interior Decorator service provided along with material is taxable as Works Contract service.

FACTS

The appellant is engaged in provision of interior decorator services. The services were provided along with materials. The Revenue is of the view that the entire activity is taxable under “Interior Decorator Service”.

HELD

Relying on the decision of the Hon’ble Supreme Court in the case of Larsen & Toubro Ltd 2015-TIOL-187-SC-ST and the decision of the Tribunal in the case of Spandrel vs. Commissioner of Central Excise, Hyderabad/Kochi 2010-TIOL-830-CESTAT-BANG, it was held that the appropriate classification of the said services is “Works Contract Service”. As there is no demand under “Works Contract Service” and the Appellant opted to pay service tax under composite scheme, the same has been taken on record. The Appeal is accordingly allowed.

12 The Commissioner of Central Excise and CGST, Udaipur vs. M/s Trinetra Cement Ltd [2023-TIOL-404-CESTAT-DEL]

Date of order: 18th April, 2023

Event management services used for award functions and programs for the dealers are eligible as CENVAT credit. Mandap Keeper services used for a business function are also allowable as CENVAT credit.

FACTS

The Assessee is a manufacturer of cement and clinker and availed CENVAT credit on inputs and input services including service tax passed by its head office through input service distributor invoices. CENVAT credit availed on advertising service, event management service, business auxiliary service, mandap keeper service and tour operator service is under dispute.

HELD

The Tribunal primarily noted that the CENVAT credit rules envisage recovery of irregularly availed credit from the one who has so availed it under Rule 14 and they have no mechanism to recover the same from the Input Service Distributor who merely passes the credit to its units. However, if the credit is availed on the strength of an excise invoice issued by the manufacturer who supplied the inputs or a service tax invoice issued by the provider of input service, the assessment of the excise duty or the service tax in such invoices cannot be examined or opened by the officers dealing with the CENVAT credit of the recipient of the input or input service as jurisdiction of the buyer is not the assessing officer of the supplier of the goods or services. With respect to advertising services it was noted that so long as the same is with respect to excisable goods sold the credit cannot be denied. It was also noted that there is no condition that the brand which is being advertised should be owned by the Assessee. With respect to business auxiliary service it was held that programs for gold distribution melas to marriage anniversary and food bills cannot be treated as sales promotion and therefore the credit is not allowable. Event management services availed for annual award functions and programs for dealers have a direct nexus to sales promotion and credit is admissible on such services. With respect to mandap keeper service it was noted that there is no evidence to justify that the food is for a private function and therefore the credit is allowable.

13 M/s Namakkal Agricultural producers Co-operative Marketing Society vs. Commissioner of Central Excise
Date of order: 25th April, 2023

There is a difference between ‘Auction’ and ‘Tender’. Marketing and other services provided to the farmers’ members through the tender process is not taxable under auctioneer service. The process of borrowing the money from the bank and lending to farmer members on interest is relatable only to its members and not to the bank therefore there is no service tax applicable under business support service. The Appellant is liable under goods transport agency services.

FACTS

The Appellant is a society created to provide services to the agriculturists who are members of the society for marketing of the agriculture produce, distribution of farm inputs, provision of produce pledge loans and processing and other value addition measures as possible. The society is involved in arranging facilities for storing, processing and marketing of the agricultural products. They provide marketing facilities such as auction yards, drying place and short-term storage facilities in the open yard and also rendering jewel loans to its members. The contention of the Department is that they are engaged in conducting auction of goods for monetary consideration, collecting appraising charges for sanction of jewel loans to its members and also making payment of freight for transport of goods thereby taxable under auctioneer’s service, GTA service and Business Support Service of the Finance Act, 1994.

HELD

The Tribunal noted that the marketing and other services rendered to farmer members in selling their agricultural produce through tender process would not be coming under “Auctioneer’s Service. The process of taking loans and utilising this money in providing jewel loans to their farmer members are relatable only to its members and not to the bank and the charges collected for appraising jewels before sanctioning of loans are in the nature of cost incurred for sanctioning of loans therefore, not taxable under business support service. Regarding Goods Transport Agency services it was noted that the Appellant has delivered the goods to the ration shops under the Public Distribution System and have failed to provide any evidence with respect to the value of the consignment to take the benefit of the exemption notification 34/2004-ST. Therefore, the same was held to be taxable.

BCAJ Admin

Goods And Services Tax

I. HIGH COURT

35 M/s M R Overseas vs. Union of India & Others
2023-TIOL-620-HC-DEL-GST
Date of order: 24th May, 2023

While rejecting the refund claim on the grounds of limitation, neither Adjudicating Authority nor Appellate Authority considered the COVID 19 period of 11th March, 2020 to 28th February, 2022 in terms of Notification 13/2022-Central Tax. Matter remanded.

FACTS

The petitioner claimed it was unable to upload / file the refund claim on account of technical glitches on supply of goods of Rs. 2.52 crore to SEZ without payment of IGST from 14th August, 2020 to 2nd April, 2021 and finally could upload it on 2nd April, 2021. The show cause notice proposed rejection on the grounds of time bar. The petitioner’s request for condonation for the outbreak of COVID 19 was not accepted. Similar fate was met in Appeal. According to the petitioner, if the time from 1st March, 2020 to 28th February, 2022 is excluded in terms of Notification 13/2022-Central Tax issued for exclusion of the said period during which COVID 19 restrictions prevailed, the above refund application was within the limitation period.

HELD

It is apparent that both the lower authorities have not considered the claim of delay for condonation. Hence, the orders are set aside and the matter is remanded back to the adjudicating authority for considering afresh the refund claim in light of the cited Notification No.13/2022 dated 5th July, 2022.

36 M/s Devi Traders vs. State of Andhra Pradesh
2023-TIOL-743-HC-AP-GST
Date of order: 19th June, 2023

Whether proceeding under section 74 of APGST Act can be independently initiated without recourse to scrutiny under section 61 of the said Act? Held: Not necessarily. Nevertheless time of three weeks provided to furnish explanation in the interest of justice.

FACTS

Petitioner, a trader in groundnuts, was registered under GST, and filed his returns till August 2019, after which, he wound up his business on account of losses, and hence his GST registration was cancelled from August 2019. He received a show cause notice dated 6th July, 2022 alleging that the petitioner fraudulently claimed input tax credit of IGST of Rs. 11.84 lakh for F. Y. 2018-19 on 16th July, 2022 which called upon him to furnish explanation by 13th July, 2022. Since the time provided had expired, he personally approached the Revenue Officer pleading that the transactions in question were genuine and covered by e-way bills with vehicle numbers and that purchasers were genuinely located in the State of Telangana and supplies made in the course of interstate supply, etc. However, this was not accepted on the grounds that the time for filing objections was over. Consequent thereupon, his salary account was attached, and out of the salary credited, the amount was deducted towards recovery of tax. The appellant’s grievance is that though the show cause notice was not yet adjudicated, the attachment was provisionally made. Further, the petitioner’s case was that without issuing ASMT-10 under section 61 of the APGST Act, scrutiny of the returns, a proceeding was initiated under section 74 of the APGST Act which is contrary to the scheme of the Act and hence the show cause notice is vitiated by law. The Revenue, in addition to countering on availability of alternate remedy, also made out a case that it is only one of the channels to conduct scrutiny proceeding under section 61 and culminate with section 74 but it is not sine qua not for initiating proceeding under section 74 whereas under exigent circumstances, section 74 could be invoked directly. Besides this, the issue before Hon’ble Court was whether the attachment of bank account of the petitioner was done legally.

HELD

After examining various relevant statutory provisions of the law in detail, the Hon’ble High Court held that section 74 is not guided by section 61 alone. Even without following section 61, an audit of accounts can be undertaken under section 65 and which being a wider exercise of verification of books of accounts and other documents, if found short payment or ITC being wrongly availed and utilised or initiation of action under section 73 or under section 74 can be made. Hence, it is clear that sections 73 and 74 are not controlled by section 61 as it starts with the clause “where it appears to the proper officer that any tax has not been paid.” These words not only subsume sections 61 and 65 but any other credible information from a different source and the Court did not find a specific reference to section 61 or section 65 in section 74 and observed that literal or strict interpretation is essential for fiscal tax and penal laws when the language employed is plain and unambiguous. As for the main allegation of fraudulent ITC without actual supply of goods/services, no conclusion was found reachable as petitioner’s objections/reply was found pending. Hence, while setting aside the writ petition for want of merits, it was noted that since the petitioner received the show cause notice only after the date by which he was given time to reply, he was permitted to submit his explanation with other material within three weeks in the interest of justice, and the adjudicating authority was directed to consider the same after affording opportunity of personal hearing to the petitioner and pass appropriate order in accordance with the law.

37 Santosh Traders vs. State of UP
2023 152 taxmann.com 413 (Allahabad)
Date of order: 19th June, 2023

The Hon’ble Court directed the Appellate Authority to decide the appeal which was filed belatedly after considering the peculiar facts of the case and the ill health of the petitioner which the Court considered a bona fide reason for the delay in filing of the appeal.

FACTS

The ASMT-10 for total demand of Rs.1.10 crores was issued to the Petitioner on 20th May, 2020. Due to the outbreak of the Corona Pandemic, the office of the Petitioner was not working in a routine manner and on account of this reason, he could not receive the said notice nor reply to it. Thereafter, the department issued a show cause notice and also issued ex-parte order in July 2021 demanding the said amount of tax along with interest and penalty. The petitioner, in July 2022, preferred an appeal under Section 107(1) of the CGST/SGST Act against the said order but the Appellate authority dismissed the said appeal vide order dated 26th December, 2022 on the grounds that the same was filed beyond the period of limitation. Hence, the petition.

HELD

The Hon’ble Court noted that as a part of the justification of delay in filing the appeal, the petitioner submitted that he fell seriously ill for which he was continuously under medical treatment from 5th February, 2021 to 19th July, 2022. He also produced the necessary evidence in support thereof. Further, he filed the appeal immediately after the recovery action was initiated. In these circumstances, the Hon’ble High Court held that although the appeal was filed beyond time, in the peculiar set of facts and circumstances, the reason for delay prima facie, appears to be bona fide. Hence, the Hon’ble Court hence set aside the appellate order and the petitioner was directed to file the appeal within two weeks, and the Appellate Authority was directed to consider the appeal filed on merits without raising any objection on the limitation.

38 Stallion Energy (P) Ltd vs. UOI
2023 152 taxmann.com 211 (Gujarat)
Date of order: 15th June, 2023

The Court dismissed the petition stating that where the department recovered the tax demand confirmed in the Adjudication Order after the expiry of the appeal period of three months, and the petitioner thereafter filed an appeal against the said Order by paying 10 per cent pre-deposit after the said period but within the extended period with prayer for condonation of delay, the prayer for a refund of the amount in excess of 10 per cent should be made before the appellant authority.

FACTS

The adjudication order confirming the tax demand of Rs.56 lakhs was passed against the assessee on 2nd March, 2022, and the order for provisional attachment was also passed on 16th June, 2022. Out of the total demand, an amount of Rs.46 lakhs was withdrawn by the respondents from the bank account of the petitioner. The petitioner filed the appeal on 4th July, 2022 along with a letter for condonation of delay and pre-deposited 10 per cent of the tax. The petitioner prayed that the respondents be directed to refund the remaining amount (i.e. the amount in excess of 10 per cent of the tax demand). On the other hand, the department contended that once the amount of Rs. 46 lakh is already recovered as per the provisions contained in the Act read with the Rules, it is not open for the petitioner to request for refund of the said amount merely because the petitioner has preferred an appeal under section 107 of the Act.

HELD

The Hon’ble Court dismissed the petition holding that if the appeal filed by the petitioner is allowed by the Appellate Authority, it is always open for the petitioner to make such request before the authority that direction be issued to the respondents to refund the amount.

39 Shree Ram Agrotech vs. State of Jharkhand
2023 152 taxmann.com 82 (Jharkhand)
Date of order: 15th June, 2023

The summary order passed without issuing a detailed show cause notice and recovery notices issued without detailed order in the original are liable to be quashed.

FACTS

The petitioner challenged the summary order in Form DRC-07, the appeal order dismissing the appeal preferred by the Appellant against the said DRC-07 and also the recovery notice issued based on the Summary Order in Form GST DRC-07. The petitioner requested the detailed order in terms of Section 73 of the JGST Act and the show cause notice, the petitioner vide its letter dated 1st September, 2021, requested the respondent authorities to provide a copy of the detailed order and the show cause notice as soon as possible. The respondent authorities expressed their inability to provide a copy of the detailed order and the show-cause notice to the petitioner as these documents were not available in the records of the respondent authorities as no copy of the detailed order and the show cause notice was provided to the petitioner

HELD

The Hon’ble Court held that as no detailed adjudication order is passed in terms of Section 73(9) of the JGST Act, 2017, the authorities have contravened the said provisions. The court also observed that no detailed show cause notice was issued to the Petitioner and the summary show cause notice in Form DRC-01 is of not much avail as it does not provide the specific alleged violations by the Petitioner and also does not specifically give the opportunity to the Petitioner to rebut the allegations of the Respondent. The Court further observed that the Appellate Authority has not considered any of the grounds taken by the petitioner herein and dismissed the appeal without discussing the same on merits though the grounds were on record. The Court, therefore, set aside the demand and quashed the summary order, appellate order and recovery notice with a liberty to the department to issue fresh show cause notice to the appellant in terms of provisions of the JGST Act.

40 Car Chassis Carriers (P.) Ltd vs. Assistant Commissioner
2023 152 taxmann.com 368 (Calcutta)
Date of order: 22nd March, 2023

Where the department did not give details of RC cancelled suppliers to the assessee as well as reasons for such cancellation and recovered the ITC from the assessee by issuing a direction to reverse such ITC by email, the Hon’ble Court set aside the said direction and directed refund.

FACTS

The issue before the Court was whether the respondent department could have directed the appellant/assessee to reverse the input tax credit against the supply on the grounds that they have purchased materials from a dealer whose registration has been cancelled.

HELD

The Court observed that the details of such cancellation were not furnished to the appellant and that, the appellant having availed the input tax credit against the inward supply, cannot be directed to reverse the input tax credit by way of an email communication without mentioning as to what was the basis of the cancellation of registration of the selling dealer. The court further held that the procedure adopted by the authority for directing the reversal of the input tax credit and thereafter compelling the appellants to pay the amount is not sustainable in the eyes of the law but is in violation of the principles of natural justice. The Court, therefore, allowed the writ petition and set aside the communication sent by the authority by email directing the authority to remit the amount of input tax credit which was reversed by the appellant on effecting payment without prejudice to their right by transmitting the same amount in the appellants’ electronic credit ledger.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.14/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-1 for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.15/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.16/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-7 for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

4. Notification No.17/2023-Central Tax dated 27th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for May, 2023, to 30th June, 2023 for registered persons whose principal place of business is in district of Kutch, Jamnagar, Morbi, Patan and Banaskantha in the State of Gujarat.

B. ADVANCE RULINGS

28 ITC vis-à-vis Co-op Society
Mahavir Nagar Shiv Shrushti Co.op Housing Society Ltd. (Order No.MAH/AAAR/AM-RM/10/2022-23 dated 30th September, 2022) (Mah)

The facts are that the Appellant is a co-operative housing society registered under the Maharashtra State Co-operative Societies Act, 1960.

The Appellant constructed a building on the plot allotted by MHADA.

In its bye Laws, amongst other things, following objects are covered.

“a) To manage, maintain and administer the property of the society;

b) To raise funds for achieving the objects of the society,

c) To undertake and provide for, on its own account or jointly with a cooperative institution, social, cultural or recreative activities.”

For achieving above objects, the appellant society raises funds by collecting contributions from the members of the society.

The said contributions are also called as charges in the bye laws of the appellant Society.

The charges to its members include property taxes, water charges, common electricity charges, contribution to repairs and maintenance funds, expenses on repairs and maintenance of the lifts of the society, including charges to run the lifts, contribution to sinking fund, service charges, car parking charges, interest on the defaulted charges, repayment of the installment of the loan and interest, non-occupancy charges, insurance charges, lease rent, nonagricultural tax, or any other charges.

The said charges are collected by the society on monthly or quarterly basis by issuing invoices.

The appellant Society has appointed M/s Unique Rehab Pvt Ltd (hereinafter referred to as the “contractor”) as the contractor for carrying out major repairs, renovations and rehabilitation works for the society. The said contractor is charging service charges along with GST for carrying out the works contract service.

The appellant Society had obtained registration under GST.

The appellant Society filed AR application dated 7th July, 2021 for determining following three questions:

“a) Whether the activities carried out by the applicant for its members qualify as “supply” under the definition of Section 7 of the CGST Act, 2017.

b) Whether the applicant is liable to obtain registration under the GST law?

c) If the activities of the applicant are treated as “supply” under the CGST Act, 2017 then whether the applicant is eligible to claim the ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant?”

The ld. AAR, vide its order No.GST-ARA-19/2021-22/B-94 dated 10th November, 2021 – 2021-VIL-418-AAR, determined question (c) of eligibility of ITC against the Appellant Society and held that Appellant Society is not eligible for ITC on repairs in view of the restrictions imposed under Section 17(5)(c) of the CGST Act, 2017.

Against above AR, this appeal was filed before Maharashtra AAAR.

Before AAAR the grounds were reiterated that appellant is entitled to get the ITC.

Amongst others, the non-application of restrictions of section 17(5)(c) was sought to be explained.

The ld. AAAR analysed position in view of relevant provisions. The ld. AAAR observed that the Appellant Society has been formed with an objective to facilitate or benefit their members by way of undertaking various activities, thereby, providing services to their members against charges in terms of their bye-laws. It is observed that Society levied 18 per cent GST on the taxable components of the charges collected by them from their members. The ld. AAAR observed that all the said underlying services provided by the appellant-society will be covered under the heading 9995 enumerated at Sl. No. 33 of the Notification No. 11/2017-C.T. (Rate) dated 28th June, 2017 having the description “services of membership organization”, and all the underlying services including the services related to building repair and renovation for which the appellant society is charging to their members, are nothing but services of membership organisation. Ld. AAAR held that their above view is also substantiated by the set of objectives and duties of the Society as prescribed under their bye-laws, which clearly state that the society’s core function is to manage, maintain and administer the society property. The ld. AAAR held that the argument that the Society is providing works contract services to their members while undertaking the task of repair, renovation, and rehabilitation of the society is not acceptable as the said services of repair, renovation, and rehabilitation of the society building would be covered under the aforesaid functions entrusted upon the appellant society in terms of the society’s bye-laws.

The ld. AAAR observed that the appellant is not supplying separate services like clearing services or repair services etc and does not recover the cost of such services under separate head specified for such services. Referring to section 17(5)(c), the ld. AAAR observed that the ITC for inward works contract services is eligible when it is for outward works contract service.

The ld. AAAR observed that the society itself is not works contract service provider, nor it is in the business of providing works contract services. Observing that the works contract services received by society, from appointed contractor, are for the common benefit of the members, and hence, the Society’s contention that they are providing works contract services to their members, is not acceptable and ld. AAAR rejected appeal and confirmed the order of AAR.

29 Registration – Permanent site office
Konkan Railway Corporation Ltd. (Order No.02/ODISHA-AAR/2022-23 dt.20.9.2022) (Odisha)

The facts are that the applicant, a Government Company having its principal place of business at Navi Mumbai, Thane, Maharashtra is engaged in providing works, contract service, transportation of gooods and passengers by railways, and project services to zonal railways and other agencies. The applicant has received a letter of acceptance (LOA) dated 15th February, 2022 for executing construction of major bridges, ROBs, supply of vehicle, site facilities and other allied works between km 143 to km 184 (172 (29 Route km + 12.108 Long chainage=41.1 km)) of Khurda Road- Bolangir new BG Rail line project of East Coast Railway (ECR) in Boudha District, Odisha. The total cost of the contract is R337.18 crore and the entire work is to be completed within 24 months from the date of issue of LOA. The applicant was required to carry out various functions like provision of vehicles, construction of viaduct, major bridge and ROBs, supply, fabrication, painting and erection of open web welded steel girders, supply, fabrication and fixing of steel sleepers for track on bridge as per tender documents and more such other functions.

The applicant submitted that it has no permanent /fixed establishment / premises in State of Odisha. However, the applicant will at its own expense, maintain sheds, storehouses, and yards in such situations and in such numbers as in the opinion of the engineer it required for carrying on the works.

The applicant contended that in absence of fixed establishment from where the supply is made, the “Location of Supplier of service” is the usual place of the supplier. It was its argument that since LOA is received by it at its address at Navi Mumbai, Maharashtra, where it has principal place of business and also registration there, the same will be the location of supplier.

The applicant also contended that in light of section 12(3)(a) of IGST Act, the place of supply is Odisha, as the contract is relating to immovable property.

Accordingly, it was submitted that the place of supply is Odisha and transaction is covered by IGST.

Applicant further submitted that the following three are the requirements to say that there is ‘fixed establishment’.

a) Having a sufficient degree of permanence;

b) Having a structure of human and technical resources; and

c) Other than a registered place of business.

It was submitted that a fixed establishment refers to a place of business which is not registered and one where the person undertakes supply of services or uses services for own needs in such place. Therefore, it was submitted that every temporary or interim location of a project site or transit-warehouse cannot become a fixed establishment. It was argued that project site or warehouse kept by applicant will not automatically become Fixed Establishment (FE). It was further argued that temporary presence of staff by way of a short visit does not make that place a fixed establishment. It was further contented that duration of site camp may not be criterion to determine Fixed Establishment by itself;

Explaining nature of activity at site the applicant submitted that site office can be used for accommodating office of project incharge and very few site engineers will be deployed in Odisha. The engineers may be staying nearby the site on their own.

It was submitted that most of the higher staff will travel from Maharashtra. The accommodation will be provided by ECR free, being part of the same Ministry.

It was further explained that most of the work will be executed through a sub-contractor located and registered in Odisha and they will bill to applicant under IGST and in turn applicant will bill to ECR under IGST. It was emphasised that there will not be any revenue loss to Odisha.

Based on the above facts, following questions were posed before the ld. AAR.

“(A). Whether separate registration is required in Odisha state? If yes, whether E-tender document/LOA would suffice as address proof since nothing else is with the Applicant and service recipient will not provide any other proof?

(B). If registration is not required in Odisha state and if we purchase goods from a supplier of Maharashtra and want to ship goods directly from the premises of a supplier of Maharashtra to Odisha state, then whether CGST & SGST would be charged from us or IGST by the supplier of Maharashtra?

(C). If registration is not required in Odisha state and if we purchase goods from a dealer of Odisha to use the goods in Odisha then whether IGST would be charged from us or CGST & SGST by the dealer of Odisha?”

The ld. AAR examined the facts and submission of applicant. The ld. AAR observed that the scope of the work mostly includes construction of bridge for the proposed new line, supply, fabrication, painting and erection of open web welded steel girders, open/pile/well foundations, setting of batching plant for production of controlled concrete and setting up of workshops for fabrication, painting, etc. of steel superstructure, which will be ‘Works Contract Service’.

The ld. AAR made reference to section 22(1) of CGST Act which provides for registration by taxpayer from where supply is made. The ld. AAR observed that for the purposes of obtaining registration, it is important to identify the ‘origin’ of supply even though GST is a ‘destination’ based tax. Though the tax goes to the destination State, the registration is required in the origin-State. The ld. AAR further observed that in case of “works contract” service, place of supply is where the immovable property is located and place of Supply (as determined under IGST Act) provides the ‘destination’ and this cannot decide place of registration. The ld. AAR held that the location of Supplier is relevant for registration. The ld. AAR made reference to Sec 2(71) which defines “location of the supplier of services” and reproduced the same as under:

“(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(d) in absence of such places, the location of the usual place of residence of the supplier;”

The ld. AAR found that the contract is for Rs.337.18 crore and for the purpose of construction of bridge for the proposed new line, supply, fabrication, painting and erection of open web welded steel girders, open/pile/well foundations, setting of batching plant for production of controlled concrete and setting up of workshops for fabrication, painting, etc. of steel superstructure, huge quantity of steel, cement, sand, aggregates, other construction materials and engineers, technicians, labour force will be required. Therefore, the nature of supply is such that, it is not feasible to get it supplied from the State of Maharashtra, observed the ld. AAR. Accordingly, the ld. AAR opined that an establishment is definitely required in the state of Odisha, where the work is being carried out. It was further found that the applicant will at its own expense, provide itself with sheds, store houses and yards in such situation and in such numbers as felt necessary by an engineer for carrying on the works and the applicant will keep at each such sheds, storehouses and yards a sufficient quantity of materials.

From Tender it was also found that the applicant shall construct one site office for the Railway Engineer, with new furniture and equipments for the Engineer’s office at no extra payment by East Coast Railway. Further it was observed that applicant has to deploy a good number of site engineers and technical personnel in Odisha for supervision of the job at site and give report to applicant’s head quarter at Mumbai, Maharashtra.

The contention of applicant about no major storing of material by it was also found incorrect in terms of tender conditions.

The contract also involved a duration of 24 months, involving activity of its staff and material.

Having above facts, the ld. AAR observed that the applicant is required to maintain suitable structures in terms of human and technical resources with sufficient degree of permanence at the site of East Coast Railway, Odisha to effect supply of desired services as per the terms and conditions of the work order. The ld. AAR held that such site office is establishment as defined under section 2(7) of the IGST Act and the location of the supplier will be in Odisha in terms of section 2(15) of the IGST Act. The Karnataka AAR cited by applicant in case of T & D Electricals (No. KAR ADRG 18/2020 dated 31st March, 2020) distinguished by the ld. AAR.

Accordingly, the contention of the applicant that the location of the supplier is in state of Maharashtra and not in Odisha rejected by ld. AAR and it held that the applicant is required to be registered under GST in Odisha. The other questions held not required to be decided in view of above ruling.

30 Classification – ‘Paratha’
Vadilal Industries Ltd. (Order No.GUJ/GAAR/APPEAL/2022/20 (In Appl. No.AR/SGST & CGST/2021/AR/11 dated 15th September, 2022 (Guj)

Originally the appellant had raised following questions before ld. AAR.

“i). Whether the product viz. ‘Paratha’ i.e. various varieties of Paratha produced by the applicant merit classification under HSN Code 19059090?

ii). Whether the product, namely, ‘Paratha’ i.e. all varieties of Paratha produced by the applicant are chargeable to 5 per cent GST (i.e. 2.5 per cent SGST and 2.5 per cent CGST) under Sl. No. 99A of Schedule-I of Notification No. 01/2017-CT (Rate) and Notification No. 01/2017-IT (Rate) dated 28-6-17?’’

The ld. AAR in Advance Ruling No. GUJ/GAAR/R/20/2021 dated 30th June, 2021 – 2021-VIL-346- AAR, held that the appellant’s ‘Paratha’ are covered by HSN 21069099, liable to GST @ 18 per cent. This is an appeal filed by appellant before Gujarat AAAR against above AR.

In AR proceedings the appellant has given information about the products. The Ld. AAAR has referred to same as under:

“The main issue here is to decide the classification of the product viz. various types of paratha i.e. Malabar Paratha, Mixed Veg Paratha, Onion Paratha, Methi Paratha, Alu Paratha, Laccha Paratha, Mooli Paratha and Plain Paratha having common ingredient as wheat flour varying in composition from 36 per cent to 62 per cent and having other ingredients viz. Water, edible vegetable oil, salt, anti-oxidant etc. These Parathas are sold by appellantin packed and frozen condition and required to be cooked on pan or griddle for-3-4 minutes till the Paratha is golden brown on both sides. The detailed cooking instruction are provided on the packaging of respective Parathas.”

The appellant has submitted that the ld. AAR has erred in classifying product under HSN 2106. It was submitted that their products i.e. various types of Parathas are classifiable under Heading 1905 which covers “Bread, pastry, cakes, biscuits and other bakers’ wares, whether or not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products” and not under Heading 2106 which covers “Food preparations not elsewhere specified or included” as held by Ld. AAR, which is a residual entry.

The ld. AAAR held that the classification of goods under the GST regime has to be done in accordance with the Customs Tariff Act, 1975, which in turn is based on HSN. The rules of interpretation, section notes and chapter notes, as specified under the Customs Tariff Act, 1975, are applicable for interpretation. Therefore, the ld. AAR has held that various types of Parathas of appellant do not merit classification under Heading 1905.

The argument of appellant was that their products are akin to roti or chapatti which is classifiable under Heading 1905 and liable to 5 per cent GST by virtue of Entry at 99A of Schedule to Notification No. 01/2017 -Central Tax (Rate) 28th June, 2017.

It was found by the ld. AAAR that the composition of various types of parathas as provided by the appellant have one common ingredient wheat flour (36 per cent to 62 per cent depending upon the type of paratha) and other ingredients are water, edible vegetable oil, salt, anti-oxidant, alu (potato), vegetables, mooli (radish), onion, methi etc. whereas, in common parlance, plain roti or chapatti is basically made only from wheat flour apart from water. Therefore, on the basis of ingredients used in the appellant’s products and roti or chapatti, the ld. AAAR disagreed with contention of appellant about similarly of their products with Roti and rejected the said ground. The further controversy of appellant was that there is no need to refer to General Rules of Classification given in Custom Tariff Act.

The ld. AAAR reproduced the said Notes and held that Rules are required to be considered. Rejecting the contention of appellant that in their case Rule 3(b) is applicable for classifying Paratha under chapter heading 1905 as the component viz. wheat flour, which gives Paratha its essential character, is akin to Roti or Chapatti, the ld. AAAR observed that the said contention does not hold ground as appellant’s products i.e. different varieties of Parathas are different from Roti and Chapatti. The ld. AAAR observed that the only common thread between these items is usage of wheat flour; however, the percentage of usage of wheat flour used in Parathas manufactured by the appellant ranges from 36 per cent to 62 per cent whereas the ingredients of Plain Roti or Chapatti is wheat flour apart from water. Finding that there are various other ingredients used in Paratha, the ld. AAAR rejected argument of appellant and observed that Parathas supplied by the appellant will not fall under the category of Roti or Chapatti and will not be classifiable under Chapter heading 1905. The ld. AAAR held that the products supplied by the appellant are quite different from plain Roti or Chapatti and are therefore not eligible for the concessional rate of 5 per cent GST (applicable to Plain Chapatti or Roti), provided under Sl.No.99A of Schedule I to Notification No. 1/2017-CT (Rate) dated 28.06.2017 as amended. Regarding justification for classification in HSN 2106, the ld. AAAR reproduced the heading 2106 and particularly made reference to supplementary note 5 to Chapter 21 of the Customs Tariff which explains the scope of tariff heading 2106 as under:

“5. Heading 2106 (except tariff items 2106 90 20 and 2106 90 30), inter alia, includes:

a. protein concentrates and textured protein substances

b. preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk or other liquids), for human consumption;”

It was also noted by ld. AAAR that the explanatory notes to HSN Code 2106 similarly mentions that this heading covers “Preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk, etc.), for human consumption”.

The ld. AAAR also observed that among the headings 1905 and 2106, latter occurs last in the numerical order and hence heading 2106 would be more appropriate and right classification of appellant’s products, even from this angle.

The other argument of the appellant that heating the said Parathas for 3-4 minutes make no difference in product also rejected by ld. AAAR as on heating the colour of paratha changes and it becomes ready for consumption. The ld. AAAR distinguished the advance ruling by Maharashtra Authority of Advance Ruling in the case of M/s Signature International Foods India Pvt Ltd [2019 (20) GSTL 640 – 2018-VIL-312-AAR], on ground that the AR by any authority is binding on applicant and jurisdictional officer of applicant and not on others. The ld. AAAR concurred with Kerala AAR in the case of M/s Modern Food Enterprises Pvt Ltd, in which Parathas are classified as liable to tax @ 18 per cent.

Observing as above, the ld. AAAR confirmed the AR passed by AAR, rejecting appeal of the appellant.

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. SPR&MD Committee felicitates young CAs

The Seminar, Public Relations & Membership Development Committee (SPR&MD) Committee of BCAS felicitated young successful CAs of the May 2023 Examination at a talk show titled “Let’s Get Techni-CA-l – Avenues & Opportunities” held on 11th August, 2023 at the Society Hall. The event was attended by over 100 participants, including some walk-ins.

Felicitation of ChAmpion CA Shubham Nighute by President, CA Chirag Doshi, Past President and Committee Chairman, CA Uday Sathaye and the eminent speakers, Past President CA Nitin Shingala and CA Vivek Shah (not in the pic)

The two eminent speakers, CA Nitin Shingala (Past President) and CA Vivek Shah, enthralled the audience with their presentations and guided them on how to mould themselves into becoming discerning professionals.

E-felicitation of ChAmpions and All India Rankers: AIR 10 CA Pooja Baghmar and AIR 11 CA Gogula Bhargavi

The audience were overwhelmed after listening to the experiences shared by CA Shubham Sahebrao Nighute during his journey of becoming a chartered accountant overcoming various obstacles and innumerable challenges faced by him in his life. Two other all-India rankers, AIR 10 CA Pooja Baghmar from Chennai and AIR 11 CA Gogula Bhargavi from Vijaywada were also e-felicitated. They too shared their experiences with the audience.

Visit the below link or scan the QR Code with your phone scanner app:

YouTube Link: https://www.youtube.com/watch?v=N_Hs-Hu899c

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2. ITF Study Circle Meeting on “Taxation of Software as a Service”
The International Tax and Finance Study Circle of the Society organised a hybrid meeting on 10th August, 2023 to discuss the topic of “Taxation of Software as a Service”.

The discussion began with the speaker CA Divya Jokhakar touching upon different services (with examples) which would be covered by the expression Software as a Service (‘SaaS’).

The taxability of payments for SaaS as royalty under the Income-tax Act, 1961 (‘the Act’) as well as various tax treaties was discussed.

Various provisions of Copyright law were also discussed to test the application of the definition of “royalty”.

Further, the situations in which such payments would attract the provisions related to capital gains were also discussed.

Further, the prospect of these payments falling within the ambit of Fees for Technical Services (‘FTS’) was also discussed.

During the course of discussions, key rulings of the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd (432 ITR 471) and Kotak Securities Ltd (383 ITR 1) were discussed.

It was further discussed that once such payments were not taxable as royalty / FTS, the taxability as business profits would need to analysed – both in terms of the Act (business connection) and the treaty.

The applicability of Equalisation Levy II (introduced in 2020) to the payments for SaaS was also discussed.

The speaker suggested the order in which the above provisions ought to be applied in order to determine the taxability of SaaS.

Towards the end of the session, various practical examples in terms of the taxability of services such as Zoom, Mailchimp, Office 365, etc — which are used frequently — were discussed.

3. Suburban Study Circle meeting on “Amendments in the Tax Audit Report”

The Suburban Study Circle organised a meeting on “Important Amendments in the Tax Audit Report for Trusts / NGOs — Form 10B/10BB” on 9th August, 2023, under the leadership of CA Pankaj Jain.

Making an insightful presentation, Jain shared his views on the following:

An elaborate discussion on various new and complex clause applicability of the respective forms:

1. Statutory provisions vis-à-vis practical difficulty

2. Regulatory implications for CA / CS professionals and matters to be included in the audit report

3. Management responsibility

4. Compliance checkpoints

5. Other practical challenges

The session covered numerous real-life examples, with Jain sharing an excellent clause-by-clause interpretation.

4. Indirect Tax Laws Study Circle case studies on “GST in Automobile Industry”

The Indirect Tax Laws Study Circle presented six case studies on various aspects of GST with reference to clarificatory circulars, provisions of law, judicial pronouncements and embracing technology, and the overall impact of all of these on the automobile sector. Presented by CA Shabd Roop Satsangi, the case studies covered the following aspects:

Discounts and Incentives, Reimbursement Claims, Price & Margin Support in the light of Tata Motors Ltd vs. Deputy Commissioner of Commercial Taxes (SPL) – [2023] 150 taxmann.com 382 (SC) & Circular No. 195/07/2023-GST, dated 17th July, 2023

Issues in supply for repairs undertaken in the state outside the state of registration

Sale of secondhand vehicles, calculation of margin, understanding the transaction value thereof w.r.t. ancillary services provided

Blocked credits for demo vehicles whether purchased, leased, supply of ancillaries like stereo, etc., foreign trips or gold coins, etc.

Taxation of add-on software like speed controllers, boot automation and massage functions at rear seats when opted at different time frames, i.e., after or at the time of supply and payment made to dealer or manufacturer separately.

Issues of composite supplies, mixed supplies or independent supplies were also discussed as well as valuation principles under 15.

Change of definition of “SUV” in light of AAAR Maharashtra — Re: Tata Motors Ltd. – order no. MAH/AAAR/SS-RJ/06/2019-20 & Circular No. 195/07/2023-GST, dated 17th July, 2023.

Pre-GST jurisprudence in the CENVAT Regime, multiple GST AARs, clarificatory circulars, as well as principles held in the case of Mohd. Ekram Khan & Sons (SC) were discussed by the group.

The meeting was held virtually on 3rd August, 2023. Around 68 participants from across India participated in the event mentored by CA Yash Dhadda, discussed the bare law, circulars, AARs and SC decisions. The seminar also presented an interesting segment analysis on the automobile sector.

5. IESG Meeting on China’s Economy

The International Economics Study Group (IESG) organised a virtual meeting on 1st August, 2023 to discuss “What’s really happening in China”. Chaired by CA Harshad Shah, the meeting noted that Chinese Economy is in turmoil and on the brink of deflation, which can trigger a recession, create a ‘doom loop’ and loss of momentum. This could mean China is headed for a lost decade, similar to Japan in 1990s. China’s property market is in crisis with a bubble situation (the property sector accounting for over 30 per cent of GDP), educated youth unemployment surging to 21.3 per cent (experts suggest it could go to 46.5 per cent), China’s $23 trillion local debt and a massive infrastructure mess about to get worse as cities are on the verge of a debt crisis threatening the stability of the banking system. The meeting also noted that China is facing complex geopolitical and geoeconomical challenges, with the ongoing trade and technology (mainly chips) war turning into Cold War II. China is also facing serious internal challenges with high unemployment, falling income and climate change, which is bringing about extreme weather conditions like floods, drought and heat wave. Its tech titans are losing investors, due to a crackdown by regulators, the collapse of CCP due to challenges it faces on the economic and social front and rare dissent shown by the public. This has resulted in many MNCs relocating their manufacturing from China to India in the China+1 policy.

6. Indirect Tax Laws Study Circle Meeting on the concept of Taxable Persons

The group leader of the Indirect Tax Study Circle made a virtual presentation on the topic “Casual Taxable Person and Non-resident Taxable Person” on 21st July, 2023. The presentation focused on the legal concept, with multiple case studies addressing the probable practical issues relating to the Casual Taxable Person and Non-Resident Taxable Person. The presentation and discussion broadly covered the intricacies of the following topics:

Meaning of Casual Taxable Person

Situations to identify the events determined as “occasional” as well as the impact of the definition of business, the furtherance of business and supply by itself, ‘supply made from’ position, the impact of identification of supply and clientele prior to the change of location

Classification for Inter State vs. Intra State w.r.t. to Casual Taxable Person

Mandatory registration provisions and situations for service providers were discussed on these aspects of co-work spaces, marketing services, etc.

Situations covering deemed supplies, ISD mechanism

Inference of casual taxable person analogy for classification of services

Non-Resident Taxable Person, its impact and utility

Around 64 participants all over India participated in the discussion.

7. Direct Tax Laws Study Circle Meeting on intricacies and issues relating to Reassessment

Under the leadership of the speaker, CA Dharan Gandhi, the Direct Tax Laws Study Circle organised a meeting on the topic, “Reassessment under the Income Tax – Law and Practice”. The meeting discussed the following concepts and issues relating to assessment procedures:

Concept of Self-Assessment, Assessment, Revision of Assessment and Rectification of Assessment under the Income-tax Act, 1961 (Act)

New provisions relating to Reassessment, Search and Survey as Introduced by the Finance Act 2021, explaining and comparing the old and new provisions of Section 147 of the Act.

• Recent Case Laws relating to Section 148:

a. [2022] 449 ITR 517 (Delhi) Suman Jeet Agarwal vs. ITO

b. (2022) 329 CTR (Mad) 809 Dr Mathew Cherian & ORS. vs. ACIT

Section 148A of the Act relating to conducting an inquiry and providing an opportunity before issuance of a notice under section 148

Section 149 of the Act relating to the time limit for notice

By delving into the minute details of these statutory provisions, the speaker shed light on the nuanced procedures and potential pitfalls that arise during the reassessment process. The meeting was held on 14th July, 2023.

8. Taxation Committee organises a Webinar on Filing of Income Tax Returns for A.Y. 2023-24

A webinar to guide taxpayers on filing their income tax returns (ITR) was taken by CA Divya Jokhakar on 5th July, 2023. The webinar highlighted that the due date for filing returns varies depending on a person’s income and filing status. He can file his returns online or by mail. By following these tips, he can file his income tax return easily and on time. Starting early will give him more time to gather his documents and ensure the accuracy of the returns. Using tax preparation software can help him file his returns quickly and easily. He can also get help from a tax professional. The speaker explained how A.Y. 2023-24 returns have changed and what precautions are needed to be taken. She further gave examples of disclosures relating to the foreign assets and incomes.

She also emphasised the importance of the various rules in Income Tax Rules 1962 and the way to compute and disclose in the ITR.

Towards the end, the method of e-verification of the ITR was explained, and it was emphasised that the new rule mentions that one must everify the ITR within 30 days of e-filing.

Visit the below link or scan the QR Code with your phone scanner app:

YouTube Link: https://www.youtube.com/watch?v=zDsRLnNN_uk

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9. Taxation Committee organises a Seminar on CBDT’s e-Verification Scheme, 2021

A hybrid seminar on CBDT’s e-Verification Scheme, 2021 was organised on 27th June, 2023.

Sunil Kumar Jha, Director of Income Tax (I&CI), Mumbai, broadly explained the important features of the e-Verification Scheme, 2021, and the manner in which the Income-tax department is collecting / collating data and information from multiple sources. He educated the members about the rationale of introducing this scheme and the intention of the department to share the information they have received from sources with the taxpayers.

Nagesh Kale, ITO (I&CI), Mumbai, made a detailed presentation explaining the features and provisions of this scheme. He also shared certain statistics regarding the number of cases selected for e-verification for F.Y. 2019-20 and F.Y. 2020-21.

Sanjay Joseph, CIT, DIT Systems, briefly explained how information collected by the department is displayed on the AIS portal and how the taxpayers are allowed to give a response on the reporting portal. He threw light on the manner of processing the query once a taxpayer provides a response on the reporting portal.

This was followed by a Q&A session wherein Sunil Kumar Jha, DIT (I&CI), and Shri Sanjay Joseph, CIT, addressed the practical issues faced by the taxpayers while responding to e-verification queries and reporting on the AIS portal.

Visit the below link or scan the QR Code with your phone scanner app:

YouTube Link: https://www.youtube.com/watch?v=MeDGy0mpW88

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BCAJ Admin

Miscellanea

I. TECHNOLOGY

1. AI use, rising in influence campaigns online, but impact limited: US cyber firm

Google-owned U.S. cybersecurity firm Mandiant said it had seen increasing use of artificial intelligence (AI) to conduct manipulative information campaigns online in recent years, though the technology’s use in other digital intrusions had been limited so far. Researchers at the Virginia-based company found “numerous instances” since 2019 in which AI-generated content, such as fabricated profile pictures, had been used in politically-motivated online influence campaigns.

These included campaigns from groups aligned with the governments of Russia, China, Iran, Ethiopia, Indonesia, Cuba, Argentina, Mexico, Ecuador, and El Salvador, the report said. It comes amid a recent boom in generative AI models such as ChatGPT, which make it far easier to create convincing fake videos, images, text, and computer code. Security officials have warned of such models being used by cybercriminals.

Generative AI would enable groups with limited resources to produce higher quality content for influence campaigns at scale, Mandiant researchers said. A pro-China information campaign named Dragonbridge, for instance, had expanded “exponentially” across 30 social platforms and 10 different languages since it first began by targeting pro-democracy protesters in Hong Kong in 2019, said Sandra Joyce, vice president at Mandiant Intelligence. Yet, the impact of such campaigns was limited. “From an effectiveness standpoint, not a lot of wins there,” she said. “They really haven’t changed the course of the threat landscape just yet.” China has denied U.S. accusations of involvement in such influence campaigns in the past.

(Source: indianexpress.com 18th August, 2023)

2. India’s digital economy creates a new vote bank all parties want to woo

If politics decides the shape of the economy, the economy too shapes the politics. For long, Indian politics has revolved around two big vote banks of caste and religion. Besides these two, pensioners, central government employees and farmers were other vote banks political parties tried to attract with financial benefits. The growth of the middle class after the economic liberalisation brought the issues of governance and service delivery to the centrestage of electoral politics. The rise of Narendra Modi had a significant push from the growing economic aspirations of Indians.

A new vote bank has emerged with the new digital economy which got a major boost during the pandemic restrictions as Amazon, Swiggy, Zomato and many other gig platforms saw sudden spike in business, which meant demand for more gig workers. Political parties have spotted this vote bank and are trying to woo it — the vote bank of gig workers. A sudden explosion of digital economy in recent times created vast opportunities for gig workers, and at the same time concerns have grown over tough working conditions and low benefits in the gig economy. The Rajasthan assembly passing a bill recently to offer social security to gig workers is the latest sign of the political heft gig workers have gained which political parties can ignore only at their own peril.

In April, hundreds of gig workers working with Zomato-owned quick commerce platform Blinkit in Delhi-NCR went on a strike, protesting against a renewed fee structure that they said would reduce their income, disrupting services at several locations. A Delhi-based Blinkit delivery partner told ET that the new structure resulted in a reduction of Rs.200-250 per day in their payout because most dark stores operate within a radius of 2 km. This was one of a series of protests by delivery workers after the pandemic. Last year in July, Swiggy faced strikes by its delivery workers across metro cities amid discussions about the industry’s poor compensations and lack of social security net.

Gig workers in India are young, financially stressed, and largely uninsured, a report found last year after surveying more than 4,000 gig workers from platforms such as Swiggy, Zomato, Uber, Ola, UrbanClap, and Amazon. The report by CIIE.CO, an incubator and accelerator at IIM-Ahmedabad, said 42.1 per cent of respondents reported not having an increase in income over time. In an inflationary environment, this means individuals are earning less each year. About 51.5 per cent of individuals reported not being able to save money.

About 47 per cent of respondents said they had no form of insurance. The most common form of insurance among individuals was two-wheeler insurance. Despite the high levels of risk to their own personal lives, only one in five gig economy workers had some kind of life or health-related insurance. There were around 7.7 million gig workers as of 2020-21, according to a report by government policy think tank Niti Aayog which said the number was expected to exceed 23.5 million by 2029-30.

Gig workers in India now have got all it takes to form a cohesive economic category of voters. They are spread across the country in large numbers as you will find delivery partners and app-based taxi drivers in all parts of India, especially cities. They have a common set of grievances. And they have been organising and protesting to press for their demands. The pandemic gave them high visibility as people were forced to buy online. Strikes and protests by gig workers have deep political impact as they disrupt delivery services in urban areas, thus attracting a lot of attention, and sympathy too. In short, they are a cohesive voting bloc which can’t be ignored.

Shaik Salauddin, the national general secretary of the Indian Federation of App-based Transport Workers representing over 45,000 cab drivers, told Reuters recently that they had been lobbying political parties for a package before the elections.

The first time significant political attention gig workers attracted was in 2020 when the Central government passed a package of labour reforms which made gig workers eligible for social security, insurance, health benefits and pension.

When Congress leader Rahul Gandhi interacted with gig workers in Bengaluru in May while campaigning for the assembly elections, and even took a two kilometer ride with a delivery partner on his scooter, it became clear that gig workers were in a position to influence elections. Bengaluru has nearly 200,000 gig workers. Last year, gig workers from Dunzo protested when the platform introduced an incentive-based model of payment for its delivery agents. The Congress party had promised benefits for gig workers in its election manifesto. Last month, the Karnataka government announced in its budget an insurance scheme with a cover of Rs. 4 lakh for gig workers across the state. The state will pay the entire premium for the scheme under which workers will get a life insurance cover of Rs. 2 lakh and an accidental cover of equal amount.

In July, the Rajasthan assembly passed a bill for the welfare of gig workers. According to the Rajasthan Platform Based Gig Workers (Registration and Welfare) bill, the state will establish a fund for “registered platform-based gig workers” and charge aggregators (the companies such as Amazon, Ola and Zomato) a “welfare fee”. The fee will be a percentage of the value of each transaction related to the gig workers as may be notified by the state. If any aggregator fails to pay the fee on time, an interest of
12 per cent per annum will be charged on the dues.

After Rajasthan, Karnataka is now planning to impose a fee on aggregators to fund welfare of gig workers. “The Social Security Code of 2020, which defines gig workers and creates a separate fund for them, the Motor Vehicle Aggregator Guidelines and now the Rajasthan government’s plan to bring a law to protect the rights of gig workers — these are all the recent successes of our persistent work in the last three years,” union leader Salauddin told TOI in January.

Last year, India’s pension fund regulator had recommended the government introduce a UK-like pension scheme for the country’s gig workers. The Pension Fund Regulatory and Development Authority (PFRDA) had proposed that workers at food and cab aggregators be automatically enrolled into the National Pension Scheme (NPS), a voluntary retirement savings scheme.

Not to be left behind the Congress governments in Karnataka and Rajasthan, the Narendra Modi government at the Centre is expected to start a comprehensive social security programme for gig workers soon.

The plan, part of the Social Security Code enacted in 2020, could include accident, health insurance and retirement benefits, Reuters reported recently, citing a senior government official. Labour Minister Bhupender Yadav has said that any scheme for gig workers might be funded through contributions by federal and state governments, as well as the platforms. An industry expert with direct knowledge of the discussions told Reuters the platforms unanimously agreed with the labour ministry’s proposal about social security for gig workers and were ready to contribute to a “transparently” run welfare fund.

More than 290 million people have already registered for an online government portal meant to issue identity cards to gig workers and other unorganised employees, while gathering such details as biometric data and their skills.

(Source: economictimes.com 17th August, 2023)

II. WORLD NEWS

1. US mortgage rates climb to highest level in 21 years

Mortgage rates in the US have climbed to their highest level in 21 years amid the Federal Reserve’s aggressive interest rate increases. The 30-year fixed-rate mortgage average 7.09 per cent, up from 6.96 per cent last week, mortgage buyer Freddie Mac reported. The rate stood at 5.13 per cent this time last year.

It is the highest level since April 2002 and the first time it has surpassed 7 per cent since last November. Mortgage rates have climbed since the Fed embarked on its campaign to raise interest rates, which at 5.33 per cent now also surpass a two-decade high.

“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” said Sam Khater, Freddie Mac’s chief economist. The 10-year Treasury yield recently hit at 15-year high of 4.258 per cent.

With high mortgage rates making buying a home more expensive, current homeowners who already have a low mortgage rate are more reluctant to sell their homes. With low inventory and rising mortgage rates, would-be homebuyers are being priced out of the market. At $410,200, the median existing-home sales prices in June was the second highest ever recorded, according to a recent report from the National Association of Realtors.

“Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales,” sad Mr Khater. The 15-year fixed-rate mortgage rate average 6.46 per cent, up from last week’s 6.34 per cent.

(Source: www.thenationalnews.com dated 17th August, 2023)

2. As UK Births Hit 20-Year Low, Indian-Born Parents Take Record Share

India overtook Romania as the most common country of birth of foreign new mothers, after a third of all residence visas were granted to Indian nationals. The number of babies born in England and Wales fell to its lowest level in two decades last year, while a record proportion came from parents who were both born abroad, highlighting a long-term shift in the nation’s demographic makeup.

Of all live births, 23.1 per cent were to non-UK-born parents – a proportion that has shot up from 16.7 per cent in 2008, and is up from 21.5 per cent a year ago, according to census data released Thursday by the Office for National Statistics.

The figures also showed the share of babies born to British parents has slipped, from 62 per cent to 60.3 per cent, and the overall number of births sank to 605,479. That’s the lowest since 2002, and points toward slower population growth that could be a drag on both the economy and labor market in the decades ahead.

The “increase in the number of non-UK born mothers is a good thing” given the UK’s own falling birth rate, said Jonathan Portes, professor of economics and public policy at King’s College London. But declining numbers of overall births is the “real story here,” he said, adding that it’s a “serious long-term social problem for us.”

The rising number of births to foreign parents could help ease fears that the UK will face a labor supply crunch as its population ages and retirees out-pace the rate at which new workers come into jobs. But polling suggests migration is still an important concern for British voters.

More than half of the public favor a cut in immigration, according to a recent survey by Kantar and the Migration Observatory. That suggests rising numbers of births to migrant families could be a thorny issue for both major political parties as they face the prospect of a general election next year.

The number of children born to parents who were both from abroad hit 139,953 last year, up from 134,308 a year earlier and its highest level since 2017. Numbers have remained relatively flat for births involving one non-UK-born parent, while births to two UK-born parents have fallen to 365,111, the lowest level in comparable data going back to 2008.

A rise in the number of people immigrating to the UK in recent years is likely to have led to the jump in migrant parents in 2022. A record 606,000 more people moved to Britain than departed last year, boosted by humanitarian programs and demand for workers whose skills were in short supply.

India overtook Romania as the most common country of birth of foreign new mothers, after a third of all third of residence visas were granted to Indian nationals. Afghanistan also entered the top 10 for the first time, after the UK formally opened the Afghan Citizens Resettlement Scheme at the start of 2022.

India also replaced Pakistan as the most common country of birth for non-UK-born new fathers. Pakistan had held the top spot since comparable data began in 2008. In London, more than two thirds of births were to parents where at least one was from outside the UK. The highest percentages were seen in Brent, Westminster, Newham and Harrow, at more than 80 per cent of births.

Outside of London, the Berkshire town of Slough and the Bedfordshire town of Luton were the areas with the highest rate of births to at least one migrant parent, at 75 per cent and 74.6 per cent respectively. Further away from the capital, Oxford and Leicester saw the highest percentages at 65.9 per cent and 65 per cent respectively.

(Source : ndtv.com dated 19th August, 2023)

3. Over 15 Million People Suffer From Food Insecurity in Afghanistan

Amid the ongoing economic and humanitarian crisis in Afghanistan, 15.5 million people in the country are suffering from severe food insecurity, Tolo News reported citing a report by the International Federation of Red Cross. Expressing distress over the crisis, the report stated that the drought in the past three years in Afghanistan and the economic crisis over the past two years have increased the needs of the people of the country.

It further stated that 2.7 million people in Afghanistan are facing famine, reported TOLO News. Seyar Qureshi, an economist said, “In the short term, the Islamic Emirate should talk with the international community for humanitarian aid to Afghanistan continues and prevent a humanitarian crisis.”

Whereas, the Taliban Ministry of Economy said that international aid has not been provided to the development sector. Adding to this, they said that the ministry has launched large economic projects to battle the economic challenges in the country.

Abdul Latif Nazari, deputy of the Economy Ministry said, “The aid of the international community has been humanitarian until now, and no significant development aid has been provided. Our effort is to help reduce poverty and provide employment for the people of Afghanistan by attracting development aid and launching large national projects.”

Moreover, Kabul residents have been complaining that they are dealing with economic problems and there is a need to pay more attention to entrepreneurship for people, according to TOLO News. Dawood, a Kabul resident said, “Organizations that make these donations distribute to those who deserve it. Winter is coming and how will people get their fuel?”

Notably, Taliban completed two years since its takeover of Kabul in 2021. During this period, aid organizations have continuously expressed their concern about the increase in poverty as well as the lack of funds for the people.

The Goverment of India has partnered with United Nations World Food Programme (UNWFP) for the internal distribution of wheat within Afghanistan. “Under this partnership, India has supplied a total of 47,500 MTs of wheat assistance to UNWFP centres in Afghanistan. The recent ongoing shipments are being sent through Chabahar Port and being handed over to UNWFP at Herat in Afghanistan.

On Wednesday, United Nations World Food Programme (UNWFP) in Afghanistan thanked India for its help in providing life-saving food to 16 million people in the country. The generous contribution by the government of India has been acknowledged by the relevant stakeholders in Afghanistan, including UNWFP.

On the medical assistance side, India has so far supplied almost 200 tons of medical assistance consisting of essential medicines, COVID vaccines, anti-TB medicines and medical/surgical items like Pediatric Stethoscopes, Sphygmomanometer mobile type with pediatric BP cuffs, infusion pumps, drip chamber set, electrocautery, nylon sutures etc.

(Source : ndtv.com dated 17th August, 2023)

BCAJ Admin

Statistically Speaking

1. NUMBER OF TAX FILERS IN EACH BRACKET FOR FY 2023

2. DIRECT TAX COLLECTIONS FOR FY 2023–24*

*Data upto 9th July, 2023
Source: Central Board Direct Taxes

3. ESTIMATED TOTAL POPULATION OF INDIA IN 2028 (IN MILLIONS)

Source: Statista, 2023

4. WORLD’S MOST CHARITABLE PERSONS IN THE LAST CENTURY

Ranking	Name	Amount Donated
1	Jamsetji Nusserwanji Tata	USD 102.4 billion
2	Bill Gates and Melinda	USD 74.6 billion
3	Warren Buffet	USD 37.4 billion
4	George Soros	USD 34.8 billion
5	John D Rockefeller	USD 26.8 billion

Source: EdelGive Foundation and Hurun Report

5. INCREASE IN CORPORATE SOCIAL RESPONSIBILITY SPENDS
(Rs in Cr)

Sectors	FY20	FY21	FY22
Health	6,841	9,276	9,987
Education	9,635	8,559	8,382
Environment	1,805	1,337	2,837
Rural Growth	2,301	1,851	1,801
Total Spending	24,966	26,211	25,933

Source: Ministry of Corporate Affairs

BCAJ Admin

Regulatory Referencer

I. COMPANIES ACT, 2013

1. Effective date for enforcement of Section 12 of Competition (Amendment) Act, 2023: MCA has notified 18th July, 2023 as the effective date for the enforcement of section 12 of the Competition (Amendment) Act, 2023. Section 12 of the Competition (Amendment) Act deals with the provisions relating to the appointment of the Director General. Now, the Commission may, with the prior approval of the Central Government appoint Director General for the purpose of assisting the CCI in conducting an inquiry into contraventions of the Act. [Notification No. S.O. 3199(E), dated 18th July, 2023]

2. MCA to launch ‘Refund form’ on V3 portal for availing of refunds against forms filed in V2 Portal: MCA has informed the stakeholders that they are launching a refund form on the V3 portal, effective from 4th August, 2023. Refund forms on the V2 portal will continue to be available for availing of refunds against forms filed in V2 Portal. [MCA update dated 1st August, 2023]

3. MCA to launch Beta Version of ‘View Public Documents’ service: MCA has informed the stakeholders that the Beta Version of the View Public Documents (VPD) service in V3 shall be launched on 16th August, 2023 for V3 documents. Till date, VPD Service was not available on the V3 Portal. Also, the existing V2 VPD Service shall remain available for the stakeholders. [MCA update dated 1st August, 2023]

4. Web version of Form No. RD-1 on V3 Portal: MCA has notified the Companies (Incorporation) Second Amendment Rules, 2023. With this amendment, the MCA has introduced Web Form RD-1 i.e., the form used for filing an application to the Central Government (Regional Director) on the V3 Portal. The web form now includes a new purpose, namely the ‘Notice of approval of the scheme of merger in CAA-11’. Further, the form has been updated to include details of the transferor company, specifying the CIN and name of the company. [Notification dated 2nd August, 2023]

II. SEBI

5. Framework to freeze PAN of Designated persons during ‘Trading Window Closure period’ to be extended to all Listed Companies: SEBI has extended the framework to restrict trading by Designated Persons (DPs) during the “trading window closure” by freezing PAN at the security level for all listed companies in a phased manner. Presently, this framework is applicable only to listed companies that are part of benchmark indices like NIFTY 50 & SENSEX. The new framework will be applicable to the top 1000 companies in terms of BSE Market Capitalisation from 1st October 2023, next 1000 companies from 1st January 2024 & remaining companies from 1st April, 2024. [Circular No. SEBI/HO/ISD/ISD-POD-2/P/CIR/2023/124, dated 19th July, 2023]

6. All non-individual FPIs to provide Legal Entity Identifier (LEI) details to designated DPs: SEBI has mandated the requirement of providing Legal Entity Identifier (LEI) details for all non-individual FPIs. Currently, FPIs are required to provide their LEI details in the Common Application Form (CAF), used for registration, KYC and account opening of FPIs on a voluntary basis. Further, all existing FPIs that haven’t provided their LEIs to their DPs must do so within 180 days from the date of issuance of this circular. This circular shall be effective immediately. [Circular No. SEBI/ HO/ AFD/ AFD– POD–2/ CIR/ P/ 2023/ 0127, dated 27th July, 2023]

7. Amendment in Mutual Fund Trustee’s ‘Half-Yearly Report’ format: As per Master Circular on Mutual Funds, the Trustees shall have arrangements with independent firms for special purpose audit and/or to seek legal advice. Accordingly, SEBI has now modified the Half Yearly Trustee Report format, as provided in Master Circular. The modified format includes for ‘Compliance with the requirement of standing arrangements with independent firms for special purpose audit and/or to seek legal advice’. These provisions shall be applicable with immediate effect. [Circular No. SEBI/HO/IMD/IMD-I –POD1/P/CIR/2023/126, dated 26th July, 2023]

8. Master Circular on ‘Alternative Investment Funds’: The SEBI had issued multiple circulars, directions, and operating instructions for Alternative Investment Funds (AIFs) on a regular basis for necessary compliance. In order to ensure that all market participants find all the provisions at one place, Master Circular on AIFs has been issued. This Master Circular is a compilation of all the existing circulars, and directions issued by SEBI up to 31st March, 2023 for AIFs. [Master Circular No. SEBI/HO/AFD/POD1/P/CIR/2023/130, dated 31st July, 2023]

9. Standardized ‘Terms of Reference’ for audit of firm-level performance data of Portfolio Managers: Earlier, SEBI vide Master Circular dated 20th March, 2023, mandated Portfolio Managers to submit audit reports on firm-level performance data to SEBI within 60 days from the end of each financial year Now, the Association of Portfolio Managers in India (APMI), in consultation with SEBI, has specified standardized Terms of Reference (ToR) for the aforesaid audit of firm-level performance data. The standard terms specified by APMI shall be applicable w.e.f. 1st October, 2023. [Circular No. SEBI/HO/IMD/IMD-POD-1/P/CIR/2023/133, dated 2nd August, 2023]

10. ‘Grievance Redressal Mechanism’ for stock market intermediaries: SEBI has notified amendment in various Regulations such as Merchant Bankers Regulations, Debenture Trustees Regulations, Mutual Funds Regulations, Collective Investment Schemes Regulations, AIFs Regulations, etc. Now, the entity shall redress investor grievances promptly but not later than 21 calendar days from the date of receipt of the grievance and in such manner as may be specified. Also, the Board may recognize a body corporate for handling and monitoring the process. [Notification No. SEBI/LAD-NRO/GN/2023/146., dated 16th August, 2023]

11 Unitholders of REITs holding at least 10 per cent of total units to nominate one director on Board: SEBI has notified an amendment to the SEBI (REIT) Regulations, 2014. A new proviso has been inserted to regulation 4, which defines eligibility criteria. It states that unitholders holding at least 10 per cent of total outstanding units of REIT, must be entitled to nominate one director on the BODs. Further, a new sub-regulation has been introduced to regulation 2 defining ‘group entities of the Manager’. Also, the ‘stewardship code’ has been introduced for compliance by unitholders. [Notification No. SEBI/LAD-NRO/GN/2023/144., dated 16th August, 2023]

BCAJ Admin

Corporate Law Corner : Part A | Company Law

11. Case Law No. 01/September /2023
M/s. Port City Nidhi Limited
ROC-ROC/CHN/ADJ Order/PORT CITY/S. 118 (1) /2023
Office of Registrar of Companies,
TAMIL NADU
Adjudication Order
Date of Order: 15th June, 2023

Order for penalty under Section 454 of the Companies Act, 2013 read with Rule 3 of Companies (Adjudication of Penalties) Rule, 2014 for Violation of Section 118(1) of the Companies Act, 2013

FACTS
PCNL is registered under the provisions of the Companies Act, 1956 under the jurisdiction of ROC, Chennai. The company was taken up for inspection by an Officer authorized by the Central Government and Show Cause Notice was issued for violation of Section 118(1) of the Companies Act, 2013.

Section 118(1) reads as under: –

“Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

It was observed that:

“the minutes Book maintained by the Company was not paginated1 properly and some entries were without the signature of the chairman.

Thus, it was further observed that it is in violation of Section 118(1) of the Companies Act which mandates every company to maintain the minutes of meeting of all the General Meetings in a properly paginated2 manner. Hence the company and every officer of the company who is in default are liable for penal action for violating section 118 (11) of the Companies Act, 2013″.

However, the inspecting officer reported that while replying when the query was raised, company has admitted the same. It has rectified the mistakes and submitted the copies of the updated minutes book, and further sought for lenient view to be taken. However, the inspecting officer recommended to initiate penal action against the company and the officers in default to make sure that such defaults shall not be repeated in the future.

Based on the report of the inspecting officer, RD authorised issuance of adjudication notice to the company and its officers. Managing Director of the company appeared on behalf of Company and himself and accepted the violation subsequent to the Inspecting Officer’s observation that they have filed the updated Minutes Book.

HELD
In view of the above, upon examination and hearing arguments, the company has not complied with Section 118 (1) of the Companies Act, 2013. Hence, penalty was imposed as per Section 118(11) of the Companies Act, 2013.

Section 118(11) of the Companies Act, 2013 reads as under:
“If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.”

Therefore, in view of the above said violation of Section 118 of the Companies Act, 2013, the adjudicating officer in exercise of the powers vested to him under Section 454(1) & (3) of the Companies Act, 2013, imposed a penalty of R25,000/- on the company and R5,000/- each on the officers in default.

12. Case Law No._02_/___2023
M/S. AT & T COMMUNICATION SERVICES INDIA PRIVATE LIMITED
ROC/D/ADJ/ORDER/AT&T/ 2924-2927
Registrar of Companies, NCT of Delhi & Haryana
Adjudication Order
Date of Order: 27th July, 2023

Adjudication Order for non-compliance of the provision of Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 with respect to incorrect certification of e-form by Authorized Signatory and Professional.

FACTS:
M/s AT & T CSIPL, had filed suo-moto application vide e-form GNL-1 dated 25th January, 2023 for the defect in filing of e-form AOC-4 XBRL dated 28th October, 2021. It was inter alia stated that M/s AT & T CSIPL had erroneously reported the total amount of turnover, from its principal product or services under the code 8517 (i.e. current line system), which came into the attention of the M/s AT &T CSIPL when it had received a Show Cause Notice (SCN) from the Cost Audit Branch of Ministry of Corporate Affairs (MCA) on 09th May, 2021.

Thereafter, in reply to the SCN received from MCA from M/s AT & T CSIPL including a certificate from CA Shri ABG who had certified HSN code-wise break up of Annual Turnover for the F.Y. 2020-21, it was observed that M/s AT & T CSIPL had erroneously reported the total amount of turnover from its principal product or services under the code 8517 in the said AOC-4 XBRL for F.Y. 2020-21, instead of reporting the same in the following manner:

SI No

HSN Codes/ ITC Codes

Description

9985

Support services

9973,9983,9984, 9985, 9987, 4907, 8302

Managed Network Services

On the basis of above observations Adjudicating Officer (AO) i.e. Registrar of Companies, NCT of Delhi & Haryana had issued a SCN to M/s AT & T CSIPL and Mr. AD, signatory i.e. signing director and CA SKK, the professional who had certified the e-form AOC-4 XBRL dated 31st May, 2023. The reply from M/s AT & T CSIPL to the SCN reiterated that M/s AT & T CSIPL had erroneously reported the total amount of turnover from its principal product or services (i.e. support services and managed network services) under the code 8517 in e-form AOC-4 XBRL for F.Y. 2020-21.

Rules 8(3) of the Companies (Registration Offices and Fees) Rules, 2014, stated that:-

“The authorised signatory and the professional, if any, who certify e-form shall be responsible for the correctness of the contents of e-form and correctness of the enclosures attached with the electronic form.”

Section 450 of the Companies Act, 2013 (Punishment where no specific penalty or punishment is provided), stated that:-

“If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.”

HELD:
AO after considering the facts of the case and submissions made, noted that Mr.AD (Director) and CA SKK (certifying professional) had filed e-form AOC-4 XBRL dated 28th October, 2021 with incorrect information. Further noted that Pursuant to Rule 8 of the Companies (Registration Offices and Fees) Rules, 2014 read with Section 450 of the Companies Act, 2013, signatories of E-form AOC-4 XBRL are liable for the correctness of the content of e-form AOC-4 XBRL.

Thereafter, AO imposed penalty as follows:

Violation of Section
and Rules

Penalty imposed on
Signatory(s)

Penalty specified under
section 450 of the Companies Act,2013

Rule 8(3) of the Companies (Registration Offices and Fees)
Rules, 2014

Mr.AD, Director (signatory of e-form AOC-4 XBRL.

Rs.10,000

Rule 8(3) of the Companies (Registration Offices and Fees)
Rules, 2014

CA SKK, signatory / Certifying Professional of e-form AOC4
XBRL.

Rs.10,000

Further, it was directed that the said amount of penalty shall be paid online through the website www.mca.gov.in (Misc. head) in favour of “Pay & Accounts Officer, Ministry of Corporate Affairs, New Delhi, within 90 days of receipt of this order, and intimation filed with proof of penalty paid.

BCAJ Admin

Allied Laws

23. Ashok Kumar Joshi vs. Achlaram Bhargava Joshi
AIR 2023 Rajasthan 97
27th March, 2023

Maintenance of parent — Father living on pension since 2008 — Father unable to maintain himself — Son bound to maintain. [Section 4, Maintenance and Welfare of Parents and Senior Citizens Act, 2007].

FACTS

The Petitioner (Ashok Kumar Joshi – son) was the eldest son of the Respondent (Achlaram Bhargava Joshi – father). The Respondent was working in the department of B.S.N.L. until his retirement in 2008. Thereafter, the Respondent was living off of pension and other rental income. The Petitioner and Respondent were staying together till 2013. The Respondent was unable to maintain himself, and hence, he filed an application for maintenance from his eldest son (the Petitioner) in 2018. The lower court held that the Petitioner was bound to maintain the Respondent and directed the Petitioner to maintain the Respondent by paying a monthly sum.

The Petitioner – Son preferred a Writ Petition before the High Court.

HELD

The Hon’ble Court observed that the Maintenance and Welfare of Parents and Senior Citizens Act, 2007, was a special legislation enacted to safeguard the rights and interests of a vulnerable section of the society, i.e., senior citizens. It held that the eldest son was bound to pay monthly maintenance to his aged father (Respondent) for expenses towards his food, medical and other requirements. Thus, the order of the lower court was upheld.

The Petition was dismissed.

24. Public Works Department, Chennai vs. East Coast Constructions & Industries Ltd
AIR 2023 Madras 188
2nd February, 2023

Arbitration — Powers to award compensation and interest by the Arbitral Tribunal [Sections 7 & 34, The Arbitration and Conciliation Act, 1996; Section 74, The Indian Contract Act, 1972].

FACTS

The Petitioner and the Respondent agreed to the construction of a new complex for the Tamil Nadu Legislative Assembly. The Respondent was unable to complete the construction in time due to the faults of the Petitioner. The Petitioner had granted an extension of time without any objections to the Respondent. Later on, the Petitioner denied a refund of liquidated damages and also consequential damages to the Respondent. The Petitioner denied payments towards consequential damages.

On Arbitration, the Arbitral Tribunal awarded compensation and interest. The Petitioner is aggrieved that the Arbitration Tribunal was not authorised to grant the same as there was no authorisation between the parties in the contract to decide any dispute ex aequo et bono (Section 28 of the Arbitration and Conciliation Act, 1996).

HELD
The Arbitral Tribunal is empowered to award interest in the form of compensation if such has been agreed by the parties. However, in the absence of such agreements, the Arbitral Tribunal can award interest to the extent of delay in payment of money in the form of compensation. Thus, the Court upheld the order of the Arbitration Tribunal awarding consequential damages.

The Petition was dismissed.

25. Mohan Sundaram vs. Punjab National Bank
AIR 2023 Kerala 110
12th December, 2022

Tenancy — Tenanted Property is mortgaged — Unable to repay — Tenanted property is a secured asset- Bank entitled to evict a tenant — Bank held as a public institution. [Section 8, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Sections 5, 6 & 9, Banking Regulation Act, 1949;
Section 13, Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI)] .

FACTS
The tenants of five premises facing eviction petitions under section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965, initiated by a single landlord (Respondent Bank) in a commercial complex, are the petitioners in the revision case. The Petitioners contested that the Respondent cannot be said to be a public institution within the scope of section 11(7) of the Kerala Buildings (Lease and Rent Control) Act, 1965. The second contention of the Petitioner was whether the Bank had locus standi as a landlord to seek eviction of tenants from a secured asset taken over by the bank for sale for realising its dues.

HELD
The Hon’ble Kerala High Court held that the Bank (Respondent) was established under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The statute was enacted in the parliament for serving the needs of the development of the economy in conformity with the national policy and objectives and for matters connected therewith or incidental thereto. Thus, the Respondent Bank was a public institution within the scope of section 11(7) of the Kerala Buildings (Lease and Rent Control) Act, 1965. The court held that according to section 17 of the SARFAESI, the Respondent Bank is empowered to take possession of the secured assets including the right to transfer by way of lease, assignment or sale for realising the secured asset. The Hon’ble Court upheld the decision of the lower court; thereby, evicting tenants from the property.

The revision petition was dismissed.

26. K N Ravindran and another vs. G Venkatesh Suresh and others
AIR 2023 Madras 222
27th January, 2023

Suit for partition — Property purchased jointly by relatives for conducting business — Business conducted by a Firm — Retirement from the firm does not amount to relinquishment of interest in the property. [Section 34, Specific Relief Act, 1962; Sections 17 & 49, Registration Act, 1908; Section 35, Stamps Act, 1899].

FACTS
The Original Plaintiff (Respondent 1), the Appellants and other Respondents had purchased the suit property to start a business. The parties are relatives of one another. After some time of running the business through a firm, issues cropped up, which led to Defendants 3–5 (Respondents) and the Original Plaintiff (Respondent 1) retiring from the partnership firm. Defendants 1 and 2 (appellants) were the remaining partners of the firm.

The Original Plaintiff and the Defendants 3–5, relinquished all their shares of the firm to the Defendants 1 and 2. Later, the Original Plaintiff, as the co-sharer of the suit property, filed for a partition suit of the property in the Trial Court.

The Trial Court held the partition in favour of the Plaintiff. The Original Defendants 1 and 2 filed an appeal.

HELD
The Plaintiff and the Defendants 3–5 relinquished all their rights concerning shares in a firm in the deed. However, the rights and title of the suit property were not relinquished by the deed. Furthermore, the family agreement (relied on by appellants) was not properly stamped and registered. Thus, the same was invalid in the eyes of the law. Thus, the decree of the Ld Trial Court declaring the partition of property in the favour of the Plaintiff was confirmed. No costs.

BCAJ Admin

Service Tax

I HIGH COURT

14. Blackberry India Pvt Ltd vs. Asstt. Central Excise & CGST
2023-TIOL-967-HC-DEL-ST
Date of order: 3rd August, 2023

The relevant date for interest payment under section 11BB of Central Excise Act is three months after the submissions of claim of refund and not the date of letter requesting for refund.

FACTS
Petitioner challenged the order to the extent it was denied interest under section 11BB of CE Act read with section 83 of Finance Act, 1994 on the amount of refund sanctioned. Adjudicating authority contended that the refund was sanctioned within a period of three months as they considered the dates of applications for refund as 7th February, 2023 instead of the date on which the applications were first made.

HELD
Following a settled issue by Supreme Court in the case of Ranbaxy Laboratories Ltd. 2011-TIOL-105-SC-CX, adjudicating authority proceeded on the basis that interest under section 11BB of the Excise Act would be payable after expiry of three months from the date of application of refund. However, while considering the date of applications, he erred in holding the date of the letter as the date of application for refund whereas petitioner had filed its applications in March 2013, March 2014 and June 2014 respectively. Hence interest is required to be calculated from the expiry of these relevant dates. Thus, allowing the petition, the High Court directed the adjudicating authority to process claims of interest.

II TRIBUNAL

15. Commissioner of Service Tax vs. M/s Net 4 Communications
2023-TIOL-615-CESTAT-KOL
Date of order: 26th June, 2023

Service of merely setting up network without involving providing information or data did not amount to providing service of OIDAR.

FACTS
Appellant inter alia provided services of system networking which involved linking of two or more computing devices together for the purpose of sharing data. This is done using mixture of hardware and software. Revenue in the show cause notice contended that the said service was Online Information and Database Access or Retrieval (OIDAR) service as contained in section 65(105)(zh) of the Finance Act 1994. Adjudicating authority dropped the demand observing that it is not so classifiable as neither generation of data or information was involved nor it involved providing it to clients. They set up network for transfer of data not provided by them in the period prior to 1st July, 2012. Hence, Revenue filed the appeal.

HELD
Perusing the definition of the service, it was observed that in order to be covered by the definition of OIDAR, (a) service must relate to providing data or information and could be retrieval or otherwise: (b) services must be provided in electronic form and (c) services must be provided through a computer network. The activity described above neither involves data / information generation nor are they providing data to the clients. Hence, the service of OIDAR is not provided and hence, the order dropping the demand SUSTAINS & revenue’s appeal was thus rejected.

16. Commissioner of GST and / central Excise vs. Vedanta Ltd
2023-TIOL-690-CESTAT-MAD
Date of order: 26th May, 2023

Onus to prove liability of service tax under RCM on the department when the assessee placed on record all relevant details that foreign institution had Permanent Establishment in India.

FACTS
The issue in the appeal relates to whether appellant was liable to pay service tax under Reverse Charge Mechanism (RCM) on the fees paid to foreign banks for External Commercial Borrowings (ECB). Appellant provided construction engineering services, GTA services, etc. During EA-2000 audit, it was observed that a sum of over Rs. 33 crore was paid to foreign financial institutions.

However, there was no evidence of payment of service tax on the said amount. Hence, a show cause notice was served. Original authority dropped the demand observing that service providers had a fixed establishment in India. Hence, RCM does not apply to the recipient. The Revenue filed an appeal against such order holding that the Commissioner ought not to have dropped the demand entirely, as respondents had not furnished evidence as to whether the foreign service providers had office in India. According to Respondent, the onus was on the department to prove the short levy and that the banks did not have permanent establishment in India. Further, the Commissioner had gone through the details furnished to demonstrate that the institutions had permanent establishments in India and the entire situation was any way revenue neutral.

HELD
The detailed information furnished by respondents demonstrated that foreign institutions had permanent establishment in India. Also, the department failed to produce that the amount sought to be taxed was subject to service or that the institutions do not have permanent establishments in India. Hence, the interference with the order of the original authority and the appeal of revenue was thus dismissed.

17. M. P. Audyogik Kendra Vikas Nigam (Indore) Ltd. vs. Principal Commissioner of C. Ex. & CGST, Indore
2023(8) Centax 219 (Tri.-Del.)
Date of order: 26th May, 2023

Demand of Service Tax under RCM based on difference between balance sheet and ST-3 returns was not legally valid

FACTS
Appellant was engaged in providing various taxable services. A letter was issued by department to pay service tax under RCM for expenses incurred on legal, professional and consultancy services as well as security services, wherein it was contended by the revenue that there was mismatch between figures as per balance sheet and ST-3 returns. It was clarified by appellant that service tax was already paid by service provider on certain expenses. Appellant also pointed out service tax notifications on the basis of which liability under RCM was not required to be paid. Without considering the clarifications provided by appellant, a SCN was issued for period 2012-13 till 2015-16 invoking extended period of limitation. Further, second SCN was issued on same allegations for subsequent period up to June 2017 demanding service tax along with interest and penalty. Both SCNs were adjudicated vide Order In Original and demand along with interest and penalty was confirmed. Further, Commissioner (Appeals) dismissed the appeal upholding the Order In Original. Aggrieved, an appeal was filed before the Tribunal.

HELD
It was held that the SCN was issued after comparing difference between balance sheet and ST-3 returns, which was totally illegal. Tax was demanded under RCM despite the appellant pointing out that service tax was already paid by the service provider. There was no provision in service tax law to raise a demand on the difference in figure of expenses in balance sheet and ST-3 returns. There was no element of fraud or suppression of facts where returns were filed on timely basis. Hence, extended period of limitation was not available to department. Service tax demand should have been calculated transaction-wise and invoice-wise. Impugned order was set aside.

BCAJ Admin

Goods And Services Tax

I. HIGH COURT

41. Shree Renuka Sugars Ltd vs. State of Gujarat
2023 (8) Centax 235 (Guj.)
Date of order: 13th July, 2023

Refund application filed manually cannot be denied due to lacunae in the electronic system.

FACTS
Petitioner exports refined sugar under bond without payment of tax. Since the exports are zero-rated supply, ITC of input supply remains unutilised. Petitioner filed the refund application for such unutilized ITC under the category of “Refund of Unutilized ITC” on the portal. However, petitioner erroneously claimed for the lower amount. Respondent sanctioned and paid the lower amount claimed. As the portal and circular dated 3rd October, 2019 does not allow filing of second application for the same period under the same category, petitioner filed supplementary refund application for the remaining amount under the category “any other”, which was rejected on ground that it was not under a valid category. Hence, the petition.

HELD
The High Court held that when substantive conditions for claiming the benefit are fulfilled, the benefits cannot be denied on the sole ground of lacunae in the electronic system by relying upon the decision of Gujarat High Court in Bombardier Transportation India Pvt. Ltd. vs. DGFT2021 (377) ELT 489- Guj and various other judgments. Refund order passed for rejecting the refund application merely on technical ground without scrutiny was not sustainable. Accordingly, petitioner was allowed to file a manual application which was open for respondent to scrutinize.

42. Savita Oil Technologies Ltd vs. Union of India
2023 (8) Centax 241 (Bom.)
Date of order: 18th July, 2023

Appeal filed manually against intimation issued in Form DRC-05 permitted in absence of facility available electronically.

FACTS
Petitioner aggrieved by intimation issued in Form DRC-05 intended to file an appeal electronically. Disputed tax amount was deposited under protest and challans were issued to petitioner. Attempt was made to file appeal on electronic portal but since there was no provision to file the appeal electronically, petitioner approached respondent seeking permission for filing appeal manually. However, respondent rejected the request of manually filing appeal on the ground that appeals are required to be filed by using electronic portal. Being aggrieved, petition was filed before Hon’ble High Court wherein petitioner contended that intimation issued by adjudicating authority was an appealable order as per section 107 of CGST Act and filing of appeal manually should be permitted where same is not allowed by portal.

HELD
The High Court held that simply because there was no provision on portal for filing appeal against intimation issued in Form DRC-05, respondent cannot decline statutory right of petitioner for filing appeal due to technical reasons. Manual filing of appeal is permitted till an appropriate provision was made for acceptance of appeal electronically. Petitioner to file appeal within two weeks and same should be entertained by respondent.

43 Tagros Chemicals India Pvt Ltd vs. Union of India
2023 (8) Centax 239 (Guj.)
Date of order: 13th July, 2023

Refund claimed for tax deposited mistakenly could not be rejected merely on technical grounds.

FACTS
Petitioner received purchase order from a registered exporter to supply goods at concessional rate of IGST at 0.1 per cent in terms of Notification No. 41/2017-IGST Rate dated 23rd October, 2017, instead of 18 per cent. Petitioner mistakenly supplied goods to exporter at the rate of 18 per cent instead of 0.1 per cent. Tax invoice was issued on 30th June, 2019 and goods were subsequently exported by buyer on 6th July, 2019. Thereafter, petitioner found that they had paid full rate of GST instead of concessional rate and a credit note was issued by petitioner to the exporter. Details of credit note were mentioned in GSTR -1 of relevant month. However, petitioner could not reduce GST liability since there was no outward supply for relevant and subsequent month. Hence, a refund was filed which was rejected by issuing a SCN. Explanation submitted by petitioner was rejected on the grounds of non-submission of documents as per relevant notification and order in original was passed. Aggrieved, petition was filed before Hon’ble High Court.

HELD
The Hon’ble High Court relied on the decision of Hon’ble Supreme Court in case of Bonanzo Engineering & Chemical Pvt Ltd vs. Commissioner of Central Excise 2012-TIOL-25-SC-CX and Share Medical Care vs. Union of India 2007-TIOL-26-SC-CUS held that even if petitioner did not take benefit of notification initially, he would not be debarred from claiming the benefit at a later stage. Condition (ii) of Notification No.41/2017-IGST Rate which states that recipient shall export goods within 90 days from date of issue of tax invoice was fulfilled. Refund claim cannot be rejected merely on the basis of technical grounds and revenue authority should refund the amount along with interest. Petition allowed in favour of petitioner.

44. Mayel Steels Pvt Ltd vs. Union of India
2023 (9) Centax 25 (Bom.)
Date of order: 19th June, 2023

Show Cause Notice and order cancelling registration to be set aside where same was uploaded on portal but copy not provided by e-mail or hand delivery.

FACTS
Petitioner was asked to remain present on 2nd August, 2022 by issuing SCN which was uploaded on portal on 1st August, 2022. SCN was neither mailed nor hand delivered to petitioner. A reply to SCN was submitted a week later after petitioner became aware of the notice being uploaded on the portal. In the meantime, order for provisional attachment of bank account/property was issued by department under section 83 of CGST Act in Form GST DRC-22. Aggrieved, petitioner approached Hon’ble High Court on 24th November, 2022 with a contention that SCN issued was in violation of principles of natural justice, and order passed was without granting opportunity of being heard. Thereafter, an order for cancelling petitioner’s registration was issued on 2nd January, 2023 by the respondent.

HELD
It was held that SCN should not be merely uploaded on web portal but a copy of the same should be forwarded to petitioner by e-mail and/or by hand delivery. Respondent acted in an arbitrary manner by passing impugned order breaching principles of natural justice. Order for cancellation of registration was passed even though petition was filed before Hon’ble High Court. Further, the issues raised in impugned order were not in the ambit of SCN. The impugned order cancelling the GST registration of petitioner and SCN was set aside. Furthermore, respondent was allowed to issue a fresh SCN wherein an opportunity to reply was directed to be given to petitioner in accordance with the law.

45. State Tax Officer vs. Shabu George
[2023] 153 taxmann.com 138 (SC)
Date of order: 31st July, 2018

Revenue’s appeal dismissed against order of the High Court holding that cash cannot be seized when it does not form part of stock-in-trade.

Hon’ble Supreme Court dismissed the SLP filed against the order of the High Court wherein it was held that in an investigation aimed at detecting tax evasion under the GST Act, cash cannot be seized, especially when cash does not form part of the stock-in-trade of business.

46. Arhaan Ferrous and Non-Ferrous Solutions (P) Ltd and Ors vs. Deputy Assistant Commissioner-1(ST) and Ors
[2023] 153 taxmann.com 325 (AP)
Date of order: 3rd August, 2023

Authorities cannot confiscate the goods under section 130 without first issuing notice under section 129 against the purchasing dealer of the goods, if it is found that the vendor from whom such goods were purchased by him, was under investigation by the department for fake registration. The responsibility of the purchasing dealer would be limited to the extent of establishing that he bonafide purchased goods from the vendor for valuable consideration by verifying the GST registration of the seller available on the official web portal.

FACTS
The first petitioner purchased goods from one supplier and in turn sold them to a customer under a valid tax invoice. The goods were transported in the vehicle of the second petitioner and the consignment was accompanied by valid documents such as invoice, way bill, weighment slip etc. While goods were in transit the department detained the vehicles along with the goods on the alleged ground that the vendor of the 1st petitioner has no place of business at Vijayawada (i.e. no business is being conducted from the said address in Vijayawada given by the vendor), and accordingly initiated impugned proceedings in the name of the said vendor by deliberately ignoring the documents produced by the drivers at the time of check. The petitioners challenged the action of the department. It was also submitted that no confiscation under section 130 of the CGST Act can be done without issuing notice under section 129 to the first petitioner.

HELD
The Court held that since proceedings under section 129 and section 130 are mutually exclusive, it is open for the department to initiate confiscation proceedings against the vendor in view of his absence at the given address and not holding any business premises at Vijayawada, however, he cannot confiscate the goods of the 1st petitioner merely on the ground that the 1st petitioner purchased goods from such vendor. The Court further held that even if the inquiry is initiated against the first petitioner, his responsibility will be limited to the extent of establishing that he bonafide purchased goods from such vendor for valuable consideration by verifying the GST registration of the said vendor available on the official web portal and he was not aware of the credentials of the said vendor. Further, he has to establish the mode of payment of consideration and the mode of receiving goods from the said vendor through authenticated documents. Except that he cannot be expected to speak about the business activities of the said vendor and also whether he obtained GST registration by producing fake documents. In essence, the petitioners have to establish their own credentials but not of the said vendor. The Court, thus held that the GST department is not correct in roping the petitioners in the proceedings initiated against the vendor without initiating independent proceedings under section 129 of CGST/APGST Act against the petitioners and disposed of the case giving liberty to the department to initiate proceedings against the petitioners under section 129 of CGST/APGST Act, 2017 and directed to release the goods and conveyance on petitioners executing a bond and 25 per cent of the value of the goods.

47. M/s Ambey Mining Pvt Ltd vs. Commissioner of State Tax
2023-TIOL-864-HC-Jharkhand-GST
Date of order: 17th July, 2023

When the order of the First Appellate Authority is not challenged or revised by the revenue authority, the same has attained finality and the same cannot be re-adjudicated.

FACTS
The case of petitioner is that two show-cause notices were issued and both are for the same period for same cause of action (except March, 2020) issued by two different authorities i.e., Deputy Commissioner of State Tax and Assistant Commissioner of State Tax. The notices attempted to start a fresh adjudication proceeding which has already attained finality by First Appellate Order as the revenue has not appealed against the said order. Therefore, the notice issued is contrary to the settled proposition of law. For March 2020, demand of interest is made for late filing of GST returns.

HELD
The Court primarily noted that the first appellate order is accepted by the department and no further appeal is filed or any revision is carried out. Thus, the revenue cannot re-agitate a matter afresh which has already come to an end by due process of law. The Court also noted that the first appellate authority cannot remand the matter to initiate a denovo proceeding. Therefore, the impugned show-cause notices are wholly without jurisdiction, without authority of law and also barred by principles of res-judicata. With respect to the interest on late filing of returns, it was noted that there was extension of due dates on account of COVID and therefore a lower interest amount is confirmed.

48. Britannia Industries Ltd vs. Union of India
2023-TIOL-953-HC-AHM-GST
Date of order: 7th August, 2023

In absence of uploading the order on the GST portal, the date of communication of the order through email is to be considered for the purpose of filing the appeal.

FACTS
The issue before the Court is whether in absence of uploading the order on the portal, the petitioners were handicapped to file the appeal through electronic mode even though the same was communicated to them manually.

HELD
The Court noted that Rule 108 of the GST Rules prescribes that the appeal has to be filed electronically, but it nowhere prescribes that the same is to be filed only after the order is uploaded on the GST portal. The Court held that the date of communication of the order by email is to be taken as the date of communication of the order for the purpose of limitation.

49. C P Pandey and Company vs. Commissioner of State Tax
2023-TIOL-960-HC-MUM-GST
Date of order: 31st July, 2023

Cancellation of GST registration on a ground which is outside the scope of the show-cause notice is illegal and deserves to be quashed.

FACTS
The petitioner contends that the cancellation of the GST registration is not on the ground contained in the show cause notice. No opportunity is provided to meet such grounds which emerged for the first time in the orders passed. Therefore, the cancellation is illegal and should be set aside.

HELD
The Court noted that there is substance in the contention as the cancellation is completely outside the scope of the show cause notice. Since no opportunity was granted, there is a breach of the principles of natural justice and therefore the order is required to be set aside. The Court, however gave a liberty to issue a fresh show cause notice in accordance with the provisions of law.

50. Thirumalakonda Plywoods vs. The Assistant Commissioner of State Tax
2023-TIOL-908-HC-AP-GST
Date of order: 18th July, 2023

Imposing of time limit for availing input tax credit is neither violative of section 16(2) prescribing the eligibility conditions for availing credit nor violative of the Constitution. Also, mere late filing of returns will not make the Assessee eligible for input tax credit for the extended period.

FACTS
Petitioner prays for writ of mandamus declaring section 16(4) of the Central Goods and Services Act, 2017 (The Act) providing time limit to avail input tax credit as violative of Article 14, 19(1)(g) and section 300-A of Constitution of India. Section 16(2) prescribing the conditions for availment of credit would prevail over section 16(4). It was also argued that sufficient opportunity was not granted to the petitioner under section 74(5) of the Act.

HELD
The Court noted that section 16(2) does not appear to be a provision which allows input tax credit, rather the enabling provision is section 16(1). On the other hand, section 16(2) restricts the credit which is otherwise allowed to only such cases where conditions prescribed in it are satisfied. Therefore, section 16(2) in terms only overrides the provision which enables the credit i.e. section 16(1). The non-obstante clause in section 16(2) is followed by a negative sentence “no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless”. This negative sentence clearly conveys that unless the conditions mentioned in section 16(2) are satisfied, no credit is eligible. Therefore, section 16(2) is not an enabling provision but a restricting provision. Unless clear inconsistency is established, overriding effect cannot be given over other provisions. In the present case, both sections 16(2) and (4) are two different restricting provisions, the former providing eligibility conditions and the later imposing time limit. However, both these provisions have no inconsistency between them. Conditions stipulated in sections 16(2) and (4) are mutually different and both will operate independently. Therefore, mere filing of the return with a delay fee will not act as a springboard for claiming credit. Such a statutory limitation cannot be stifled by collecting late fee.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.18/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-1 for April 2023 to June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.19/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for the months of April, May and June 2023 to 31st July, 2023, for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.20/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for Quarter ending June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

4. Notification No.21/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-7 for April 2023 to June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

5. Notification No.22/2023-Central Tax dated 17th July, 2023
By above notification, the date for filing GSTR 4 for the financial years 2017–18 to 2021–22 which was extended up to 30th June, 2023 is now further extended up to 31st August, 2023, with no other change.

6. Notification No.23/2023-Central Tax dated 17th July, 2023
A facility is provided to the Registered Person whose registration has been cancelled on or before 31st December, 2022 for non-filing of returns to file returns up to effective date of cancellation with applicable interest and late fees up to 30th June, 2023. The same is now further extended to 31st August, 2023. If such returns are filed then they can apply for revocation of cancellation of registration.

7.    Notification No.24/2023-Central Tax dated 17th July, 2023
A facility given to registered person who failed to file valid return within the period of 30 days from the service of best judgment assessment order under section 62(1) of CGST Act and issued before 28th February, 2023, to file return before 30th June, 2023, is further extended up to 31st August, 2023. Upon filing the same, order can get cancelled.

8.    Notification No.25/2023-Central Tax dated 17th July, 2023
A facility given to the defaulter of filing annual return in form 9 for the years 2017–18 to 2021–22 till 30th June, 2023 is extended up to 31st August, 2023. If such return is so filed, then the late fees will be a maximum R10,000 instead of higher late fees as per normal provisions

9.    Notification No.26/2023-Central Tax dated 17th July, 2023
Waiver of late fees is provided in case of return in Form GSTR-10. The return was to be filed up to 30th June, 2023 and date is now further extended up to 31st August, 2023.

10. Notification No.27/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified 1st October, 2023 as the date for coming into force of provisions of section 123 of the Finance Act, 2021 (13 of 2021). The provisions of section 123 pertains to amendment in section 16 of IGST Act.

11. Notification No.28/2023-Central Tax dated 31st July, 2023

By above notification, Central Government has notified that the provisions of sections 137 to 148 and 155 to 162 of the Finance Act, 2023 (8 of 2023) shall come into force from 1st October, 2023 and section 149 to 154 shall come into force from 1st August, 2023. The amendments are in various sections of CGST Act vide Budget 2023.

12. Notification No.29/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified Special procedure to be followed by a registered person in case of dispute out of directions of Hon. Supreme Court in Filco Trade Centre Private Limited read with Circular No. 182/14/2022-GST, dated 10th November, 2022 relating to TRAN-1.

13. Notification No.30/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified specific forms seeking information on various issues in relation to notified items in said notification. The items are mainly Tobacco and its products.

14. Notification No.31/2023-Central Tax dated 31st July, 2023
By notification no.27/2022–Central Tax dt. 26th December, 2022, Rule 8(4A) was made applicable to all States except Gujarat. Now by above notification, State of Pondicherry is also excluded.

15. Notification No.32/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has exempted the registered person from filing annual return whose aggregate turnover in the financial year 2022–23 is up to two crore rupees.

16. Notification No.33/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has provided ‘Account Aggregator’ as system with which information may be shared by common portal under section 158A of CGST Act.

17. Notification No.34/2023-Central Tax dated 31st July, 2023
By above notification, Central Government seeks to waive requirement of mandatory registration under section 24(ix) of CGST Act for person supplying goods through ECO, subject to conditions.

18. Notification No.35/2023-Central Tax dated 31st July, 2023
By above notification, common adjudication authority is sought to be appointed in respect of show cause notice for taxpayers mentioned in said notification.

19. Notification No.36/2023-Central Tax dated 4th August, 2023
By above notification, special procedure to be followed by the Electronic Commerce Operators in respect of supplies of goods through them by composition taxpayers is provided. The notification to apply from 1st October, 2023.

20. Notification No.37/2023-Central Tax dated 4th August, 2023
By above notification, special procedure to be followed by the Electronic Commerce Operators in respect of supplies of goods through them by unregistered persons is provided. The notification to apply from 1st October, 2023.

21. Notification No.38/2023-Central Tax dated 4th August, 2023
By above notification, amendments are made in various Rules. The indicative list of changes is as under:

Rules

Pertaining to:

9(1)

Verification
of registration application.

10A

Furnishing
of bank account details.

21A

Suspension
of registration.

23 (w.e.f.
1^st October, 2023)

Revocation
of cancellation of registration

Physical
verification of business premises in certain cases.

(w.e.f.
1^st October, 2023)

Manner
of determination of ITC in respect of capital goods and reversal thereof.

Tax
Invoice.

Form
and manner of furnishing details of outward supplies.

(w.e.f.
1^st October, 2023)

Form
and manner of submission of returns by person providing OIDAR services.

(w.e.f.
1^st October, 2023)

Form
and manner of submission of statement of supplies through E-com operator.

88D
(new)

Manner
of dealing with difference in input tax credit available in auto-generated
statement containing the details of input tax credit and that availed in
return.

Application
for refund of tax etc.

(w.e.f.
1^st October, 2023)

Credit
of amount of rejected refund claim.

Refund
of IGST paid on goods or services exported out of India.

108

Appeal
to Appellate Authority.

109

Application
to Appellate Authority.

138F
(new)

Information
to be furnished in case of intra state movement of gold, precious stones,
etc., and generation of e-way bills thereof.

142B
(new)

Intimation
of certain amounts liable to be recovered under Section 79 of the Act.

162

(w.e.f.
1^st October, 2023)

Procedure
for compounding of offences.

163
(new)

(w.e.f.
1^st October, 2023)

Consent
based sharing of information.

Notifications relating to Rate of Tax

22. Notification No.6/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 11/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023. The changes are mainly relating to procedure regarding GTA services.

23. Notification No.7/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No.12/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023. “Satellite launch services” is added by substitution.

24. Notification No.8/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 13/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023.

25. Notification No.9/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 01/2017- Central Tax (Rate) to implement the decisions regarding change of rates in the 50th GST Council.

26. Notification No.10/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 26/2018- Central Tax (Rate) to implement the decisions of 50th GST Council. This notification is relating to supply of gold through nominated agencies.

Similar changes are made in IGST by issue of separate notifications under IGST Act.

B. ADVISORY

There is advisory dated 24th July, 2023, by which the availability of E-invoice exemption declaration functionality on GSTN is informed.

C. CIRCULARS

a) Clarification about charging of interest u/s. 50(3) of CGST Act -Circular no.192/04/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification regarding charging of interest under section 50(3) of CGST Act in the cases where IGST credit has been wrongly availed by a registered person.

b) Clarification about ITC in Form GSTR-3B -Circular no.193/05/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving various clarifications to deal with difference in Input Tax Credit (ITC) availed in FORM GSTR-3B as compared to that detailed in FORM GSTR-2A vis-a-vis Rule 36(4) for the period from 1st April, 2019 to 31st December, 2021.

c) Clarification about TCS liability u/s. 52 of CGST Act – Circular no.194/06/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarifications on TCS liability under section 52 of the CGST Act, 2017 in case of multiple E-commerce Operators in one transaction.

d) Clarification about availability of ITC in respect of warranty replacement – Circular no.195/07/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on liability under GST and availability of ITC in respect of warranty replacement of parts and repair services during warranty period.

e) Clarification about holding shares in Subsidiary Company – Circular no.196/08/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification whether holding of shares in a subsidiary company by holding company will be treated as ‘supply of service’ or not.

f) Clarification about refund related issues – Circular no.197/09/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on various issues relating to refunds under GST.

g) Clarification about issues pertaining to E-invoice – Circular no.198/10/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on issues in respect of applicability of e-invoice under rule 48(4) of Central Goods and Services Tax Rules, 2017 in given situations.

h) Clarification about liability in case of distinct persons – Circular no.199/11/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons.

i) Clarifications pursuant to 50th GST Council Meeting-Circular no.200/12/2023-GST, dated 1st August, 2023
The CBIC has issued above circular, in which the clarifications are given in light of recommendations in 50th GST Council meeting held on 11th July, 2023.

j) Clarification about tax on certain services – Circular no.201/13/2023-GST, dated 1st August, 2023
The CBIC has issued above circular in which clarifications regarding applicability of GST on certain services like director service, restaurant services etc., are given.

D. ADVANCE RULINGS

ITC vis-à-vis CSR

31. Bambino Pasta Food Industries Pvt Ltd (Order No.: A R Com/17/2022 dt. 20th October, 2022 (TSAAR Order No. 52/2022) (Telangana)

The applicant, Bambino Pasta Food Industries, is a manufacturer of Vermicelli and pasta Products. The Applicant filed advance ruling application to know the admissibility of ITC on the Corporate Social Responsibility (shortly known as CSR) expenditure spent by it.

The applicant informed that during the covid time, when oxygen was scarce in the country, Applicant has donated oxygen plant to AIIMS hospital Bibinagar, Yadadri Bhongir District, for the benefit of patients who were suffering with low oxygen levels. For this purpose, the applicant had purchased PSA oxygen plant and spare parts for that oxygen plant for Rs.62,74,200 which included IGST paid of Rs.9,16,200. The applicant opined that the expenditure made by them comes under the CSR provisions as per Section 135 of the Companies Act, 2013 and hence, it is not as gift.

It was submitted that CSR activity is to be considered as “used or intended to be used in the course or furtherance of business” because any company, which meets the criteria for CSR, is mandatorily required to incur expenditure in CSR activities, so as to be compliant with the Companies Act, 2013.

It was explained that as per Section 17(5)(h) of the CGST Act, 2017, input tax credit shall not be available in respect of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”

Reliance placed upon the Judgment of the Hon’ble Supreme Court of India, in the case of Ku. Sonia Bhatia vs. State of UP (1981-VIL-06-SC), wherein Hon’ble Court has cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the following words: “A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation there for.

That a ‘gift’ is a gratuity and an act of generosity and not only does not require a consideration, but there can be none.” Citing the definition, it has been observed by the Hon’ble Court that “The concept of gift is diametrically opposed to the presence of any consideration or compensation. A gift has aptly been described as a gratuity and an act of generosity and stress has been laid on the fact that if there is any consideration then the transaction ceases to be a gift.”

It was thus insisted that the CSR is not gift but under compulsion.

The judgment of Hon. CESTAT Mumbai, in the case of M/s Essel Propack Ltd vs. Commissioner of CGST, Bhiwandi {2018 (362) E.L.T. 833 (Tri.-Mumbai) – 2018-VIL-621-CESTAT-MUM-ST} was cited in which similar ITC is allowed.

The different penal provisions under Companies Act, 2013 were also shown to further state that it is to save business from such actions and hence, expending duly covered by scope of expenditure for business.

The learned AAR referred to statutory provisions of the Companies Act, 2013 and observed that the running of the business of a company will be substantially impaired if they do not incur the said expenditure. Therefore, the expenditure made towards corporate social responsibility under section 135 of the Companies Act, 2013, is expenditure made in the furtherance of the business, and hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit under CGST and SGST Acts, held the learned AAR. Accordingly, the matter allowed in favour of applicant.

(Note: By amendment by Finance Act 2023, section 17(5) (fa) is inserted to block ITC on CSR expenses.)

32. RCM / liability on Compensation received Continental Engineering Corporation (Order No.: AAARCom/05/2022 dt. 19th October, 2022 (Order No. AAAR/11/2022) (Telangana)

This is an appeal against AR bearing no. TSAAR/13/2021 dt. 8th October, 2021. The facts are that M/s Continental Engineering Corporation, Telangana is engaged in the construction of highway, tunnel, bridge, mass rapid transit and high-speed rail projects.

The appellant (original applicant) has sought clarification from the AAR in respect of taxability of certain receipts under GST. Out of various items decided by AAR, the appellant filed appeal against two issues before the ld. AAAR. The issues raised before the ld. AAAR are as under:

“a) Whether GST is payable on the claim of R22,00,000 [sic] for the HGCL share of sitting fees and other expenses paid by the applicant on the directions of the Arbitrators for an amount.

b) Whether GST is payable on the claim of R1,15,80,62,000 [sic] (including interest amount) on account of compensation of additional cost incurred due to delay in issue of drawings and failure of HGCL to handover site on time and refusal to issue the taking over certificate.

c) If the answer to questions (a) and (b) are in affirmative, then under what HSN Code and GST rate the liability is to be discharged by the Appellant, and at what time?”

In respect of issue about amount paid as sitting fees for arbitration, the ld. AAR observed that the lower authority had held that Arbitration service was supplied independently after the introduction of GST i.e., the arbitration tribunal was constituted conclusively on 20th November, 2017 and rendered its orders on 9th May, 2019 and therefore this supply is liable to tax on reverse charge basis under GST.

The appellant was arguing that it has made payment of money as per award. It was the contention that money is not goods or services. However, the ld. AAAR observed that the Government vide Sl.No.3 of Notification No.13/2017. dt. 28th June, 2017 has levied tax in respect of services provided by the Arbitration Tribunals to be paid by any business entity located in the taxable territory, under reverse charge mechanism. The ld. AAAR also observed that the relevant tariff is also provided like SAC code of 998215 for such services taxable @ 9 per cent each under CGST and SGST.

Therefore, the ld. AAAR confirmed order of AAR on the above count. In respect of amount received as compensation for delay in issue of drawing and failure to hand over site on time, the ld. AAAR observed that these damages are claimed by the appellant from the contractee due to the delays in making available possession of site, drawings & other schedules by the contractee beyond the milestones fixed for completion of project. The ld. AAR has considered these damages for tolerating an act or a situation arising out of the contractual obligation. The Ld. AAAR noted that as per the issues mentioned in the arbitration award, clauses 6.4 and 42.2 of the General Conditions of Contract (GCC) specifically state that in case of any delay in issuance of drawings or failure to give possession of site the engineer shall determine the extension of time and amount of cost that the contractor may suffer due to such delays in consultation with the employer and the contractor.

The appellant was contending that these receipts are towards reimbursement of additional costs incurred during extended period while performing the work. It was contended that this is not a consideration towards the supply of goods and services.

The ld. AAAR justified the AAR order observing as under:
“As per the claim documents submitted before the lower authority, not disputed by the applicant, the amount was towards compensation for delay in execution of the works and prolongation costs. When a subjective meaning is deciphered from the phase used by the applicant themselves, the amounts were recovered as compensation for delay in execution of the works. That is to say that the applicant had received the amount to agreeing to the obligation to refrain from an act, or tolerating an act or a situation that arose due to delay in execution or protraction or elongation of work. This is nothing but compensation for refraining to do an act or tolerating to do an act. The consideration received for such act is taxable @ 9 per cent each under CGST and SGST and falls under Ch Head 9997 at Sl. No. 35 of Notfn No. 11/2017-CT (rate).”

Thus, in appeal, AR confirmed on both the issues.

33. Scope of AR – State wise
Comsat Systems P Ltd (Order No.: A R Com/11/2022 dt. 20th October, 2022 (TSAAR Order No. 51/2022) (Telangana)

The applicant, Comsat Systems Private Limited, is engaged in manufacture, supply, install, testing and commissioning of satellite communication antenna systems. They submitted that the antennas manufactured at their factory (Hyderabad, Telangana) are required to be installed at various locations in different states of India, including Andaman, Nicobar, Dweep Islands.

They submitted that they have to install 19 Nos., antenna systems at various locations/states in India and that M/s Bharat Electronics Ltd, Bangalore Karnataka, their recipient is insisting them to have separate temporary GST number for each location / state.

Based on above facts following questions were raised before the ld. AAR:

“1. Is it necessary to have temporary GST Registration at various locations/States for each location to claim GST tax installation, testing & commissioning of antennas?

2. How far Sec.22 of the CGST Act is applicable?”
The ld. AAR examined scope of section 96 of GST Act. The ld. AAR ruled as under:

“The applicant is having his place of business in the state of Telangana and is seeking a ruling on his liability to obtain a registration in other states where he is executing to contracts including installation, testing and commissioning of antennas. In this connection it is inform that under Section 96 of the CGST Act, the authority for advance ruling constituted under the provisions of a state goods and services Act shall be deemed to be the authority for advance ruling of that state. As seen from this provision there is a territorial nexus between the authority for advance ruling of a state and its geographical boundary. Therefore, this advance ruling authority constituted under the Telangana State Goods and Services Act cannot give a ruling on the liability arising under the CGST Act or SGST Act in a different state. Therefore, the application is Rejected.”

Thus, it is clear that the scope of AAR is limited to particular state and cannot rule for liability in other states.

Valuation – Reimbursement of diesel cost

Tara Genset Engineers (Regd) (Ruling No.11/2022-23 in Appl. No.08/2022-23 dt. 13th October, 2022 (Uttarakhand) The applicant submitted that they are a partnership firm in the business of renting of DG Set to various customers in different Districts of Uttarakhand and they have entered into agreements with them to install diesel Generator on hire basis for rent with reimbursement of diesel cost. They are discharging the Tax @ 18 per cent (CGST @ 9 per cent + SGST @ 9 per cent) on DG Set hiring charges plus on reimbursement of diesel cost incurred for running DG Set.

It is further submitted that now one of the recipients of service is of the opinion that the taxes charged and collected by them on the component of the reimbursement of diesel charges for running the Diesel Generator is erroneous, as the said commodity i.e., the diesel does not come under the purview of GST. It was the opinion of said recipient that since diesel is a non-GST goods as per section 9 of CGST/SGST Act, 2007 it is not liable to GST and he has requested the applicant to reimburse the wrongly collected tax.

In view of the above, the applicant has raised above question before AAR about GST applicability on cost of the diesel reimbursed by recipient for running DG Set in the Course of Providing DG Rental Service.

The ld. AAR held that the issue is about valuation of the supply and hence made reference to section 15 of the CGST Act, 2017 and as reproduced the said section in AR. The ld. AAR observed that section 15 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 observed that section 15 of the CGST Act, 2017, mandates that the value of supply shall include among other 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 good or services or both. The Ld. AAR observed that the provisions of the section 15 are very clear and in unambiguous terms it has been mandated that 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, is part of value of supply.

The ld. AAR made reference to section 7 and section 2(31) defining ‘Consideration’. The ld. AAR observed that consideration includes any payment whether in money terms or otherwise. Ld.

AAR observed that 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 definition leaves no doubt about the spirit and essence of the Act.

On facts, the ld. AAR found without the fuel, the Diesel Generator Set cannot be operated to generate/ produce “Electricity”, i.e., intended purpose of installing DG set on hire cannot be achieved. The ld. AAR observed that the rental service of Diesel Generator Set has the integral component of running the Diesel Generator and for this, “Diesel” is required. It further observed that the running condition of Diesel Generator (DG) Set cannot be achieved without the fuel i.e., the “Diesel”.

The ld. AAR observed that contract entered between the applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge (Running Charge) is the charge for the diesel used. Both are parts of the same consideration and are for the contract of supplying DG Set on hire.

It is observed that there is no separate contract for supply of diesel and single invoice is issued for the supply of rental service of DG Set although both the components are shown separately. The ld. AAR also observed that the reimbursement of expenses as cost of the diesel, for running of the DG Set is nothing but the additional consideration for the renting of DG Set and attracts GST @18 per cent.

The ld. AAR referred to Advance Ruling in case of Goodwill Autos (KAR ADRG 44/2021 – 2021-VIL-282-AAR dated 30th July, 2021) by Karnataka AAR in which also similar position is upheld.

In view of above, the ld. AAR ruled that GST @18 per cent is applicable on the cost of the diesel incurred for running DG Set in the Course of Providing DG Rental Service as per section 15 of the Central Goods and Services Tax Act, 2017 / Uttarakhand Goods and Service Tax Act, 2017.

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Disclosures regarding ‘Related Parties’ (RP) and transactions between RP and whether the same are at “Arms’ Length” continue to draw regulatory attention especially when it involves listed entities. Statutory Auditors of such listed entities are under constant scrutiny of the investors and regulators about the verification process followed and whether the same are at ‘Arms’ Length’. This process becomes all the more critical when external agencies issue reports questioning such relationships and transactions between alleged RP.

In the following case, following external revelations, the statutory auditors, in their report on the quarterly and annual results had given a Qualified Opinion for transactions with certain parties for which sufficient and appropriate evidence was not available to the satisfaction of the auditors (Refer page 67 of the July 2023 issue of BCAJ). Extracts of the reports issued by the said statutory auditors u/s 143 of the Companies Act 2013 are given below.

After issuing a similar qualified report for the quarter ended 30th June, 2023, the said statutory auditors submitted their resignation on 12th August, 2023 with the following reason “As discussed, we are tendering our resignation as statutory auditors of the Company with immediate effect because we are not statutory auditors of a substantial number of Other Adani Group •of companies (as referred to under “Other Matters” in the audit and limited review reports dated 30th May, 2023 and 8th August, 2023, for the year ended 31st March, 2023 and quarter ended 30th June, 2023 respectively), including an Adani Group company (and its subsidiaries) after completion of our term of five years”.

ADANI PORTS AND SPECIAL ECONOMIC ZONE LIMITED

From Independent Auditor’s Report on audit of annual standalone financial statements for the year 31st March, 2023

Qualified Opinion
We have audited the accompanying standalone financial statements of Adani Ports and Special Economic Zone Limited (“the Company”), which comprise the Balance Sheet as at 31st March, 2023, and the Statement of Profit and Loss (including Other Comprehensive Income), the Statement of Cash Flows and the Statement of Changes in Equity for the year then ended, and a summary of significant accounting policies and other explanatory information.

In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects of the matter described in the Basis for Qualified Opinion section below, the aforesaid standalone financial statements give the information required by the Companies Act, 2013 {“the Act”) in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards prescribed under section 133 of the Act read with the Companies (Indian Accounting Standards). Rules, 2015, as amended, (“Ind AS”) and other accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 2023, and its loss, total comprehensive loss, its cash flows and the changes in equity for the year ended on that date.

BASIS FOR QUALIFIED OPINION

Not reproduced – refer page 67 of BCAJ July 2023.

KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements of the current period. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Additionally, the matter below in respect of the Short Seller Report has been reported in the Basis for Qualified Opinion section of our report. We have determined the matter as described below to be the key audit matter to be communicated in our report.

Sr. No

Key Audit
Matter Description

Auditors’
Response

Short Seller
Report (“the Report”)

(Refer to Basis
for Qualified Opinion section above)

In January 2023, there was a Report
containing allegations relating to the Adani group of companies. The Report
alleged that transactions with certain parties named in the Report were not
appropriately identified and reported as related parties, which were not in
compliance with applicable laws and regulations.

The Company had purchases, sale of
services and financing transactions (including equity) with/by certain
parties including those identified in the allegations made in the Report.

The allegations in the report are under
investigation by the Securities and Exchange Board of India in accordance
with the direction and monitoring of Hon’ble Supreme Court of India

Principal audit
procedures performed

• We
inquired with the Company on their approach to assess these allegations to
ascertain whether there is any effect on the standalone financial statements.

• We
requested the Company to initiate an independent external examination of
these allegations to determine whether these allegations may have any
possible effect on the standalone financial statements of the Company. The
Company represented to us that these allegations have no effect on the
standalone financial statements of the Company, based on the evaluation it
performed and because of the ongoing investigation by the Securities and
Exchange Board of India as directed by the Hon’ble Supreme Court of India,
did not consider it necessary to initiate an independent external
examination.

• We
evaluated the assessment performed by the Company, as described in Note 46 to
the standalone financial statements and have read the memorandum prepared by
an external law firm which the Company considered in its assessment, to
determine whether these allegations have any possible effect on the
standalone financial statements of the Company. The assessment by the Company
did not constitute sufficient appropriate audit evidence for the purposes of
our audit.

• In
the absence of an independent external examination by the Company and because
of insufficient appropriate audit evidence described immediately above, we
have performed alternative audit procedures in respect of these allegations
including consideration of information relating to the ownership and
association of the parties identified in the Report to the extent publicly
available.

• We
also evaluated the design of the internal controls in respect of allegations
made on the Company

FROM INFORMATION OTHER THAN THE FINANCIAL STATEMENTS AND AUDITOR’S REPORT THEREON

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. As described in the Basis for Qualified Opinion section above, in the absence of an independent external examination by the Company and pending completion of investigation, including matters referred to in the Report of the Expert Committee constituted by the Hon’ble Supreme Court of India as described in Note 46 to the standalone financial statements, by the Securities and Exchange Board of India of these allegations and in respect of sale of assets, we are unable to comment whether transactions stated in Basis for Qualified Opinion section above, or any other transactions may result in possible adjustments and/or disclosures in the standalone financial statements in respect of related parties, and whether the Company should have complied with the relevant laws and regulations. Accordingly, we are unable to conclude whether or not the other information is materially misstated with respect to this matter.

OTHER MATTER
We are not statutory auditors of majority of the other Adani group companies and therefore the scope of our audit does not extend to any transactions or balances which may have occurred or been undertaken between these Adani group companies and any supplier, customer or any other party which has had a business relationship with the Company during the year.

Our opinion on the standalone financial statements and our report on the Other Legal and Regulatory Requirements below is not modified in respect of this matter.

From Report on the Internal Financial Controls with reference to standalone financial statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013

Qualified Opinion
In our opinion, to the best of our information and according to the explanations given to us except for the possible effects of the material weakness described in Basis for Qualified Opinion section above on the achievement of the objectives of the control criteria, the Company has maintained, in all material respects, adequate internal financial controls with reference to standalone financial statements and such internal financial controls with reference to standalone financial statements were operating effectively as of 31st March, 2023, based on the internal control with reference to standalone financial statements established by the Company considering the essential components of internal controls as stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.

We have considered the material weakness identified and reported above in determining the nature, timing, and extent of audit tests applied in our audit of the standalone financial statements of the Company for the year ended 31st March, 2023, and we have issued a qualified opinion on the said standalone financial statements of the Company.

FROM CARO 2020 REPORT
Clause (iii)
Except for the possible effects of the matter relating to security deposits given to the Contractor described in our Basis for Qualified Opinion section in our audit report on the standalone financial statements, during the year, the Company has not given any advances in nature of loans but has made investments in, provided guarantee, granted unsecured loans to companies and provided security during the year, in respect of which: (not reproduced)

Clause (iv)
Except for the possible effects of the matters described in the Basis for Qualified Opinion section in our audit report on the standalone financial statements, in our opinion and according to the information and explanations given to us, and considering the legal opinion taken by the Company on applicability of section 185 of the Companies Act, 2013, in respect of certain loan transactions which are in the ordinary course of business, the Company has complied with the provisions of the Section 185 of the Companies Act, 2013 In respect of grant of loans and providing guarantees and securities, as applicable.

Further, based on the information and explanations given to us, the Company has complied with the provisions of Section 186 of the Companies Act, 2013 in respect of grant of loans, making investments and providing guarantees and securities, to the extent applicable.

Clause (xiii)
Except for the possible effects of the matters described in the Basis for Qualified Opinion section of our audit report on the standalone financial statements, in our opinion, the Company is in compliance with Sections 177 and 188 of the Companies Act, 2013, where applicable, for all transactions with the related parties and the details of related party transactions have been disclosed in the standalone financial statements as required by the applicable accounting standards.

FROM NOTES TO FINANCIAL STATEMENTS

Note 47
Assets classified as held for sale

In line with guidance from the risk management committee, subsequent to the reporting date, the company divested its investment in container terminal under construction in Myanmar (held through an overseas subsidiary) to Solar Energy Limited, an unrelated party. Given the continued US Sanctions in Myanmar and urgency to divest the asset, the company re-evaluated the asset value on ‘as is where is’ basis through two independent valuers and the sale consideration was renegotiated between the parties. Company explored other potential buyers which did not fructify. Basis the sale agreement, the company has recorded an impairment of Rs. 1,558.16 crore factoring net realizable value less cost to complete and balance of Rs. 194.76 crore has been classified as held for sale.

Note 48
The company has been working with the contractor for its capital projects over a decade. The payment terms have been negotiated to secure contractor capacity, reduced cost / overruns and improved operational efficiency of the projects. The contractor has successfully delivered the projects without defaults and with highest operating credentials. The net balance outstanding on such contracts as on reporting date stood at Rs.2,457.05 crore, which includes purchase contracts worth Rs. 1,501.50 crore and security deposits of Rs. 713.63 crore carrying interest @8% p.a. and other receivable of Rs. 241.92 crore. The security deposits approximate to about 20% of the cost of projects under execution. Of the security deposits, deposits for which projects are in progress amount Rs. 460 crore and the balance are for projects under engineering and design stage. The security deposits are refundable either on completion or termination of the project against which the said security deposit was given and in every instance the deposits were returned when due along with interest. The company has also obtained an independent opinion from a reputed law firm that the contractor is an unrelated party.

BCAJ Admin

Glimpses of Supreme Court Rulings

44. CIT vs. Prakash Chand Lunia
(2023) 454 ITR 61 (SC)

Business Loss — Loss of confiscation — Search was conducted by Directorate of Revenue Intelligence (DRI) officers at premises of Assessee — Recovered slabs of silver and two silver ingots were confiscated — The decision of the High Court holding that the loss on confiscation of silver by DRI official of Customs Department was business loss relying upon decision of Supreme Court in case Piara Singh is reversed as the assessee was carrying on an otherwise legitimate silver business and his business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra) — Also, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.

A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at NOIDA taken on rent by the Assessee, Shri Prakash Chand Lunia. The DRI recovered 144 slabs of silver from the premises and two silver ingots from the business premises of the Assessee at Delhi. The Assessee was arrested under section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act. The Collector, Customs held that the Assessee Shri Prakash Chand Lunia was the owner of silver/bullion and the transaction, thereof, was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver weighing 4641.962 Kilograms, valued at Rs. 3.06 Crores. The Collector Customs further imposed a personal penalty of Rs. 25 Lakhs on Shri Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature.

During the course of the assessment proceedings for the A.Y. 1989–90, the AO observed that the Assessee was not able to explain the nature and source of acquisition of silver of which he was held to be the owner; therefore, the deeming provisions of Section 69A of the Income-tax Act, 1961 (hereinafter, referred to as ‘the Act’) would be applicable. The investment in this regard was not found recorded in the books of accounts of the Assessee that were produced before the then AO. Accordingly, the AO passed an assessment Order and made an addition of Rs. 3,06,36,909 under section 69A of the Act.

In appeals preferred by the Assessee against the assessment order, the CIT(A) dismissed the appeal of the Assessee.

Feeling aggrieved, the Assessee preferred the appeal before the ITAT. The ITAT, Jaipur also upheld the order of the CIT(A) so far as Section 69A is concerned. However, the ITAT partly allowed the appeal of the Assessee. As regards some other minor additions, the ITAT set aside some minor other additions and remanded the matter to the AO for fresh examination.

The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well, upheld the order of the authorities below.

A reference was made by the ITAT to the High Court with the following questions of law:

(i) “Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in Section 69A of the Income-tax Act, 1961 was right in law, in holding that the Assessee was the owner of the 144 silver bars found at premises No. A 11 & 12, Sector – VII, Noida and two silver bars found at premises of M/s Lunia & Co. Delhi and in sustaining addition of Rs. 3,06,36,909 being unexplained investment in the hands of the Assessee under Section 69A of the Act?

(ii) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh vs. CIT, 124 ITR 41 and thereby not allowing the loss on account of confiscation of silver bars?

While the reference was pending before the High Court, penalty proceedings were initiated against the Assessee. An order under Section 271(1)(c) of the Act came to be confirmed by both the CIT(A) and the ITAT. Accordingly, the Assessee filed an appeal under Section 260A of the Act against the Penalty order, before the High Court. The High Court while deciding both the cases together, qua the first question, decided in favour of the Revenue, and the same was to be added to his income as a natural consequence. However, with regard to the second question, the High Court held that loss of confiscation by the DRI official of Customs Department was business loss. While holding, the High Court relied upon the decision of the Supreme Court in the case of CIT, Patiala vs. Piara Singh reported in 124 ITR 41.

An appeal was filed before the Supreme Court against the judgment and order passed by the High Court.

According to the Supreme Court, the short question which was posed for consideration before it was whether the High Court has erred in law in allowing the Respondent – Assessee the loss of confiscation of silver bars by DRI officials as a business loss, relying upon the decision of this Court in the case of CIT Patiala vs. Piara Singh, [(1980) 124 ITR 40 – SC].

On going through the judgment and order passed by the High Court, it appeared to the Supreme Court that the High Court had simply relied upon the decision of the Supreme Court in the case of Piara Singh (supra). After going through the decision in the case of Piara Singh (supra), the Supreme Court was of the opinion that the High Court had materially erred in relying upon the decision in the case of Piara Singh (supra).

The Supreme Court noted that in the case of Piara Singh (supra), the Assessee was found to be in the business of smuggling of currency notes and to that it was found that confiscation of currency notes was a loss occasioned in pursuing his business, i.e., a loss which sprung directly from carrying on of his business and was incidental to it. Due to this, the Assessee in the said case was held to be entitled to deduction under Section 10(1) of the Income Tax Act, 1922. In view of the above fact, the Supreme Court in the case of Piara Singh (supra) distinguished its decisions in the case of Haji Aziz & Abdul Shakoor Bros. [(1961) 41 ITR 350 –SC] and the decision in the case of Soni Hinduji Kushalji & Co. [(1973) 89 ITR 112 (AP)] and did not agree with the decision of the Bombay High Court in the case of J S Parkar vs. V B Palekar, [(1974) 94 ITR 616 (Bom)]. The Supreme Court observed that in all the aforesaid three cases which were relied upon by the Revenue in the case of Piara Singh (supra), the assessees were found to be involved in legitimate businesses and not smuggling business. However, they were found to have smuggled goods contrary to law, which resulted in an infraction of law and resultant confiscation by customs authorities.

The Supreme Court noted that in the case of Haji Aziz (supra), the Assessee claimed deduction of fine paid by him for release of his dates confiscated by customs authorities, which was rejected on the ground that the amount paid by way of penalty for breach of law was not a normal business carried out by it. In the case of Soni Hinduji Kushalji (supra) and J S Parkar (supra), the customs authorities had confiscated gold from Assessees otherwise engaged in legitimate businesses. In the aforesaid two cases, the Assessee claimed the value of gold seized as a trading / business loss. It was held that the Assessees were not entitled to the deductions claimed as business loss.

In the case of Soni Hinduji (supra), the Andhra Pradesh High Court held that when a claim for deduction is made, the loss must be one that springs directly from or is incidental to the business which the Assessee carries on and not every sort or kind of loss which has absolutely no nexus or connection with his business. It was observed that confiscation of contraband gold was an action in rem and not a proceeding in personam. Thus, a proceeding in rem in the strict sense of the term is an action taken directly against the property (i.e., smuggled gold); and even if the offender is not known, the customs authorities have the power to confiscate the contraband gold.

In the case of J S Parkar (supra), the Assessee not only claimed the value of the gold confiscated as a trading loss, but also set off of the said loss against his assumed and assessed income from undisclosed sources. The value of gold was sought to be taxed under section 69/69A of the Act by the tax authorities. However, the Bombay High Court held the Assessee to be the owner of the smuggled confiscated gold and not entitled to claim value of such gold as a trading loss.

The Supreme Court noted that in the present case, the ownership of the confiscated silver bars of the Assessee was not disputed. Even on that, there were concurrent findings by all the authorities below and including the customs authorities. Therefore, the question that required consideration was as to whether the Assessee could claim the business loss of the value of the silver bar confiscated and whether the decision of this Court in the case of Piara Singh (supra) would be applicable?

To answer the aforesaid question, the Supreme Court noted that in the present case, the main business of the Assessee was dealing in silver. His business could not be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra). He was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of law. In that view of the matter, the decision of the Supreme Court in the case of Piara Singh (supra), which had been relied upon by the High Court while passing the impugned judgment and order, would not be applicable to the facts of the case. On the other hand, the decision of the Supreme Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the decisions of the Andhra Pradesh High Court and the Bombay High Court, which were pressed into service by the Revenue in Piara Singh (supra), would be applicable with full force.

In view of the above, the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the AO, CIT(A) and the ITAT, which rejected the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss, and consequently allowing the same as business loss, were unsustainable and the same were quashed and set aside by the Supreme Court.

By a separate order, Justice Shri M M Sundresh, while concurring with the ultimate conclusion arrived at in overturning the decision of the High Court by Justice Shri M R Shah, gave his own reasoning on the aforesaid aspect. After considering the provisions of Section 37(1), including Explanation 1 thereto and that of Section 115BBE of the Act and after referring to the plethora of judgements on the subject, he concluded as follows:

I. The word “any expenditure” mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, being incidental to it.

II. As a consequence, any loss incurred by way of an expenditure by an Assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.
III. Such an expenditure / loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.

IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction, regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business.

V. The decisions of this Court in Piara Singh (supra) and Dr T A Quereshi [(2006) 287 ITR 547- SC] do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37.

The appeal of the Revenue, therefore, deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature.

Note:
The detailed discussion by Justice Shri M M Sundresh on subject with reference to English and Indian cases makes it a good read.

45. D N Singh vs. CIT
(2023) 454 ITR 595 (SC)

Unexplained money, etc. — Section 69A — Assessee must be found to be the owner, and he must be the owner of any money, bullion, jewellery or other valuable articles — Short delivery of bitumen by carrier — A carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner — No material to show that the goods short delivered were sold — Bitumen not a valuable article — Addition could not be made.

The Appellant–Assessee carried on business as carriage contractor for bitumen loaded from oil companies namely HPCL, IOCL and BPCL from Haldia. The goods were to be delivered to various divisions of the Road Construction Department of the Government of Bihar. According to the Appellant, it has been in the business for roughly three decades.

A scam was reported in the media. The scam consisted of transporters of bitumen, lifted from oil companies, misappropriating the bitumen and not delivering the quantity lifted to the various Divisions of the Road Construction Department of the Government of Bihar. The scam had its repercussion in the assessments under the Act.

By an Assessment Order dated 27th March, 1998 being passed for A.Y. 1995–96, the AO, taking note of the scam, issued ShowCause Notice dated 23rd January, 1998, alleging that the Appellant had lifted 14,507.81 metric tonnes of bitumen but delivered only 10,064.1 metric tonnes. This meant that the Appellant had not delivered 4,443 metric tonnes. The Appellant produced photocopies of challans to establish that the bitumen had been delivered. Summons was issued by the AO to the Executive Engineers and Junior Engineers. It is the case of the Appellant that all Junior Engineers, except Shri Madan Prasad and Ahia Ansari, accepted the factum of delivery of bitumen. The AO, in fact, noticed that only those Junior Engineers accepted receipt of bitumen, where the Engineer in-charge or the Executive Engineer accepted the delivery. Shri Madan Prasad denied that the signature alleged to be his, was not his signature. The AO found that the Junior Engineers denied putting stamp and took the position that if there was stamp, then, it must indicate the name of the section. The AO added a sum of Rs. 2,19,85,700 being the figure arrived at, by finding that 4,443 metric tonnes of bitumen had not been delivered. This was done by invoking Section 69A of the Act.

For the A.Y. 1996–97, the AO passed Order dated 31st March, 1999. The Appellant, in its Return, disclosed a net profit of Rs. 6,76,133. On scrutiny, the AO, again, noticing the scam and finding that while 10,300.77 metric tonnes had been lifted by the Appellant, only 8,206.25 metric tonnes had been delivered. Accordingly, it was found that 2,094.52 metric tonnes had not been delivered. On the said basis and again invoking Section 69A of the Act, a sum of Rs. 1,04,71,720.30 was added as income of the Appellant.

The Commissioner Appeals found that all Junior Engineers, except two, had accepted delivery. After finding that the addition made by the AO in respect of quantity, where Junior Engineers had accepted delivery, was untenable, the Appellate Authority ordered deletion of a sum of Rs. 2,01,14,659. This amount represented the value of 4,064.28 metric tonnes. In regard to the disputed quantity, viz., the dispute raised by Shri Madan Prasad and Ahia Ansari, Junior Engineers, the matter was remanded back for affording an opportunity for cross-examination. This Order related to the A.Y. 1995–96.

Also, for A.Y. 1996–97, the Appellate Authority found merit in the case of the Appellant that except two Junior Engineers, the others had accepted the delivery. The addition of Rs. 1,04,71,720 was ordered to be deleted.

The Revenue filed appeals before the Income-Tax Appellate Tribunal (hereinafter referred to as, ‘the ITAT’, for short) for both the Assessment Years, viz., 1995–96 and 1996–97.

In regard to the order passed by the Appellate Authority for the A.Y. 1995–96, another development took place during the pendency of the Appeal before the ITAT. By rectification Order dated 31st May, 2001, the CIT(A) set aside the addition of Rs. 2,01,14,659 with the direction to the AO that he shall issue summons to the concerned Jr. Engineers, who have received 4,064.28 metric tonnes of bitumen as per challans furnished by the Appellant, record their statement, allow the Appellant an opportunity to cross-examine them and, if necessary, refer their signatures to the handwriting experts to establish the genuineness or otherwise of such signatures. Only after carrying out these directions, any addition shall be made.

The Revenue had filed an Appeal before the ITAT for the A.Y. 1995–96. The Appellant had filed cross-objection in the said Appeal. The Appellant also filed appeal before the ITAT against the Order of Rectification passed under Section 154 of the Act. The ITAT dismissed the Appeals filed by the Revenue and the Appellant taking note of the Order of the CIT(A), passed under Section 154 of the Act, by which, the matter stood remitted back. The cross-objection came to be disposed of accordingly.

For the A.Y. 1996–97, the ITAT disposed of the Appeal filed by the Revenue and also the cross-objection filed. The Appeal filed by the Revenue was allowed. The Tribunal found that the Appellant had not disputed the lifting of the bitumen. The claim made by the Appellant that full supply was made, stood demolished, when photocopies of delivery challans were found to be false and fabricated. The Executive Engineers, it was further found, had confirmed non-delivery to the tune of 2,090.40 metric tonnes. The Commissioner Appeals, it was found, reached a wrong conclusion, as he did not address himself to the explanation offered by the Junior Engineers. It was found that all Executive Engineers of the Consignee Divisions presented a case of non-delivery before the AO. Thus, the ITAT allowed the Appeal filed by the Revenue and sustained the Order of the AO relating to addition on account of short supply of bitumen for the A.Y. 1996–97.

On an appeal to the High Court by the Appellant–Assessee for the A.Y. 1996–97, the Court, after referring to the submissions, focussed on the scope of Section 69A of the Act. The High Court found that the word “owner” has different meaning in different contexts, and when a transporter sells the goods and receives money for that not on behalf of the real owner, it became the owner for the purpose of tax. Having lifted bitumen and not supplied to the Road Construction Department to which it was to be supplied, the Appellant would be liable to pay tax on the bitumen lifted and not delivered. The High Court distinguished the judgment in Dhirajlal Haridas vs. CIT (Central), Bombay (1982) 138 ITR 570 by noting that for determining the person liable to pay tax, the test laid down by this Court was to find out the person entitled to that income. The Court also went on to distinguish the judgment in CIT vs. Amritlal Chunilal (1984) 40 CTR Bombay 387. It was found that in the said case, the Assessee, therein, was not found to be the owner whereas the ITAT found the Appellant to be the owner. The High Court agreed with the said finding. Thereafter, the High Court went on to deal with the argument that the words “other valuable articles” in Section 69A could not include “bitumen”. The argument of the Appellant which is noted is that for applying Section 69A bitumen should have some nexus with money, bullion or jewellery. It was found that any Article which has value would come under the expression “valuable article” under Article 69A and the value of such Article can be deemed to be the income of the Assessee, should the Assessee fail to offer any explanation or the explanation offered be unsatisfactory. The argument that Section 69A would not apply as the Appellant had offered an explanation was not accepted as it was found that an explanation though offered, being not accepted, would lead to the invocation of Section 69A if the explanation was not satisfactory. In other words, Section 69A applied. Lastly, in regard to the argument of the Appellant that the cost of the bitumen and not the value, thereof, was added as income, the High Court found that the Appellant did not have a case that it had sold the bitumen at the price lower than the cost. The Appellant was found to be the owner of the bitumen and the addition was sustained.

The Supreme Court noted that Section 69A may be broken down into the following essential parts:

a. The Assessee must be found to be the owner;

b. He must be the owner of any money, bullion, jewellery or other valuable articles;
c. The said articles must not be recorded in the Books of Account, if any maintained;

d. The Assessee is unable to offer an explanation regarding the nature and the source of acquiring the articles in question; or the explanation, which is offered, is found to be, in the opinion of the Officer, not satisfactory;

e. If the aforesaid conditions are satisfied, then, the value of the bullion, jewellery or other valuable Article may be deemed as the income of the financial year in which the Assessee is found to be the owner;

f. In the case of money, the money can be deemed to be the income of the financial year.

Applying the provision to the facts of the case, the Supreme Court noted that the points that arise were as follows:

I. The question would arise, as to whether the Appellant could be treated as the owner of the bitumen;

II. The further question would arise, as to whether bitumen could be treated as other valuable articles;

III. Thirdly, the question arises, as to how the value of the bitumen is to be ascertained.

As regards the first question, viz., whether the Appellant could be treated as the owner of the bitumen is concerned, it was indisputable that the Appellant was engaged as a carrier to deliver the bitumen, after having lifted the same from the Oil Companies to the various Divisions of the Road Construction Department of the Government of Bihar.

Under Section 15 of the Carriage by Road Act, 2007, which repealed the Carriers Act, 1865, if the consignee fails to take delivery of any consignment of goods within 30 days, the consignment is to be treated as unclaimed. The period of 30 days is declared inapplicable to perishable consignments, in which case, a period of 24 hours’ notice or any lesser period, as may be agreed between the consignor and the common carrier, suffices. In the case of perishable consignment, following such notice, the consignment can be sold. In a case where the goods are not perishable, if there is failure by the consignee to remove the goods after the receipt of a notice of 15 days from the carrier, the common carrier is given a right to sell the consignment without further notice. Section 15(3) enables the carrier to retain a sum equal to the freights, storage and other charges, due, including expenses incurred for the sale. The surplus from the sale proceeds is to be returned to the consigner or the consignee. Section 15(4) clothes the carrier with a right to sell in the event of failure by the consignee to make payment of the freight and other charges, at the time of taking delivery. In such cases, if the other ingredients of Section 69A are satisfied, there may be no fallacy involved if an Assessee is found to be the owner of the goods which he disposes of under the authority of law.

The Supreme Court noted that in this case, it is not the case of either party that the Appellant had become the owner of the bitumen in question in a manner authorised by law. On the other hand, the specific case of the Appellant is that the Appellant never became the owner and it remained only a carrier. However, as noticed, if it is found that there has been short delivery, this would mean that the Appellant continued in possession contrary to the terms of contract of carriage.

The Supreme Court further observed that when goods are entrusted to a common carrier, the entrustment would amount to a contract of bailment within the meaning of Section 148 of the Contract Act, 1872 when it is for being carried by road, as in this case.

According to the Supreme Court, to apply Section 69A of the Act, it is indispensable that the Officer must find that the other valuable article, inter alia, is owned by the Assessee. A bailee, who is a common carrier, is not an owner of the goods. A bailee who is a common carrier would necessarily be entrusted with the possession of the goods. The purpose of the bailment is the delivery of the goods by the common carrier to the consignee or as per the directions of the consignor. During the subsistence of the contract of carriage of goods, the bailee would not become the owner of the goods. In the case of an entrustment to the carrier otherwise than under a contract of sale of goods also, the possession of the carrier would not convert it into the owner of the goods.

The Supreme Court further noted that Section 405 of the Indian Penal Code, 1860 reads as follows:

“Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits ‘criminal breach of trust’.

Illustration (f) Under Section 405 is apposite, and it reads as follows:

Illustration f. A, a carrier, is entrusted by Z with property to be carried by land or by water. A dishonestly misappropriates the property. A has committed a criminal breach of trust.”

The Supreme Court noted the provisions of Sections 27 and 39 of the Sale of Goods Act, 1930, and observed that sale by a carrier does not pass title except when it is immunised by the conduct of the owner of the good, which would in turn estop the owner from impugning the title of the buyer.

The Supreme Court noted that in the commentary in the context of Section 69A on Sampath Iyengar’s, Law of Income Tax, it was observed it cannot be said in the case of stolen property that the thief is the owner thereof.

The Supreme Court observed that the question would arise pointedly, as to, when a common carrier refuses to deliver the consignment, and continues to possess it contrary to contract and law, and converts it into his use and presumably sells the same, as to whether he could be found to be the owner of the goods. Would he be any different from a person who commits theft and sells it claiming to be the owner. Can a thief become the owner? It would be straining the law beyond justification if the Court were to recognise a thief as the owner of the property within the meaning of Section 69A. Recognising a thief as the owner of the property would also mean that the owner of the property would cease to be recognised as the owner, which would indeed be the most startling result. While possession of a person may in appropriate cases, when there is no explanation forthcoming about the source and quality of his possession, justify an
AO finding him to be the owner, when the facts are known that the carrier is not the owner and somebody else is the owner, then to describe him as the owner may produce results which are most illegal apart from being unjust.

After considering the other relevant laws and various judgment of the Supreme Court dealing with the meaning of “owner” in the context of different provisions of the Income-tax Act, 1961 and applying various test considered therein, the Supreme Court, in this context, summarised its findings as under:

1. Appellant as a carrier was entrusted with the goods.

2. The possession of the Appellant began as a bailee.

3. Proceeding further on the basis that instead of delivering the goods, the Appellant did not deliver the goods to the concerned divisions of the department in the State of Bihar.

4. Ownership of the goods in question by no stretch of imagination stood vested at any point of time in the Appellant.

5. Property would pass from the consignor to the consignee on the basis of the principles which are declared in the Sale of Goods Act. It is inconceivable that any of those provisions would countenance passing of property in the goods to the Appellant who was a mere carrier of the goods.

6. Section 405 of the Indian Penal Code makes it an offence for a person entrusted with property, which includes goods entrusted to a carrier, being misappropriated or dishonestly being converted to the use of the carrier. A specific illustration under Section 405 makes it abundantly clear that any such act by a carrier attracts the offence under Section 405. The Supreme Court in other words would have to allow the commission of an offence by the Appellant in the process of finding that the Appellant is the owner of the goods. In other words, proceeding on the basis that there was short delivery of the goods by the Appellant, inevitably, the Supreme Court must find that the act was not a mere omission or a mistake but a deliberate act by a carrier involving it in the commission of an offence Under Section 405. In other words, the Court must necessarily find that the Appellant continued to possess the bitumen and misappropriated. It is in this state that the AO would have to find that the Appellant by the deliberate act of short delivering the goods and continuing with the possession of the goods not only contrary to the contract but also to the law of the land, both in the Carriers Act 1865 and breaking the penal law as well, the Appellant must be treated as the owner.

7. Under Section 54 of Transfer of Property Act, a carrier who clings on to possession not only without having a shadow of a right, but what is more, both contrary to the contract as also the law cannot be found to be the owner.

8. The possession of the carrier who deliberately refuses to act under the contract but contrary to it, is not only wrongful, but more importantly, makes it a case where the possession itself is without any right with the carrier to justify his possession.

9. Recognising any right with the carrier in law would involve negation of the right of the actual owner, which if the property in the goods under the contract has passed on to the consignee is the consignee and if not the consignor.

The Supreme Court found that the Appellant was bereft of any of the rights or powers associated with ownership of property.

Approaching the issue from another angle, the Supreme Court observed that the rationale of the Revenue involves ownership of the bitumen being ascribed to the Appellant based on possession of the bitumen contrary to the contract of carriage and with the intention to misappropriate the same, which further involves the sale of the bitumen for which there is no material as such. But proceeding on the basis that such a sale also took place, even than what is important is, the requirement in Section 69A that the AO must find that the Assessee is the owner of the bitumen. According to the Supreme Court, in the facts, the Appellant could not be found to be the owner. The Appellant could not be said to be in possession in his own right, accepting the case of the Revenue that there was short delivery. The Appellant did not possess the power of alienation. The right over the bitumen as an owner at no point of time could have been claimed by the Appellant. The possession of the Appellant at best was a shade better than that of a thief as the possession had its origin under a contract of bailment. Hence, the Supreme Court held that the AO acted illegally in holding that one Appellant was the ‘owner’ and on the said basis made the addition.

The Supreme Court, thereafter, referred to the Principles of Ejusdem Generis and Noscitur a Sociis, which are Rules of construction and observed that when it comes to value, it is noticed that in the definition of the word “valuable” in Black’s Law Dictionary, it is defined as “worth a good price; having a financial or market value”. The word “valuable” has been defined again as an adjective and as meaning worth a great deal of money in the Concise Oxford Dictionary. Valuable, therefore, cannot be understood as anything which has any value. The intention of the law-giver in introducing Section 69A was to get at income which has not been reflected in the books of account but found to belong to the Assessee. Not only it must belong to the Assessee, but it must be other valuable articles. The Supreme Court considered few examples to illustrate the point. Let us take the case of an Assessee who is found to be the owner of 50 mobile phones, each having a market value of Rs. 2 Lakhs each. The value of such articles each having a price of Rs. 2 Lakhs would amount to a sum of Rs. 1 Crore. Let us take another example where the Assessee is found to be the owner of 25 highly expensive cameras. Could it be said that despite having a good price or worth a great deal of money, they would stand excluded from the purview of Section 69A. On the other hand, let us take an example where a person is found to be in possession of 500 tender coconuts. They would have a value and even be marketable but it may be wholly inapposite to describe the 500 tender coconuts as valuable articles. It goes both to the marketability, as also the fact that it may not be described as worth a ‘good’ price. Each case must be decided with reference to the facts to find out that while articles or movables worth a great deal of money or worth a good price are comprehended articles which may not command any such price must stand excluded from the ambit of the words “other valuable articles”. The concept of ‘other valuable articles’ may evolve with the arrival in the market of articles, which can be treated as other valuable articles on satisfying the other tests.

Bitumen is defined in the Concise Oxford English Dictionary as “a black viscous mixture of hydrocarbons obtained naturally or as a residue from petroleum distillation, used for road surfacing and roofing”. Bitumen appears to be a residual product in the petroleum refineries, and it is usually used in road construction, which is also probabalised by the fact that the Appellant was to deliver the bitumen to the Road Construction Department of the State. Bitumen is sold in bulk ordinarily. The Supreme Court noted that in the Assessment Order, the Officer has proceeded to take R4,999.58 per metric ton as taken in the AG Report on bitumen scam. Thus, it is that the cost of bitumen for 2,094.52 metric ton has been arrived at as Rs. 1,04,71,720.30. This would mean that for a kilogram of bitumen, the price would be only Rs 5 in 1995–96 (F.Y.).

Bitumen may be found in small quantities or large quantities. If the ‘article’ is to be found ‘valuable’, then in small quantity, it must not just have some value but it must be ‘worth a good price’ {See Black’s Law Dictionary (supra)} or ‘worth a great deal of money’ {See Concise Oxford Dictionary (supra)} and not that it has ‘value’. Section 69A would then stand attracted. But if to treat it as ‘valuable article’, it requires ownership in large quantity, in the sense that by multiplying the value in large quantity, a ‘good price’ or ‘great deal of money’ is arrived at then it would not be valuable article. Thus, the Supreme Court concluded that ‘bitumen’ as such could not be treated as a ‘valuable article’.

In view of these findings, the Supreme Court did not deal with other points. The appeals were allowed. The impugned judgment was stand set aside and though on different grounds, the order by the Commissioner Appeals deleting the addition made on the aforesaid basis was restored.

Shri Hrishikesh Roy, J. agreed with judgement of Shri K M Joseph J. that for the purposes of Section 69A, –the deeming effect of the provision will only apply if the Assessee is the owner of the impugned goods. Secondly, for any Article to be considered as ‘valuable article’ Under Section 69A, it must be intrinsically costly, and it will not be regarded as valuable if huge mass of a non-precious and common place Article is taken into account, for imputing high value and added his reasoning to justify his opinion.

Section 69A provides as a Rule of evidence that for the deeming effect to apply, the Assessee must be the owner of money, bullion, jewellery and other valuable articles on which he is unable to offer a satisfactory explanation. Someone having mere possession and without legal ownership or title over the goods will not be covered within the ambit of Section 69A. In the present case, the Assessee was certainly not the owner of the bitumen — but was the carrier who was supplying goods from the consignor – oil marketing companies to the consignee – Road Construction Department. Notably, due to short delivery of goods, the possession of the Assessee was unlawful. The inevitable conclusion, therefore, is that the Assessee is not the owner, for the purposes of Section 69A.

For purpose of Section 69A of Income-tax Act, 1961, an ‘article’ shall be considered ‘valuable’ if the concerned Article is a high-priced Article commanding a premium price. As a corollary, an ordinary ‘article’ cannot be bracketed in the same category as the other high-priced articles like bullion, gold, jewellery mentioned in Section 69A by attributing high value to the run-of-the-mill article, only on the strength of its bulk quantity. To put it in another way, it is not the ownership of huge volume of some low cost ordinary Article but precious gold and the likes that would attract the implication of deemed income under Section 69A.

BCAJ Admin

National Litigation Policy: Need of the Hour

With several distinctive features, Bharat is also famous for prolonged, repetitive and frivolous litigations. In fact, one of the major impediments or deterrents to FDI and ease of doing business in Bharat is its time-consuming judicial system. Today, the Judicial system in Bharat is clogged with crores of pending cases, i.e., 4,46,05,238 as of 27th October, 2023¹ at the District and Taluka levels only, out of which more than one lakh cases are 30 years old, as per the National Judicial Data Grid. Majority of these cases (75.11 per cent) are criminal cases, and the balance are civil cases. The total number of cases pending at various High Courts is 61.66 lakhs, and at the Supreme Court, it is 0.79 lakhs. This shows how alarming the situation is.

In 2022, Former Chief Justice of India, Shri N. V. Ramana² said, “It is a well-acknowledged fact that governments are the biggest litigants, accounting for nearly 50 per cent of the cases.” Even though the exact number of cases where the Government is a party cannot be known in the absence of data, it is an accepted fact that the government is the biggest litigant in India. Recently, the division bench headed by the CJI of Delhi High Court, in the case of UOI vs. Kiran Kanojia³ and other appeals, observed that “the overwhelming majority of cases currently clogging the judicial system involve either the Central Government, State Governments, or public sector undertakings (PSUs).”

The former Finance Minister and former President of India, Bharat RatnaPranab Mukherjee⁴, said, “One area of concern is litigation with taxpayers. The (Income-tax) Department is filing appeals in a routine manner without careful thought and examination, leading to the Department earning the dubious distinction of being the biggest litigant in the Government of India.” Coming down heavily on frivolous cases, in May 2023, a bench headed by Justice B. R. Gavai verbally observed that at least 40 per cent of litigation filed by Central and State Governments is frivolous. Thus, the issue is not only of a large number of cases by the Government but also of them being frivolous and unjust in nature. In Urban Improvement Trust, Bikaner vs. Mohan Lal⁵, the Supreme Court observed that “It is a matter of concern that such frivolous and unjust litigation by governments and statutory authorities are on the increase. Statutory Authorities exist to discharge statutory functions in public interest. They should be responsible litigants. They cannot raise frivolous and unjust objections, nor act in a callous and highhanded manner.” Unfortunately, Government officials get away with frivolous claims as there is no accountability on their part. Notably, the States of Sikkim and Haryana have implemented rules / policies to hold Government officials accountable for lapses resulting in failure of cases.

1 https://njdg.ecourts.gov.in/njdgnew/index.php

2 Speaking at the Joint Conference of Chief Ministers and Chief Justices of High Courts

3 FAO 265/2014, CM APPL. 39547/2019 Judgement date 22nd September 2023

4 Speaking at the 150th Anniversary of Income Tax in India in 2010

5 (2010) 1 SCC 512. Special Leave Petition[C] 29852 OF 2009 [CC NO.11768] dated 30.10.2009

It is not that the Government is not aware of this sorry state of affairs. In a pivotal move to tackle this issue, the “National Litigation Policy, 2010” (NLP) was formulated. However, unfortunately, this policy was never implemented. There were plans to introduce a revised NLP in 2015, but this, too, is yet to be implemented. On 13th June, 2017, the Government formulated the “Action Plan to Reduce Government Litigation.” This plan emphasises that appeals should only be filed in cases which touch upon significant policy matters and vexatious litigation should be promptly withdrawn. However, practical experience suggests that this, too, is not followed by Government officers. The Government came out with the “Vivad Se Vishwas” Scheme to reduce the pendency of litigation; however, it did not get the desired response for various reasons.

Regarding reasons for the Government being the biggest litigant, the Supreme Court, in Urban Improvement Trust (supra), noted as under:

“Unwarranted litigation by Governments and statutory authorities basically stems from the two general baseless assumptions by their officers. They are: (i) All claims against the Government / statutory authorities should be viewed as illegal and should be resisted and fought up to the highest court of the land.

(ii) If taking a decision on an issue could be avoided, then it is prudent not to decide the issue and let the aggrieved party approach the court and secure a decision.

The reluctance to take decisions, or tendency to challenge all orders against them, is not the policy of Governments or statutory authorities but is attributable to some officers who are responsible for taking decisions and / or officers in charge of litigation. Their reluctance arises from an instinctive tendency to protect themselves against any future accusations of wrong decision-making, or worse, of improper motives for any decision-making. Unless their insecurity and fear is addressed, officers will continue to pass on the responsibility of decision-making to courts and tribunals.”

In order to monitor the cases involving the Central Government, a portal called LIMBS — Legal Information Management and Briefing System is established. Currently, LIMBS is showing that 6.75 lakh cases involving the Central Government remain pending. This shows the dire need for a well-thought-out strategy to reduce litigation.

A step towards the reduction of tax litigation was taken by the CBDT in 20186 by increasing the monetary limits for filing Departmental Appeals. The present limit before the ITAT stands at Rs. 50 lakhs; before the High Court — R One Crore and before the Supreme Court — R Two Crore.

Almost 96 per cent of direct tax collection is by way of voluntary payments by taxpayers in the form of Advance Tax, Self-Assessment Taxes, TDS and TCS, where there is no cost of collection to the Government, but the taxpayers bear high compliance costs. Ironically, instead of thanking taxpayers for their services in tax collection, they are penalised heavily and threatened with prosecution even for minor and technical lapses. This increases litigation and harassment of honest taxpayers. The tendency to reopen cases based on change of opinion, interpretation, audit objections (often unjustified), retrospective amendments to tax laws, or decisions favouring Revenue, etc. leads to a plethora of cases. The recent spate of reopening of cases under section 148 of the Income-tax Act is a glaring example. The recent ruling by the Apex Court in the case of Nestle and others regarding giving effect of an MFN Clause in a tax treaty will surely result in a flood of fresh litigation. Isn’t it strange that all these litigations and heart burns are only to collect remaining 4 per cent of revenue.

6 CBDT Circular No. 3 of 2018 dated 11th July, 2018

The clogging of cases in Indian courts is a complex issue. It requires a multi-pronged strategy. There is an immediate need for a comprehensive National Litigation Policy with a definitive timeline for its implementation, along with provisions for accountability of Government Officials for frivolous and unjust applications. On the other hand, Government Officials should be empowered to take bold decisions in favour of taxpayers / citizens without fear or favour. CAG Audit objections, which are at times contrary to the law laid down by the Courts, need not be acted upon where the tax authority and his superior are of the view that no mistake has been committed. The launch of a Faceless Assessment Scheme is a step in that direction. Besides, there is a need to change the mindset on the part of officers. The Government should promote Alternative Dispute Resolution methods to reduce litigations coming to courts and expedite the decisions. When a court decision, contrary to the view taken by courts in the past, which will have large-scale repercussions on past assessments, is passed, the CBDT, in the interests of stability of business, should take a pragmatic view and implement that decision prospectively. There is a need to increase the overall efficiency in working of the judicial system by cutting the number of holidays, removing vacations, filling up vacancies and so on. In short, comprehensive Judicial reforms, along with stable, simple and pragmatic laws, can help reduce litigation and make the lives of citizens easy.

Wish you all the best wishes for a happy Deepavali and a Happy New Samvat Year, 2080!

BCAJ Admin

Representation Made

1. BCAS has submitted, “Representation to the Charity Commissioner”, regarding extension of time-limit for audit submission of audited accounts and related documents in the Office of Charity Commissioner for FY 2022-23

To read the Representation – Scan here

2. BCAS has submitted, “Representation to the Finance Minister of India”, regarding Notification No. 7/2023 dated February 21, 2023, in respect of filing Form 10B & 10BB, deferring the applicability by one year.

To read the Representation – Scan here

BCAJ Admin

अप्रियस्य च सत्यस्य वक्ता श्रोता च दुर्लभ:!!

This Sanskrit line is often quoted as a proverb and is quite often experienced in our day-to-day life. In fact, this saying also aptly applies to our audit profession.

This particular shloka appears in two places in our ancient Indian literature. In Valmiki Ramayana, when Ravana pressurises his maternal uncle Maricha to adopt the guise of a golden deer (suvarna-mriga) and lure Seeta so that Rama would chase him. This would enable Ravana to kidnap Seeta. Maricha was trying to caution him and dissuade him from inviting enmity with Rama. He described to him the valour and superhuman powers of Shri Ram.

Further, in Mahabharata, Mahatma Vidur advises his eldest brother Dhritarashtra (father of Kauravas) about ethical behaviour (Neeti). He utters this shloka in the famous Vidurneeti. The full text of the shloka is:

सुलभा: पुरुषा: राजन् सततं प्रियवादिनः

अप्रियस्य च सत्यस्य वक्ता श्रोता च दुर्लभ:!!

“O King, it is very easy to get people around you continuously praising you in sweet words; however, it is very difficult or rare to get a person who speaks the truth which may be unpleasant; and also a person would listen to such unpleasant truth.”

In both the instances of Ravana and Dhritarashtra, they never listened to the truth as it was unpleasant. That caused total disaster of Ravana and demons; and also Kauravas.

If we observe around us, this is a very common scenario. Take the example of some of our political leaders. Howsoever efficient and well-intentioned they may be, they develop ego. They are not capable of listening to any disagreement from others. Even if they listen, they cannot digest it, so the question of acting on it does not arise. This makes them dictatorial.

Many times, close relatives, good friends and other well-wishers do desire to give good advice, which they honestly believe is in that person’s interest. However, they avoid it, thinking as to why they should displease or antagonise him. They are not sure as to how he will take it. They fear that the reaction will be violent and it will unnecessarily spoil their relations. Very few people have good communication skills to tell an unpleasant truth without offending the other person.

We, CAs, experience this in our day-to-day practice, be it audit or advisory. Clients often want to manipulate things for obvious reasons. We are not comfortable with it, particularly when we are required to certify the statements. Similarly, we sometimes feel that our other CA friend is doing something wrong that may cause trouble for himself. In all such situations, we avoid confrontation and avoid telling the ‘unpleasant truth’. This leads to the deterioration of the quality of financial statements. It also spoils the transparency in financial conduct. In turn, it leads to social evils. And if and when it is exposed, it tarnishes the image of the profession apart from damaging the economy. We should develop the courage to tell the truth and correct the wrong actions of the client. Imagine, the risk that we assume if we are knowingly party to a wrong decision, which may entail huge losses to the company. Our years of hard work and reputation are at stake. It is better to leave any unethical work than siding or hiding it at any cost.

On the other hand, we should be good and patient listeners of unpleasant truths. If we are wrong, we must admit it quickly and emphatically. This leads to our growth.

As an enlightened citizens, our sacred duty is to protect, promote, and nurture social and moral values. As humans, we should also be present to others’ feelings and communicate the right things tactfully but effectively. That will be in the interest of all of us and our nation.

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

1. Full Day Workshop – “Use of Technology in GST Compliance” held on 9th September, 2023, at BCAS Hall.

The Indirect Taxation Committee jointly with Technology Initiative Committee organised a full day workshop on the use of technology in GST compliance through a demonstration of various automation tools. Automation and use of software in compliance processes can help professionals increase the efficiency of their team and improve compliance.

The 1st session was addressed by CA Jigar Doshi and CA Yash Goenka on strategies for evaluation and selection of automation software and practical challenges in implementation. They explained the checkpoints and important considerations while selecting ERP and ASP / GSP Software.

This was followed by a Panel Discussion on Issues, challenges and areas for automation in GSTR1, GSTR 3B and ITC Reconciliation by use of ASP / GSP Software. The Panel was composed of Darshan Shah and CA Punit Mehta from Tally, CA Aneree Shah from ClearTax and CA Vaishali Dedhia and the panel was moderated by CA Mandar Telang.

The 3rd session was addressed by CA Nachiket Pendharkar who explained the use of VBA and Macros in Excel for preparation of data for GST returns and reconciliation.

CA Rajiv Narayanan explained and demonstrated the use of Robotic Process Automation and Artificial Intelligence tools like Python, Alteryx, Chat GPT and Gamma.app in the 4th and the final session. He emphasised on the increase in efficiency and accuracy of the team by use of RPA and AI.

The event was attended by more than 50 participants and they benefited from the deliberations of the speakers.

2. Half Day Seminar on “Revised Format of Audit Report for Charitable Institutions”, held on 2nd September, 2023, at IMC, Churchgate.

A half-day seminar on Revised Format of Audit Report containing a session explaining the changes made in Form 10B and 10BB applicable for A.Y. 2023–14 followed by a Panel Discussion was organised by the Taxation Committee in a hybrid mode.

CA Sonalee Godbole explained Form 10B clause-wise with a break-up of the details being called by the auditor. She explained the care to be taken while reporting the information and the risks associated with incorrect or incomplete reporting and how the auditor is responsible for the entire reporting to the Income-tax Department.

At the time of the panel discussion — clause-wise questions and answers were undertaken by CA Anil Sathe and CA Gautam Nayak. They cited the decisions of the courts and tribunals which helped the participants to understand the coverage of the revised forms.

The seminar ended with a Q&A session with the participants. The seminar was attended by over 425 participants physically and online.

Representation dated 11th September, 2023, requesting the deferment of the applicability of the revised form 10B / 10 BB (Audit report for Charitable Trusts) by one year.

Based on the various aspects discussed in the said seminar, the Society, with the help of Taxation Committee, also made a representation to the Hon’ble Finance Minister on 11th September, 2023, expressing concerns over complex coverage of the forms vis-a-vis machinery and resources available with the assessees (viz. charitable / non-profit organisations) to compile the details and information called for in the said forms. The Society therefore requested the deferment of the revised forms for a period of one year and continuance of the old forms for the time being.

To read the Representation, Scan the QR code on the following page:

[Editor’s Note: Vide Circular No. 16/2023, dated 18th September, 2023 the CBDT has extended the due date for furnishing Audit Reports in form 10B/Form10BB for the A.Y. 2023–24 from 30th September, 2023, to 31st October, 2023]

3. “Forensic Accounting and Investigation Standards (FAIS)” event held on Friday, 1st September, 2023, at Hotel Parle International.

The ICAI has recently issued revised Forensic Accounting and Investigation Standards (FAIS). These standards have now become mandatory for all the engagements conducted on or after 1st July, 2023. Internal Audit Committee organised this seminar to enlighten the participants about the framework governing these revised standards, the basic concepts covered in the standards, legal framework and report writing. The seminar received a good response, particularly from young participants who want to foray into the field of forensic audits.

The seminar was divided into four sessions followed by a panel discussion. The faculty for the sessions were part of the Expert committee of ICAI which was involved in the standard-setting process and hence they had good insights on the topic. CA Satish Shenoy, in his key-note address, spoke about the need for FAIS, governing framework and professional opportunities for CAs. CA Nikunj Shah, in the first technical session discussed various concepts across FAIS. This was followed by discussion about its relevance and recognition and the extent of reliance on the work of the professionals in legal world which was taken by CA Uday Kulkarni. Lastly, CA Chetan Dalal shared his practical experiences, recent cases and discussed a few tips about the report writing. The seminar ended with a panel discussion between all the three technical session experts and interaction with the participants in Q&A form which was guided by CA Ashutosh Pednekar. All speakers were very lucid and they made the sessions very interesting and engaging with lots of examples.

Link for downloading the standards: https://resource.cdn.icai.org/75009daab030723.pdf

4. Direct Tax Laws Study Circle on “Key changes under TCS provisions” on 1st September, 2023, in Online Mode.

The study circle meeting was led by CA Chaitee Londhe wherein the participants discussed the following points:

• Amended Provisions of Section 206C(1G) of the Income-tax Act, 1961 and her analysis of the same.

• Overview of the Amendments introduced to the TCS provisions by the Finance Act, 2023.

• Subsequent changes were introduced to the TCS provisions by way of Circular No. 10/2023.

• Amended Provisions of Section 206CC and 206CCA of the Income-tax Act, 1961.

• Amendments introduced in the Liberalised Remittance Scheme of RBI.

• Clarifications issued by the CBDT with respect to the amended TCS provisions.

The speaker delivered a comprehensive analysis and insightful perspective on the amended TCS provisions, offering invaluable clarity by dissecting the CBDT’s issued clarifications.

5. Panel Discussion on “Investing in India’s AmritKaal: Equities and beyond” held on Friday, 25th August, 2023, in Online Mode.

In a dynamic financial landscape, the event “Amrit Kaal” organised by the Managing Committee shed light on the shifting paradigms of investment. The speakers Mr Kushal Thaker, Mr Aditya Sood, and CA Vikas Khemani meticulously navigated through the evolving asset classes, emphasising how Alternative Investment Funds (AIFs), Commodities, Portfolio Management Services (PMS), and even Sovereign Gold Bonds are carving distinctive realms within the investment spectrum. These unconventional avenues, once ancillary, are now emerging as robust investment classes, offering diversification and new avenues for wealth creation.

A pivotal theme of the event was the transformation in India’s macroeconomic landscape. The speakers illuminated how India’s economic trajectory has witnessed notable shifts over recent years, reshaping the investment narrative. Insights were shared on the changing dynamics of growth, inflation, fiscal policies, and global positioning, offering attendees a comprehensive view of the macroeconomic trends shaping investment decisions.

Of paramount significance was the discourse around equity investments. The event unpacked how equity, as an enduring asset class, is extending its allure to new entrants in the market. With insightful discussions on long-term strategies, risk management, and the role of technology, attendees gained a profound understanding of the opportunities and challenges that equity investments present, not only for seasoned investors but also for those embarking on their investment journey.

Throughout the event, the resonating message was the need for adaptability. The financial landscape is no longer static; it’s a dynamic ecosystem where traditional norms are being redefined. The event encapsulated the essence of embracing change, whether by exploring diverse asset classes, decoding macroeconomic shifts, or embracing equity investments as a transformative force.

The panel discussion was guided by CA Abhay Mehta who moderated the session.

Link for watching the session: https://www.youtube.com/watch?v=0xs5frO6kdo

QR Code:

6. Direct Tax Laws Study Circle meeting on “Reassessment under the Income-tax Act — Law and Practice” held on Thursday, 24th August, 2023, via Zoom.

Dharan Gandhi took up Part 2 of the meeting on the topic of Reassessment under the Income-tax Act — Law and Practice, wherein he discussed the following concepts and issues relating to the assessment procedures:

• Section 150 of the Income-tax Act, 1961 relating to cases where assessment is in pursuance of an order on appeal.

• Section 151 of the Income-tax Act, 1961 relating to Sanctions for issue of notices by the specified authority for the purposes of Section 148 and Section 148A.

• Procedure for reassessment under the new provisions in Search and Non-Search Cases, and Search Cases of a third-party including steps, approval and time period relating to the same.

• Relevant Case Laws on Section 148 and 148A of the Income-tax Act, 1961.

• Analysis and views of various courts on notices issued at different points in time.

The speaker conducted a thorough examination of the recently established reassessment provisions, clearing not only their intricacies but also delving into the diverse perspectives presented by various courts in response to the raised issues during the reassessment proceedings. The session concluded with a vote of thanks.

7. Direct Tax Laws Study Circle meeting on Issues with respect to “Deductions under Capital Gains” held on Friday, 18th August, 2023, in Online Mode.

The study circle meeting was led by CA Shashank Mehta in which the participants discussed various issues w.r.t. allowability of deductions under capital gains, with the help of Case Studies. The following concepts were covered:
• Cost of Acquisition with respect to section 55 of the Income-tax Act, 1961 (Act).

• Eligible exemption as per section 54F read with section 50C of the Act.

• Cost of acquisition in case of House Property where the entire amount of Interest is not allowed as a deduction u/s 24(b) of the Act.

• Eligible Indexation as per section 48 of the Act.

• The criteria to be fulfilled for claiming exemption as per section 54, section 54EC, section 54F of the Act.

• Deduction under section 54 in case investment in new house property is not purchased in the name of the Assessee.

The group leader provided a comprehensive breakdown of capital gains deductions, citing case studies and case laws to illustrate allowable deductions and exemptions shedding light on important concepts.

8. BCAS’s Social Cause Visit to Umargaon: “Nurturing Education and Nature” on 5th and 6th August, 2023.

As one of the initiatives of the Managing Committee, in a remarkable display of community spirit, BCAS & BCAS Foundation orchestrated a two-day event that combined the power of education and environmental stewardship. A group of 27 dedicated volunteers participated in the social cause visit at Umargaon.

The event kicked off with a Social Cause visit to schools helped by the BCAS Foundation in collaboration with the Rushabh Foundation which took on the admirable responsibility of providing education infrastructure in 25 schools, through the introduction of Digital Classrooms. These schools overcame the challenge of teacher shortages and ignited a newfound enthusiasm for learning. Witnessing the astonishing results achieved in just six months was nothing short of awe-inspiring. BCAS has assured its support to ensure quality education for all. The team played indoor and outdoor games, fostering an atmosphere of joy and inclusivity.

As planned, the team visited Bhaskar Save’s Natural Farm, “Kalpavruksha”. Revered as the ‘Father of Natural Farming’ in India, Bhaskar Save and his successors illuminated the principles of Natural Abundance. Exploring the dichotomy between Natural and Organic Farming, the team learned how the farmer aligns with the fundamental principle of cooperation inherent in nature itself. The five critical concerns of farming — Tillage, Fertility Inputs, Weeding, Irrigation, and Crop Protection — were elegantly addressed through nature’s intricate balance. Bhaskar Save’s conviction that “Non-violence is only possible through natural farming” resonated deeply, a testament to the harmony that can be achieved through sustainable practices.

On the subsequent day, the group ventured to the proposed land of the MaBap Foundation. The four pillars of the foundation are PrakrutikChikitsa (Natural Healing), SanskrutikVikas (Cultural Development), Vedic Abhyas (Vedic Practices), and AdhyatmikUnnati (Spiritual Progress), through which the foundation embodies holistic growth. The significance of PanchTatva (Five Elements)

in every facet of existence was highlighted, setting the tone for a symbolic tree-planting ceremony. Excitement and enthusiasm rippled through the group as they planted Ashopalav, Neem, Mango, Jamun, and Saru trees, marking a significant stride towards BCAS’s 75th year.

The group treasured enriching memories and returned with an enlightening experience of profound learning, gratitude, and an unshakable belief in the power of concerted efforts to create a better world.

9. A Panel Discussion on “Disclosure of Foreign Assets and Incomes” held on 26th July, 2023, in Online Mode.

The Taxation Committee organised a Panel Discussion on Disclosures of Foreign Incomes and Assets in a virtual mode. The Panel consisted of CA RutvikSanghavi, CA KartikBadiani, and CA Mahesh Nayak who co-authored the book on “Disclosures of Foreign Assets and Incomes” published by BCAS.

CA Hardik Mehta moderated the session addressing various questions to each of the panelists bringing out comprehensive responses from each Panelist.

CA Rutvik Sanghavi explained the importance and objective and the rationale behind the enactment. He also stressed on the principles one needs to keep in mind while reporting the same. He also explained the importance of the documentation for reporting the foreign assets and income. He also briefly touched upon reporting of gifts, ESOPs, etc. The issue of mismatches was also explained and how to mitigate the same with proper documentation.

CA Kartik Badiani answered questions with respect to reporting in the foreign asset schedules including the impact of change in residential status, reporting by minors, reporting of joint holding of house properties, investments in Gift City etc. He also took the case study of ESOPs and its reporting issues.

CA Mahesh Nayak took the participants through the case study of overseas brokerage accounts and how to report the same. He also explained as to which cases will be covered in subparts A1 to A4 and others in B of the FA Schedule.

All three panelists touched upon various other issues involving the FA schedule and what each subpart intends to cover. They even explained the issue regarding the easy availability of foreign exchange rates for reporting., the issue of calendar year vs. financial year etc. The panel discussion was very well received and appreciated the insights shared by all three panelists.

Link to access the space session: https://www.youtube.com/watch?v=dXoApEdvwnw

QR Code:

10. A Twitter Space Session on “Filing ITR for A.Y. 2023–24” held on 4th July, 2023, in Online Mode.

This Twitter Space Session on filing ITR for A.Y. 2023–24 was organised by the Technology Initiative Committee, with an objective of sharing the crucial precautions and best practices for filing ITR that professionals need to observe.

In a candid discussion that was moderated by the chairman of the committee, CA Ameet Patel, the speakers, CA Nitin Shinghala, CA Sanjeev Lalan, and CA Rajni Shah, shared insights on the dos and don’ts for tax professionals to ensure a hassle-free tax filing experience.

The session was open to all and got an encouraging response as several non-members, including representatives from the media attended the same.

BCAJ Admin

Miscellanea

I. WORLD NEWS — ECONOMY

1. Two Fed Officials Suggest That Interest Rates Will Rise Again

In their first comments since the Federal Reserve Bank decided to keep the US key interest rate unchanged this week, officials from the bank signaled that the hiking cycle hasn’t ended.

Fed Governor Michelle Bowman and Boston Fed President Susan Collins both warned in separate events that inflation is still a threat.

“Inflation is still too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 per cent goal in a timely way,” Bowman said in a speech at an event of the Independent
Community Bankers of Colorado in Vail. “I see a continued risk that energy prices could rise further and reverse some of the progress we have seen on inflation in recent months.”

Bowman said that, according to economic projections assessed by the FOMC, inflation will stay above the Fed’s 2 per cent “at least until the end of 2025.”

The Fed’s Federal Open Market Committee voted on Wednesday to maintain the benchmark rate in the range of 5.25 per cent to 5.50 per cent, the highest level in 22 years. Both Bowman and Collins said they supported the decision.

Projections in the Fed’s dot plot, which accompanied the announcement, showed the likelihood of one more hike this year and two cuts in 2024, or two fewer than indicated in June’s update.

“I expect rates may have to stay higher, and for longer, than previous projections had suggested, and further tightening is certainly not off the table,” Collins said at the annual convention of the Maine Bankers Association. “There are some promising signs that inflation is moderating and the economy rebalancing. But progress has not been linear and is not evenly distributed across sectors.”

Annual U.S. inflation accelerated to 3.7 per cent in August from 3.2 per cent in July, pressured mainly by gas prices. The Fed has two more monetary policy meetings in 1st November, and 13th December, 2023.

(Source: International Business Times — By Helder Marinho — 22nd September, 2023)

2. SPORTS

1. India Fires First World Record of Asian Games as Japanese Teen Dazzle

India claimed the first world record of the Hangzhou Asian Games on Monday as hosts China snapped up more gold medals and 15-year-old skateboarder Hinano Kusaki triumphed for Japan.

The Indian trio of DivyanshPanwar, RudrankkshPatil and AishwaryTomar blew away the field with a new world-best 1,893.7 points to win the men’s 10m air rifle team event on day two of the multi-sports extravaganza.

They beat the previous mark of 1,893.3 set by China last month in Baku.

In doing so they won India’s first gold of a Games where the hosts have swept 28 of the 44 titles decided so far.

“In the 10m event they are both perfect athletes,” Tomar said of his teammates. “Playing with them is huge, it’s really good.”

Another shooting world record fell to China’s Sheng Lihao in the men’s 10m air rifle with his 253.3 points surpassing teammate Yu Haonan’s 252.8 from Rio four years ago.
“I had good luck in the final. I did quite well today, I was basically smooth,” said Sheng.

Like India, Macau clinched its first gold in Hangzhou, with wushu athlete Li Yi winning the Changquan title to become the first woman in history from the Chinese territory to earn an Asian Games gold.

“I’m really proud. This one completes the process so I feel really fortunate,” said the 31-year-old.

“This, maybe, brings my 20 years as an athlete to a perfect end.”

In other early action on day two, Kusaki dazzled in skateboarding to easily win the women’s park final at Qiantang Roller Sports Centre.

“I am very happy with how everything went,” said the teenager.

After winning all seven gold medals in the swimming pool on the opening day, China is primed to dominate again on Monday night, spearheaded by breaststroke world champion Qin Haiyang.

The Chinese star caused a major upset at the world championships in Fukuoka in July when he won the 100m gold in 57.69 ahead of a stacked field and in the absence of British great Adam Peaty.

He went on to complete an unprecedented clean sweep of the breaststroke titles, an achievement he is aiming to match at his home Asiad as he builds towards next year’s Paris Olympics.

Qin, the second-fastest ever over 100m after Peaty, was in a class of his own in the heats, touching in 58.35 to better the previous Games best set by Japan’s Yasuhiro Koseki in 2018.

South Korea’s Choi Dong-yeol came in second — a gaping 1.55 seconds behind Qin.

Hong Kong’s Siobhan Haughey could prevent another Chinese clean sweep when she lines up in the women’s 200m freestyle final.

(Source: International Business Times — By Martin Parry — 25th September, 2023)

3. BUSINESS

1. India fourth in number of startups with $50million + funding: Study

India ranks fourth in the world in the number of scaleups, or startups that have received more than $50 million of disclosed VC investment. Ahead of India are the US, China, and the UK, the first edition of Startup Genome’s Scaleup Report said.

However, it’s ahead of the UK in the total VC investment that has gone into these scaleups, and in the cumulative tech value investment of the scaleups. India, the report says, has recorded 429 scaleups, with a VC investment of $127 billion and a total value of tech investment of $446 billion.

The report is a research into scaleup success factors, building on the question of what behaviours, resources, and characteristics of startups differentiate those that within four to eight years scaled to $50 million and higher valuations from those startups that didn’t.

Startup Genome, an innovation policy advisory and research firm, surveyed startups in over 80 cities across more than 40 countries and looked at 60 plus metrics.

The report said India has startups with 50 per cent or more of their customers coming from outside of their continent and having the highest scaleup rate. This can partly be attributed to startups that tailor their products and services to truly global markets — not just beyond their country, but beyond their continent — dramatically increasing their potential customer base.

Startups based in large countries (US excluded) scale at a higher rate when they focus on their domestic market. In those countries, the size of the domestic market is so large that it may be worth delaying or forgoing global markets. This is certainly clear in India, where B2C startups can achieve unicorn status and billion-dollar exits without going out of the country. Startups with a local connectedness index score of 6 or above achieve a scaleup of 5.1 per cent compared to 3.8 per cent for those with a score of 2 to 4 — a 34 per cent boost. The local connectedness index measures the size, density, and quality of a startup’s local network. Early-stage startups with a higher local connectedness index see their revenue grow twice as fast as those with a lower local connectedness index.

Scaleup success rate clearly increases with global connectedness, and startups that develop a high level of global connectedness have a 3.2 times higher chance of scaling than those with a low level. Ecosystems that are more connected to top global ecosystems (such as Silicon Valley, NYC and London) see their startups go global at a much higher rate on average (66 per cent correlations between those very distinct variables)

Founders looking to improve their chances of scaling should ensure that they offer stock options for all employees, have more than five global connections to top ecosystems, and have at least three advisers for their startup.

(Source: Times of India – By ShilpaPhadnis – 25th September, 2023)

BCAJ Admin

Regulatory Referencer

I. COMPANIES ACT, 2013

1. One-time relaxation for filing of Forms–3, Form–4 and Form–11 under the LLP Act without any additional fee: MCA has granted one-time relaxation in additional fees for LLPs that are/were unable to file Forms 3, 4 and 11 within due dates. Filing of Forms 3 and 4 without additional fees shall be applicable for event dates from 1st January, 2021 and onwards. The filing of Form 11 without additional fee shall be applicable for F.Y. 2021-22 onwards. Further, these forms shall be available for filing from 1st September, 2023 onwards till 30th November, 2023. [General Circular No. 8/2023, dated 23rd August, 2023]

2. MCA extends the tenure of the Company Law Committee by another one year till 16th September, 2024: The Ministry of Corporate Affairs vide an order dated 18th September, 2019 had constituted the Company Law Committee to examine and recommend various provisions and issues pertaining to the implementation of the Companies Act, 2013 and the LLP Act, 2008. The tenure of the said Company Law Committee was set to expire on 16th September, 2023 which is now extended till 16th September, 2024. [Order No. 2/1/2018-CL-V, dated 13th September, 2023]

II. SEBI

3. Voluntary delisting norms for non-convertible debt securities and non-convertible redeemable preference shares: SEBI (LODR) (3rd Amendment) Regulations, 2023 are notified. As per the amended norms, a new chapter —VI A has been added which prescribes the framework for voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares. It shall not be applicable on certain listed entities like a listed entity that has outstanding listed non-convertible debt securities or non-convertible redeemable preference shares issued by way of a public issue etc. [Notification No. SEBI/LAD-NRO/GN/2023/149, dated 23rd August, 2023]

4. Additional disclosures for certain Foreign Portfolio Investors: SEBI has mandated the criteria for submission of additional disclosures by foreign portfolio investors under FPIs norms. As per the criteria, details of all entities holding any ownership, economic interest, or exercising control in the FPIs need to be provided by certain FPIs. These are FPIs that hold more than 50 per cent of their Indian equity Assets Under Management (AUM) in a single Indian corporate group and FPIs that individually, or along with others hold more than R25,000 crore of equity AUM in the Indian markets. [Circular No. SEBI/ HO/ AFD/ AFD — POD — 2/CIR/ P/2023/148, dated 24th August, 2023]

5. Framework for unitholders of REITs and InvITs allowing them to exercise their board nomination rights: SEBI has released a framework for eligible unit holders of Real Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) allowing them to exercise their board nomination rights. As per the framework, the manager of a REIT / InvIT must review whether the eligible unit holders who have exercised their board nomination right, continue to hold the required number of units of REIT / InvIT and make a report on the same. The circular shall be effective immediately. [Circular No: SEBI/HO/DDHS-POD-2/P/CIR/2023/153 & 154, dated 11th September, 2023]

DIRECT TAX: SPOTLIGHT

1. Guidelines under Section 10(10D) of the Income-tax Act, 1961 — Circular No. 15/2023, dated 16th August, 2023:

Finance Act, 2023 made amendments to Section 10(10D). These amendments significantly impact the income-tax exemption eligibility for sums received under life insurance policies.

The circular contains comprehensive guidelines, designed to determine the taxability of consideration received under eligible life insurance policies with the help of a series of detailed scenarios and examples.

2. Extension of timelines for filing Form 10B/10BB and Form ITR 7 for Assessment Year 2023-24 — Circular No. 16/2023, dated 18th September, 2023:

The CBDT has extended the due date for furnishing Audit reports in Form 10B/Form 10BB for A.Y. 2023–24 from 30th September, 2023 to 31st October, 2023.

Consequently, the due date for filing the Return of Income in Form ITR-7 for the A.Y. 2023–24 has also been extended from 31st October, 2023 to 30th November, 2023.

3. Insertion of Rule 11UACA Computation of income chargeable to tax under section 56(2)(xiii)- Income-tax (Sixteenth Amendment) Rules, 2023 – Notification No. 61/ 2023, dated 16th August, 2023:

The Rule provides computation of income chargeable to tax under Section 56(2)(xiii), where any person receives at any time during any previous year any sum under a life insurance policy.

4. Amendment to Rule 26 Rate of Exchange for the purpose of deduction of tax at source on income payable in foreign – Income-tax (Seventeenth Amendment) Rules, 2023 – Notification No. 64/ 2023, dated 17th August 2023.

5. Amendment to Rule 3(1) computation of perquisite value of rent-free accommodation provided by employer — Income-tax (Eighteenth Amendment) Rules, 2023 —Notification No. 65/ 2023, dated 18th August, 2023.

6. Insertion of Rule 134 and Form 71- Application under section 155(20) regarding credit of tax deduction at source – Income-tax (Twentieth Amendment) Rules, 2023 — Notification No. 73/2023, dated 30th August, 2023:

Where any income has been included in the return of income furnished by an assessee for any assessment year and tax on such income has been deducted at source in a subsequent financial year, the assessee can apply to the Assessing Officer in Form 71 to obtain credit of TDS.

FEMA AND IFSCA REGULATIONS

1. RBI allows residents to make study-related remittances in IFSCs under LRS:

Presently, remittances to IFSCs under LRS can be made only for making investments in securities. Resident individuals can now remit payment of fees to foreign universities or foreign institutions in IFSCs for pursuing courses mentioned in the Notification No. S.O. 2374(E), dated 23rd May, 2022 under the purpose ‘studies abroad’ as mentioned in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000. [A.P. (DIR SERIES) Circular No. 6, dated 22nd June, 2023]

2.Discontinuation of MIFOR as a ‘Significant Benchmark’:

RBI has announced that after 30th June, 2023, the Mumbai Interbank Forward Outright Rate (MIFOR) shall cease to be recognised as a ‘significant benchmark’. This decision comes as a result of the cessation of the US Dollar LIBOR. The updated list of significant benchmarks shall come into effect from 1st July, 2023. [Circular No. FMRD.FMSD. 03/03.07.25/2023-24, dated 23rd June, 2023]

3. International Credit Card usage brought under LRS:

On 16th May, the Government omitted Rule 7 of Current Account Transaction Rules resulting in transactions made through the use of ICCs by residents abroad to be covered under LRS. The purpose was to bring transactions made through ICCs under the TCS net. This change was covered in the previous journal. However, after hue and cry, the Government has backtracked and reinstated the rule, w.e.f. 16th May. In effect, the use of ICCs abroad is again outside the LRS limit and the status quo is maintained. However, further changes can be expected by 1st October 2023, the date till when TCS on LRS has been deferred to. [Notification No. G.S.R. 472(E) [F. NO. 1/5/2023-EM], dated 30th June, 2023]

4. IFSCA introduces the definition of ‘distributor’:

IFSCA has introduced the definition of ‘distributor’ in IFSCA (Capital Market Intermediaries) Regulations, 2021 and made related amendments in other regulations. [Notification No. IFSCA/2023-24/GN/REG040, dated 3rd July, 2023]

5. Central Government prescribes the procedure for import, export, procurement and supply of ships by an IFSC Unit:

The Government has amended the SEZ Rules by inserting a new Rule 29B to set the procedures for import or export or procurement from or supply to the Domestic Tariff Area of ships by a Unit in the International Financial Services Centre. [Notification No. G.S.R. 481(E) [F. NO. K-43013(13)/2/2022-SEZ], dated 4th July, 2023]

6. RBI issues report of the IDG on Internationalization of INR:

An Inter-Departmental Group (IDG) of the Reserve Bank of India (RBI) was formed to examine the internationalization of INR. The objective of the IDG was to review the extant position of INR as an international currency and to frame a road map for the internationalization of INR. The IDG has submitted its report containing its final set of recommendations. The recommendations of the report will be examined by RBI for implementation. [Press Release 2023-2024/539, dated 5th July, 2023]

7. IFSCA allows IFSC Banking Companies to set up banking units in IFSC in addition to IFSC banking Units:

IFSCA has amended its Banking Regulations to allow IFSC Banking Companies to set up banking units in IFSC in addition to IFSC banking Units. The amendment allows the establishment of a banking unit in an IFSC as either an IFSC Banking Unit (IBU) or an IFSC Banking Company (IBC). Earlier, this option was not available. The key amendments include the introduction of the terms “IFSC Banking Unit” and “IFSC Banking Company”, along with the criteria for granting a license or permission to set up an IFSC banking company have been prescribed. [Notification No. IFSCA/2023-24/GN/REG041, dated 6th July, 2023]

BCAJ Admin

Letters to the Editor

To
The Editor,
BCAS,
Mumbai

Respected Sir,

This has reference to the latest articles by Dr. Anup P. Shah in the September Edition of BCAJ.

The article written by Mr. Anup Shah is of great importance as most of the clients of a practicing chartered accountant have borrowed funds for personal / business purposes. The Indian System of borrowing from banks and financial institutions invariably seek collateral securities and backed by guarantee from one or more guarantors. Often such guarantors are not aware of their responsibilities and future contingent liabilities.

The author has provided detailed analysis of provisions under Indian Contract Act as also other contemporary laws such as IBC laws, etc. The evolution of legal case laws and up to date situation of applicable laws to a guarantor have been brought out succinctly and comprehensively. The utility value of such articles of day to day advisory services to clients has been enormous and highly useful. Many of articles written by the author Dr. Anup P. Shah have been highly useful for day to day practice for CAs and tax practicing professionals.

We thank Mr. Anup Shah for taking time out of his very busy schedule and rendering yeoman’s service to the profession on a regular basis for last several years by way of comprehensive articles under the heading “Law and Business”.

CA Mukesh Shah

Dear BCAJ Team,

I write to express my profound appreciation for the enlightening two-part interview featuring Senior Advocate Shri Arvind Datar. His valuable insights derived from a 40-year-long professional journey shed light on a multitude of aspects:

• The early struggles and eventual triumphs in his career trajectory provide a glimpse into the challenging yet rewarding path of the legal profession.

• The delicate balance between his writing experiences and demanding work life offers a perspective that aspiring professionals can learn from.

• From gleaning wisdom from seasoned seniors to imparting guidance and motivation to the younger generation, Shri Datar’s advice and reflections present a roadmap for budding legal minds.

• His candid and bold views, along with suggested improvements to legal provisions, shed light on the need for fairness within the legal system and the hardships faced by the citizens and taxpayers of our nation.
This piece stands as one of the boldest contributions within BCAJ, and I hope it resonates with the right audience, conveying a powerful message.

A significant portion of the credit for this enriching experience goes to the thoughtfully crafted and practical questions posed by the three astute interviewers. Shri Datar reciprocated with equal thoughtfulness, delivering a unique experience for BCAJ readers.

I vividly recall Shri Datar’s impactful address during the release of the Festschrift “Essays and Reminiscences” in honour of N.A. Palkhivala at NCPA, Mumbai, in January 2020. He shared the painstaking efforts and unwavering commitment of his team in curating old records and documents to bring forth the book, even at the expense of their professional practice.

This interview represents a rare and invaluable opportunity, and all involved made the best of it for the benefit of all.

Kudos and three cheers to everyone involved!

Thank you.

CA Suhas Paranjpe

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

MEETING ON COMPANY LAW: SCHEDULE III AND CARO

On 7^th April, 2023, the Students Forum under the auspices of the HRD Committee organised a virtual’ Students’ Study Circle meeting on the topic “Company Law: Schedule III and CARO”.

In her presentation, CA Nidhi Patade, explained the Schedule III and applicability. The main focus of the session was on the disclosure aspects under the schedule and challenges thereon.

Under the guidance of the mentor CA Vijay Gajaria, important disclosures requirement such as Benami Properties disclosure, promoters’ shareholding, property plant and equipment, trade payable, etc. were discussed in detail along with format and examples.

Applicability of CARO 2020, its applicability and clauses were also discussed with a CARO report for better understanding of students.

The interactive session also addressed the questions raised by the participants.

The Students’ Study Circle program is designed in a way to train students under the guidance of the Mentor.

Youtube Link: https://www.youtube.com/watch?v=zlFlrOxniWk

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Suburban Study Circle Meeting on “Analysis of Section 45(4) and 9B of Income Tax Act, 1961”

Suburban Study Circle Meetings on “Analysis of Section 45(4) and 9B of Income Tax Act, 1961”, held in two parts, were addressed by CA Upamanyu Manjrekar as a Group Leader and chaired by CA Amit Sawant.

Manjrekar made an insightful presentation with inputs from Sawant and shared his views on the following:

Applicability of Section 45(4) and 9B

Comparative analysis of erstwhile Section 45(4), new Section 9B and Section 45(4)

Case studies illustrating operation of provisions

Interpretational issues such as determination of nature of capital gains

Insightful discussion on Supreme Court case of ‘The Commissioner of Income Tax vs. M/s. Mansukh Dyeing and Printing Mills’

Process to be followed in case of double taxability

Supreme Court judgment on applicability of Section 45(4) of the Income Tax Act in cases of subsisting partners of a partnership, transferring the assets in favor of a retiring partner.

The session was knowledgeable, practical and all the points were very well covered with numerous case studies to make it simpler for the group.

Both sessions had wonderful interactive participation from the group. Large number of queries from the participants were satisfactorily addressed by CA. Manjrekar. The participants also benefited from the elaborate presentation shared by the group leader.

XII^TH RESIDENTIAL STUDY COURSE ON IND AS

The Accounting and Auditing Committee of the BCAS organised the XII^th Residential Study Course (RSC) on Ind AS (in physical mode) at The Dukes Retreat, Khandala which was attended by 66 participants from across India.

Welcoming the participants, CA Mihir Sheth, President, BCAS mentioned that the topics selected for the RSC were of great importance to the accounting and auditing fraternity and requested the participants to derive the maximum benefits. He concluded by giving his best wishes for the success of the RSC.

In his opening remarks, CA Manish Sampat, Chairman, Accounting and Auditing Committee traced the history of the previous RRCs and gave a broad overview of the structure and topics selected for the current RSC and thought process behind the same.

The RSC comprised three engaging papers for Group discussion along with two interesting presentation papers and an excellent Panel discussion.

The paper for group discussions comprised following topics:

Case studies on the Intricate issues of Ind As Standards across Industries

Case Studies on Consolidated Financial Statements (Ind AS 110) and Business Combinations (Ind AS 103)

Case Studies on Intricacies in Financial Instruments (Ind AS 32 and Ind AS 109)

Presentation Papers comprised following topics:

Recent Development in Global Reporting Framework

ESG- Concepts and Reporting

A Panel discussion was organized on:

Preparing for Regulatory Challenges and Managing Stakeholders’ expectations in Auditing. The Panel discussion gave the perspective from the viewpoint of Auditors, Audit Committee Representative and the Industry. It was very well moderated to generate interesting discussion.

The Auditor perspective was shared by CA Ashutosh Pednekar. The Audit Committee perspective was represented by CA Sanjay Khemani while the industry perspective was shared by CA Raj Mullick. The session was moderated by CA Raman Jokhakar.

Other speakers at the event included CA Dr. Anand Banka, CA Parag Kulkarni, CA Sarvesh Warty, CA Himanshu Kishnadwala and CA Raj Mullick.

The RSC concluded with closing remarks by the Chairman. He thanked all those who contributed to making the RSC a grand success. He also invited some of the participants to share their experience of the RSC and feedback.

WORKSHOP ON APPROACH TO LITIGATION UNDER GST

The Indirect Tax Committee organised a full day workshop on “Approach to Litigation under GST” covering the entire gamut of litigation under GST. The workshop received 190 registrations (109 members and 81 non-members). 70 participants attended physically while 113 attended virtually.

The tone of the session was set by the key-note address delivered by Vipin Jain, Advocate by sharing important anecdotes from the experience he encountered during his legal carrier.

In the first technical session, Mr Deepak Mata, Dy. Commissioner explained how Department using AI/ML through different softwares obtains various data to identify instances of tax evasion and takes necessary actions. The inputs from Mr Mata gave an insight to the participants as to how the Department receives information from various sources, such as the income tax department, MCA, fast-tag, etc., to unearth tax-evasion and helped them understand the need to be careful while advising clients keeping various aspects in mind.

In the second technical session, Rinkey Jassuja, Advocate explained the provisions relating to notices under section 73 & 74, taking the audience through the necessary provisions, and explaining the ingredients which are necessary for a valid SCN and points to be captured while responding to the SCN.

The third session was addressed by CA. S S Gupta who gave the participants an insight into the appeal provisions, including pre-deposit and instances when a taxpayer should opt for writ route to get relief from High Court. He also dealt with the provisions related to condonation of delay and the importance of timely filing of appeal.

In the last session, Vinay Jain, Advocate, took up live case studies on various issues faced by businesses, such as GSTR-3B vs. GSTR-2A mismatch, circular trading, taxability of leasehold rights, cross-charge, etc.

INDIRECT TAX LAWS STUDY CIRCLE MEETING ON ISSUES IN REPORTING

The group leader of the Indirect Tax Study Circle, CA Deepali Mehta conducted a meeting to discuss seven case studies addressing the practical issues in reporting vis-à-vis turnover for applicability of turnover for e-Invoice, and other practical issues in e-Way Bills and e-Invoices. The presentation and discussion broadly covered the intricacies on the following topics:

Determination of turnover for e-Invoice while considering the specific transactions of WDV as per the Income Tax Act.

Procedural lapse in the generation of e-Invoice and subsequent issues of credit eligibility, applicability of penalties thereon, if any

Turnover issues for considering e-Invoicing when part of the services are exempted from generating e-Invoices

Expiry of e-Way bill due to technical issue of conveyance like flat tyre, engine break down, etc. Penalty was paid under DRC-03 but whether same can be appealed later on to recover the same to prove the bonafide or any other remedy available to the registered person.

Determination of Jurisdiction against confiscation orders of goods in transit, whether in source state, destination state or transit state.

Issue of multiple e-Way bill in a single transaction of transshipment, whether updations will suffice or if PO is cancelled by recipient during the transit, then the issues emanating out of the same.

80 participants from all over India took an active part in the threadbare discussion on the seven detailed case studies and issues discussed with reference to various clarificatory circulars, jurisprudence including recent judgment in relation to Karanatak VAT for similar factors of tax invoice and collective discussion.

HRD STUDY CIRCLE MEETING ON LIFE AND BREATH

The HRD Committee of the Study Circle organised a hybrid meeting on the topic ‘Life and Breath’ on 14^th March, 2023, by Shri Pravin Mankar.

The discussion at the meeting revolved around the thought: ‘Life itself is the most wonderful fairy tale. Do we really live? Are we aware of our Breath? Are we conscious of our breathing and breathing habits?’

Listed Below a few points/glimpses from the teaching imparted at the meeting:

Pneuma, Breath of Life, is the natural life of the body.

CA’s got interested in this subject because health is very important to be able to function physically.

A fundamental law: debit the receiver and credit the giver.

Life is about how to balance in order to be successful.

Following important terms were discussed at the meeting:

a) We are not aware of how much we receive.

b) Who is receiving, who is giving, we are receiving, Universe is giving. If I receive more and give less or if I give more and receive less, there will be an imbalance.

c) Give and Take is the law of life. We cannot keep receiving, we have to learn to give also. You can’t even take a breath without giving out breath. Try to continuously inhale.

d) Law is the existence of a condition irrespective of circumstances.

e) Life – Dharma. Be clear of what you collect, you can give away what you collect. If you collect goodies you can give them out, if you collect rubbish, that’s what you’ll be able to give out to the society.

f) Karma follows the law of Cause and Effect or reap as you sow.

g) Dharma is the purpose for which you were born. Most of us don’t know why we were born.

h) Disease is being ill at ease, physically or mentally.

Explore these points and correlate to life and breath.

Youtube Link: https://www.youtube.com/watch?v=ofgTAk0UXxo

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WORKSHOP ON PRACTICAL ASPECTS OF AUDIT FOR SME PRACTITIONERS

A two-day hybrid workshop was held from 10^thand 11^th March, 2023 at the BCAS auditorium to comprehensively deal with various important and practical aspects of auditing for SME entities. The aim of workshop was to help SME practitioners improve the overall quality of audit, avoid pitfalls and make them aware of certain important aspects in audit. The workshop was attended by 35 participants in person and other 18 participants through virtual mode.

The workshop started with the topic: ‘Standards on Auditing – Practical aspects and important considerations SQC-1, AQMM. CA Rajesh Mody covered overall Audit Strategy and touched upon important SAs based on his more than 25 years of experience in identifying and assessing the Risk of Material Misstatements (ROMMS) by being aware to sniff the red flags and respond to the same to obtain Sufficient and Appropriate Audit Evidences (SAAE) in order to arrive at the conclusion for opining on the true and fairness of Financial Statement. He also covered briefly the SQC-1 and AQMM besides answering the queries raised by the participants.

The next session was on ‘Practical Challenges – CARO Reporting’ by CA Tejas Parikh. The speaker touched upon important 8- 10 items in CARO reporting and dealt with peculiar aspects of those items and how the auditors have dealt with and reported the same in the 2022 audited accounts based on the Published Results of listed entities.

After lunch, the third session on FRRB/QRB Observations on Financial Statements, Learnings from NFRA Orders on Audit Reviews, Procedures, and Documentation commenced. Moderated by CA Amit Purohit, the session aimed to create awareness amongst the participants to realize the importance of complying with the SA and avoid the pitfalls as observed by NFRA, FRRB and QRB.

The last session was on practical aspects on SA-320 Materiality determination, SA-315, SA-330 – Risk Assessment and Auditors response, SA-450 – Evaluation of misstatements identified during Audit by CA Nikhil Patel. The standards covered were the most fundamental and the backbone of all quality audits.

The day two of the workshop began with the SAs covering all reporting aspects of audit including SA-700 series on Audit Conclusions and Reporting and SA-265 – Communicating deficiencies on Internal Control evaluation by CA Ajit Vishwanath. He dealt with all the reporting standards very lucidly and explained important considerations with practical examples. His session was well received by the participants.

The next session SA-530 – Audit sampling, SA- 300 Planning an Audit, SA-230 Audit Documentation and peer review readiness was moderated by CA Harshvardhan Dossa. He explained provisions with real life case studies besides demonstrating how the samples are derived, the Audit Program, how the things are documented and the real folder management.. The participants appreciated the session.

Post lunch the session was on SA 520 – Analytical Procedures and use of Technology in Conducting Audit by CA Gautam Shah. The speaker demonstrated how simple tools like excel can be used to carry out various kinds of analysis to identify the red flags and outliers and then carry out audit procedures to obtain SAAE to derive quality results. He also demonstrated many real life case studies wherein he had used the analysis and arrived at quality samples for minimizing the risk of material misstatement (ROMM). He also named few specialised software for the benefit of the participants. The last session of two days’ workshop was on use of Tally features for conducting an effective Audit by CA Anand Paurana. The speaker demonstrated on live tally data and explained the features available in Tally ERP which can help auditor execute certain important audit procedures and derive meaningful samples for conducting quality audit thereby minimizing the ROMM. He also answered the issue raised by the participants.

The two-day workshop concluded with vote of thanks.

WORKSHOP ON PENALTIES UNDER INCOME TAX ACT 1961

The Taxation Committee organised a Workshop on Penalties under Income Tax Act 1961. The Workshop was divided into two parts. The first part of the workshop was held on 19^th January 2023 and the second on 27^th January, 2023.

The speaker of the Workshop, CA Jagdish Punjabi educated the participants about the recent
amendments made in the penalty provisions. He gave an overview of the provisions of sections 271AAC, 271AAD, 271D, 271DA, 271E, 271J and sections 270A, 270AA, 273B.

Jagdish Punjabi highlighted the distinctive features between the erstwhile penal provisions and the amended penal provisions. He pointed out various technical issues in the erstwhile penal provisions which have been plugged in the new provisions.

The speaker further enlightened the participants about various points which one needs to keep in mind while replying to notices issued for levying penalty under various provisions.

The workshop got an overwhelming response.

BCAJ Admin

Welfare Kingdom

Once upon a time, there was a kingdom which had two different names in two languages. People were fighting among themselves about which name should be used in government communications. The king was very strict, selfless and disciplined. He wanted to make his country strong and very wealthy.

Once, he was sitting in his court discussing the situation in the country along with his ministers. Suddenly, he heard some people shouting and crying outside the court. The security person came in and reported that some people in very simple attire wanted to meet the king.

King : Who are they?

Security : Maharaj, I don’t know, but they appear to be some social workers.

King : You should have asked them what they want.

Security : I asked, but I didn’t understand what they were saying.

King : You are an idiot. Can’t you understand even simple things?

Security : I am sorry, Maharaj. Sometimes, even our bosses don’t understand what law they have made! And bosses say that sometimes even the ministers don’t understand!

King : Shut up.

Security : Maharaj, they were uttering the words like trust foundation, charity and so on.

Minister (politely intervenes) : Maharaj, they might be trustees of some charitable organisations.

King : Security, let them in.

Minister : Maharaj, I request that only they may come. If they are accompanied by some chartered accountant, please don’t allow him.

King : Why?

Minister : These CAs often make some logical arguments for which we may not have an answer!

King : I wonder why and how charity organisations still exist. I had asked you to make such laws that would force them to close their shops! I also wonder why these CAs continue to help the trusts. Anyway, Security, ask CAs to wait outside only.

Security : Ji Maharaj.

(Eight to ten persons enter.)

Minister : All of you, please introduce yourselves one by one.

Person 1 : Maharaj, I am running schools for poor students in villages and slum areas. They charge negligible fees or often give free education.

Person 2 : I provide medical and health services to people in remote villages and also in cities. We cater mainly to poor patients.

Person 3 : I am running yoga centres everywhere at a nominal charge.

Person 4 : I try to preserve monuments and heritage properties. It is honorary work.

Person 5 : I work to conserve the environment. I don’t take any remuneration.

Person 6 : I work for the upliftment of the poor and needy — like orphans, handicapped persons, destitute women, unsupported old people and the like.

Person 7 : Maharaj, I do general social work — like running libraries, spreading good moral values, running old age homes and so on.

King : What is your grievance?

People : We are doing selfless work for society. We raise funds by literally begging around.

King : Then what?

People : We are made to pay tax at a very high rate, even higher than business organisations.

King (to minister) : Is it true? Why so?

Minister : They may not have submitted a couple of forms. Maharaj, for my Ministry, their social work is not important. Paperwork is more important. There should be compliance.

People : Maharaj, we cannot afford the compliance cost. And our country’s infrastructure is so well developed that we have no electricity for hours together, no water for days together and no roads to approach our CA in the district place.

Minister : Who asked you to do all this work?

People : We do it voluntarily. We have been doing it for decades. Since ours is a Welfare Kingdom, many people are poor, and deprived of many things.
King : But we are becoming a superpower. We need revenue.

People : Maharaj, there is a lot of ambiguity and anomaly in the law.

Minister (stops them) : You can approach the judiciary.

People : Our grandfathers have already approached the judiciary. Our grandsons may get the decision.

Minister : Maharaj, please don’t worry. We will change the law from retrospective effect!

King : Good.

Minister : Maharaj, these CAs give us a lot of headaches.

King : Make such stringent regulations for CAs that they also will close their offices. Punish everybody.

Minister : Yes, Maharaj. The number of students has already reduced. Even those who pass dare not enter the profession.

King : Very good. So we will have peace of mind.

People (to minister) : What about ease of doing business?

Minister : It is for ‘business’ and not for ‘social work’.

Folks, we are scheduled to fly abroad to teach and guide other countries to improve their tax system.

Good bye!

BCAJ Admin

Society News

LEARNING EVENTS AT BCAS

POWER SUMMIT 2023 BY THE HRD COMMITTEE

Human Resource Development Committee organised a two-day residential program “The Power Summit 2023” on the 3^rd and 4^th March, 2023 at the Byke Suraj Plaza, Mumbai. This was the sixth season of the Power Summit with the first one being held in 2011.

Attended by 67 participants, the Power Summit had 13 eminent faculties. The program was curated and anchored by a team of three faculty members, CA Nandita Parekh, CA Ameet Patel, and CA Vaibhav Manek.

The benefits of holding the program in a residential format were truly reaped and cherished by the participants. They not only got added networking opportunities, but also a chance to have casual interactions with some of the faculties present during the entire duration of the program.

The topics of discussion at the Power Summit were selected to give momentum to the growth of the practicing firms. The summit aimed to help the participants develop and frame strategies to capitalise on the growth opportunities stirred up by the World Congress of Accountants held in Mumbai in November 2022.

The presentations by the faculties over the two days were creative, intriguing, and intertwined in such a way that all the participants returned home with good food for thought, and zeal to walk forward on the growth trajectory.

The program on Day 1 started with a session by CA Dinesh Kanabar, CA Jayesh Sanghrajka, and CA Vaibhav Manek on the importance of brand building for practicing CA firms with insights on how the same can be achieved.

In the next session, CA Druman Patel gave insights on how new-edge technologies like Artificial Intelligence would impact the profession. He also focused on the opportunities that these technologies open up for the CAs.

Thereafter, CA Vaibhav Manek and CA Nandita Parekh led an interesting discussion on the importance of capital in CA firms for growth, and the ways and options to exist.

CA Ajay Sethi, CA Arpit Jain, and CA Chetan Shah shared some of their strategies to navigate through road and mind blocks faced during their journeys over thee years.

On Day 2, CA Nitin Shingala talked about his desires he had during the early years of his career. Participants were also recommended several useful books read by the speaker in the past.

CA Rajat Dutta and Anu Chaudhary explained about the new and alternative service areas for CA firms including services around inheritance, succession planning, and ESG. Both speakers captivated the audience with their respective oratory styles as well as the contents of their talks.

CA Nikunj Shah explained how CA firms can use various technology-based tools in their day-to-day practice to improve their service offerings.

Three of the participating firms presented their mock pitch for possible merger and acquisition opportunities before the senior faculty members. The feedback shared by the faculty members helped all the participants.

The program ended with CA Vaibhav Manek, CA Ameet Patel, and CA Nandita Parekh sharing practical ways in which a firm should build up its strategic plan.

The interest of the participants was evident in terms of the involved discussions and the large number of questions raised during and after each session, and also during the casual networking interactions.

SEMINAR ON BRAND Building Professional on Zoom

A seminar on ‘’Building a Professional and Personal Brand for Professionals,’ was held on 2^nd March, 2023 on Zoom.

Led by speaker, CA Pankaj Mundra, the session provided insights and examples on ‘How to Build a Brand Personally and Professionally.’

He also explained the importance of brand-building, and cited social media as one of the driving factors of brand-building.

Link::- https://www.youtube.com/watch?v=aOtaI683Ah4

Q.R.Code :-

LECTURE MEETING – SOCIAL AUDIT OF SOCIAL ENTERPRISES

On 1^st March, 2023, BCAS organised a virtual lecture meeting on “Social Audit of Social Enterprises” in virtual mode.

The speaker, CA Sangeeta Kumar approached the topic in a very simple and logical manner by dividing it into various sections broadly covering the following:

Historical background and principles of social audit.

The legislative and policy background for setting up a Social Stock Exchange including the formation of relevant working and technical groups.

Kumar also focused on the key highlights of the SEBI guidelines dealing with the setting up of Social Stock Exchanges and the regulation of Social Enterprises. She also gave an outline of the two stock exchanges functioning currently i.e. the Bombay Social Stock Exchange and the NSE Social Stock Exchange.

The functioning of the various global social stock exchanges in different countries was touched upon covering their success stories and their failures in some countries resulting in closure were highlighted.

The modes and procedures for registration and raising funds (including specific financial instruments like Zero Interest Zero Principal Bonds) by Social Enterprises through Social Stock Exchanges coupled with the various disclosure requirements, both initially at the time of raising funds and on an ongoing basis were also dealt with.

Additionally, the seminar also discussed changes recommended in tax laws and CSR guidelines arising out of the legislation of social enterprises.

Further, it provided an interesting perspective on undertaking social audits by the CAG coupled with a video on a case study on the social audit under the MGNREGA emphasizing the practical aspects like site visits and interviews coupled with the role of Gram Panchayats and Gram Sabha. The legislative support and the various global reporting standards and organisations dealing with the Social Audit were covered along with the draft Standards and Guidelines issued by the ICAI,

Finally, the challenges which lie ahead for implementation in our country were highlighted.

Visit the below link or scan the Q.R. Code with your phone scanner app:

Link:- https://www.youtube.com/watch?v=GM04TqhoyDg

Q.R. Code:-

study circle meeting on Deemed Conveyance

Corporate and Commercial Law Study Circle organised a meeting on the topic “an overview of Deemed Conveyance.” At the meeting, Adv. Viral Shukla gave an insight into the position related to Deemed Conveyance before the MOFA (Maharashtra Ownership Flat Act), and legal provisions relating thereto post-MOFA 1963. He also briefly summarized the subsequent amendments made thereto in 2008, 2010, and 2018. Further, he dealt with all the queries of the participants. The meeting was attended by 50 participants.

PROGRAM ON SUCCESS IN CA EXAM

The society organized a program titled ‘Success in CA Exam ‘ on 19^th February 2023 on Zoom. The program included a Q&A session with the rank holders.

In the first session of this program, Dr. CA Mayur Nayak shared his inspiring journey as a CA student who failed in CA intermediate exams but cracked the CA final exams in the first attempt and thereafter secured an all India rank with his sheer determination, hard work, and positive attitude. He focused on the ways to mentally prepare for the exams, and accept failure. He gave tips on how to mentally calm one’s mind while attempting the paper, besides teaching a few deep breathing techniques. He explained that the greatest danger faced by the students is not in setting their aim too high and falling short but in setting their aim too low and achieving their mark.

In Q&A with the Rank holders Session, students asked live questions to the rank holders. The answers were designed to help the students prepare their best strategy based on the experience of the rank holders. Moderated by CA Vishal Poddar, Penalist CA Radhika Beriwala, and CA Shubham Keshwani, the session was very interactive.

CHATGPT – AN OPPORTUNITY OR A THREAT TO PROFESSIONALS?

Artificial Intelligence (AI) has already revolutionized most industries by taking up jobs that could only be performed by skilled and intelligent humans. The next move of AI is the professional services domain like law, medicine, and education, where it is all set to solve problems humanity faces. It looks like; we shall soon be blessed by technology!

In the session conducted by the society on 18^th February 2023, the speaker CA Vatsal Kanakiya spoke about what is ChatGPT and whether it is an opportunity or a threat for professionals.

The event witnessed a thrilling registration count of 750 participants.

The speaker explained about Chat generative Pre-Trained Transformer (Chat GPT). This was a first-hand and insightful session that focused on how ChatGPT can be an opportunity for professionals.

Link:- https://www.youtube.com/watch?v=DcyqXjSH5f8

Q.R. Code:-

7. 23^RD DTAA COURSE HELD VIA ONLINE PLATFORM

The society successfully conducted its 23^rd Study Course on ‘Double Taxation Avoidance Agreement’ via an online platform spanning from December 2022 to February 2023. The course was spread over 30 days and included over 36 sessions delivered by leading tax professionals of the country.

The course was designed to cover all the articles of DTAA, an overview of FEMA / BEPS / MLI / GAAR, Transfer Pricing, Source Rules under the Income Tax Act, 1961, TDS under section 195, Substance v/s Form, and other relevant provisions. The course introduced complex topics such as taxation of specific structures (e.g., Partnership, triangular cases, AOP, etc.) and selection of structures.

The course concluded with a Brain Trust Session having trustees namely CA Gautam Nayak, CA Yogesh Thar, and Shri Sanjeev Sharma, IRS, and moderated by CA Ganesh Rajgoplan.

About 167 Participants from 15 states spread over 30 cities attended the course which was well-received and appreciated by the participants.

The society will shortly distribute the participation certificates to all the eligible participants.

IESG Meeting on Budget 2023

In the meeting held by the IESG (International Economics Study Group) on 16^th February, 2023, CA (Dr.) Kishore K. Pahuja made a presentation on the topic,‘Impact of Budget on Indian Economy.’ In this presentation, Pahuja made a detailed analysis of many sectors including Defence, Agriculture, Automotive, Building, Construction & Real Estate, Education & Skill Development, Energy & Natural Resources, Healthcare, Infrastructure, Financial Services, etc.

CA Harshad Shah presented his ‘Vision for Amrit Kaal – an Empowered & Inclusive Economy.’ Amrit Kaal originates from the Vedic astrology and translates to the Golden era. It is the critical time when the gates of greater pleasure open for the inhuman, angels, and human beings, laying out a new roadmap for India for the next 25 years, a blueprint for India@100. The theme of the Amrit Kaal is a technology-driven and knowledge-based economy with strong public finances and a robust financial sector. It also focuses on ushering in the latest technology and digitization and reducing government interference in public life.

BCAJ Admin

Corporate Law Corner – Part A | Company Law

13. Case Law No. 01/October/ 2023

M/s. VINAYAK BUILDERS AND DEVELOPERS PRIVATE LIMITED

No. ROC/ PAT/ Inquiry/13665/834

Office of the Registrar of Companies,

Bihar-Cum-Official Liquidator,

High Court, Patna Adjudication Order

Date of Order: 18th August, 2023

Order for penalty for violation of section 143 of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 for non-disclosure in the Auditor’s Report by the Statutory Auditor.

FACTS

As per the documents available on MCA Portal, Mr SK was the auditor of the company for the financial year ending 31st March, 2017.

Registrar of Companies, Bihar (“RoC”) on inspection of the financial statements of M/s VBDPL for the financial year ending 31st March, 2017 observed that, in the column of details of Specified Bank Notes (SBNs) held and transacted during the period from 8th November, 2016 to 30th December, 2016 was mentioned as zero. However, the directors of M/s VBDPL in their reply dated 17th January, 2019 had enclosed a letter dated 16th January, 2019 from ICICI Bank in which the details of the deposit amount had been mentioned as follows:

Date	Amount	Denominations
14^th November, 2016	150,000	1000 x 150
15^th November, 2016	50,000	1000 x 50
24^th November, 2016	200,000	1000 x 200
02^nd December, 2016	150,000	1000 x 150

As per Ministry’s Notification No. G.S R. 307(E) dated 30th March, 2017, the following clause was inserted in rule 11 of the Companies (Audit and Auditors) Rules, 2014 after clause (c), namely:

“(d) Whether the company had provided requisite disclosure in its financial statements as to holdings as well as dealings in specified Bank Notes during the period from 8th November, 2016, to 30th December, 2016, and if so, whether these are in accordance with the books of accounts maintained by the company.”

Hence, it appeared that the provisions of Section 143(3) of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014 had been contravened by the Auditor for the financial year 31st March, 2017 for Non-disclosure of Specified Bank Notes (SBN) held and transacted during the period from 8th November, 2016 to 30th December, 2016 and therefore he was liable for penalty under section 450 of the Companies Act, 2013.

Based on the above facts, RoC had issued a show cause notice for default under section 143 of the Companies Act, 2013. However, no reply was received to the show cause notice from Mr SK, Auditor.

Further, RoC had also issued a “Notice for Hearing” to M/s SK, Auditor in default to appear personally or through an authorised representative under Rule 3(3), Companies (Adjudication of Penalties) Rules, 2014 on 11th August, 2023 and also to submit their response, if any, one working day prior to the date of hearing.

On the date of the hearing, Mr SK neither appeared nor any submission was made regarding the aforesaid non-compliance. Hence, it was concluded that the provisions of Section 143 of the Companies Act, 2013 had been contravened by the auditor and therefore he was liable for penalty u/s 450 of the Companies Act, 2013 for the financial year ended 31st March, 2017.

HELD

Adjudication Officer (‘AO’) after considering the facts and circumstances of the case and after taking into account the provisions of Rule 11(d) of Companies (Audit and Auditors) Rules, 2014 (as amended), imposed a penalty on Mr SK, Chartered Accountants as per the below mentioned table:

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 since M/s VBDPL satisfied the criteria of being a Small Company where Mr SK was an auditor.

Nature of
default

Relevant section under the Companies Act, 2013

Name of

persons on whom the penalty is imposed

No. of

days of default

Penalty

for defaults as per Section 450 of the Companies Act, 2013 (₹.)

Total

penalty

(₹)

Final penalty imposed as per Section 446B of the Companies Act, 2013 (₹) #

Non-disclosure in Audit Report

Section 143(3) of the Companies Act, 2013 read with Rule 11(d) of the Companies (Audit and Auditors) Rules, 2014

Mr SK, Chartered Accountants

10,000

5,000

BCAJ Admin

SEBI Acts Tough against Market Manipulators

The Securities and Exchange Board of India (SEBI) on 16th September, 2022, passed a stiff order of penalty, on a case involving, among others, allegedly synchronised trades. By the other order, it also debarred some of the parties from the securities markets. Soon thereafter, in June 2023, the Securities Appellate Tribunal (“SAT”) rejected the appeals against the order in an almost dismissive way to the appeal. What is noteworthy is that SEBI has shown that it means serious business in such cases. The penalty levied is fairly large, considering the facts and figures involved, apart from the order to restrain persons from the markets. This should hopefully show that SEBI now means business in tackling this almost uniform feature in cases of market manipulation. If this approach continues, this should mean that the manipulators see a strong deterrent to engaging in such activities.

SYNCHRONISED MANIPULATIVE TRADING

Price manipulation is rarely carried out without involving synchronised trading. But, such cases have seemingly gotten away without strong deterrent penal measures. The use of synchronised trades has been a regular feature for decades.

The pattern is almost consistent in such cases. The manipulators, using blatant or camouflaged techniques, use this modus operandi with successful results. Small investors rarely carry out the most basic efforts and work to check up on the history of price and volume, or the fundamentals of the company. So while investors pile on by being attracted to the prospect of quick and handsome, the manipulators sell and exit.

COMMON PATTERNS OF SYNCHRONISED MANIPULATIVE TRADING

The method may vary in small details, but some features are common. There is a circular on trading amongst a group of persons who also steadily increase the quoted price. This artificial spurt in price and volume is meant to create an image that something good is about to happen which selected people know and anticipate.

Another common pattern has been to project that the company is engaged in a business that is the latest fad. At one time, for example, we had the dotcom boom, then internet-based services and apps, infrastructure, etc. The advantage of using such methods from the point of view of the manipulators was that past fundamentals become totally irrelevant. There may be occasional star performers and some genuine but failed attempts. But smart manipulators recognised that this front would attract investors. This included changing the name of the company, passing resolutions to start such a business, etc.

What allegedly happened in this particular case? (Till there is a finality in the form of a Supreme Court, one cannot consider the matter as closed for this particular case.) The price of the shares was hiked up by a slow increase with small synchronised trades at successively higher prices. SEBI has also stated that thereafter, even SMSes were circulated about the potential of the company. And hence, yet again, as public interest grew, those who held shares in the company sold them at a high price. And, yet again, the price slowly crashed to as low as almost 2 per cent of the highest price.

WHETHER THE LAW IS LACKING?

It is not as if the law is lacking in this regard. Multiple provisions in the SEBI PFUTP regulations deal with such manipulative practices. The transactions have been dissected into individual steps and portions and make each of them specifically an offence. This includes circular trading, artificially jacking up the price, the price, spreading false news, etc.

IMPLEMENTATION OF THE LAW

That is the law. Next comes the investigation which plays an important role. These days, SEBI carries out very meticulous analysis of the parties, the trades, the bank accounts, etc., of the parties. These days much of the data is available almost instantaneously thanks to electronic trading. SEBI then takes it to the next level by meticulously investigating the background of the parties, including their relations, personal or commercial, and study of their bank statement and internal transactions. The parties may not even realise that they are being investigated since such information is available from stock exchanges or other authorities directly. Of course, at a later stage, SEBI may summon some or all of the parties to question them independently. Often, the weakest persons in the group, including those who are mules, may break down and confess. But even otherwise, too, many of the facts, available from credible independent third parties like banks, brokers, etc., cannot be so easily countered or explained away.

LOW DETERRENT ACTION IN THE PAST

What was perhaps lacking was the final step of a strong deterrent step which would make the wrongdoers feel the loss and even realise that such acts are simply not profitable enough. Unfortunately, in too many cases, while the penalty has been levied, it has rarely been proportionate to the severity of the crime.

A recent example that can be taken is of the brazenness of false trading in illiquid options. It was found that thousands of persons engaged in circular trades in illiquid options. The objective did not seem to be enticing and cheating investors. Rather, it was very likely to pass on profits or loss for tax evasion. A person who had profits and did not want to pay tax traded in the options by buying high and then selling very low and that too with the same counterparty and also, often, within a gap of barely minutes. Though this may not harm investors directly, it violates multiple SEBI regulations and, worse, creates an impression of stock markets as being a lawless jungle. When SEBI initiated proceedings, it was prolonged by the need to serve notice, give hearings to each party, etc. Quite a few parties went in to appeal the clogging of the dockets of SAT, which requested SEBI to come with a scheme of settlement. SEBI did so but for various reasons including Covid, it did not get the required response. So the dockets of SAT clogged again, which yet again requested SEBI to make another attempt. The second scheme of 2022 got a better turnout. However, the moral here was that since the parties got away effectively with barely a rap on the knuckles, it did not have any real deterrent effect.

Hopefully, orders like this one, assuming they attain finality, will make parties think really hard before contemplating such acts. And even if there is some change in appeal, it will be a lesson in principle generally.

A SIMILAR FIRM APPROACH IS NEEDED IN OTHER OFFENCES

Going a step further, I think a similar firm hand is needed in other categories of market evils, including insider trading, front running, etc., where often there is no real deterrent action. Fortunately, here too, the data generated is quick and SEBI’s investigation is often thorough. Law is also helpful and empowers SEBI to disgorge the illicit profits, debar parties, etc. SEBI has powers to levy very stiff penalties. Here, too, if some examples are set, there can be a fear and also a sense of inevitability of getting caught. Granted that parties can be more sophisticated here using mules, underhand passing of profits, use of sophisticated technology, etc. So establishing guilt may not always be easy. But here again, SEBI often interviews the weakest links in the chain who may spill the beans. That said, perhaps some changes could help.

CLOSING NOTE: PROPOSAL OF SEBI TO DEEM CERTAIN SUSPICIOUS TRANSACTIONS AS VIOLATIONS UNLESS REBUTTED

Although discussed in great detail earlier in this column, it is worth mentioning that a group of radical proposals to deal comprehensively with the menace of insider trading, front running, etc., have been made by SEBI in a consultation paper issued in March 2023.

This aspect is worth mentioning since SEBI has proposed to deal particularly with those sophisticated manipulators where there is multiple evidence of crime committed all over but it is difficult to pinpoint the parties and find them guilty. Very specific examples of what had transpired in certain actual cases (names withheld in paper but not difficult to guess).

SEBI noted that while several Supreme Court rulings have generally supported the stand of SEBI in using circumstantial evidence of a clear pattern of suspicious transactions, it was also noted that this was not sufficient enough, and a generic set of enabling provisions was needed. The Supreme Court ruling allowed SEBI to use the lower benchmark of circumstantial evidence to indicate guilt. But that too required crossing certain hurdles which sophisticated market manipulators and legal technicalities could make the process difficult and delayed.

Hence, SEBI has proposed a set of provisions which would deem the parties involved as guilty if a certain pattern of suspicious trading is observed. This does not mean that this one-sided judgement of SEBI would close the matter. The parties would still get a chance to present their case and rebut the finding and allegation. In short, the onus shifts to the parties to rebut the allegations or be deemed guilty.

These provisions, if implemented, could certainly make the task of SEBI easier. But there is also a flip side to this. Presently, SEBI carries out extensive investigations to establish guilt. It is possible that these efforts may be diluted if such deeming provisions are available.

Also, such provisions are like putting a genie out of the bottle, which cannot be put back in. SEBI may be perceived to be exercising arbitrariness. While good benchmarks are provided before the provisions are applied, one would not know how they are applied in actual cases. Here again, considering the rewards, large sophisticated abusers of the law may continue to escape. Smaller parties on the other hand may find it difficult to hire expensive legal advice to present a credible and effective defence to shift the onus back.

It is also doubtful how courts would view such provisions, which almost give a one-sided power to SEBI to a large extent. Whether such provisions are held arbitrary and unconstitutional? This aspect becomes even more important when we consider that it is SEBI, who would make Regulations to implement this proposal and not Parliament made law or amendments. In the nearly six months after its introduction, there does not seem to be any indication from SEBI of whether and how it is going to implement these proposals. But, to conclude, a fair re-haul of the law is certainly needed to counter the brazen cases of market abuse.

BCAJ Admin

Hindu Law: Rights of an Illegitimate Child in Joint Property

INTRODUCTION

The codified and uncodified aspects of Hindu Law deal with several personal issues pertaining to a Hindu. One such issue relates to the rights of an illegitimate child, in relation to inheritance to ancestral property, self-acquired property of his parents, right to claim maintenance, etc. This feature has earlier (March 2021) examined the position of the rights of an illegitimate child. However, recently a larger bench of the Supreme Court in Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated:1st September, 2023, has examined the position of such a child’s rights in respect of joint family / HUF property.

VOID / VOIDABLE MARRIAGE

The Hindu Marriage Act, 1955, applies to and codifies the law relating to marriages between Hindus. It states that an illegitimate child is one who is born out of a marriage which is not valid. S.16(1) of this Act 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. Hence, all children of void/voidable marriages under the Act are treated as legitimate. The Act also provides that such children would be entitled to rights in the property of their parents.

SUCCESSION TO PROPERTIES OF OTHER RELATIVES

However, while such a child born out of a void or voidable wedlock would be deemed to be legitimate, the Act does not confer any rights on the property of any person other than his parents. This is expressly provided in s.16(3) of the Hindu Marriage Act.

In JiniaKeotin&Ors. vs. Kumar SitaramManjhi&Ors. (2003) 1 SCC 730, the Supreme Court held that s.16 of the Act, while engrafting a rule of fiction in ordaining the children, though illegitimate, to be treated as legitimate, notwithstanding that the marriage was void or voidable chose also to confine its application, so far as succession or inheritance by such children is concerned to the properties of the parents only. It held that conferring any further rights upon such children would be going against the express mandate of the legislature.

This view was once again endorsed by the Supreme Court in Bharatha Matha & Anr vs. R. Vijaya Renganathan, AIR 2010 SC 2685 where it held that a child born of void or voidable marriage is not entitled to claim inheritance in ancestral coparcenary property but is entitled only to claim share in self-acquired properties, if any.

CONTROVERSY IN THE ISSUE

The above issue of whether illegitimate children can succeed in ancestral properties or claim a share in the HUF was given a new twist by the Supreme Court in 2011 in the case of Revanasiddappa vs. Mallikarjun (2011) 11 SCC 1. The question which was dealt with in that case was whether illegitimate children were entitled to a share in the coparcenary property or whether their share was limited only to the self-acquired property of their parents under s.16(3) of the Hindu Marriage Act? It disagreed with the earlier views taken by the Supreme Court in JiniaKeotin (supra), BharathaMatha (supra) and in Neelamma&Ors. vs. Sarojamma&Ors (2006) 9 SCC 612, wherein the Court held that illegitimate children would only be entitled to a share of the self-acquired property of the parents and not to the joint Hindu family property.

The Court observed that the Act uses the word “property” and had not qualified it with either self-acquired property or ancestral property. It has been kept broad and general. It explained that if they have been declared legitimate, then they cannot be discriminated against and they will be at par with other legitimate children, and be entitled to all the rights in the property of their parents, both self-acquired and ancestral. The prohibition contained in s. 16(3) will apply to such children only with respect to the property of any person other than their parents. Qua their parents, they can succeed in all properties! The Court held that there was a need for a progressive and dynamic interpretation of Hindu Law since Society was changing. It stressed the need to recognise the status of such children which had been legislatively declared legitimate and simultaneously recognisethe rights of such children in the property of their parents. This was a law to advance the socially beneficial purpose of removing the stigma of illegitimacy on such children who were as innocent as any other children.

The Supreme Court also explained the modus operandi of succession to ancestral property. Such children will be entitled only to a share in their parents’ property but they cannot claim it in their own right. Logically, on the partition of an ancestral property, the property falling in the share of the parents of such children would be regarded as their self-acquired and absolute property. In view of the Amendment, such illegitimate children will have a share in such property since such children were equated under the amended law with legitimate offspring of a valid marriage. The only limitation even after the Amendment was that during the lifetime of their parents such children could not ask for partition but they could exercise this right only after the death of their parents.

Hence, the Court in Revanasiddappa (supra) concluded that it was constrained to take a view different from the one taken earlier by it in JiniaKeotin (supra), Neelamma (supra) and Bharatha Matha (supra) on s. 16(3) of the Act. Nevertheless, since all these decisions were of Two-Member Benches, it requested the Chief Justice of India that the matter should be reconsidered by a Larger Bench.

CURRENT STATUS

After a long wait of more than 12 years, the Supreme Court Larger Bench has finally resolved the matter in the case of Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated: 1st September, 2023.The issue for determination, as framed by the Supreme Court, was “Whether such an illegitimate child, who has been deemed to be legitimate by virtue of s.16 of the Act, can succeed only to the self-acquired properties of his parents or even to their ancestral properties?” The Court was also examining whether such a child could become a coparcener in the HUF.

LEGITIMACY UNDER SECTION 16

The first issue settled by the Apex Court was that legitimacy bestowed by s.16 of the Hindu Marriage Act was irrespective of whether (i) such a child was born before or after the commencement of the Amendment Act of 1976 which introduced s.16; (ii) a decree of nullity was granted in respect of that marriage under the Act and the marriage was held to be void. Further, where a voidable marriage has been annulled by a decree of nullity, a child ‘begotten or conceived’ before the decree has been made, is deemed to be their legitimate child, notwithstanding the decree.

HUF AND HINDU SUCCESSION ACT

The Court examined the meaning of an HUF and its genesis under the Hindu Law. It also examined the rights of coparceners to succeed to the share of their father in the HUF in light of the Hindu Succession Act, 1956. This could be by way of a Will or by intestate succession. In the case of intestate succession, the provisions of the Hindu Succession Act provide for Class I heirs to succeed to the property of a Hindu male. In this situation, the Court noted that the Hindu Succession Act did not distinguish between legitimate Class I heirs and illegitimate heirs. The fact that legitimacy has been bestowed upon the children of a void marriage by virtue of s.16 of the Hindu Marriage Act would mean that no distinction can be drawn between those children who were legitimate and those who are deemed to be legitimate.

INTESTATE PROPERTY INCLUDES SHARE IN HUF

All property of an intestate Hindu male was to be divided amongst his Class I heirs. The Apex Court observed that the phrase “all property” means all property belonging to the intestate and included the share in his HUF. The Hindu Succession Act also provided for a notional partition of the HUF to determine the share of the deceased in the HUF. The legislature had provided for the ascertainment of the share of the deceased on a notional basis. The expression ‘share in the property that would have been allotted to him if a partition of the property had taken place’ indicated that this share represented the property of the deceased. Where a person died intestate, the property would devolve in terms of the Hindu Succession Act. The Court held that in the distribution of the property of the deceased who had died intestate, a child who was recognised as legitimate under the Hindu Marriage Act would be entitled to a share. Since this was the property that would fall to the share of the intestate after the national partition, it belonged to the intestate. Hence, where the deceased had died intestate, the devolution of this property must be among the children – legitimate as well as those conferred with legitimacy by the Legislature. The Court gave an illustration of a HUF with 4 coparceners. Of these, C2, one coparcener dies and is survived by his wife and two children. One of the two children is illegitimate but deemed to be legitimate as above. A notional partition of the HUF would take place, and C2’s share would be determined as 1/4th and this 1/4th would be split equally amongst his widow, his legitimate child and his illegitimate child. Each of them would get a 1/3rd share in C2’s 1/4th share, i.e., a 1/12th share in the HUF.

ENTITLED TO SHARE BUT NOT A COPARCENER

However, the Court held that the illegitimate child would not ipso facto become a coparcener in the HUF. He would get a share in his deceased father’s HUF share but not directly become a coparcener in the HUF. This is because the HUF property is not the exclusive property of his father. S.16(3) of the Hindu Marriage Act has an express carve out that a deemed legitimate child cannot succeed to properties of other relatives. To make him a coparcener would violate s.16(3). It noted several amendments during the year to the Hindu Succession Act to remove gender biases. But the legislature has not stipulated that a child whose legitimacy is protected by s.16 of the Hindu Marriage Act, would become a coparcener by birth.

The very concept of a coparcener postulated the acquisition of an interest by birth. If a person born from a void or voidable marriage to whom legitimacy was conferred by s.16 were to have an interest by birth in a HUF, this would affect the rights of others apart from the parents of the child. Holding that the consequence of legitimacy under s.16 was to place such an individual on an equal footing as a coparcener in the coparcenary would be contrary to the provisions of s.16(3) of the Hindu Marriage Act.

CONCLUSION

The issue relating to HUF rights of illegitimate children has been quite contentious and litigation-prone. After a long wait, the issue has reached finality. The Court has aimed for a balancing approach by protecting the rights of the deemed legitimate child on the one hand and also preserving the rights of other HUF coparceners on the other hand!

BCAJ Admin

Alternative Investment Funds (AIFs) — Examining the Application of PARI-PASSU and PRO-RATA Concepts

Alternative Investment Funds (AIFs) play a vital role in India’s economy. They provide risk capital in the form of equity/quasi-equity capital for pre-revenue stage companies, early and late-stage ventures, growth companies that wish to scale their operations, and even companies facing distress.

The size of AIFs has grown to a significant amount over the years. There are around 1,100 AIFs registered with SEBI with over 8.44 trillion INR in commitments (as of 30th June, 2023), witnessing an annual growth rate of over 30 per cent.

Considering the need of the economy for such funds, its growth and the huge amount committed, SEBI, aptly supported by its policy advisory committee, is continuously making sincere attempts to ensure transparency and good governance. Recently in May 2023 SEBI, in its consultation paper titled “Consultation paper on proposal with respect to pro-rata and pari-passu rights of investors in Alternative Investment Funds (AIFs)”, has empathetically asserted:

“Considering that fair treatment of investors is a core and inherent principle for a pooled investment vehicle, as also evident from global references given above it is essential to expressly provide that AIFs shall not provide any differential treatment to investors which affects economic rights of other investors. Therefore, it is necessary to explicitly provide for fair treatment of all investors as a principle under the AIF Regulations, from the perspective of investor protection.” (para 31 — emphasis supplied)

The objective of this article is to critically examine the extant regulations on pari-passu and pro-rata rights of investors in AIF and the fair treatment of all investors as regards investors joining a fund at different points in time.

What is pari-passu?

Pari-passu is a Latin term that means “ranking equally and without preference.” Applied in the context of investments, pari-passu means that multiple parties to an investment joining an investment scheme at different points of time with varying amounts are treated the same, “ranking equally and without preference — in the sense that the assets or securities would be managed with equal preference or a preference weighted on the value or amount invested and when invested in either the asset or securities.”

Fundraising by an AIF scheme/ fund:

SEBI Regulations governing AIFs viz. SEBI (Alternative Investment Funds) Regulations, 2012, contemplate that a fund approved by SEBI may be able to attract investors to such a fund at different points of time, committing varying amounts (subject to the minimum prescribed). The terms used for investors joining at different points of time are (i) investors joining at the time of First Closing, (ii) investors joining at Subsequent Closing(s), and (iii) investors joining at the time of Final Closing. The Private Placement Memorandum (PPM — explained later) (in section VII) requires each scheme to specify indicative timelines for Initial closing, Subsequent closing(s), Final closing, Commitment Period and Term of the Fund/Scheme.

Considering the above, there is a need to place all these investors joining at different points of time with varying amounts on equal footing.

In mutual fund equity schemes where daily NAV based on the market prices is readily available, all subsequent investors join based on this daily NAV at the time of joining.

However, the investments by most AIFs are in private equity/ quasi equity. These investments have certain time frame depending on the period of nurturing required and success and growth of the ventures. They are illiquid investments and can’t have daily market value. Considering this limitation, the best way to put these investors joining at different points of time with varying amounts is by ensuring equal IRR (Internal Rate of Return) or equal RoI (Return on Investment) for all investors. The implementation of this system may be practically cumbersome and, therefore, in order to simplify the process, in cases of AIFs, this is ensured by what is popularly known as equalization method. In this method, there are three different types of contributions which investors joining during subsequent closing(s) and final closing have to pay — Catch-up Contribution, Compensatory Contribution and Management Fees Additional Contribution. The first two viz. Catch-up Contribution and Compensatory Contributions are meant to place subsequent investors on equal footing vis-à-vis earlier investors and therefore, are distributed by the fund amongst earlier investors on pro-rata basis.

In this article, I am making an attempt to specifically focus on the following:

• The precise nature of Catch-up Contribution and Compensatory Contribution.

• How they are quantified, collected from subsequent contributors (investors) and distributed pro-rata amongst original/ prior contributors.

In Annexure 1, I have brought out the key concepts and the regulatory framework that guides the functioning of AIFs.

The subject of the economic rights of investors during fundraising by AIF — specifically in the context of Category II AIF is very significant.

MODEL CONTRIBUTION AGREEMENT:

Every investor investing in an AIF has to enter into an agreement which is called a Contribution / Subscription Agreement.

The format of PPM provided by SEBI in Part A in Section VII titled ‘Principal Terms of the Fund/Scheme’ requires the Investment Manager to specify the indicative timeline for various closings, the payments unitholders participating in subsequent closings have to make (like catch-up contribution, compensatory contribution).

SIDBI, which manages Fund of Funds, on its website, provides a model contribution agreement.

https://www.sidbivcf.in/files/new_announcement/Model per cent20Contrubution per cent20Agreement per cent20for per cent20AIFs.pdf

The relevant definitions for the present subject are:

• “Catch-up Contribution”

• “Compensatory Contribution”

• “Final Closing”

• “First Closing”

• “Subsequent Closing”

• “Subsequent Contributor”

Clause 3 of this model agreement deals with the “Induction of new contributors and the issue of Units.”

For brevity, the same are not reproduced here.

On reading the above definitions and clause 3 of the model agreement and requirements of PPM, it conveys:

1. At every subsequent closing up to the Final Closing, subsequent contributors shall pay Catch-up Contribution as well as Compensatory Contribution.

2. Both these amounts collected by the Fund shall be distributed amongst the contributors who were admitted prior to such subsequent closing pro rata in proportion to their respective capital contributions.

Considering the above-stated provisions usually contained in all contribution/ subscription agreements and similar provisions contained in PPMs, it is evident that AIFs have to collect catch-up and compensatory contributions from subsequent investors and distribute the same pro-rata amongst prior/ earlier investors.

The next step is to understand how these two contributions are quantified, collected and distributed.

The methodology of quantifying, collecting and distributing Catch-up Contributions and Compensatory Contributions are explained using case studies.

CATCH-UP CONTRIBUTION:

Before a private equity fund is launched, the IM solicits commitments to invest from potential investors. These soft commitments are not legally binding and do not represent future subscriptions. They, however, indicate as to how much capital might be raised.

Once the IM decides to launch the fund, the PPM is published and circulated amongst potential/prospective investors. Thereafter, hard commitments are made by investors with whom contribution/subscription agreements are signed.

The IM can seek to raise additional commitments and capital at any time between the First Closing and the Final Closing.

The above is illustrated below by a hypothetical case of Rahul Fund as at First Closing on 30th November, 2018 (Table no. 1):

Investor	COMMITMENT(INR)	OWNERSHIP
The IM	5,00,00,000	10 per cent
Investor1	15,00,00,000	30 per cent
Investor 2	15,00,00,000	30 per cent
Investor 3	15,00,00,000	30 per cent
TOTAL	50,00,00,000	100 per cent

The Fund issues a drawdown notice dated 1st December, 2018 calling upon the investors to contribute 10 per cent aggregating to Rs. 5,00,00,000 and all investors send their contributions by 31st December, 2018. Accordingly, the above data will appear as under (Table no. 2):

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1
The IM	5,00,00,000	10 per cent	50,00,000
Investor1	15,00,00,000	30 per cent	1,50,00,000
Investor 2	15,00,00,000	30 per cent	1,50,00,000
Investor 3	15,00,00,000	30 per cent	1,50,00,000
TOTAL	50,00,00,000	100 per cent	5,00,00,000

One year after the Initial Closing, the IM decides to seek additional capital commitments and finds an investor (Investor 4 in the table below). Rahul Fund’s investor allocation will now be as under (Table no. 3):

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1
The IM	5,00,00,000	8.33 per cent	50,00,000
Investor1	15,00,00,000	25 per cent	1,50,00,000
Investor 2	15,00,00,000	25 per cent	1,50,00,000
Investor 3	15,00,00,000	25 per cent	1,50,00,000
Investor 4	10,00,00,000	16.67 per cent	NIL
TOTAL	60,00,00,000	100 per cent	5,00,00,000

With this additional investor’s commitment, the initial investors’ ownership has been diluted, yet the new investor hasn’t paid anything into the fund. Investor 4 could simply make the initial drawdown payment to balance things out, but this wouldn’t accurately compensate the initial investors and would eat into Fund’s IRRs.

Instead, an equalisation needs to be completed.

What is equalisation — catch-up contribution?

Equalisation is the process of truing up all investors as if they had all joined a fund on its initial closing date. The process of doing so is multi-pronged. This is called catch-up contribution.

First, Investor 4 pays in drawdown 1 on 31st December, 2019. But rather than making the payment to the fund, the payment is allocated across the initial investors, according to their percentage of ownership of the fund (Table no. 4).

INVESTOR	COMMITMENT	OWNERSHIP	DRAWDOWN 1	Returned/called	Adj.Drawdown1	Per cent drawdown
The IM	5,00,00,000	8.33%	50,00,000	(8,35,000)	41,65,000	8.33
Investor1	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 2	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 3	15,00,00,000	25%	1,50,00,000	(25,00,000)	1,25,00,000	25
Investor 4	10,00,00,000	16.67%	NIL	83,35,000	83,35,000	16.67
TOTAL	60,00,00,000	100%	5,00,00,000	NIL	5,00,00,00	100

The magic of equalisation is putting Investor 4 as if Investor 4 had joined the Fund at the time of initial closing — at par with the IM and other three Investors 1, 2 & 3.
Clause 3.1.of the model agreement also states:

“The Investment Manager shall promptly distribute Catch-up Contributions amongst the Contributors who were admitted prior to such Subsequent Closing pro rata in proportion to their respective Capital Contributions and such amounts distributed to the Contributors shall be added back to their Unpaid Capital Commitments, ……….”

This provision is illustrated as under (Table no. 5):

INVESTOR	COMMITMENT	DRAWDOWN 1	Unpaid capital commitment	Returned/called	Adj.Drawdown1	Adjusted unpaid capital
The IM	5,00,00,000	50,00,000	4,50,00,000	(8,35,000)	41,65,000	4,58,35,000
Investor1	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 2	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 3	15,00,00,000	1,50,00,000	13,50,00,000	(25,00,000)	1,25,00,000	13,75,00,000
Investor 4	10,00,00,000	NIL	nil	83,35,000	83,35,000	9,16,65,000
TOTAL	60,00,00,000	5,00,00,000	45,00,00,000	NIL	5,00,00,00	55,00,00,000

From this Table No. 5, it is evident that the share in catch-up contribution received by The IM and Investors 1, 2 and 3 adds up to unpaid capital commitment by all four of them. This, in essence, means that the share in the catch-up contribution received is part refund of the amount they had already paid. This is relevant in deciding the taxability, if any, of this share in catch-up contribution received by original/ prior investors.

The cardinal principle of an AIF is — All investors have to be treated at par — equally treated (barring a few issues like set-up fees, and management fee structure). This ‘catch-up contribution’ has the effect of putting all investors on an equal footing. The outcome should be that, having re-balanced contributed capital, the amount of uncalled capital for each partner is consistent with the percentage ownership of each partner after this subsequent closing.

A basic premise in the treatment of subsequent closings is that subsequent investors should be treated as if they had invested at the beginning.

Following this principle, the new/subsequent investors who join at a later date are put at par with original/ prior investors following this system of catch-up contribution and its pro rata distribution amongst prior/ original investors.

Note that, so far, it appears that the fund does not receive cash on 31st December, 2019; the net effect of the cash flows shown is zero as the flows simply re-balance the investor’s capital

COMPENSATORY CONTRIBUTION:

However, there is one more area where also, both these types of investors need to be put at par — time value of money.

In the given case, the original three investors and the IM had put their money by December, 2018. Whereas the new investor 4 puts his pro rata contribution in December, 2019 — after a lapse of a year. This issue is addressed by what is called Compensatory Contribution in India and Equalisation Interest abroad. The same is amplified as under.

What is Equalisation Interest — called Compensatory Contribution in India?

In the given case, the IM and 3 original investors paid their first drawdown on 31st December, 2018. Whereas, Investor 4 pays Rs. 83,35,000 only on 31st December, 2019 — after a time lapse of 1 year. To compensate for this, Investor 4 also pays compensatory contribution at a specified rate per annum. Normally, this rate is the Hurdle Rate provided in the Contribution/ Subscription Agreement. This compensatory contribution is also distributed amongst original/ prior investors pro-rata.

The collection of Compensatory Contribution from the new investor and distribution of the same amongst the IM and original three investors will put all investors at par vis-à-vis each other. Any drawdown(s) thereafter will be paid by all the 5 investors as per their respective shares of unpaid capital commitments.

The impact of Compensatory Contribution is illustrated on the following page:

INVESTORS	DATE	AMOUNT	Per cent HOLDING	Equalisation Interest
Original Investors:
Investment Manager	31-12-2018	2,00,00,000	7.41 per cent	1,95,09,000
Investor 1	31-12-2018	20,00,00,000	74.07 per cent	19,50,11,000
Investor 2	31-12-2018	5,00,00,000	18.52 per cent	4,87,60,000
Final Closing:
Investor 3	30-06-2021	94,00,00,000		-26,32,80,000

Investor 3 pays interest at 10 per cent p.a. (compounded quarterly), being hurdle rate, from 31st December, 2018 to 30th June, 2021.

The readers will notice the loss original investors would suffer (almost close to 100 per cent of the invested amount) if an investment manager decides to waive this equalisation interest.

These calculations look relatively easy and straightforward, but it is easy to imagine how they quickly become increasingly complex as factors multiply. Funds might have multiple capital calls that they need to track between the initial and subsequent closing, as well as multiple closings with different investors on-boarding at different times.

Whether Investment Manager has the right to waive Catch-up and/or Compensatory Contributions?

Clause 3 of the Model Contribution Agreement deals with the Induction of new contributors and issue of Units). This clause states — “The Investment Manager shall however, have the power to waive or increase/reduce, subject to the consent of the Advisory Committee, the Compensatory Contribution on Catch-up Contributions to be received and accepted at such Subsequent Closings.”

In this context, readers’ attention is invited to SEBI’s Consultation paper with respect to pro-rata and pari-passu rights of investors issued in May 2023¹. In this paper, inter alia, it is stated, “While the above principle is not explicitly stated in AIF Regulations, maintaining pro-rata rights of investors in each investment of the scheme of AIF, including while making distribution of investment proceeds, is an essential characteristic of the AIF structure.”

1. https://www.sebi.gov.in/reports-and-statistics/reports/may-2023/consultation-paper-on-proposal-with-respect-to-pro-rata-and-pari-passu-rights-of-investors-of-alternative-investment-funds-aifs-_71540.html

Considering the above, the right, if any, of the investment manager to waive catch-up and/ or compensatory contribution has to be subject to conditions, and the fund and the trustee are responsible for ensuring pari-passu rights of all investors — initial as well as subsequent — at all times.

As mentioned earlier, accounts of each fund have to be audited each year and the auditor may consider examining, during the course of audit, whether the fund has collected and distributed catch-up as well as compensatory contributions from subsequent investors or not. And, if not, the auditor needs to examine whether such an act affects the pro-rata and pari-passu rights of investors or not. If the auditor finds that it affects this essential characteristic of the AIF structure, it may be his responsibility to suitably report the same.

Taxation of Catch-Up Contribution & Compensatory Contribution:

Also, considering that category II AIF enjoys pass-through status, it is important to understand the income-tax implications of the catch-up contribution and compensatory contribution collected from subsequent contributors and distributed by the Fund amongst prior/ original contributors.

No attempt is made here to analyse income tax implications of these two amounts either in the hands of the Fund or in the hands of contributors (both original as well as subsequent contributors).

However, the potential tax issues are listed as under:

1. The Fund:

• Whether it is a business income and therefore liable to be taxed in the hands of the Fund,

• If not, whether, while passing on both these amounts to original/ prior investors, whether the Fund is required to deduct tax at source? If yes, whether on both the amounts or only on equalisation interest (compensatory contribution)?

2. Subsequent contributors (new investors):

• Whether catch-up contribution as well as compensatory contribution will be treated as ‘cost’ while computing their taxable capital gain? If not, does it mean that same will not give any tax relief in respect thereof to such subsequent investors?

• Whether compensatory contribution which is in the nature of equalization interest (and not actual interest) can be claimed as deduction while computing gross taxable income of such a subsequent contributor in the year of payment?

3. Original / prior contributors:

• Whether these amounts are ‘capital receipts’ or ‘revenue receipts’?

• Whether catch-up contribution received can be adjusted against the amounts paid against earlier drawdown(s) to reduce that amount?

• If not, whether the catch-up contribution is liable to be taxed as capital gain or as income from other sources?

• Whether compensatory contribution (which is in the nature of equalisation interest) liable to be taxed as ‘interest income’? Or, whether the same too will go to reduce the cost already incurred? [NOTE: It is important to note that these so called ‘subsequent investors’ too will qualify to receive both ‘catch-up contribution’ as well as ‘compensatory contribution’ whenever there is any fresh round of fund-raising post their investment.]

CONCLUSION

Considering the above, I submit that it is the responsibility of the Investment Managers, PPM Auditors and Investors to assess if the true principles of catch up and compensatory contributions have been followed.

i. The investment managers have to decide whether to adopt equalisation method at the times of each subsequent closing(s) and final closing.

ii. The AIF PPM Auditors (who can be internal/external auditors or legal professionals), while conducing audits of PPM and annual accounts, have the responsibility to examine the actions and decisions of the IM and, if required, to report on the same.

iii. The investors too need to be vigilant as to their rights to receive catch-up and compensatory contributions whenever they notice that the fund in which they have invested has raised fresh commitments.

The writer has come across an instance where the IM, using its discretionary power, waived these contributions even though such a waiver negatively impacted the investor’s economic rights in his regard.

The annual audit of PPM compliance is mandated in the interests of investors. Considering this, SEBI regulations must provide that this annual audit report should also be shared with each investor along with corrective action(s) taken by AIFs. Considering the automation in back-office systems, the time allowed for conducting such an audit too needs to be reduced to maximum 90 days. SEBI also needs to take initiative to form an investors forum which can, on an on-going basis, disseminate information to investors in the matter of their economic rights and representatives of such a forum are included in alternative investment policy advisory committee.

ANNEXURE 1

The background on AIFs is briefly stated for readers’ quick references and understanding.

What is an Alternative Investment Fund (“AIF”)?

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy (stated in PPM) for the benefit of its investors.

AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Further, certain exemptions from registration are provided under the AIF Regulations to family trusts set up for the benefit of ‘relatives‘, employee welfare trusts or gratuity trusts set up for the benefit of employees, ‘holding companies‘ etc. [Ref. Regulation 2(1)(b)]

(source – SEBI FAQs)
https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf

AIFs are regulated by the capital market regulator’s SEBI (Alternative Investment Funds) Regulations, 2012 as amended from time to time and circulars issued by SEBI.

https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-alternative-investment-funds-regulations-2012-last-amended-on-march-6-2017-_34694.html

SEBI’s Master Circular dated 31st July, 2023 on AIFs:
https://www.sebi.gov.in/legal/master-circulars/jul-2023/master-circular-for-alternative-investment-funds-aifs-_74796.html

SEBI circulars on AIFs:
https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListingAll=yes&cid=25

SEBI also has formed Alternative Investment Policy Advisory Committee under the chairmanship of Mr N R. Narayana Murthy. This committee has published three reports which are available on SEBI’s website.

Report dated 31st December, 2015:

https://www.sebi.gov.in/sebi_data/attachdocs/1453278327759.pdf

Report dated 26th November, 2017:
https://www.sebi.gov.in/sebi_data/attachdocs/jan-2018/1516356419898.pdf

In terms of SEBI AIF Regulations it is mandatory to obtain certificate of registration from SEBI for enabling AIFs to operate under one of the following 3 categories:

• Category I — AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure. Includes venture capital funds, SME funds, social venture funds, infrastructure funds, angel funds, etc.

• Category II — AIFs, which do not fall in Category I or Category III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Includes private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other regulator.

• Category III — AIFs, which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Includes hedge funds or funds, which trade for short term returns, or open-ended funds, for which no specific incentives or concessions are given by the government or any other regulator.

Private Placement Memorandum (PPM):

The PPM is a risk disclosure document (akin to a prospectus issued by a company making public issue) used for marketing a fund to its potential/ prospective investors.

In terms of Regulation 12, AIF has to, at least 30 days prior to the launch of a scheme, submit Placement Memorandum with the Board and the Board may communicate its comments which will have to be incorporated in the placement memorandum before it can be released to prospective investors. Circular dated 5th February, 2020 issued by SEBI has prescribed format for PPM.

The PPM is divided into two parts — Part A requiring minimum disclosures in respect of 15 sections listed in annexure I to the circular and Part B where any additional information in relation to the Fund/Scheme, Manager, investment team which does not form part of the standard disclosures and the section-wise supplementary section under the earlier sections, can be indicated. Considering a sizable amount invested by each investor and high risks associated with such investments, investors should read the PPM and understand the precise nature of the fund where the amount is being invested, particularly provisions which directly or indirectly affect investors’ economic and legal rights.

http://www.aibi.org.in/Circulars/Disclosure per cent20Standards per cent20for per cent20Alternative per cent20Investment per cent20Funds per cent20(AIFs).pdf

https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_1_p.pdf

Economic rights:

The parity of economic rights between investors of AIFs is necessary as well as critical. It is observed that at times, the PPMs adopt different practices which provide differential benefits/rights to certain investors over others. Few such terms on which differential economic rights are provided by AIFs are Drawdown timeline, Hurdle rate of return/performance linked fee, Transfer rights, Information rights, Compensatory contribution for investors on-boarded in subsequent closings including catch-up contribution for maintaining pro-rata rights of investors, and Co-investment rights.

Even though PPMs may provide equal rights to investors in these matters, the IMs may, using their discretion, give such preferential rights to a select group of investors or waive catch-up as well as compensatory contributions. As the minimum investment amount prescribed is rupees one crore, general perception is that the investors are sophisticated and capable of taking decision to invest after properly studying PPM and understanding its contents. However, this perception in reality may not be correct.

AIFs and AUDIT REQUIREMENTS:

To complement the measures prescribed by SEBI, chartered accountants as auditors and consultants, also have an important role to play to ensure orderly growth of AIFs and protection of investors’ economic rights.

The accounts of each fund managed by a registered AIF have to be audited annually by a qualified auditor. Each AIF has to provide Annual Report to all its investors including financial information of investee companies and detailed risk profiles. The auditor’s report along with audited accounts are shared with the investors in each such fund along with the annual report. In order to further protect investors’ interests, SEBI circular has introduced a specific requirement that the terms of a contribution or subscription agreement (by any name it may be called) signed with each investor must be aligned with the terms of the Private Placement Memorandum (PPM — what is PPM is explained earlier) and contribution agreement cannot go beyond the terms of the PPM. The Investment Managers are required to ensure that they carry out all activities of the AIF in accordance with the PPM and that they should maintain fairness in ensuring that investors economic and legal rights are of paramount importance.
Also, with a view to ensure that the management team has complied with the terms of PPM, SEBI has introduced a requirement for annual audits of PPM. The results of the audit and any necessary corrective action must be shared with (i) the Trustee, Board, or Designated Partners of the AIF; (ii) the Board of the Manager; and (iii) SEBI within six months of the financial year’s end.

AIFs that have not received any funding from investors are exempt from the requirement of audit compliance. However, within six months of the end of the financial year, a Certificate from a Chartered Accountant declaring that no money has been raised must be provided to support this claim.

Considering SEBI’s persistent attempts to increase good governance and risks management in the management of AIFs through compliances and disclosures, management teams face number of challenges in their functioning and time is not far when large sized funds will need external audit firms to conduct internal audits to assist the management.
Considering the above, such high risk non-traditional investments present number of challenges to chartered accountants as auditors, tax experts & consultants to ensure that they discharge their expected obligations with due care and caution.

Considering the huge amount generated by AIFs, the responsibilities cast on auditors are enormous and, therefore, the auditors need to be familiar with various special features of AIFs, particularly economic rights of investors. One such important feature is — investors joining a fund at different points of time and ensuring they all stand in equal footing — paripassu.

In May 2023, SEBI had come out with several proposals for stricter regulations of AIFs. SEBI issued four consultation papers.

AIF Taxation:

Category I and Category II AIFs enjoy pass-through status. This subject is known to most tax practitioners.
Government’s role in AIF Funding:

Fund of Funds:

Government of India (GoI) created access to a large capital of funds for startups in India, through the scheme “Fund of Funds for Start-ups” to create a nation of job creators than job seekers. This Fund is operated by SIDBI. https://www.sidbivcf.in/en

Self-Reliant India (SRI) Fund — Mother-Daughters Fund:

MSME Sector is very important for the Indian economy in terms of contribution to GDP and employment generation. Considering that the GoI has set-up SRI Fund (Mother Fund) to assist MSME sector through Daughters Fund in the form of Category II Alternative Investment Fund (AIF) who are oriented towards providing funding support to MSMEs as growth capital, in the form of equity or quasi-equity. The details are available at https://dcmsme.gov.in/Final per cent20SRI per cent20Operating per cent20Guidelines per cent20 per cent20approved per cent20by per cent20Minister per cent20 per cent2017 per cent2008 per cent202021.pdf

The SRI Fund is managed by NSIC Venture Capital Fund. The details are available at http://www.nvcfl.co.in/AboutUs

BCAJ Admin

From Published Accounts

COMPILERS’ NOTE

Reporting on the impact of climate change and steps taken to mitigate the same and become ‘carbon neutral’ is today increasingly gaining importance. Auditors are also increasingly required to consider these impacts on the financial statements (in many jurisdictions, regulations also mandate auditors to do so) and modify the audit plan and reporting accordingly.

Given below is an instance of such reporting by auditors and corresponding disclosure in Notes to the financial statements.

A similar extract was given in this column on page 75 of BCAJ December, 2020. If a comparison is to be made, the level of disclosures and reporting has significantly increased since then.

BP P.L.C (UK)

From Independent Auditor’s Report on Consolidated Financial Statements for the year 31st December, 2022.

KEY AUDIT MATTER

The potential impact of climate change and the energy transition (impacting PP&E, goodwill, intangible assets, investments in joint ventures and provisions).

Climate change impacts BP’s business in several ways as set out in the strategic report on pages 1 to 76 of the Annual Report and Note 1 of the financial statements on page 185 (reproduced below). It represents a strategic challenge and a key focus of management. The related risks that we have identified for our audit are as follows:

Forecast assumptions used in assessing the value-in-use of oil and gas PP&E assets within BP’s balance sheet for impairment testing, particularly oil and gas price assumptions and their interrelationship with forecast emissions costs, may not appropriately reflect changes in supply and demand due to climate change and the energy transition (see ‘Impairment of upstream oil and gas PP&E assets’ below).

The timing of expected future decommissioning expenditures with respect to oil and gas assets may need to be brought forward with a resulting increase in the present value of the associated liabilities due to the impact of climate change.

In addition, there is an exposure to decommissioning obligations that may revert back to BP in respect of assets transferred to third parties through historical divestments. The risk of exposure is enhanced due to the impacts of climate change which have heightened long-term financial resilience concerns for many industry participants.

Furthermore, provisions for decommissioning refining assets, not generally recognised on the basis that the potential obligations cannot be measured given their indeterminate settlement dates, might need to be recognised if reductions in demand due to climate change curtail their operational lives; (see ‘Decommissioning provisions’ below).

The recoverability of certain of the group’s $4.2 billion total Exploration and Appraisal (E&A) assets capitalised as of 31st December, 2022 (2021 $4.3 billion) are potentially exposed to climate change and the global energy transition risk factors (see Note 15). This is because a greater number of E&A projects may not proceed as a consequence of the energy transition leading to lower forecast future oil and gas prices, BP’s intention to reduce its hydrocarbon production (by around 25 per cent by 2030 relative to 2019 — see page 186) and potentially increased objections from stakeholders to the development of certain projects. The determination of whether and when E&A costs should be written off, impaired, or retained on the balance sheet as E&A assets, remains complex and continues to require significant management judgement.

The carrying value of BP’s refining assets within PP&E may no longer be recoverable, due to changes in supply and demand which arise as a consequence of climate change and the energy transition, for example, the adoption of electric vehicles in markets where BP has significant fuel refining activity. Management identified impairment indicators in respect of certain refineries during the year. As a result, impairment tests were performed to assess the recoverability of the refineries’ carrying values. As disclosed in Note 4 to the accounts on page 208, management has recorded an impairment charge of $1,366 million in respect of the Gelsenkirchen refinery in Germany, driven by changes in economic assumptions.

BP’s intention to reduce its hydrocarbon production (by around 25 per cent by 2030 relative to 2019 and the group’s wider strategy includes potentially disposing of certain higher emissions intensity upstream oil assets and others. As a consequence, for certain assets and investments judgment is required in the determination of the recoverable amount as to whether it should consider the estimated disposal proceeds from a third party, as a key input. Management recorded $2.9 billion (2021 $1.1 billion) of pre-tax impairment charges in 2022 for such potential disposals as described in Note 4. There is a risk that management judgments taken to determine whether impairment charges are required based on BP’s view of whether transactions are likely to proceed or not, and BP’s strategic appetite regarding the value of disposal consideration that would be accepted, are not reasonable.

The carrying value of the group’s investments in low-carbon energy assets may no longer be recoverable due to an increase in the low-carbon energy discount rate, project development costs increasing as a result of higher inflation and the impact that the increased activity within the sector, as a result of the energy transition, has had on the demand for low carbon energy supply chain goods and services.

The useful economic lives of the group’s refining assets may be shortened as society moves towards ‘net zero’ emissions targets and BP seeks to achieve its net zero ambition, such that the depreciation charge is materially understated. Of the total refining assets carried in the balance sheet, all but an immaterial residual value relating primarily to land and buildings will be fully depreciated by 2050. As disclosed in Note 1 to the accounts, management concluded that demand for refined products is expected to remain sufficient for the existing refineries to continue operating for the duration of their remaining useful lives and hence no changes to the useful economic lives of its refinery assets were required.

The total goodwill balance as of 31st December, 2022 is $12.4 billion, of which $7.2 billion relates to upstream oil and gas assets. The carrying values of goodwill may no longer be recoverable as a consequence of climate change and therefore may need to be impaired. For oil production & operations (OP&O), goodwill is allocated to Cash Generating Units (CGUs) in aggregate at the segment level and for gas & low carbon energy (G&LCE) goodwill is allocated to the hydrocarbon CGUs within the segment. The most significant assumption in the goodwill impairment tests affected by climate change relates to future oil and gas prices (see ‘Impairment of upstream oil and gas PP&E assets’ below). Given the significant level of headroom in the goodwill impairment tests, management identified no other assumption that could lead to a material misstatement of goodwill due to the energy transition and other climate change factors. Disclosures about sensitivities for goodwill are included within Note 14 on page 221. The Contracting and Procurement (C&P) segment has a goodwill balance of $4.7 billion, of which the most significant element is $2.5 billion relating to the Lubricants business. Notwithstanding the expected global transition to electric vehicles which may reduce demand for Lubricants, due to the substantial headroom in the most recent impairment test (as described in Note 14), management has assessed as remote the likelihood that the recoverable amount of goodwill is less than its carrying value.

Climate change-related litigation brought against BP, as disclosed in Note 33 to the financial statements, may lead to an outflow of funds requiring provision.

The above considerations were a significant focus of management during the period which led to this being a matter that we communicated to the audit committee, and which had a significant effect on the overall audit strategy. We therefore identified this as a key audit matter.

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER

Overall response
We held discussions with management, with our Climate Change specialists and within the group engagement team to identify the areas where we felt climate change could have a potential impact on the financial statements.

We also continued to utilise a climate change steering committee comprising a group of senior partners with specific climate change and technical audit and accounting expertise within Deloitte to provide an independent challenge to our key decisions and conclusions with respect to this area.

Audit procedures
The audit response related to two of the audit risks identified is set out under the key audit matters for ‘Impairment of upstream oil and gas PP&E assets’ on pages 157–159 and ‘Decommissioning provisions’ on pages 160–161. Other procedures are as follows:

In respect of the recoverability of E&A assets capitalised as of 31st December, 2022:

• We obtained an understanding of the group’s E&A write-off and impairment assessment processes and tested relevant internal controls, which specifically consider climate change-related risks;

• We challenged and evaluated management’s key E&A judgments with regard to the impairment criteria of IFRS 6 and BP’s accounting policy. We corroborated key judgments with internal and external evidence for assets that remained on the balance sheet. This included analysing evidence of future E&A plans, budgets and capital allocation decisions, assessing management’s key accounting judgement papers, reading meeting minutes and reviewing licence documentation and evidence of active dialogue with partners and regulators including negotiations to renew license or modify key terms;

• We assessed whether the progression of any projects that remain on the balance sheet would be inconsistent with elements of BP’s strategy and in particular its net zero carbon commitments and BP’s intention to reduce its hydrocarbon production (by around 25 per cent by 2030 relative to 2019 — see page 186).

We have considered the impact of potential changes in supply and demand on the group’s refining portfolio and reviewed internal and external market studies of future supply and demand. In relation to the Gelsenkirchen refinery impairment test, we assessed the valuation methodology, tested the integrity and mechanical accuracy of the impairment model and assessed the appropriateness of key assumptions and inputs, notably forecast refining margins and energy input costs, challenging and evaluating management’s assumptions by reference to third party data where available. We also evaluated management’s ability to forecast future cash flows and margins by comparing actual results to historical forecasts and tested management’s internal controls over the impairment test and related inputs.

We challenged management’s analysis that identified the specific assets that are likely to be disposed of by BP as part of its strategy. Where relevant, we challenged BP’s asset impairment assessments based on their estimated disposal proceeds and whether transactions are judged likely to proceed or not. We obtained evidence of any negotiations with third parties, carefully considered BP’s strategic intent in this context and challenged management’s assessment of the recoverable amounts for material transactions. We also tested relevant controls which covered both the recoverable amounts determined and the likelihood of transaction completion.

In respect of the impairment tests performed on certain low-carbon energy investments, we tested the result by:

• Testing the relevant controls over low-carbon energy impairment tests including controls over key assumptions and the discount rate;

• Assessing the low carbon energy discount rate with input from our valuation specialists;

• Challenging and evaluating the key assumptions within the impairment tests, which included capital and operating cost assumptions, forecast yield and power price assumptions, debt and interest assumptions, and the applicability of the Inflation Reduction Act legislation on investment credit assumptions and

• Testing the mechanical accuracy of the impairment models.

We challenged management’s assertion that no changes are required to the assessed useful economic lives of refining assets as a consequence of climate change factors. In doing this, we obtained third-party reports assessing future refined petroleum product demand for those countries which are included in our group’s full audit scope for the C&P segment. In particular, we considered the forecasts as set out in the IEA World Energy Outlook 2022 which shows that demand for refined petroleum products is expected to remain sufficient for at least the current remaining useful economic lives of the refineries such that current depreciation rates are appropriate, including under the Announced Pledges Scenario which is associated with a temperature rise of 1.7°C in 2100 (with a 50 per cent probability).

We performed procedures to satisfy ourselves that, other than future oil and gas price assumptions, there were no other assumptions in management’s oil and gas goodwill impairment tests to which reasonably possible changes due to the energy transition and other climate change factors could cause goodwill to be materially misstated. We obtained evidence which supported management’s conclusion that goodwill relating to the C&P segment activities is not impaired due to climate change or other factors.

With regards to the climate change litigation, we designed procedures specifically to respond to the risks that provisions could be understated or that contingent liability disclosures may be omitted or be inaccurate including:

• Holding discussions with the group general counsel and other senior BP lawyers regarding climate change matters;

• Conducting a search for climate change litigation and claims brought against the group;

• Making written inquiries of, and holding discussions with, external legal counsel advising BP in relation to climate change litigation and;

• Reviewing the contingent liability disclosures in the annual report on pages 257–259.

We read the other information included in the Annual Report and considered (a) whether there was any material inconsistency between the other information and the financial statements; or (b) whether there was any material inconsistency between the other information and our understanding of the business based on audit evidence obtained and conclusions reached in the audit.

KEY OBSERVATIONS

Key observations in relation to oil and gas price assumptions used in oil and gas PP&E asset impairment tests and the impact of climate change on decommissioning provisions are set out in the relevant key audit matter below.

We concluded that the key E&A assessments had been appropriately determined and the judgments management had made were appropriately supported. We did not identify any additional impairments or write-offs from the work we performed. We also confirmed management’s view that they did not consider that the progression of any of their E&A assets would be inconsistent with BP’s current strategy and management’s capital frame and capital allocation intentions in light of climate change and the energy transition.

We are satisfied:

• with the results of our procedures relating to the carrying value of refining assets and that the impairments recorded are reasonable;

• that management’s planned disposal-related asset impairment assessments are reasonable and we did not identify any additional material impairment;

• with the results of the low-carbon energy impairment tests, noting that the investment valuations remain sensitive in particular to capital and operating cost assumptions, the ability to secure project financing at the interest rates assumed, and for certain projects the pricing that can be secured under future power purchase contracts. The discount rate used by management was lower than we would have expected but this did not impact the outcome of the tests;

• with the results of our procedures relating to the assessment of the useful economic lives of refining assets and therefore depreciation charges, based on the market studies we read;

• with the sensitivity analysis disclosures around the energy transition and other climate change factors performed in respect of the goodwill balances; and that the group’s goodwill balances are not materially misstated;

• with management’s assertion that no provision should currently be made in respect of climate change litigation. Based on the audit evidence obtained both from internal and external legal counsel, we concluded that management’s disclosure of the contingent liabilities in respect of these matters is appropriate and that management’s other disclosures in the Annual Report relating to climate change are consistent with the financial statements and our understanding of the business.

Whilst many of BP’s oil and gas properties and refining assets are long-term in nature, by 2050, the remaining carrying value of assets currently being depreciated will be immaterial, this date being the target set by the majority of governments with ‘net zero’ emissions targets and also by BP, being Aim 1 of the ‘Getting to net zero’ strategy set out on page 45. At current rates of depreciation, depletion and amortisation (DD&A), the average remaining depreciable life of the upstream oil and gas PP&E (within the OP&O and G&LCE segments) is just six years and the refining assets (within the C&P segment) is thirteen years.

FROM NOTES ON FINANCIAL STATEMENTS

Significant accounting policies, judgments, estimates and assumptions.

Judgments and estimates made in assessing the impact of climate change and the transition to a lower carbon economy.

Climate change and the transition to a lower carbon economy were considered in preparing the consolidated financial statements. These may have significant impacts on the currently reported amounts of the group’s assets and liabilities discussed below and on similar assets and liabilities that may be recognized in the future. The group’s assumptions for investment appraisal form part of an investment decision-making framework for currently unsanctioned future capital expenditure on property, plant and equipment, and intangibles including exploration and appraisal assets that is designed to support the effective and resilient implementation of BP’s strategy. The price assumptions used for investment appraisal include oil and gas price assumptions, which are producer prices and are therefore net of any future carbon prices that the purchaser may be required to pay, and an assumption of a single carbon emissions cost imposed on the producer in respect of operational greenhouse gas (GHG) emissions (carbon dioxide and methane) in order to incentivize engineering solutions to mitigate GHG emissions on projects. The group’s oil and gas price assumptions for value-in-use impairment testing are aligned with those investment appraisal assumptions, except for 2023 oil and gas prices which reflect near-term market conditions. The assumptions for future carbon emissions costs in value-in-use impairment testing differ from the investment appraisal assumptions, are described below:

Impairment of property, plant and equipment and goodwill

The energy transition is likely to impact the future prices of commodities such as oil and natural gas which in turn may affect the recoverable amount of property, plant and equipment and goodwill in the oil and gas industry. Management’s best estimate of oil and natural gas price assumptions for value-in-use impairment testing was revised in 2022. Prices are disclosed in real 2021 terms. The Brent oil assumption from 2024 up to 2030 was increased to $70 per barrel to reflect near-term supply constraints before steadily declining to $45 per barrel by 2050 continuing to reflect the assumption that as the energy system decarbonizes, falling oil demand will cause oil prices to decline. The price assumptions for Henry Hub gas up to 2035 and up to 2050 were increased to $4.00 per MMBtu and $3.50 per MMBtu respectively, reflecting increased demand for US gas production to offset reduced Russian gas flows. The revised assumptions sit within the range of external scenarios considered by management and are in line with a range of transition paths consistent with the temperature goal of the Paris Climate Change Agreement, of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

As noted above, the group’s investment appraisal process includes a single carbon emissions price assumption for the investment economics which is applied to BP’s anticipated share of BP’s forecast of the investments assets’ scope 1 and 2 GHG emissions where they exceed defined thresholds and is assumed to be payable by BP as the producer or as a non-operator. However, for value-in-use impairment testing on BP’s existing Cash Generating Units (CGUs), consistent with all other relevant cash flows estimated, BP is required to reflect management’s best estimate of any expected applicable carbon emission costs payable by BP, including where BP is not the operator, in the future for each jurisdiction in which the group has interests. This requires management’s best estimate of how future changes to relevant carbon emission cost policies and / or legislation are likely to affect the future cash flows of the group’s applicable CGUs, whether currently enacted or not. Future potential carbon pricing and/or costs of carbon emissions allowances are included in the value-in-use calculations to the extent that management has sufficient information to make such an estimate. Currently, this results in limited application of carbon price assumptions in value-in-use impairment tests given that carbon pricing legislation in most impacted jurisdictions where the group has interests is not in place and there is not sufficient information available as to the relevant policy makers’ future intentions regarding carbon pricing to support an estimate.

Where we consider that the outcome of a value-in-use impairment test could be significantly affected by a carbon price in place in any jurisdiction, this is incorporated into the value-in-use impairment testing cash flows. The most significant instances where a carbon price has been incorporated in this way are for the UK North Sea and Gelsenkirchen refinery, where assumptions of approximately £100 / tCO2e and an average of approximately €70 / tCO2e were applied in the 2022 value-in-use impairment tests respectively.

However, as BP’s forecast future prices are producer prices, the group considers it reasonable to assume that if, in addition to the costs already in place, further scope 1 and 2 emission costs were partially to be borne directly by oil and gas producers including BP in future and the prevalence of such costs were to become widespread, the gross oil and gas prices realised by producers would be correspondingly higher over the long term, resulting in no expected overall materially negative impacts on the group’s net cash flows. See significant judgments and estimates: recoverability of asset carrying values for further information including sensitivity analysis in relation to reasonably possible changes in the price assumptions and carbon costs.

Production assumptions within the upstream property, plant and equipment and goodwill value-in-use impairment tests reflect management’s current best estimate of future production of the existing upstream portfolio. The group sees the expected reduction in upstream hydrocarbon production by around 25 per cent by 2030 from its 2019 baseline (see page 11) being achieved through future active management, including divestments, and high-grading of the portfolio. Changes in upstream production since 2019 will be included in the best estimate to the extent the divestments have been announced or completed however, as the specific future changes to the remainder of the portfolio are not yet known, the current best estimate used for accounting purposes does not include the full extent of the expected upstream production reduction. See significant judgments and estimates: recoverability of asset carrying values and Note 14 for sensitivity analyses in relation to reasonably possible changes in production for upstream oil and gas properties and goodwill respectively.

Impairment reversals were recognized on certain upstream oil and gas properties partly as a result of the higher near-term assumptions. See Note 4 for further information. For the customers & products segment, though the energy transition may impact demand for certain refined products in the future, management anticipates sufficiently robust demand for the remainder of each refinery’s useful life.

Management will continue to review price assumptions as the energy transition progresses and this may result in impairment charges or reversals in the future.

Exploration and appraisal of intangible assets

The energy transition may affect the future development or viability of exploration prospects. A significant proportion of the group’s exploration and appraisal intangible assets were written off in 2020 and the recoverability of the remaining intangibles was considered during 2022. No significant write-offs were identified. These assets will continue to be assessed as the energy transition progresses. See significant judgement: exploration and appraisal intangible assets and Note 8 for further information.

Property, plant and equipment — depreciation and expected useful lives

The energy transition may curtail the expected useful lives of oil and gas industry assets thereby accelerating depreciation charges. However, a significant majority of BP’s existing upstream oil and natural gas properties are likely to be fully depreciated within the next 10 years and, as outlined in BP’s strategy, oil and natural gas production will remain an important part of BP’s business activities over that period. The significant majority of refining assets, recognized on the group’s balance sheet on
31st December, 2022 that are subject to depreciation, will be depreciated within the next 12 years; demand for refined products is expected to remain sufficient to support the remaining useful lives of existing assets. Therefore, management does not expect the useful lives of BP’s reported property, plant and equipment to change and does not consider this to be a significant accounting judgment or estimate. Significant capital expenditure is still required for ongoing projects as well as renewal and / or replacement of aged assets and therefore the useful lives of future capital expenditure may be different. See significant accounting policy: property, plant and equipment for more information.

Provisions: decommissioning

The energy transition may bring forward the decommissioning of oil and gas industry assets thereby increasing the present value of associated decommissioning provisions. The majority of BP’s existing upstream oil and gas properties are expected to start decommissioning within the next two decades. The group’s expectation to reduce its upstream hydrocarbon production by around 25 per cent by 2030 from its 2019 baseline is expected to be achieved through future active management, including divestments, and high-grading of the portfolio. Any resulting increases or decreases to the weighted average timing of decommissioning will be driven by the profile of assets held in the revised portfolio. Currently, the expected timing of decommissioning expenditures for the upstream oil and gas assets in the group’s portfolio has not materially been brought forward.

Management does not expect a reasonably possible change of two years in the expected timing of all decommissioning to have a material effect on the upstream decommissioning provisions, assuming cash flows remain unchanged.

Decommissioning cost estimates are based on the known regulatory and external environment. These cost estimates may change in the future, including as a result of the transition to a lower carbon economy. For refineries, decommissioning provisions are generally not recognized as the associated obligations have indeterminate settlement dates, typically driven by the cessation of manufacturing. Management will continue to review facts and circumstances to assess if decommissioning provisions need to be recognized. Decommissioning provisions relating to refineries on 31st December, 2022 are not material. See significant judgments and estimates: provisions for further information.

BCAJ Admin

Accounting of Export Incentives

Accounting for Government Grants can be complex because grants may be subjected to numerous conditions, some of which could provide conflicting signals as to what the grant is trying to compensate or incentivise. Additionally, Ind AS 20 is based on the legacy IAS 20, which has not been revised for many years and may have outlived its utility. The accounting of the grant should reflect what the grant is meant to do, on a broad level. Here, we look at an export incentive scheme and discuss the various accounting issues and the appropriate Ind AS accounting and presentation.

QUERY

Gopaldas Exports Ltd (GEL), the exporter, is eligible to receive export incentives for merchandise exports under the RoDTEP (Remission of Duties and Taxes on Exported Products) Scheme under the Foreign Trade Policy of the Government of India. Under the scheme:

1. GEL is entitled to receive Duty Credit Scrips (DCS) ranging from 1.5 per cent to 2 per cent of the exported goods, depending on the type of product exported.

2. DCS can be used by the GEL for payment of import duty or it may sell it in the market. Typically, the DCS scrips would fetch 80 per cent to 95 per cent of the value in the market, depending upon the demand and supply for DCS at the time of sale.

3. DCS is allowed at the time of presentation of the shipping bill, but it is subject to receipt of foreign exchange. If foreign exchange is not ultimately collected, DCS will be deemed to be ineligible.

GEL has raised the following queries:

1. Is the DCS incentive a government grant or government assistance?

2. At what point in time should DCS be recorded as income?

3. At what amount should DCS be recorded as income?
4. Whether the incentive income is presented as revenue from operations, other income or other operating revenue?

RESPONSE

First, let us take a look at the various relevant references.

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

Definition

Government grants are assistance by the government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them, and transactions with the government which cannot be distinguished from the normal trading transactions of the entity.

7 Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that: (a) the entity will comply with the conditions attached to them; and (b) the grants will be received.

9 The manner in which a grant is received does not affect the accounting method to be adopted in regard to the grant. Thus, a grant is accounted for in the same manner whether it is received in cash or as a reduction of a liability to the government.

29 Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.

GN on Division II – Ind AS Schedule III to the Companies Act 2013

9.1.7. Revenue from operations needs to be disclosed separately as revenue from (a) the sale of products, (b) the sale of services and (c) other operating revenues. It is important to understand what is meant by the term “other operating revenues” and which items should be classified under this head vis-à-vis under the head “Other Income”.

9.1.8. The term “other operating revenue” is not defined. This would include Revenue arising from a company’s operating activities, i.e., either its principal or ancillary revenue-generating activities, but which is not revenue arising from the sale of products or rendering of services. Whether a particular income constitutes “other operating revenue” or “other income” is to be decided based on the facts of each case and a detailed understanding of the company’s activities.

9.1.9. The classification of income would also depend on the purpose for which the particular asset is acquired or held. For instance, a group engaged in the manufacture and sale of industrial and consumer products also has one real estate arm. If the real estate arm is continuously engaged in leasing of real estate properties, the rent arising from leasing of real estate is likely to be “other operating revenue”. On the other hand, consider a consumer products company which owns a 10 storied building. The company currently does not need one floor for its own use and has given the same temporarily on rent. In that case, lease rent is not an “other operating revenue”; rather, it should be treated as “other income”.

9.1.10. To take other examples, the sale of Property, Plant and Equipment is not an operating activity of a company, and hence, profit on the sale of Property, Plant and Equipment should be classified as other income and not other operating revenue. On the other hand, the sale of manufacturing scrap arising from operations for a manufacturing company should be treated as other operating revenue since the same arises on account of the company’s main operating activity.

RESPONSE TO QUERY 1

Government grants are assistance by the government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with the government which cannot be distinguished from the normal trading transactions of the entity. For e.g., free access to water supply by the government, which is not subjected to any normal trading transaction or future condition, would qualify as government assistance.

A reasonable value can be placed on the DCS scrips and are earned basis conditions to be fulfilled and arise from normal trading transactions. Consequently, basis the Ind AS definition, the DCS scrips qualify as government grants. Additionally, as per paragraph 9, it does not matter if the incentive is received in cash or by way of scrips; that does not change the view that the incentive is a grant.

RESPONSE TO QUERY 2

The most important condition for earning the DCS incentive is the export of the merchandise. However, if the foreign exchange remittance is not received, GEL will be ineligible for the DCS incentive. It may be fair to assume that the export proceeds will be collected in due time since most of the exports are based on letters of credits or another form of guarantees. Therefore, the DCS incentive shall be recognised once the export is made and revenue is recognised in accordance with Ind AS 115 Revenue from Contracts with Customers.

RESPONSE TO QUERY 3

As per paragraph 7, government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that: (a) the entity will comply with the conditions attached to them; and (b) the grants will be received. Therefore, the DCS incentive should be recognised at the full amount, subject to the following adjustments:

If DCS is intended to be sold rather than used for importing goods, appropriate adjustments should be made for the decline in the market value. For e.g., the value of DCS is Rs. 100, but it can be sold in the market only at R80, DCS should be recognised at Rs. 80, rather than Rs. 100.
To the extent it is estimated that foreign exchange would not be received, the DCS incentive amount to be recognised should be reduced.

RESPONSE TO QUERY 4

In the extant case, the government is providing an incentive to export rather than paying any revenue amount on behalf of the importer. Therefore, treating this as revenue from operations is clearly incorrect. However, with respect to classification as other income or other operating revenue, there seems to be a debate.

Paragraph 29 of Ind AS 20 requires the presentation of the incentive as ‘other income’. On the other hand, as per the guidance (paragraphs 9.1.7 to 9.1.10 above) under the ICAI GN on Division II – Ind AS Schedule III to the Companies Act 2013, the incentive may be presented as ‘other operating revenue’ if those arise from the normal trading activities of the entity. Since DCS arises from GEL’s trading activities, the same is operating in nature, and hence may be presented as ‘other operating revenue’. Basis paragraph 29 of Ind AS 20, the incentive may even be presented as ‘other income’.

BCAJ Admin

Sustainability Reporting and Opportunities for Practitioners

INTRODUCTION

The nations across the world are in a race to become the most developed economies. This race has not only exploited the resources to the extent of their near extinction, but also resulted in the world becoming a gas chamber of pollution. People are now realising the irreversible damage that they have done to the environment and are trying to gather as much information as possible to understand the causal-effect relationship of this never-ending race. Investors and other stakeholders are holding the industries and companies responsible for the depletion of the quality of the environment. Their expectations are being evaluated by the regulatory authorities, and in return, relevant regulations have been passed for adequate disclosures by the companies. G20 nations in New Delhi also reiterated their commitment to achieve global net zero GHG emissions / carbon neutrality by or around mid-century in the recently concluded G20 Summit.

Globally, the companies are now disclosing how their operations are making use of the natural resources and what is the impact of the same on the neighbouring environment. There are many sustainability reporting frameworks which are commonly used by companies for disclosing their sustainability-related information, viz. GRI Standards issued by the Global Sustainability Standards Board (GSSB), Task Force on Climate-related Financial Disclosures (TCFD) recommendations issued by the Financial Stability Board, SASB standards issued by the Sustainability Accounting Standard Board (SASB)(now part of International Sustainability Standards Board (ISSB)). Recently, ISSB has issued IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related disclosures), which will be effective for annual reporting periods beginning on or after 1st January, 2024, with a ‘climate first’ transition option available to entities, allowing them to provide only climate-related disclosures in the first year of applying IFRS S1 and IFRS S2.

Environmental-Social-Governance (ESG) disclosures have become a popular tool to attract investors and other stakeholders. Few companies are marketing their sustainability policies without executing the same in action at the ground level. By doing so, these policies may convey misleading information about how a company’s products / services and practices are environmentally sound. To avoid these instances of green washing, the regulators in various countries felt the need for assurance of ESG disclosures.

Assurance providers provide assurance on the ESG disclosures made by the company under various assurance frameworks and guidance like International Standard on Assurance Engagements (ISAE) 3000 (Assurance Engagements Other than Audits or Reviews of Historical Financial Information) / ISAE 3410 (Assurance Engagements on Greenhouse Gas Statements) (issued by International Auditing and Assurance Standards Board (IAASB)), AA1000 Assurance Standard v3 issued by Account Ability Standards Board, etc.

The objective of this article is to provide the regulatory requirements on sustainability reporting in India and the mandatory reasonable assurance requirements from financial year 2023-24 onwards. It also covers the role of Chartered Accountants in Sustainability reporting and assurance.

SUSTAINABILITY REPORTING IN INDIA

Business Responsibility and Sustainability Reporting (BRSR) for listed entities

India, in response to the worldwide changes, has come up with a sustainability framework of Business Responsibility and Sustainability Reporting (BRSR), which helps the companies to meet the stakeholders’ expectations on disclosures relating to the area of ESG. Securities and Exchange Board of India (SEBI) vide circular¹ dated 10th May, 2021 had issued the guidelines for the top 1,000 listed entities (by market capitalisation) to voluntarily provide BRSR disclosures in FY 2021–22 and mandatorily from FY 2022–23 as a part of their annual report. The goal of the new reporting format is to co-relate the financial performance of an entity to its sustainability performance. These disclosures are based on the principles covered in the National Guidelines on Responsible Business Conduct (NGRBC) issued by the Ministry of Corporate Affairs in 2019, which itself emanates from the UN Sustainable Development Goals. The circular also provided the format of BRSR along with guidance on certain aspects of some key performance indicators (KPIs) of BRSR.

1. https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html

The BRSR disclosures are segregated into the following three different sections:

1. Section A: General Disclosures
Information relating to the listed entity, like products / services offered, operations, markets served by the entity, CSR details, etc., needs to be disclosed.

2. Section B: Management and Process Disclosures
This section is aimed at helping businesses demonstrate the structures, policies and processes put in place towards adopting the NGRBC Principles and Core Elements.

3. Section C: Principle Wise Performance Disclosures
This section is aimed at helping entities demonstrate their performance in integrating the Principles and Core Elements with key processes and decisions.

There are nine principles (mentioned below) under which an entity needs to provide ‘Essential’ and ‘Leadership’ disclosures. Essential indicators need to be provided mandatorily, and Leadership indicators are voluntary in nature.

ASSURANCE ON BRSR CORE FOR LISTED ENTITIES

To take the BRSR to the next level, SEBI has introduced the concept of “BRSR Core” as a subset of BRSR. It contains selected KPIs related to BRSR. To enhance the reliability of disclosures in BRSR, SEBI has mandated the reasonable assurance of BRSR Core to the top 150 listed entities (by market capitalisation) from FY 2023 – 24 onwards, which will be extended to the top 1,000 listed entities (by market capitalisation) by FY 2026 – 27 in a phased manner vide amendment in Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations). The format of BRSR Core has been prescribed by SEBI vide circular² dated 12th July, 2023.

2. https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.html

In line with the BRSR Core attributes, the format for BRSR has also been amended. BRSR Core consists of KPIs under the following nine ESG attributes:

ESG Attribute	Description
Change in GHG footprint	Scope 1 & 2 emissions & intensity
Change in water footprint	Water consumption & intensity
Energy footprint	Details of total energy consumed from renewable
Embracing circularity	Break-up of waste management across 8 categories
Employee well-being & safety	Amount spent (per cent of revenue) on employee wellbeing initiatives (including health insurance, daycare, maternity benefits, etc. and details on safety-related incidents)
Gender diversity	per cent of wages paid to women and complaints on POSH
Inclusive development	per cent of materials sourced from MSMEs, small producers and job creation opportunities in small towns
Fair engagement with customers & suppliers	No. of days of accounts payable and per cent of negative media sentiment
Open-ness of business	Conducting business with concentrated (limited) parties along with loans and investments made to related parties

BRSR CORE FOR VALUE CHAIN PARTNERS OF LISTED ENTITIES

SEBI has also mandated the disclosures as per BRSR core for value chain partners of the top 250 listed entities (by market capitalisation) from FY 2024–25 on a comply-or-explain basis. These value chain partners encompass top upstream and downstream partners of a listed entity, cumulatively comprising 75 per cent of purchases / sales (by value), respectively. A listed entity covered above will be required to report the KPIs in the BRSR Core for their value chain to the extent it is attributable to their business with that value chain partner.

Further, with effect from FY 2025–26, SEBI has directed the limited assurance of the disclosures in BRSR Core for value chain partners on a comply-or-explain basis.

Disclosing data with respect to value chain partners may involve several practical challenges, e.g., a compilation of data for entities outside the group, defining reporting boundaries, and assurance of such data.

BRSR FOR LISTED ENTITIES NOT COVERED ABOVE

As regards listed entities which are not covered within the ambit set in the abovementioned circulars, SEBI has provided that these entities, including the ones listed on SME Exchange, can voluntarily comply with the requirements to disclose their and their value chain’s disclosures in the BRSR / BRSR Core as the case may be, as a part of their annual report and to provide reasonable / limited assurance on such disclosures.

GENERAL GUIDANCE TO ASSURANCE PROVIDERS

Information provided by the companies in BRSR relates to both financial as well as non-financial information. Financial information like paid-up share capital, corporate social responsibility details, products / services sold by the entity, related party transactions, employee-related benefits, etc., can be referenced from the financial statements and notes / disclosures annexed to those. However, non-financial disclosures which relate to the information pertaining to the measure of greenhouse gas emissions (Scope 1 and 2), water discharge, circular economy, etc., require technical expertise. Assurance providers should have requisite knowledge of both financial and non-financial metrics for providing quality assurance services. Technical knowledge of planning, executing, and concluding the assurance engagement as per the auditing standards and framework governing the assurance of sustainability reports is also a prerequisite for providing effective and efficient assurance services.

The International Federation of Accountants (IFAC) has performed an annual benchmarking study³ on global practices in sustainability disclosure and its assurance for three consecutive years: 2019, 2020 and 2021. For 2021, a study on 1,350 companies across 21 jurisdictions was done. 1,283 of 1,350 companies reported ESG information in 2021 compared to 1,283 of 1,400 in 2020. Further, 63 per cent of the assurance engagements were provided by audit firms as against 61 per cent and 57 per cent in 2020 and 2019, respectively. For the remainder of the engagements, other assurance providers were appointed.

3. https://ifacweb.blob.core.windows.net/publicfiles/2023-02/IFAC-State-of-Play-Sustainability-Assurance-Disclosures_0.pdf

In the Indian context, according to a publication by a large firm, for the FY 2021–22, basis analysis of the data for the top 20 listed companies (by market capitalisation as on 31st March, 2023), 14 of these companies have disclosed information pertaining to BRSR. 13 Companies out of 14 (i.e., 93 per cent), have specifically disclosed that the sustainability report or integrated report have been subject to assurance in accordance with International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (issued by International Auditing and Assurance Standards Board (IAASB)) / AA1000 Assurance Standard v3 issued by Accountability Standards Board. Some of the non-financial disclosures / metrics disclosed in the BRSR also form part of such an integrated report. The assurance providers on four companies are non-audit firms. Out of the remaining nine companies, one has not included the assurance report in its annual report. It is pertinent to note that only two companies out of the balance seven companies have appointed a Chartered Accountant (member of the Institute of Chartered Accountants of India) as the assurance provider.

To provide a reasonable / limited level of assurance on sustainability reporting, the Sustainability Reporting Standards Board (SRSB) of the Institute of Chartered Accountants of India (ICAI) has issued the following standards:

Standard on Sustainability Assurance Engagements (SSAE) 3000, ‘Assurance Engagements on Sustainability Information.’
Standard on Assurance Engagements (SAE) 3410, ‘Assurance Engagements on Greenhouse Gas Statements.’

SSAE 3000 is an umbrella standard applicable to all assurance engagements on sustainability information. In case there is subject matter information to which a specific assurance standard applies (e.g., GHG emissions), SSAE 3000 will apply in addition to the subject matter-specific standard (e.g., SAE 3410). The effective date of application of SSAE 3000 and SAE 3410 is as follows:

Voluntary basis for assurance reports covering periods ending on 31st March, 2023.
Mandatory basis for assurance reports covering periods ending on or after 31st March, 2024.

SEBI’s recently issued FAQs⁴ has specified that assurance of BRSR is profession-agnostic. In its recent circular dated 12th July, 2023, SEBI clarifies that assurance providers should have the necessary expertise for undertaking assurance. However, what constitutes “necessary expertise” has not been defined in the circular. The Board of the listed entity shall ensure that the assurance provider appointed for assuring the BRSR Core has the necessary expertise for undertaking reasonable assurance in the area of sustainability.

4. https://www.sebi.gov.in/sebi_data/faqfiles/aug-2023/1691500854553.pdf

Furthermore, a person appointed as an assurance provider should have no conflict of interest with the listed entity. SEBI circular read with FAQs lays down the over-arching principle that there should not be any conflict of interest with the assurance provider appointed for assuring the BRSR Core. If an assurance provider sells its products or offers any non-audit or non-assurance services to a listed entity or its group entities, irrespective of whether the nature of the product / service is financial or non-financial, it will not be eligible to undertake assurance of the BRSR Core. The Circular does not mandate or recommend the use of any specific assurance standard. The assurance provider may appropriately use a globally accepted assurance standard on sustainability / non-financial reporting, such as the International Standard on Assurance Engagements (ISAE) 3000 or assurance standards issued by the ICAI. Whilst requiring certain prescribed entities to get an independent assurance of their data, the lack of clarity or uniformity in the qualifications/affiliations of the assurance service providers may result in different standards / yardsticks being adopted, thereby making it difficult for the stakeholders to assess the level of compliance by different entities. It would be desirable if SEBI lays down some common yardsticks / format of assurance reporting as well as the professional qualifications for the assurance service providers, other than CAs.

An assurance on sustainability-related disclosures can be at a limited level or reasonable level. For a limited assurance engagement, the assurance procedures are limited as compared to reasonable assurance but sufficient to express negative assurance. For a limited assurance engagement, we may place relatively greater emphasis on inquiries of the entity’s personnel and analytical procedures and relatively less emphasis, if any, on tests of controls and obtaining evidence from external sources than would be the case for a reasonable assurance engagement.

ROLE OF CHARTERED ACCOUNTANTS IN SUSTAINABILITY REPORTING AND ASSURANCE

With the increasing focus on environmental sustainability, governance, and ethical practices, there is no better time than now for CAs to explore this area. Similarly, new regulatory standards and emerging requirements for non-financial reporting add a new layer to the demand. For effective implementation of the new framework prescribed by SEBI and to meet the increasing need of stakeholders for such information, it is essential for the companies to establish a comprehensive data management system, as such information needs to be collated and coordinated between various functional departments / units within the entity. Further, if the management decides to disclose information on a consolidated basis, then information relating to various components / affiliates needs to be accumulated in one place without any impact on the quality and reliability of the same. All these can be achieved only when the entity invests in designing and implementing adequate internal controls over the processes, systems and information produced by the company for disclosures in the BRSR.

A CA may support the management in designing and implementing the relevant internal controls to ensure that there are reduced or no instances of unintentional errors / intentional green washing. The professionals may also support the companies in assessing their readiness for BRSR. They may support in developing ways to measure the metrics in BRSR, developing processes and controls to produce and verify the information and supporting in preparation of BRSR reports. While the collection mechanisms are different, CAs are well-positioned to help companies design methods to track and analyse ESG data. However, they will have to comply with the provisions of the ICAI code of ethics and SEBI circular for listed entities (i.e., they cannot provide assurance on BRSR core in case they provide the above-stated services).

A CA in practice or statutory auditor has relevant knowledge of standards on auditing (SA) along with knowledge of how an assurance engagement is planned, executed, concluded, and documented. Considering SEBI circular permits even CAs to provide assurance services, they must involve subject matter experts in accordance with SA 620, ‘Using the Work of an Auditor’s Expert’ while providing assurance, primarily in respect of various environmental aspects like calculation of emissions, measures adopted towards “net zero” etc. Similarly, for reporting/disclosing data in respect of the value chain partners, practitioners may have to rely on the work of their auditors in accordance with SA-600, ‘Using the Work of another Auditor’. The regulators may issue suitable clarifications/guidance in this regard.

ICAI has already opened the doors of opportunities for Chartered Accountants by issuing SSAE 3000 for Chartered Accountants who can provide assurance under this standard. Moreover, ICAI has also announced a BRSR certificate course whose aim is to disseminate knowledge and awareness amongst its members on Global Trends in Corporate Sustainability Reporting, Disclosure requirements- BRSR and BRSR Lite and Assurance aspects of Sustainability Report.⁵

5. https://learning.icai.org/committee/business-responsibility-certificate-course-batch17/

CONCLUSION

India being the first country to mandate reasonable assurance on BRSR core from the FY 2023 – 24 onwards, companies should gear up and assess their readiness for independent assurance mandated by the regulator. The focus should be on establishing internal controls, systems, and processes akin to financial reporting systems. Assurance providers may enhance their understanding of the assurance framework and standards, a transition from limited to reasonable assurance, considering many companies were obtaining limited assurance on a voluntary basis, engage in timely discussions with the audit committees to identify the issues, if any and better plan their engagements.

BCAJ Admin

Why Gen Z Should Be Chartered Accountants?

Born from 1997 to 2012, Gen Z — or Zoomers — have grown up with mobile phones, social media and, of course, the internet. With ease, they hop between the planet Earth, and the Metaverse in their digital ‘avatars’. These ‘digital nagriks (natives)’ are the most globally connected generation in human history. While the world gets older, India is getting younger, with Gen Z comprising 27 per cent of its population — higher than the world’s average of 24 per cent and much higher than the average Gen Z population of China, Europe and North America, at 17 per cent each¹. This emerging generation is steering the future of work, in an environment where expectations change rapidly, where careers are being shaped by a multitude of issues, including shifting social behaviours and values.

1. NASSCOM Report – “Gen Z and Millennials: Reshaping the Future of Workforce” – December 2022

UNDERSTANDING GEN Z

The economic and societal backdrop of a developing nation have shaped their behaviours and their views on work. Yes, the remuneration package matter to Gen Z — but other things matter even more. As some members of this generation would be looking out for a professional qualification, it is imperative that we draw their attention towards chartered accountancy — which offers a lifetime of rewarding benefits. So, what does Gen Z expect from a professional career?

Job security

Gen Z is worried for job security, and their concern is certainly understandable. This generation witnessed their parents going through the global financial crisis and also experienced something that none of the previous working generations has ever seen — the full wrath of COVID-19 — which created a domino of mayhem and disruptions. Seeing their parents and families suffer from financial instability, they have a stronger focus on finding stable careers. They would obviously choose a career that would provide long-term employability, allowing them to earn, save, and expand their knowledge.

Continual skill acquisition

Gen Z attacks their stress about job security with a tried and tested strategy, i.e., they would choose a career that can provide them with continuous skill acquisition and opportunities to future proof their professional life. Gen Z would gravitate towards a career option that provides opportunities for continuous learning and aids the acquisition of new capabilities. Gen Z believes that new skills would bring multiple benefits: help generate new and innovative solutions, support the development of a more energised and committed workforce, and foster inter-generational learning opportunities.

Gaining international experience

Experience is the best teacher. As a truly connected global generation, it is not surprising that Gen Z sees opportunities to pursue international career experiences high on the priority list. Gen Z would step outside their comfort zone with ease to gain experience that would give them a competitive advantage, e.g., the experience of advanced business processes / practices, a higher level of confidence, opportunity to develop cross-cultural communication skills.

Technology — an enabler

Nowadays, Gen Zers can frequently be seen interacting with Artificial intelligence (‘AI’) powered conversational chatbots — the smart technology currently in rage. This chatbot learns and grow from the existing database, deliver humanised experiences by delivering bespoke answers to customer queries and providing relevant suggestions. AI technologies, natural language processing and blockchain are further boosting the speed and scale of decision-making and providing the tech architecture for collaborative working and better insights. These digital natives are interested in a professional qualification which will enable them to harness the potential of these smart technologies. Not surprisingly, they are also concerned about the impact of smart technology on their own job opportunities for the future.

Protecting the planet

Gen Z believes that solving today’s environmental/societal issues is just as important as making profits. Gen Zers are highly interested in finding work that is linked with social responsibility and that contributes to the betterment of our planet. They would like to bring their talent and tech know-how to pursue careers with higher purpose and do jobs that make a difference to the planet.

A SHOUTOUT TO GEN Z FOR CHARTERED ACCOUNTANCY

Chartered accountancy is deeply rooted in its strong heritage, and its contribution to Indian businesses and the global economy is indelible. It is purpose-driven with specific opportunities to make a real difference to broader issues. Chartered accountancy provides a breadth of skills and the portability of the finance roles and across industries. These factors can help mitigate Gen-Z concerns about job security and provide a passport to multiple careers and roles in varied businesses. Following broad career opportunities emerge for Gen Z.

Business entrepreneurs

From being the ‘Indian Warren Buffett’ or establishing the world’s fourth largest bank or being the Chairman of one of the largest global conglomerates, chartered accountants have emerged as prominent entrepreneurs. Their success stories not only underscore the value of chartered accountancy qualification but serves as an inspiration for Gen Z. Their professional background enables them to make well-informed decisions, negotiate deals, make strategic investments, manage finances effectively, and ensure the sustainability of businesses.

The explosive growth of digital payments and the success of fintech (start-up) companies are creating newer entrepreneurial opportunities. There has been an uptick in the number of entrepreneurs expressing interest in this field; most happen to be chartered accountants themselves, because they understand the ballgame best. Several chartered accounting aspirants seem to be gravitating towards fintech — being aided by the vibrant start-up culture in the country.

Modern finance leaders

A highly effective modern finance leader is someone who can ‘join the dots’ between functions in their organisation. This quality requires a broad mix of skills such as knowing the business inside out, achieving business agility, driving performance with the right key performance indicators, and ensuring insightful financial reporting to achieve short-term and long-term goals. The field of finance is buzzing — with India leading the adoption of some of the novel trends in financial inclusion, e.g., fintech is spearheading the country’s financial inclusion agenda through hyper-focused products for end consumers and embedded financial products and services like banking, payments, lending, co-branded cards, and more. Career-wise, being a chartered accountant is an ideal pathway to finance leadership roles for Gen Zers in any organisation. Gen Zers, as a Chief Financial Officer, would take a seat at the strategy planning table and help influence the future direction of the company.

Assurance champions

From auditing to risk management, from corporate governance to compliance roles, a dynamic and challenging environment is driving assurance needs across businesses. Increased stakeholder scrutiny of organisation performance and processes and the ever-growing need for reliable information is further fuelling the demand for high-quality assurance professionals.

The assurance profession is transforming the look and experience of roles of the future, with the usage of cutting-edge automated tools and techniques, e.g., anomaly detectors — which uses machine learning and AI for sensing anomalous entries in large databases. Though technology is an enabler, it takes human insight and professional experience to ultimately understand the context underlying the output as well as the causation of the output relative to the inputs provided. The bright future of assurance makes it a compelling career choice for Gen Z in any professional services firm.

Tax advocates

Tax policy plays an important role in any economy — from funding public services to incentivising public and organizational behaviour. The increasing digitalization of the global economy has seen greater focus by the OECD² and its BEPS 2.0³ project to address its impact on direct taxation, particularly when organizations and individuals operate in markets with limited physical presence. Unlike direct taxes, indirect taxes are not a bottom-line cost for many clients, but the compliance requirements can be complex and can impact cash flows.

2. Organisation for Economic Cooperation and Development
3. Base Erosion and Profit Shifting

When Gen Z train as tax practitioners, they will acquire skills that can be relevant to almost any domain of their choosing — including working in a firm providing tax advisory services or working as the tax head of an organisation operating in multiple tax jurisdictions. This will not only put their mathematical side of the brain at work but also encourage them to solve complex challenges using logic and tax expertise. Thanks to this, Gen Z won’t have to worry about being stuck in just one or two fields — and can explore as much as they want to.

Data explorers

Growing data sources present exponential analytics-led roles for driving improved and faster insight, formulating competitor strategies, or facing risk challenges. The true value of data analysis comes when decisions are made using insights derived from the data — given impetus by the growth in the volume of data and breakthroughs in technology, e.g., how cab-hailing companies identify demand for cab at any given time or location. Determination of the economic value of businesses using appropriate valuation models — especially for start-ups is an evolving area for chartered accountants. Backed by regulations e.g., the Companies Act, 2013 and valuation standards, the emergence of valuation professionals is on rise.

To uncover the economic value of businesses or provide deeper insights, a professional must first understand the business context. Not only do chartered accountants understand this context, but they also live it. Organisations foresee a great future in these emerging knowledge domains and call upon the tech-savvy Gen Z to plunge into big data analytics/valuation of businesses and leverage the huge opportunities available.

Trusted advisors

Organizations are capitalising on risks caused by disruption. They are updating their risk functions to generate fresh value and provide a competitive advantage. With growing capabilities in tools and technologies to support these changes, business and strategy consulting is a real opportunity.

As a qualified chartered accountant, Gen Z will be able to provide strategic advice to help achieve optimal — and sustainable — results. Whether a business is in crisis or is simply facing an operational challenge, Gen Z would be professionally equipped to help management teams identify and prioritise the most critical issues, stabilise the business, establish a leadership and stakeholder consensus around the solution, and deliver tangible results quickly. Merger and acquisition advisory is another attractive area where Gen Z can refine entity growth strategy, perform deal sourcing, conduct diligence, and achieve greater synergies during merger and acquisition integration.

Technology-centric roles are growing rapidly, and those in Gen Z who want to apply their ‘digital’ skills to help solve real business issues will have lots of opportunities. With increased digitisation comes the risk of cyber security. Gen Z can play a critical role in implementing and executing a strategy and overarching cyber program that allows for rigorous, structured decision-making and financial analysis of cyber risks.

HOW CAN EMPLOYERS HARNESS THE POTENTIAL OF GEN Z?

If an organisation is looking to attract, hire and retain incoming Gen Z talent, it will need a smart strategy in place. They should first try to understand them and then acknowledge the potential and ideas they have that can revolutionise the workplace and leave a mark on the organisation. Some recommendations include the following.

Mentor, but don’t teach

Gen Z expects to be led by example. If you can’t convince them with your approach, Gen Zers won’t follow your word. From their perspective, a title in the corporate hierarchy fails to impress them. An increasing number of CEOs and founders are giving up on the attributes of power (be it a separate office, a tie, or a badge in a gold frame). Humble leadership comes to the forefront for this generation because it matches Gen Z’s values perfectly.

Let them make mistakes

Gen Z sees mistakes more often as experiences and lessons learned. Experienced professionals should support them and observe them — but shouldn’t micromanage. Give feedback right away. When explaining what went wrong, be consistent and patient. Creating a culture of continual feedback and acknowledgement is essential in engaging Gen Z. Identifying new ways of recognising exceptional performance and sharing with peers and across the organisation, as well as articulating what their specific contribution, is essential to motivation. It’s really powerful for an organisation to visibly demonstrate how they have listened to Gen Z feedback by implementing ideas that help shape future strategies and policies.

Employers can create spaces such as “innovation hubs or sandboxes” within their organisations that allow for experimental thinking and flow of ideas that can positively impact the future of their organisation, drive change management and better engagement.

Integrate organisational purpose with individual needs

Gen Z is keen to understand the ‘big picture’ – what their contribution would be to the vision of the enterprise. Gen Z is attracted to organisations that can offer security through long-term career prospects. Strengthening this aspect with interventions that particularly support career development, such as regular career conversations, is powerful. Identifying opportunities for Gen Z to grow in a way that caters to their uniqueness is vital to their engagement and retention.

Exploit their digital mastery

Organisations should create roles that are tech-focused, as Gen Z is known to attack business problems differently by leveraging technology and rapidly creating solutions. Companies must institute a culture of constant innovation using digital solutions to keep pace with the societal changes that are impacting their future business. Boards can help management teams prioritise technology investment and iterative efforts with an eye towards the future. Enterprises should see Gen Z as fantastic ambassadors and early adopters to encourage the rest of the business to use digital.

Rethink learning: short and visual

Gen Z watches YouTube videos, listens to podcasts, and binges shows. Organisations need to create learning content that will grasp their attention. Mobile learning opportunities and new learning platforms continue to evolve, and everything from gamification to simulation and Augmented and Virtual Reality are becoming staple offerings for employers that understand how Gen Z want to acquire knowledge and learn. Peer-to-peer learning opportunities are also powerful.

Don’t forget to have fun!

For Gen Zers, work is part of life — the hard division into 9-5 work is blurred. The younger generation wants to feel good not so much at work as while working. Smile, play, have fun, organise social initiatives, charity runs, and donations etc. This is what interests and engages them. Create an excuse for integration, fun, and joint laughter.

MAKING THE PROFESSION MORE ‘COOL’

With India targeting a USD 5 trillion economy by 2025, many finance professionals (auditors / corporates) are getting extremely jittery⁴. Reaching this goal would not only require a gargantuan amount of investments – ranging from USD 5 trillion to USD 7 trillion but, more importantly, would definitely require a reliable pipeline of modern financial professionals. Veterans are grappling with a chasm in talent gap as well as skill gap — as professionals lack the ability to support broader business goals across various industries. Addressing these challenges requires a collective effort from industry stakeholders, including firms, educational institutions, professional bodies, and recruiters.

4. The Gap in India’s Economy Worrying an Ex-Deloitte Boss — India edition of Bloomberg on 21st September, 2023

The Institute of Chartered Accountants of India — our alma mater — has already formulated the new curriculum in line with International Education Standards and National Education Policy, 2020, after considering the inputs from various stakeholders. The new curriculum comes into effect from 1st July, 2023 and would equip future chartered accountants with the requisite technical knowledge and professional skills to perform well at the workplace. The new curricula emphasise more on the development of higher-order skills of application, analysis and interpretation. A special feature is the multi-disciplinary case study at the Final level, which would help students integrate professional knowledge in different subject areas, analyse and apply such knowledge in problem-solving. While implementing the new curricula, the Institute should make serious efforts to.

Dispel common misconceptions plaguing the profession: It is a very common belief that accountants just have to work on calculations, and creativity is not required for the same. However, this is untrue, as finding tax deductions and constructing a client’s financial portfolio benefit from creativity. Another common belief is that it is extremely difficult to clear the exams. Debunking the misconceptions about the profession would certainly invigorate the much-needed force into the talent pipeline.

Incorporate practical case studies: Case studies are effective ways to get students to practically apply their skills and their understanding of learned facts to a real-world situation. They are particularly useful where situations are complex, real-life case studies in the learning material will provide a more engaging experience for aspiring chartered accountants.

Provide career counselling: Career counselling should include personalised guidance and support to help the students make informed decisions about their career path. It should involve assessing one’s interests, skills, values, and personality traits to help identify potential career paths that align with their goals and aspirations.

Keep the curricula agile: Flexible, innovative and agile curricula offer many advantages over more traditional approaches. Agile curricula would deliver better results by focusing on learners and provide the flexibility to include employability skills matched to the market’s needs. The curriculum would also be open to incremental improvement, ensuring that it gets better and better.

CLOSING ENTRIES

Chartered accountants are the foundation base of the economy. Being nation-builders, the qualification of a chartered accountant would prepare Gen Z with the skills and knowledge to achieve anything they want in the field of finance. In the new world of work, career routes and opportunities for continuous learning and acquiring new capabilities will continue to open up for chartered accountants as pathways diversify further. Irrespective of role, sector, industry, or geography, it’s the application of these vital skills and the sheer diversity of future possibilities afforded by a background in chartered accountancy that be a key attraction for Gen Z. It seems that chartered accountancy remains a pretty good bet for Gen Z and continues to be a gateway to a good career with a positive image.

BCAJ Admin

Natural Hedging – A Practical Approach to Designation and Effectiveness

A. Introduction

Predictability of cash flows is one of the primary goals of a business while charting its short-term as well as long-term capital management plan. For this, risk management is one of the important aspects. The company is exposed to various risks ranging from political, geographical, economical to natural risks. One of the risks that we are going to discuss is exposure to foreign exchange fluctuation risk and hedging through a non-derivative instrument. Foreign currency exposure in a business originates on various transactions such as import and export of goods/services, foreign currency borrowings, overseas investments, etc. A company can manage this risk with a clear risk management and treasury policy. If the company opts to hedge its foreign exchange risk, it can do it by passive hedging or active hedging.

B. Hedging

In simple terms, from a foreign currency risk perspective, it is a technique or an approach whereby an entity can secure or ring-fence its cash flows while the exchange rate may fluctuate in future till the expected foreign currency cash flows hit the bank account.

It is to be noted that hedging is not about gaining or losing. It is about fixing the price risk and freezing the volatility for the future. It can arise on account of interest rates, commodity prices, currency, etc.

“To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is, therefore, a trade that is made with the purpose of reducing the risk of adverse price movements in another asset.” – Investopedia

An entity can protect its profits/cashflows by entering into various types of derivative contracts. Exposure to foreign currency can be hedged by forward contracts, future contracts and currency options, call options, swaps, etc. These contracts can be entered into with commercial banks / authorised dealers as counterparties.

Another way of viewing risk is net basis. The company could be exposed to the same foreign currency risk exposure on, say, trade receivables, highly probable revenue, loans, investments, etc., as well as on outflows arising on account of trade payables, borrowings, interest payments, etc. In this scenario, depending on the matching profile of cash inflows and outflows, the company may enter into derivative contracts to hedge its net open exposure on foreign currency. The strategy to hedge on a net basis brings in the concept of Natural Hedge.

C. Passive hedging

Passive hedging is not an accounting term but is used by businesses while formulating risk management policies. Passive hedging means taking hedge positions matching with underlying maturities and are held till maturity. With this approach, the company is insulated from unwanted volatility in the income statement at a minimal/no hedge cost. At the same time, it could miss a potential gain if that arises in the short term.

Passive hedging can be done by either taking a derivative instrument such as forward contracts or a non-derivative financial instrument such as trade receivables or trade payables / borrowings depending on the side of forex risk a company wants to hedge.

D. Active hedging

Active hedging, on the other hand, is undertaking a foreign currency position in the market with a derivative instrument which caps the loss and retains the potential of an upside in a derivative position, which again should be in line with the Company’s Risk Management and Treasury Policy. Here the position is not held till maturity of the underlying, but will be squared off if the trade hits the stop loss limits or becomes favourable at any point of time during the contract period. Given the dual objective of loss protection and trying to generate some returns, this cannot be done through non derivative instruments.

Thus, from Company’s Risk Management and Treasury policy, Natural hedging will form part of its Passive hedging strategy.

E. Regulatory framework

This section brings out some aspects which are allowed by regulators but may not strictly pass the accounting test.

RBI has issued comprehensive guidelines on derivatives vide RBI/FMRD/2016-17/31FMRD Master Direction No. 1/2016-17, where it defines hedging as an activity of undertaking a derivative contract to offset the impact of an anticipated or a contracted exposure. It allows an entity to take Short i.e., Sell position without having a corresponding purchase option. (“Written option”).

A written option does not qualify as a hedging instrument unless it is designated as an offset to a purchased option. [para B6.2.4 of Ind AS 109]

‘Specific Directions’ under the RBI guidelines allow domestic non-retail corporates having a rupee liability may, at their discretion, to convert the rupee liability into a foreign currency liability through a currency swap. This position can be taken by the entity with authorised dealers without proving any foreign currency exposure.

Thus, an entity having, say Rs. 500 crore loan from Indian institutions can approach the authorised dealer and take a rupee swap to US dollar / Japanese Yen / Swiss Franc / any other currency.

Further, it states that entities may take positions (long or short), without having to establish the existence of underlying exposure, up to a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.

Attention is also drawn to Master Direction No.5, dated 1st January, 2016, on “External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers”, as amended from time to time and A P (DIR Series) Circular No. 11 dated 6th November, 2018, in terms of which certain eligible borrowers raising foreign currency denominated External Commercial Borrowing (ECB), having an average maturity of less than five years, are mandatorily required to hedge 70 per cent their ECB exposure.

For hedge purposes, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. (para 2.5.1 of Master Direction No 5, issued on 1st January, 2016, issued by RBI)

Under Ind AS 109, a derivative maturing, say on, 15th March, 2024, with underlying offsetting cashflow occurring on 15th April, 2023, would be difficult to qualify as an effective hedge on two counts, viz, 1) Timing mismatch, and 2) from 16th April, 2023, till 15th March, 2024, the derivative is without an underlying and thus, won’t qualify as a qualifying hedge during FY 23–24.

F. Chapter 6 Hedge accounting – Ind AS 109 Financial Instruments (Relevant extracts)

It is well understood that Ind AS 109 allows entities to designate non-derivative instruments under hedge relationships and hence in this article, we will focus on non-derivative instruments that are allowed to be designated under hedging relationships.

Hedging Instrument:

Para 6.2 of Ind AS 109 states that for a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial asset or a non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income.

Hedge Item:

As per para 6.3.1 of Ind AS 109, a hedged item can be recognised as asset or a liability, an unrecognised firm commitment or a highly probable forecast transaction or a net investment in a foreign operation.

Further, para 6.3.5 of Ind AS 109 states that for hedge accounting purposes, only assets, liability, firm commitments or highly probable forecast transactions with a party external to the reporting entity can be designated as hedge items.

Hedge Qualification:

6.4.1 “A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:

(a) The hedging relationship consists only of eligible hedging instruments and eligible hedged items.

(b) At the inception of the hedging relationship, there is a formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.

(c) The hedging relationship meets all of the following hedge effectiveness requirements:

(i) There is an economic relationship between the hedged item and the hedging instrument;

(ii) The effect of credit risk does not dominate the value changes that result from that economic relationship.

(iii) The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item……”

Key takeaways from Ind AS 109 perspectives:

1. Hedging of only foreign currency risk elements can be done through non-derivative financial instruments i.e., borrowings, receivables.

2. The counterparty in a hedge relationship should be an external party from a reporting group perspective.

3. To be effective, there should be an economic relationship between the hedge item and the hedge instrument.

4. The company should have a formal risk management policy and strategy in place.

5. Formal designation and documentation should be in place at the inception of the relationship and in alignment with the management policy.

G. Hedge item vis-a-vis hedge instrument:

Table 1 tabulates the choice of hedging instruments available under both (derivative / non-derivative) categories for a qualifying hedge relationship under Ind AS 109.

Table 1

Sr. No	Hedge item	Derivative Instruments	Non-Derivative instruments
1.	Interest-bearing foreign currency liability (FX risk)	Forward contract, Interest rate swap, Principal swap, Cross currency swap, Call options, Floor options, etc.	Foreign currency receivable on balance sheet, loan receivables, dividend receivables, etc
2.	Highly probable foreign currency revenue (FX risk)	Forward contract, Put options, etc.	Foreign currency liability on balance sheet
3.	Receivables (FX risk)	Forward contract, Put options, etc.	Foreign currency liability, etc.

H. Natural hedge accounting

Guidance is available in terms of testing effectiveness for a “derivative” instrument used for hedging foreign currency risk of an underlying exposure as compared to a “non-derivative” instrument. In this article, we will run through effectiveness testing for a non-derivative instrument.

If both the hedged item and non-derivative instrument as tabulated above, are on the balance sheet and monetary in nature, under Ind AS 21, both will be marked to market, thereby offsetting in P&L. (B5.7.4 of Ind AS 109)

To select a relationship which impacts P&L, we will take the example of designation for those relationships where the hedge item is off the balance sheet, such as point 2 in table 1. This is because if there is no designation, borrowing will be marked to market at every reporting date under Ind AS 21 while forecasted revenue will not, and thus impacting P&L if not hedge accounted.

Example: Company A, with INR as a functional currency, has a US$400 of borrowing @ 4.5 per cent p.a. interest, payable on a monthly basis, with bullet repayment in the ninth month. The company has highly probable forecasted US$ linked revenues on a monthly basis that match the cash flows linked to US$ borrowings, both for interest and repayment of principal.

Company A designates highly probable foreign currency revenue as a hedge item and existing foreign currency interest-bearing liability as a non-derivative hedging instrument under Cash Flow Hedge.

Foreign currency liability is measured at amortised cost in financial statements, while highly probable revenue is an off-balance sheet item.

In accordance with B6.5.4 of Ind AS 109, when measuring hedge ineffectiveness, Company A shall consider the time value of money of the Hedge item to make it comparable to the Hedging instrument, which is subject to amortised cost and is also a present value measurement.

The IASB noted that hedging instruments are subject to measurement either at fair value or amortised cost, both of which are present value measurements. Consequently, in order to be consistent, the amounts that are compared with the changes in the value of the hedging instrument must also be determined on a present-value basis. The IASB noted that hedge accounting does not change the measurement of the hedging instrument, but that it might change only the location of where the change in its carrying amount is presented. As a result, the same basis (i.e. present value) for the hedged item must be used in order to avoid a mismatch when determining the amount to be recognised as hedge ineffectiveness [BC6.281 IFRS 9].

In the given case, foreign currency liability is measured at amortised cost. Considering no outstanding interest payments, discounting the borrowing with its coupon rate, the present value of borrowing matches with its amortised cost. Refer to Table 2 on the right.

Similarly, Company A present values the expected designated revenue against each corresponding cash flow of the Hedge instrument, discounted at the same discount rate of the Hedge instrument, giving us the present value of the hedged item. Refer Table 3 below.

(Table 2 – The net present value of non-derivative hedging instrument)

(Table 3 – NPV of the hedged item at inception)

In Table 3, to provide a broader view of assessing effectiveness under different scenarios, the table considers three different sets of cash flows designated as Hedge items against the Hedge instrument, which is kept constant.

It can be seen that in scenario 2.1 of Table 3, the effectiveness is 100 per cent, which reduces to 98.92 per cent in scenario 2.2 and further goes down to 95.61 per cent in scenario 2.3, where we altered revenue designations assuming different revenue expectations. Table 3 reflects the effectiveness at the inception of the hedge.

As a first step to establish hedge qualification, apart from applying critical terms match test, the Company establishes an approach to test effectiveness at every reporting date. Though there is no 80-125 principle prescribed under Ind AS 109, Company A will have to document a logical range, beyond which Company A will not apply hedge accounting. Say in the above example, if the result of effectiveness was 72 per cent, then it would be subjective on the Company to adopt hedge accounting.

One may debate on what discount rate should be used to measure the change in fair value of the hedged item (forecast sale) for effectiveness testing. There is no explicit guidance on what rate should be used under Ind AS or in IFRS. An acceptable approach would be to use a risk-free rate / borrowing’s coupon rate to discount both the hedged item and the hedging instrument for the purposes of calculating ineffectiveness.

We now move towards splitting the effective and ineffective MTM in the above example. In accordance with paragraph 6.5.11 of IFRS 9, the lower of the cumulative gain or loss on the hedging instrument (borrowing) and the cumulative change in fair value of the hedged item (revenue) is recognised through other comprehensive income in a separate component of equity.

At every subsequent reporting date (say Month 6), Company A remeasures the NPV at a constant discount rate and arrives at the revised effectiveness percentage and the amount to be accounted in Other Comprehensive Income (‘OCI’) and Income Statement (‘P&L’). Refer to computation table 4.

(Table 4 – NPV of the hedged item at subsequent reporting rate with OCI vs. P&L impact)

*Month 0 - 1US$ = Rs. 80 and Month 6 - 1US$ = Rs. 82

NPV of the hedging instrument is assumed to be the same, considering no outstanding interest payments and borrowing accounted at amortised cost. The above is performed at every reporting date till Borrowing is settled. The MTM in OCI is recycled to the income statement when the underlying hedge item hits the income statement.

Disclosures:

21A of Ind AS 107, states the disclosure requirements for those risk exposures that an entity hedges and for which it elects to apply hedge accounting. Hedge accounting disclosures shall provide information about:

a. Entity’s risk management strategy and how it is applied to manage risk;

b. How the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows.

c. The affect that hedge accounting has had on the entity’s balance sheet, statement of profit and loss and statement of change in equity.

I. Documentation for hedging of a foreign currency exposure using a non-derivative hedging Instrument:

Company: XYZ Limited

Functional Currency: INR Table 5

Hedging objective	The objective of the transaction is to hedge currency exchange fluctuations with respect of forecasted foreign currency-denominated sales.
Date of designation	(Date of designation of existing foreign currency liability or Date of designation of new foreign currency liability at inception)
Type of hedge	Cash flow Hedge
Hedging instrument	Interest-bearing foreign currency liability on the balance sheet (US$…..)
Hedged item	The highly probable foreign currency revenue on the date of designation US$……. matches the outflow on the hedging instrument on a monthly basis. (tabulation of inflows to be done)
Hedged period	Monthly expected (say, US$) revenue (tabulated as above)
How “hedge effectiveness” will be assessed	As the cash flows of the underlying and the hedging instrument occur at similar times, changes in cash flows attributable to the risk being hedged are expected to be completely offset by the instrument.
How “hedge ineffectiveness” will be measured	Effectiveness will be measured by using the offset method of testing. The company shall consider the time value of money of the Hedge item to make it comparable to a Hedging instrument, which is subject to amortised cost (a present value measurement). In accordance with paragraph 6.5.11 of IFRS 9, the lower of the cumulative gain or loss on the hedging instrument (borrowing) and the cumulative change in fair value of the hedged item (revenue) is recognised through other comprehensive income in a separate component of equity. [Though there is no 80-125 principle prescribed under Ind AS 109, Company A will have to document a logical range, beyond which Company A will not apply hedge accounting. Say in the above example, if the result of effectiveness was 72 per cent, then it would be subjective on the Company to adopt hedge accounting]

COMPLETED BY: ______________________________DATE: ____________

J. Conclusion

a. Achieving the hedge objective with a non-derivative instrument is a cost-efficient way of hedging exposures while also addressing P&L volatility from reporting perspective.

b. Hedge accounting can be done even with mismatch in cashflows between hedge instrument and its designated underlying, using NPV approach.

c. Company’s results, that are reflective of its stated risk management policy have higher reliability and acceptability levels amongst its stakeholders.

BCAJ Admin

Development Agreements under GST and Tax Implications

INTRODUCTION

It is now commonplace to undertake real estate development by entering into development agreements. Such development agreements typically involve multiple stakeholders, two typical stakeholders being the landowner and the developer. A popular manner of entering into a development agreement is a scenario where the land-owner grants development rights to the Developer in return for monetary consideration. At times, the monetary consideration is fixed and lumpsum, whereas, at times, the monetary consideration can be variable based on the final selling price of the developed property by the Developer. At times, the consideration for the grant of development rights is non-monetary in nature, in the sense that the Developer allots certain developed property back to the Owner for either self-consumption or further sale. In many cases, the development agreement may provide for a combination of both monetary as well as non-monetary considerations. In such a scenario, the development agreement is generally understood to be a barter agreement whereby:

a. The developer pays a monetary consideration for a grant of development potential to the owner.

b. The developer further allots some flats / units in the new building to the owner. The owner may further sell the units allotted either during construction or post-construction.

c. The developer generally sells / allots balance flats / units to prospective new purchasers who join in or become members of the proposed society during construction. Some flats/units may remain unsold at the time of receipt of the completion certificate and may be sold thereafter.

Therefore, the entire business arrangement can be summarised as under:

Transaction 1: Transactions between Developer and Owner
Transaction Set 2: Transactions between Developer and New Buyers
Transaction Set 3: Transactions between Owner and New Buyers

TRANSACTIONS BETWEEN DEVELOPERS AND BUYERS

In view of Entry 5(b) of Schedule II of the CGST Act, 2017, it is evident that the said transactions constitute services to the extent that some consideration is received prior to the completion certificate. However, in view of the retrospective amendment to Section 7 of the CGST Act, 2017, Schedule II has been relegated to merely a classification schedule rather than a deeming provision. It could, therefore, be argued that the said transactions would constitute transactions of the sale of immovable property and, therefore, not liable for GST. However, such a position could be litigated. Based on the settled industry position of conservatism, the applicable GST may be discharged on such transactions.

Depending on the nature of the units being developed, the transactions could be taxable under the different sub-clauses specified in Entry 3 of Notification No. 11/2017 — CT (Rate). Further, abatement in the value on account of land would be available. However, each of the tax rates mentioned in Entry 3 is conditional (except sub-clause (if) dealing with the construction of commercial apartments in a REP other than an RREP and construction of residential apartments in an ongoing project), and therefore, the following conditions need to be fulfilled:

No Input Tax Credit is available for inputs and input services.
The tax has to be paid through electronic cash ledger only.
80 per cent of the value of inputs and input services are procured from registered suppliers only, and in case of a shortfall, the tax @ 18 per cent is discharged on such shortfall under the reverse charge mechanism.

It is a settled proposition that if no consideration is received prior to the receipt of the completion certificate, the transaction does not constitute a provision of service but is that of the sale of the building and therefore, no GST is payable if the residential unit is sold and the entire consideration is received after issuance of completion certificate.

TRANSACTIONS WITH LAND OWNER

At this juncture, it may be relevant to examine the tax implications of Transaction 1 i.e., the entering into the development agreement by the landowner with the developer. As far as Transaction 1 is concerned, it may be noted that there are two separate deliverables where the GST implications need to be analysed separately:

a. Deliverable by the Owner to the Developer — Here, the owner grants the development rights to the developer and, in turn, is compensated in the form of monetary consideration as well as constructed units. Essentially person to be tested as a supplier in these cases is the owner. One needs to examine whether the owner can be said to have supplied service in the nature of the transfer of the development rights and whether such service can be taxable in the hands of the promoter developer as a recipient of such service under the reverse charge mechanism in view of the specific recitals of Entry 5B of Notification 5/2019 — CT(Rate).

b. Deliverable by the Developer to the Owner — Here, to the extent of the area allotted to the Owner, the developer undertakes the activity of constructing the units for the Owner. The consideration received by the developer is in the form of development rights being granted to the developer. In the case of this leg of the transaction, the suspected supplier is the promoter developer himself, and the issue which needs examination is whether the Developer can be said to have provided services to the Owner warranting payment of GST.

TAXABILITY OF DEVELOPMENT RIGHTS

Section 9 of the CGST Act, 2017 provides for a levy of CGST on all intra-state supplies of goods or services or both. In general, the tax is required to be paid by the taxable person being the supplier of the goods or services or both. However, Sections 9(3) and 9(4) empower the Government to notify cases where the recipient will pay the tax on a ‘reverse charge’ basis. It may be important to note that the provisions of Section 9(3) & 9(4) can operate only in a scenario where there is a levy created by Section 9(1) and in that sense, the provisions of Section 9(3) & 9(4) are subservient to the provisions of Section 9(1). At the cost of repetition, the levy is imposed under section 9(1) only on supplies of goods or services or both. It is therefore important to understand the scope of the terms “goods” and “services” and check whether the transactions contemplated fit within any of the said terms.

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 immovable property, it is evident that there is no supply of goods.

The term “service” 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.

On going through the above definition of service, it is evident that the term 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 transaction should bear an essential character of 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 as being any activity carried out by a person for another for a consideration 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.

One 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.

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

The item should have a utility,
The item should be capable of being bought and sold,
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 or intangible. 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.

In the instant case, since the transaction is one related to the transfer of rights in an immovable property, it can be contended that the same cannot amount to the supply of service. Therefore, the transaction does not qualify to be either a supply of goods or a supply of services and therefore, the levy under section 9(1) is not attracted. Accordingly, it can be argued that the moment the levy is not attracted, the further question of reverse charge mechanism does not apply.

It may further be noted that Section 7(2) of the CGST Act, 2017 stipulates that the activities or transactions specified in Schedule III shall be treated neither as the supply of goods nor a supply of services, thus excluding such transactions from the levy of CGST under section 9 of the Act. Schedule III Entry 5 specifies that the sale of land and sale of buildings as transactions which shall be treated as neither a supply of goods nor a supply of services. It can be argued that the purposive interpretation would further suggest that the exclusion provided vide Schedule III Entry 5 should be applicable in the instant case.

Further support can be drawn from Entry 1(b) of Schedule II, which classifies any transfer of right in goods or of undivided share in goods without the transfer of title thereof is a supply of services. It, however, falls short of specifically classifying the transfer of right in immovable property without the transfer of title within the scope of services.

At this point, it may be essential to elaborate on the fact that the taxability of every transaction has to be seen with reference to the dominant intention of the parties entering into the contract. To analyse any transaction, it may be of utmost importance to look at the intention of the parties to the contract. Section 8 of the CGST Act does provide that the tax implications of the principal supply will govern the tax implications of a composite contract. Therefore, the essence of the transaction, along with the dominant intention, has to be looked into before determining the taxability of any transaction.

In general understanding, a development right is a right to develop the land for agricultural, residential and commercial use. Essentially, land, like any other asset, is a bundle of several rights that accrue to it. Several rights one may identify with land are development rights, possession rights, cultivation rights etc.

By granting the development rights, one can argue that it shall not result in the transfer of ownership of the land in totality but only the aspectual right to develop the land has been transferred. Therefore, the moot question to be answered is whether the grant of development rights would amount to the transfer of title in an immovable property. If the said transfer amounts to a transfer in title, whether it is equivalent to either a sale of land or a transaction which cannot qualify as a service.

Blackstone defines the term “Title” to be “the means whereby the owner of lands has the just possession of his property. “Title” is the means whereby a person’s right to property is established. In Canbank Financial Services vs. Custodian, 2004 (8) SCC 355 – 2004 (7) SC 507, it was held by the apex court that the word “Title” generally used in the context to the property means a right in the property. The title of a property connotes a bundle of rights. The ‘Title’ in an immovable property is the means whereby a person’s right to such property in praesenti is established and does not include a bare expectancy to get such right in due course of time i.e., title means a present right or interest in an immovable property capable of being transferred. The expression Title conveys different forms of a right to a property, which can include a right to possess such property.

In Syndicate Bank vs. Estate Officer (AIR 2007 SC 3169), it was held by Supreme Court that:

“A jurisprudential title to a property may not be a title of an owner. A title which is subordinate to an owner and which need not be created by reason of a registered deed of conveyance may at times create title. The title which is created in a person may be a limited one, although conferment of full title may be governed upon fulfilment of certain conditions. Whether all such conditions have been fulfilled or not would essentially be a question of fact in each case”.

Based on the above arguments, it is possible to contend that the development rights granted by the owner to the Developer are not covered in the definition of service and accordingly cannot be subjected to GST.

Having said that on first principles and based on the legislative framework, a transaction of the grant of development rights by the owner to the developer does not amount to a rendition of service and therefore not liable for GST at all, it will be important to recognize the existence of the following notifications:

a) Notification No. 4/2019 — CT(Rate) amending exemption Notification No. 12/2017 — CT(Rate) to introduce an Entry 41A in the list of exempted services whereby services by way of transfer of development rights (herein refer TDR) or Floor Space Index (FSI) (including additional FSI) on or after 1st April, 2019 are exempted conditionally. Effectively the condition stipulates that the promoter-developer shall pay tax proportionate to the unsold units at the time of receipt of the completion certificate.

b) Notification No. 5/2019 — CT(Rate) which prescribes the reverse charge mechanism in this regard.

It is very likely that the Department may use a reverse analogy to contend that Notification No. 4/2019 — CT(Rate) grants conditional exemption and therefore to the extent of unsold units on the date of the completion certificate, the levy is attracted on a proportionate basis. It can be argued that such a contention of the Department would be incorrect due to various reasons.

It is a settled legal proposition that the existence of an exemption / reverse charge notification cannot by itself infer or presume the existence of a levy. In a particular case, the conduct of musical programs was excluded from the levy provisions of the Entertainment Tax Act. A notification issued under the said Act also granted an exemption, however, subject to certain conditions. When the authorities attempted to demand the entertainment tax citing non-compliance with the conditions mentioned in the notification, the Supreme Court held that if the transaction is excluded from the levy itself, the exemption actually becomes redundant and the conditions mentioned in the said exemption notification have no relevance. One may refer to the Supreme Court decision in the case of Gypsy Pegasus Limited vs. State of Gujarat 2018 (15) GSTL 305 (SC).

Even for a moment, if it is assumed that the scope of ‘service’ is wide enough to include a grant of development rights, it would be important to analyse whether the said ‘supply’ is covered under section 7(1) of the CGST Act. This is important because the scope of supply for the purposes of GST is restricted only to the supplies of goods or services made in the course or furtherance of business. In the instant case, the alleged supply of service is made by the owner. Based on the specific facts of each case, it may be possible for the owner to argue that he is not in the business of development of the real estate, but merely holds the land as an investment or capital asset and therefore the grant of the development right is more in the nature of a transfer of capital asset rather than business activity.

In the context of service tax, the Chandigarh CESTAT was examining the applicability of service tax on transferable development rights. Relying on various judicial precedents, the Tribunal held that there is no element of service in a transaction of transfer of development rights since the same pertains to immovable properties. (DLF Commercial Projects Corporation vs. Commissioner of Service Tax 2019 (27) GSTL 712 (Chandigarh Tribunal)). The said decision is pending before the Supreme Court.

Therefore, a view that no GST is payable by the developer on the development right granted to him is legally possible. However, the position will be litigative and will not be free from doubt. If the developer chooses to adopt a conservative stand and does not like to challenge the vires of the notifications issued in this regard, the tax liability would be determined based on the discussions in the subsequent paragraphs.

Having accepted a position that due to the specific notifications issued in this regard, the grant of development right through the development agreement constitutes a service, the immediate next questions would be the value of the development rights and the effective rate of tax applicable on the same.

Rule 27 of the CGST Rules, 2017 specifies that where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall be the open market value of such supply. The execution of the development agreement attracts stamp duty. For the said purpose, the development right is valued by the respective authorities. The said value can be adopted for the purposes of GST. At this point, it may also be noted that para 2A of Notification No. 11/2017 — CT(Rate) prescribes a value for construction service and not the value for development rights and is therefore not applicable in the current case. The said para is analysed separately later.

Since there is no specific entry in the rate schedule dealing with the transfer of development rights, the same would get covered under the residuary entry for real estate services (HSN 9972) and be liable for GST @ 18 per cent.

Entry 41A of Notification No. 12/2017 — CT(Rate) provides for a conditional exemption in this regard. The said entry exempts service by way of transfer of development rights for construction of residential apartments by a promoter in a project, intended for sale to a buyer. The amount of GST exemption available for construction of the residential apartments in the project under this notification shall be calculated as under:

GST payable on TDR or FSI (including additional FSI) or both for construction of the project] x (carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project)

The abovementioned exemption is subject to the condition that the promoter shall be liable to pay tax at the applicable rate, on a reverse charge basis, on such proportion of the value of development rights as is attributable to the residential apartments, which remain un-booked on the date of issuance of the completion certificate, or first occupation of the project, as the case may be, in the following manner:

GST payable on TDR or FSI (including additional FSI) or both for construction of the residential apartments in the project but for the exemption contained herein] x (carpet area of the residential apartments in the project which remain un-booked on the date of issuance of completion certificate or first occupation ÷ Total carpet area of the residential apartments in the project)

It is further provided that the tax payable shall not effectively exceed 1 per cent of the value in case of affordable residential apartments and 5 per cent of the value in case of residential apartments other than affordable residential apartments remaining un-booked on the date of issuance of completion certificate or first occupation.

Interestingly, the entry provides for an exemption for the development rights attributable to the residential apartments, but through a condition, imposes a tax to the extent of the unbooked apartments on the date of the completion certificate. This approach may again seem circumspect and could be challenged legally. However, the intention is clearly evident — to require payment of GST on the unsold apartments on the date of the completion certificate.

Entry 5B of Notification No. 13/2017 — CT(Rate) prescribes a reverse charge mechanism in the case of services supplied by way of transfer of development rights and accordingly, the promoter is made liable for payment of GST. In the instant case, the developer would be registered as a promoter under RERA and would become liable for payment of GST under the reverse charge mechanism.

Further, Notification No. 6/2019 — CT(Rate) prescribes that the liability to pay the tax shall arise on the date of issuance of the completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier.

The GST Implications on the development rights transferred under the development agreement are accordingly summarized below:

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 un-booked area as of the date of the completion certificate. For example, if 20 per cent of the developed area remains un-booked 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.

TAXABILITY OF FLATS ALLOTTED TO OWNER

That brings us to the second leg of the question — as to whether GST is payable on the constructed units provided to the owner? In the instant case, it is evident that there is a supply of service of construction by the developer to the owner for a non-monetary consideration and therefore, the transaction does qualify as a supply liable for GST. This view was also followed by the Hon’ble Tribunal in the case of LCS City Makers vs. Commissioner [2013 (30) S.T.R. 33 (Tri. — Chennai)].

Notification No. 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 No. 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.

Further, when the construction is underway, the owner could enter into a further agreement for the sale of the under-construction unit with a third party on which the issue of taxability may arise. As far as the owner is concerned, there are multiple reasons to suggest that no GST liability is attracted. Clearly, the agreement is for the transfer of a title in an immovable property under construction. Even if full effect has to be given to Schedule II Entry 5(b), the said entry requires ‘construction’ as well as ‘sale’. In the instant case, admittedly, no construction activity is carried out by the owner, but by the Developer. Having said so, a doubt is created due to the fourth condition of the rate notification prescribed for the developers. The said condition reads as under:

Provided also that where a registered person (landowner-promoter) who transfers development right or FSI (including additional FSI) to a promoter (developer-promoter) against consideration, wholly or partly, in the form of construction of apartments, —

(i) the developer-promoter shall pay tax on the supply of construction of apartments to the landowner-promoter, and

(ii) such landowner-promoter shall be eligible for a credit of taxes charged from him by the developer-promoter towards the supply of construction of apartments by developer-promoter to him, provided the landowner-promoter further supplies such apartments to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and pays tax on the same which is not less than the amount of tax charged from him on the construction of such apartments by the developer-promoter.

In view of the above condition, a presumption is sought to be created that the landowner would also be liable for payment of GST if he resells the property under construction. Since the landowner would also be entitled to input tax credit of the taxes charged by the developer, in the interests of conservatism, it may be preferable to adopt this position rather than litigate on the same. Therefore, in such a scenario, the owner can discharge GST @ 5 per cent on the consideration actually received by him. He would be eligible for the input tax credit of the GST @ 5 per cent charged by the developer on the notional value (i.e., as per the first sale agreement) and would be liable to pay the differential tax. It may be noted that as per the above condition, the output tax payable by the landowner cannot be less than the input tax credit.

While in general, the developer is entitled to defer the tax till the date of completion certificate, in the above instance, such deferment can result in blockage of credit since the said facility of deferment of tax is not available to the owner selling the flat. Therefore, in such a situation, it may be advisable for the developer to discharge the tax beforehand and issue a valid tax invoice to the landowner enabling him to claim the input tax credit.

The tax implications on the owner’s share can be summarised as under:

a) If not registered, the Owner should register himself with the GST Authorities.

b) The Developer should prepone the tax liability and discharge GST @ 5 per cent based on the first sale agreement value and issue a valid tax invoice to the owner.

c) The Owner should claim the input tax credit of the tax charged by the Developer to him.

d) The Owner should collect GST @ 5 per cent of the agreement value when he sells the under-construction unit to a third party.

e) The Owner should discharge the GST collected by utilizing the input tax credit charged by the Developer and balance in cash.

CONCLUSION

This Article deals with the basic provisions applicable to a development agreement and touches upon some of the controversial areas relating to GST. The Article has specifically avoided coverage of specific types of transactions like redevelopment projects, slum rehabilitation schemes and redevelopment of tenanted properties. Also, as could be seen from the article, the law has undergone a substantial change w.e.f. 1st April, 2019, and this article has also avoided discussion on the tax implications of ongoing projects. We intend to discuss these aspects in subsequent issues.

BCAJ Admin

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

7. Sarva Capital LLC vs. ACIT

[2023] 153 taxmann.com 618 (Delhi-Trib.)

ITA No.: 2289/Del./2022

A.Ys.: 2019–20

Date of Order: 10th August, 2023

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

FACTS

The assessee was a tax resident of Mauritius. It was incorporated with the objective of investing in India in education, agriculture, healthcare, microfinance institutions and other financial services sectors. Mauritius tax authority had granted TRC to the assessee. The assessee had invested in CCPS of ‘V’ prior to 1st April, 2017. CCPS were converted into equity shares of ‘V’ as per the terms of their issue without there being any substantial change in the rights of the assessee. The conversion resulted in only a qualitative change in the nature of the rights of the shares but did not alter voting or other rights of the assessee.

The assessee sold the shares during the A.Y. 2019–20 and earned long-term capital gain (“LTCG”) from the same. The assessee claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA.

AO denied the benefit of DTAA to the assessee and brought to tax, the entire LTCG under the IT Act.

HELD

(i) Valid TRC bars AO from questioning tax residency:

• The assessee was granted TRC by Mauritius Tax Authority. It is well settled that if an assessee is holding a valid TRC, the AO in India cannot go behind such TRC to question the tax residency of the assessee and deny benefits of DTAA.

• ITAT placed reliance on UOI vs. AzadiBachaoAndolan1 to support its view that DTAA benefit cannot be denied even if Mauritius does not levy capital gains tax.

• AO’s allegations that the assessee, (a) was set up for tax avoidance purposes through treaty shopping, (b) was a conduit company and there was an absence of commercial rationale or substance behind the setting up of the assessee were not supported by any material / evidence.

(ii) CCPS acquired prior to 1st April, 2017, converted to equity shares after that date:

• Since the assessee had acquired CCPS prior to 1st April, 2017, LTCG derived from the sale of equity shares after the conversion of CCPS was covered under Article 13(4) of India-Mauritius DTAA and not under Article 13(3A) or 13(3B) of India-Mauritius DTAA.

• Therefore, in terms of Article 13(4) of India-Mauritius DTAA, LTCG was taxable only in the country of residence of the assessee (i.e., Mauritius).

• A perusal of Article 13(3A) of India-Mauritius DTAA shows that the expression therein is ‘gains from the alienation of shares’. The term ‘shares’ has been used in a broader sense and will cover within its ambit all shares, including preference shares.

• Initially, the assessee had claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA. However, that would not preclude the assessee from claiming benefit under Article 13(4) if LTCG were clearly within the ambit of Article 13(4) of India-Mauritius DTAA

BCAJ Admin

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

34. ITO vs. Babita Gupta

[2022] 100 ITR(T) 252 (Delhi – Trib.)

ITA No.: 5313 (Delhi) of 2019

A.Y.: 2014–15

Date of Order: 18th October, 2022

Section 54B — Where assessee claimed capital gains arising on sale of agricultural land as exempted u/s 54B on purchase of another agricultural land, since the assessee had furnished all sales documents viz., agreement to sell and purchase, receipt, possession letter, GPA and affidavit, along with a copy of the return filed by the land owner, from whom new land was purchased, wherein she had declared capital gains arising from the sale of its land to assessee, the benefit of exemption u/s 54B was allowable.

FACTS

In the course of assessment proceedings, the AO noticed that the assessee had sold agricultural land measuring 8 bighas situated in the Revenue Estate of Bakkarvala Village, Delhi for a consideration of ₹8,76,56,250 and claimed long-term capital gain of ₹8,48,80,881 as deduction u/s 54B of the Act. The assessee submitted the documentary evidences such as the copy of the agreement to sell, to purchase the agricultural land in the year 2000, copy of General Power of Attorney, copy of possession letter, affidavit of Shri Kali Ram Ganga Bishan (HUF) in proof of purchase of land by the assessee and copy of sale deed, dated 7th November, 2013, executed in the name of Pearls Life Style Developers (P) Ltd [Old Agricultural Land] and copy of the sale deed, dated 15th November, 2013, for the purchase of new agricultural land from Smt. Sumitra Devi Gupta, copy of General Power of Attorney, copy of possession letter, affidavit of Smt. Sumitra Devi Gupta in proof of purchase of land by the assessee[New Agricultural Land].

The AO while completing the assessment u/s 143(3) of the Act accepted the first transaction i.e., the sale of Old Agricultural land as genuine and fulfilled all the criteria and the second transaction i.e., the purchase of New Agricultural Land was not accepted on the ground that this transaction was made through General Power of Attorney only to claim deduction u/s 54B of the Act.

Aggrieved by the order of AO, the assessee filed an appeal before CIT(A). The CIT(A) considering the submissions of the assessee, the evidence furnished before him and following the decision of the Hon’ble Delhi High Court in the case of CIT vs. Ram Gopal [2015] 55 taxmann.com 536/230 Taxman 205/372 ITR 498 allowed deduction u/s 54B of the Act as claimed by the assessee.

Aggrieved by the order of CIT(A), the revenue filed a further appeal before the Tribunal.

HELD

The ITAT observed that the assessee immediately upon receiving the payments (through the banking channel) on account of sale consideration in respect of old agricultural land the assessee had invested the whole of the sale consideration received in respect of her old agricultural land towards the purchase of new agricultural land. Since the assessee had purchased the new agricultural land by investing the whole of the sale consideration in respect of the old agricultural land within the next few days, she had become eligible and entitled to claim the deduction / exemption u/s 54B of the Act, and accordingly, the assessee had claimed the deduction / exemption u/s 54B in her ITR filed for A.Y. 2014–15, which was denied by the AO.

The Tribunal observed that the AO accepted the transactions pertaining to old agricultural land and disbelieved the transaction of purchase of agricultural land from Smt. Sumitra Devi Gupta made by the assessee during the assessment year under consideration for the reason that there was no mutation in the Revenue Records and the purchaser of the property, Smt. Sumitra Devi Gupta, did not respond to the notice issued u/s 133(6) of the Act.

The ITAT further observed that in the course of appellate proceedings, the assessee had furnished the Return of Income filed by Smt. Sumitra Devi Gupta from whom the land was purchased by assessee, wherein the capital gain was declared by Smt. Sumitra Devi Gupta in her return of income for the A.Y. 2014–15.

The ITAT relied on the decision of the Delhi High Court in the case of Ram Gopal (supra) wherein it was observed that the Hon’ble Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd (340 ITR 1 SC) is of no consequence because the Hon’ble Apex Court had dealt with whether a sale or transfer based upon confirming a GPA amounted to sale / conveyance but the Hon’ble Apex Court did not consider and had no occasion to deal with section 2(14) and section 2(47) of the Act in the context of a claim of acquisition of rights of property and interest in a capital asset for the purpose of Income-tax Act, 1961. Applying the principles of this decision, the ITAT held that there was no infirmity in the order passed by the CIT(A) in allowing the exemption claimed u/s 54B of the Act as claimed by the assessee.

In the result, the appeal filed by the revenue was dismissed.

BCAJ Admin

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

33. DSG Papers (P) Ltd vs. ACIT/DCIT

[2022] 99 ITR(T) 241 (Chandigarh – Trib.)

ITA No.: 82 to 86 (Chd.) of 2022

A.Ys.: 2013–14 to 2017–18

Date of Order: 29th July, 2022

Section 4 — Where pursuant to search upon assessee-company, an addition was made merely on the basis of statements recorded of ex-employees and where no incriminating material was recovered from premises of assessee, impugned addition made without giving assessee opportunity to cross-examine said ex-employees and dealers was unjustified. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon.

FACTS

The assessee-company was engaged in the business of manufacturing paper and paper products. For the A.Y. 2013–14, the assessee company’s case was selected for scrutiny proceedings u/s 143(3) and was completed on 20th March, 2016, at the returned income. Subsequently, the PCIT, Patiala set aside the assessment order and directed the Assessing Officer (AO) to pass a fresh assessment order vide order u/s 263, dated 31st August, 2017. The assessment subsequent to the revisionary proceedings was completed on 26th December, 2018, wherein the income of the assessee company as per the original assessment order passed u/s 143(3) on 20th March, 2016, was confirmed.

Meanwhile, there was a search and seizure operation on 5th August, 2016, on the business premises of the assessee-company, and the search was also conducted on Shri Sanjay Dhawan, an ex-president of the assessee company as well as three-four dealers of the assessee company and some ex-employees of the assessee company. During the course of the search at the residential premises of Shri Sanjay Dhawan, parallel invoices of goods manufactured and sold by the assessee-company were allegedly recovered. The evidence of undervaluation of sales was allegedly in the form of statements of third parties recorded u/s 14 of the Central Excise Act, 1944. There was also allegedly evidence of unaccounted sales and undervaluation of accounted sales made to third parties in the form of e-mail communication between the assessee-company and third parties. The information was passed on by the Intelligence Wing of GST to the Income-tax Department that the assessee-company had been allegedly suppressing its turnover by way of not accounting for the sales by under-invoicing the sales. Relying upon the said information and the said statements, the AO had initiated the reassessment proceedings u/s 147.

During the course of reassessment proceedings, the assessee-company had specifically requested to cross-examine the persons on whose statements the AO had relied. However, the AO brushed aside the request of the assessee for the opportunity to cross-examine these persons by simply observing that since the assessee had no explanation to offer, there was no requirement for giving any such opportunity. The AO proceeded to reject the books of account maintained by the assessee-company u/s 145(3) of the Act and, thereafter, proceeded to complete the assessment after making an addition of ₹31,40,021 on account of additional net profit by applying the net profit rate of 4.42 per cent. The alleged undisclosed sales for the year were computed at ₹3,62,60,331.

Aggrieved, the assessee-company filed an appeal before CIT(A). The CIT(A) upheld the action of the AO in rejecting the books of account but gave partial relief with respect to additional net profit by holding that the average net profit rate of 3.64 per cent was to be applied rather than 4.42 per cent.

Aggrieved, the assessee-company filed an appeal before the ITAT.

HELD

The ITAT had observed that it was an undisputed fact that during the course of search proceedings conducted by the Central Excise Authorities, neither at the premises of the assessee-company nor from any other premises, any other evidence with regard to undisclosed sales was found except for the invoices recovered from the residence of Shri Sanjay Dhawan and the impugned additions on account of the undisclosed / additional net profit on alleged unaccounted sales have been made only on the basis of invoices recovered from the residence of Shri Sanjay Dhawan.

The ITAT also observed that it was an undisputed fact that the assessee-company had specifically requested the AO to provide an opportunity to it to cross-examine these persons but such an opportunity was not granted. The ITAT further observed the following:

i. the assessee–company had demonstrated with ample evidence that Shri Sanjay Dhawan was a disgruntled employee of the company whose intentions were to put the assessee-company into unnecessary financial trouble and litigation,

ii. that the allegation that the unrecorded goods were being transported by vehicles owned by the assessee-company is incorrect in as much as it was physically impossible for the same vehicle to have delivered goods at two different stations within a short span of time on the same day, when time is required not only for movement of goods from one station to another but time is also required for loading and unloading of goods,

iii. that the statement of one of the ex-employees was in contradiction to the statement of Shri Sanjay Dhawan and the Income-tax authorities had relied on both, which does not hold good.

The ITAT observed that the denial of cross-examination by the Income-tax authorities has a significant bearing on the final outcome of this batch of appeals for the simple reason that the AO has relied upon those statements which had been recorded at the back of the assessee and the assessee was not given any opportunity to effectively rebut. The department had failed to follow the cardinal principle of providing adequate opportunity for rebuttal of evidence being sought to be relied upon. The ITAT had relied on the following decisions:

i. Andaman Timber Industries vs. CCE [2015] 62 taxmann.com 3/52 GST 355 (SC),

ii. CIT vs. Rajesh Kumar [2008] 172 Taxman 74/306 ITR 27 (Delhi.),

iii. CIT vs. Dharam Pal Prem Chand Ltd [2008] 167 Taxman 168 / [2007] 295 ITR 105 (Delhi HC),

iv. Prakash Chand Nahta vs. CIT [2008] 170 Taxman 520 / 301 ITR 134 (Madhya Pradesh HC).

The ITAT held that in the absence of such cross-examination having been allowed to the assessee-company and also in view of no incriminating material having been recovered from any of the premises searched; coupled with the fact that the assessee-company had filed an FIR against Shri Sanjay Dhawan and the statement of ex-employee itself stated that the parallel invoices used to be destroyed after the delivery of the consignments, the Income-tax authorities should not have placed complete reliance without any corroborative evidence on such statements.

In the result, the appeal filed by the assessee-company was allowed.

BCAJ Admin

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

32. Vishnu DattatrayaPonkshe vs. CPC

ITA No.: 1570/Mum./2023

A.Y.: 2017–18

Date of Order: 29th August, 2023

Sections: 44AD, 44ADA

Income from the business of consultancy qua stamp duty and registration would not be liable for taxation u/s 44ADA. The action of the assessee in offering profits of such business u/s 44AD was upheld.

FACTS

The Assessee e-filed its return of income declaring income, u/s 44AD of the Act, @8 per cent on receipts of ₹8,30,800 from the business of consultancy qua stamp duty and registration. The amount of ₹8,30,800 included the receipt of ₹4,81,280 on which TDS was deducted u/s 194J of the Act (fees for professional and technical services), and therefore, the AO / CPC added the income @50 per cent u/s 44 ADA of the Act, which resulted in making the addition of ₹2,40,640.

Aggrieved, the Assessee preferred an appeal to CIT(A), who by taking into consideration that all the deductors are big corporates and deducted tax u/s 194J of the Act, construed that the receipts of ₹4,81,280 related to professional and technical services and are covered u/s 44ADA of the Act and, therefore, taxable @50 per cent. The Commissioner ultimately computed the total income of the Assessee to the tune of ₹2,68,640 (₹2,40,640 + ₹27,982 @8 per cent of ₹3,49,500) and restricted the income of ₹3,49,500 u/s 139(1) of the Act to the tune of ₹2,68,602 only.

HELD

The Tribunal observed that the amount of ₹4,81,280 on which TDS was deducted u/s 194J of the Act, in fact, is part of the total receipt of ₹8,30,800 on which the Assessee has declared income @8 per cent u/s 44AD. However, both the authorities below applied the provisions of section 44ADA of the Act, which deals with persons carrying on legal, medical, engineering or architectural profession or profession of accountancy, technical consultancy or interior decoration or any other profession as is notified by the Board in the official gazette. The Tribunal noted that, admittedly, the Assessee is just a 10th/matriculation passed and does not have any qualification to act as a legal, medical, engineering or architectural professional or professional accountancy or technical consultancy of interior decoration or any other profession as is notified by the Board in the official gazette, as prescribed u/s 44AA of the Act.

The Tribunal held that the Assessee’s case does not fall under the provisions of section 44ADA of the Act. It deleted the addition of R2,40,640 sustained by the Commissioner.

BCAJ Admin

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

31. ND’s Art World Pvt Ltd vs. ACIT

ITA No.: 6850/Mum./2019

A.Y.: 2016–17

Date of Order: 23rd August, 2023

Sections: 56(2)(viib), Rule 11UA

Where valuation, as done by a registered valuer, vide a valuation report furnished by the assessee is rejected, the AO should refer the valuation to Departmental Valuation Officer (DVO).

FACTS

The assessee, a company engaged in the business of art direction, set construction, studio and equipment hire, filed its return of income on 17th October, 2016, declaring a total income of ₹8,41,17,500. The Assessing Officer (AO) vide order passed u/s 143(3) of the Act determined the total income at ₹23,68,86,730 by making various additions / disallowances.

During the year under consideration, the assessee had issued 1,780 shares of a face value of ₹10 at a premium of ₹98,280 per share. On perusal of the financials called for, the AO noticed that the assessee had in the financial year relevant to A.Y. 2015–16 revalued upwards the assets held by the assessee and had created a revaluation reserve. The immovable assets in the balance sheet pertained to land situated at Karjat along with the other assets, buildings, sets, etc., which were shown at WDV. Should the assessee while computing the book value of the assets for determining the fair market value of the shares consider the book value or should it be a revalued amount which is not reduced by the upward revaluation of the assets. The AO held that the assessee has increased the value of the assets in the previous year by creating an upward revaluation, and as a result, has determined the higher price per share. The AO stated that the valuer had not considered the prevailing stamp duty value at the time of the valuation of the land and building of the assessee and had not specified as to what methodology or reference was made to substantiate the value of the assets. According to the AO, the valuer has merely arrived at the market value of the land at ₹6,500 per square feet without considering the value of the land, current market price and various other criteria and has also not made a comparable analysis of nearby land sold during that period. The AO stated that the valuer has not justified the charging of an additional premium in his report and has merely increased the value of the sets and buildings which are depreciable assets, the value of which does not increase over a period of time. A similar observation was made by the AO on the value of the vehicles, plant and machinery, office equipment, etc., which are properties subject to depreciation. The AO held that the assessee has failed to substantiate the increase in the value. The AO further stated that the Rule 11UA specifies that the revaluation of the assets is not to be considered for the calculation of the share premium.

The AO calculated the fair market value of the shares after removing the revaluation value of the assets and arrived at the share price of ₹17,815 per share as against the assessee’s determination of the value per share amounting to ₹80,465. He made an addition to the difference of share premium of ₹80,465 per share aggregating to ₹14,33,27,700 u/s 56(2)(viib) of the Act on the grounds that the premium value under Rule 11UA cannot be taken using the revaluation of the assets, thereby recomputing the premium value at ₹17,815 per share as against the assessee’s valuation of ₹98,280 per share.

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 where it was contended, on behalf of the assessee, that theassessee would not be covered u/s 56(2)(viib) of the Act for the reason that the shares were transferred only amongst the family members of the assessee, and the assessee is a company. So then how can it have relatives? And even otherwise, neither the AO nor the CIT(A) has referred the matter to the DVO for the purpose of determining the valuation of the assets. It was submitted that Rule 11UA does not mention that the revaluation reserve is to be reduced and that only Rule 11UAA inserted w.e.f. 1st April, 2018, lays down the Rules for valuation and that Rule 11UAA was not applicable to the assessee for the impugned year. Reliance was placed on the decision of the coordinate bench in the case of DCIT vs. Pali Fabrics Pvt. Ltd. [2019] 110 taxmann.com 310 (Mum)(Trib).

HELD

The Tribunal noted that the DR contended that AO had challenged the validity of the valuation report and that the AO is entitled with the power of the valuer and can determine the value himself. Without prejudice, he stated that this issue may be remanded to the file of the AO for determining the valuation after referring the same to the DVO. The DR relied on the decision of the Delhi Tribunal in the case of Agro Portfolio Pvt Ltd vs. ITO [(2018) 94 taxmann.com 112 (Del Trib)].

The Tribunal observed that the difference of share premium was added u/s 56(2)(viib) of the Act since the AO has rejected the valuation determined by the assessee as per the valuation report submitted by the assessee vide letter, dated 13th December, 2018. The AO further has failed to accept the valuation report of the assessee for the reason that the valuer has not adopted any methodology or reference for the purpose of calculation of the land value without considering the factors such as value of the land as per stamp authority, land market price, location factors and the value at which the neighbouring lands were sold during that period, etc. It is observed from the said fact that the AO has not referred the said matter for valuation to the DVO while he has merely rejected the valuation report submitted by the assessee. The Tribunal found it pertinent to point out that the lower authorities have failed to exercise the option of referring the matter to the DVO for the purpose of valuation of the assets which are very much within the purview of the jurisdiction of the lower authorities.

The Tribunal considered it fit to remand this issue back to the file of the AO for the purpose of valuation of the assets by referring the same to the DVO and to consider the said issue in light of the valuation report of the DVO.

BCAJ Admin

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

30. DCIT vs. Smt. Aruna Chandhok

ITA No.: 387/Del./2021

A.Y.: 2015–16

Date of Order: 5th September, 2023

Sections: 56(2)(vii)(c)

Provisions of section 56(2)(vii)(c) are not applicable on receipt of bonus shares / bonus units.

FACTS

The assessee, an individual, filed her return of income for the A.Y. 2015–16 on 16th October, 2015, declaring income under the head salary, house property, capital gains and other sources.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the previous year relevant to the assessment year under consideration, received bonus shares and bonus units from Tech Mahindra Ltd. and JM Arbitrage Advantage Fund – Bonus options. The assessee was given a show cause as to why the value of these bonus shares and bonus units should not be added u/s 56(2)(vii)(c) of the Act. The assessee submitted that the provisions of section 56(2)(vii)(c) are not applicable to bonus shares / bonus units as these are received on capitalisation of profits. The value of the shares would remain the same, and there would be no increase in the wealth of the shareholders on account of bonus shares and his percentage of holding the shares in the company remains constant. Pursuant to bonus shares and bonus units, the share / unit gets divided in the same proportion for all the shareholders. There would be no receipt of any property by the shareholder and what is received is only split shares out of her own holding. Reliance was placed on the decision of the Supreme Court in the case of CIT vs. General Insurance Corporation Ltd [286 ITR 232 (SC)], which held that the issuance of bonus shares by a company does not result in any inflow of fresh funds and nothing comes to the shareholders. It was also submitted that the market price of any share after the bonus issue gets reduced almost in proportion to the bonus issue, and hence, there would be no increase in the market value of shares held by the assessee pursuant to the bonus issue. The overall wealth of a shareholder post-bonus or pre-bonus remains the same. Hence, the assessee received no additional benefit or income on the allotment of bonus shares, because it is only a split of his total rights in the wealth of a company, which remains the same even after the bonus issue.

The AO did not accept the contentions made by the assessee and taxed ₹36,10,63,656 u/s 56(2)(vii)(c) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who distinguished the decisions relied upon by the AO and relied on the decision of the Delhi Tribunal, dated 27th January, 2017, in the case of Meenu Satija vs. PCIT. The CIT(A) held that the AO had misread the judgment of the Bangalore Bench of the Tribunal in the case of Dr Rajan Pai.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD
The Tribunal held that bonus shares are issued on capitalisation of existing reserves of the company. It noted that the AO had not disputed that the overall wealth of the shareholder post-bonus or pre-bonus remains the same. Having held so, the Tribunal observed that it was wrong on the part of the AO to invoke section 56(2)(vii)(c) on the grounds that there is a double benefit derived by the assessee due to the bonus shares. The Tribunal noted that the issue is covered by the ratio of the decision of the Karnataka High Court in the case of PCIT vs. Dr. Ranjan Pai in ITA No. 501 of 2016, dated 15th December, 2020. The Tribunal held that the CIT(A) had rightly appreciated the contentions of the assessee.

The Tribunal not finding any infirmity in the order of the CIT(A) dismissed the grounds of appeal filed by the revenue and upheld the relief granted by the CIT(A) to the assessee.

BCAJ Admin

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

18. Principal Commissioner of Income Tax – 31 vs. Indravadan Jain, HUF

[Income Tax Appeal No. 454 OF 2018; Dated: 12th July, 2023; A.Y.: 2005-06; (Bom.) (HC)]

Section 68 of the Act — Long term capital gain treated by AO as unexplained cash credit.

Assessee had shown sale proceeds of shares in scrip RamkrishnaFincap Ltd (RFL) as long-term capital gain and claimed exemption under the Act. The Respondent had claimed to have purchased this scrip at ₹3.12 per share in the year 2003 and sold the same in the year 2005 for ₹155.04 per share. It was AO’s case that investigation revealed that the scrip was a penny stock and the capital gain declared was held to be accommodation entries. A broker BasantPeriwal & Co. (the said broker) through whom these transactions have been effected had appeared and it was evident that the broker had indulged in the price manipulation through a synchronised and cross-deal in the scrip of RFL. SEBI had also passed an order regarding irregularities and synchronised trades carried out in the scrip of RFL by the said broker. In view thereof, the Assessee’s case was reopened under Section 148 of the Act.

The AO did not accept the Respondent’s claim of long-term capital gain and added the same to the Assessee’s income under Section 68 of the Act. While allowing the appeal filed by the Assessee, the CIT[A] deleted the addition made under Section 68 of the Act.

The Tribunal while dismissing the appeals filed by the Revenue observed on facts that these shares were purchased by the Assessee on the floor of the Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange.

The Honourable High Court observed that the CIT[A] and ITAT had observed that the AO himself has stated that SEBI had conducted an independent enquiry in the case of the said broker and in the scrip of RFL, through whom the Assessee had made the said transaction, and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in RFL. The lower authorities also did not find anything wrong in the Assessee doing only one transaction with the said broker in the scrip of RFL. The lower authorities concluded that the Assessee brought 3000 shares of RFL, on the floor of the Kolkata Stock Exchange through a registered share broker. In pursuance of the purchase of shares, the said broker had raised an invoice and the purchase price was paid by cheque and the Assessee’s bank account has been debited. The shares were also transferred into the Assessee’sDemat Account where it remained for more than one year. After a period of one year, the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to the sale of shares, the said broker had also issued contract notes cum bill for the sale, and these contract notes and bills were made available during the course of Appellate proceedings. On the sale of shares, the Assessee effected delivery of shares by way of Demat instructions slip and also received payment from the Kolkata Stock Exchange. The cheque was deposited in the Assessee’s bank account. In view thereof, it was found that there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act. The ITAT therefore, rightly concluded that there was no merit in the appeal. In view thereof, the Appeal of Revenue was dismissed.

BCAJ Admin

Section 37: Business expenditure — Commission payment — Wholly and exclusively for the purpose of the business — Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Assessee.

16. The Indian Hume Pipe Co. Ltd Construction House vs. Commissioner of Income Tax, Central II
[ITXA No. 744 OF 2002; Dated: 31st August, 2023; (Bom.) (HC)]

Section 37: Business expenditure — Commission payment — Wholly and exclusively for the purpose of the business — Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Assessee.

The Appellant-Assessee is a limited company listed on the stock exchange and is engaged mainly in the business of manufacturing and sale of R.C.C. Pipes, Steel Pipes etc., which are required for water supply and drainage systems. In the course of the assessment proceedings, the Appellant filed details of commission paid amounting to Rs. 26,90,104. The Appellant also filed copies of the agreements with the aforesaid parties and justified the allowability of the commission payment as business expenditure incurred in the course of its business. The Assessing Officer disallowed a sum of Rs. 22,89,941 on account of commission payment claimed as a deduction by the Appellant-Assessee.

The Assessing Officer disallowed the whole amount with respect to some parties and balance parties; the Assessing Officer allowed only 1/3rd as deductible expenditure and disallowed balance 2/3rd on the ground that the entire payment cannot be considered as laid out wholly and exclusively for the purpose of the business because neither the Appellant nor the recipients of commission could show that orders were procured with their assistance.

The Commissioner of the Income Tax (Appeals) disposed of the said appeal. With respect to ground relating to the disallowance of commission payment, the Commissioner (Appeals) followed his own order for the A.Y. 1985-86 and allowed the whole of the amount which was disallowed by the Assessing Officer, that is, Rs. 22,89,941.

Being aggrieved by the aforesaid order, the Respondent-Revenue filed an appeal to the Tribunal. The Tribunal disposed of the said appeal relating to the commission payment, and the Tribunal restricted disallowances to 2/3rd of the total commission. With respect to one party, the Tribunal directed to give relief of 1/3rd of the amount and with respect to other remaining parties, the Tribunal confirmed the disallowance made by the Assessing Officer on the ground that the Appellant-Assessee did not furnish any evidence in support of services rendered by these commission agents. The Tribunal further observed that there should have been a lot of correspondence between the Appellant-Assessee and the recipient of commission and in the absence of any evidence in this regard, the disallowance made by the Assessing Officer was justified. Being aggrieved by the Tribunal’s order, the Appellant-Assessee filed the appeal on a substantial question of law before the Hon. High Court.

The Appellant-Assessee consolidated appeals for A.Ys. 1986-87, 1987-88 and 1988-89 against common order passed by the Income Tax Appellate Tribunal, dated 18th January, 2002, was admitted on the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal’s conclusion that the commission agents had not rendered services to the Appellant company to warrant payment of commission is based on relevant and valid material and is sustainable in law?”

The Appellant-Assessee further contended that the commission agents are not related to the Appellant and further they have also produced the commission agreements with these agents in the course of the assessment proceedings. The payments have been made through a banking channel and there is no allegation that payments made to the commission agent have come back to the Appellant. The Appellant further submitted that the nature of services is such that there would not be any documentary evidence in support thereof.

The Respondent-Revenue contended that the Appellant-Assessee has failed to furnish any evidence to show that services have been rendered and therefore, the Assessing Officer was justified in disallowing the commission. The Respondent also brought to the notice of the Court Explanation 1 to Section 37(1) of the Act which was introduced by the Finance No. 2 Act of 1998 with retrospective w.e.f. 1st April, 1962. However, he fairly submitted that in the present appeal, the case of the Revenue is not based on Explanation.

The Hon. High Court held that the Assessing Officer, with respect to 4 parties, disallowed 2/3rd of the commission payment on the ground that the Appellant-Assessee could not furnish evidence about the services having been rendered. With respect to 3 parties, the AO disallowed the whole of the commission payment on the ground that they were acting as sub-contractors to the Appellant-Assessee and therefore no question arises to make payment of commission to these parties. With respect to 1, there was a discrepancy in the figures paid by the Appellant-Assessee and confirmed by the recipient and therefore the full amount was disallowed. The said disallowance was fully deleted by the First Appellate Authority. The Hon. Court observed that the Assessing Officer and the Tribunal both have not fully disallowed the commission payment but as partly allowed (1/3rd) and partly disallowed (2/3rd). If that be so, then the lower authorities have accepted the rendering of service by the commission agent and it is only on that basis that 1/3rd came to be allowed by the Assessing Officer and the Tribunal. The Court observed that the services are either rendered or not rendered and the Assessing Officer and the Tribunal having allowed partly the commission payment clearly indicate that both the authorities have accepted that the services have been rendered. The part disallowance confirmed by the Tribunal and the Assessing Officer would then amount to the Revenue venturing into the quantum of payment whether the commission payment was reasonable for rendering the services, which course of action, in the facts of the present case, is not permissible under the Act because the transaction is between unrelated parties. It is a settled position that the Revenue cannot sit in judgment over the assessee to come to a conclusion on how much payment should be made for the services received by the Appellant-Assessee. Therefore, the Tribunal was not justified in confirming the disallowance of 2/3rd as made by the Assessing Officer and allowing the relief of only 1/3rd of the expenses.

The Court further noted that there was no allegation made in the assessment order of any flow back of the commission payment by the commission agent to the Appellant-Assessee. The commission agents had confirmed the receipt of the commission. The payments had been made through banking channels. Therefore, even on this account, the genuineness of the payment cannot be doubted.

The AO and the Tribunal were not justified in bifurcating the commission payment between the work done for assisting in getting the tender and the follow up action for obtaining the payment. The agreement has to be read as a whole and merely because the payment of the commission is deferred in tranches, it could not be said that partly the payments are justified and partly are not justified. The action of the Assessing Officer and the Tribunal on this account would amount to rewriting of the agency agreement which is not permissible. Therefore, the finding of the officer and the Tribunal for disallowing part of the commission payment on the above basis was also not justified.

The Court further observed that the Appellant-Assessee was in the business, which inter alia involves
contracts / works awarded by the public sector/government, which necessitates the Appellant to apply for various tenders issued by the public sector co. / government across the country. To apply for such public tenders the Appellant is required to engage the services of agents. As per the commission agency agreement, the services rendered by the commission agent are for supplying information for working out the tender and to give information about the competitive tenders. The said agreement further requires the commission agent to keep the Appellant-Assessee informed about various clarifications required by the companies who floated the tenders. The role of the commission agent does not stop at this, but if the Appellant-Assessee gets the contract, then the commission agent has to follow up with these corporations for realising the payments on account of bills raised by the Appellant-Assessee. It is for such composite services to be rendered by the commission agent that the Appellant-Assessee makes payment of the commission.

The Court observed that merely because the contracts awarded to the Appellant are by Government / Public Corporations does not mean that the Appellant-Assessee cannot obtain services of the commission agents to assist them in the tendering process and for the follow-up action for recovery of the money. For the Appellant, it is fully a commercial activity and engaging expert/specialised services is under a written contract entered between the commission agents and the Appellant. It was not the case of the Revenue that there is any legal prohibition for the Appellant-Assessee to avail services of such commission agents. It was also not the case of the Revenue that these commission agents within the meaning of the Act are entities/persons related to the Appellant-Assessee and/or they are government employees. Therefore, it was the business prerogative of the Appellant-Assessee as to whose services they should engage in the course of its business and on what terms and conditions. Most significantly, the fact that the Assessing Officer and the Tribunal have allowed part of the commission payment for the purpose of business also indicates that the Revenue has accepted the services rendered and this part of expenditure in that regard was held to be allowable. There cannot be a contradictory course of action as the Revenue needs to be consistent.

It was true that it is for the Assessing Officer to decide, whether, any commission paid by the Appellant-Assessee to his agents is wholly or exclusively for the purpose of his business and the mere fact that the Appellant-Assessee establishes the existence of an agreement between him and his agent and the fact of actual payment, the discretion of an officer to consider, whether such expenditure was made exclusively for the purpose of the business is not taken away. The expenditure incurred must be for commercial expediency. However, in applying for the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be judged from the businessman’s point of view and not from the Revenue’s perspective. In view thereof, the appeal of the Assessee was allowed.

BCAJ Admin

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

17. Sofitel Realty LLP vs. Income Tax Officer (TDS) – Ward 2(2)(4)

[WP (L) No. 14574 OF 2023

Dated: 18th July, 2023; (Bom.) (HC)]

Section: 276B r.w.s 278B of the Act — Offence and prosecution — Prosecution to be at the instance of Chief Commissioner / Commissioner (Compounding of Offences) — Whether there is no limitation provided under sub-section (2) of section 279 for submission or consideration of compounding application.

The Petitioner, a Limited Liability Partnership firm, for the period of A.Y. 2009-2010, for various reasons did not deposit the TDS amount that it had deducted with the income tax authorities. Petitioner deposited those TDS amounts on or about 23rd March, 2010 beyond the time provided for deposit. This was before Petitioners even received a show cause notice from the department. Thus there was no outstanding amount of TDS.

Petitioner and its partners received the show cause notice, dated 30th November, 2011 calling upon Petitioners to show cause as to why prosecution against them be not lodged for an offence under Section 276B read with Section 278B of the Act. On 26th March, 2012, Petitioners filed a compounding application, dated 5th March, 2012, (first application) in the prescribed format. As the Petitioners failed to deposit the compounding fees in time, therefore, the Petitioner’s application, dated
5th March, 2012, came to be rejected.

On 26th August, 2013, PCIT passed a sanction order for initiation of prosecution against Petitioners. A complaint was filed before the Metropolitan Magistrate, 38th Court at Esplanade under Section 276B read with Section 278B of the Act. On 14th July, 2014, Petitioner no.1 paid the entire compounding fees of ₹7,39,984/- as was indicated by the department. On 8th October, 2015, Petitioner filed a fresh compounding application (second application) and also agreed to pay any further or additional compounding fees as may be directed. Almost three years later, on 21st September, 2018, the Petitioner received a letter, dated 17th September, 2018, annexing the copy of the order, dated 17th July, 2013. The Petitioner addressed a letter requesting the department to provide a copy of the order passed in the second application. In response, the Petitioner received a letter, dated 13th April, 2023.

In the affidavit in reply filed through one Shashi Shekhar Singh, Income Tax Officer (TDS)-2(2)(4) Mumbai, affirmed on 7th July, 2023, it is stated that compounding application, dated 8th October, 2015, is barred by limitation of time as per the compounding guidelines, dated 23rd December, 2014 issued by CBDT. In paragraph 8(vii), it is provided that in respect of offences for which complaint had been filed with competent court 12 months prior to the receipt of the application for compounding, such offences generally not be compounded. According to the affiant, since a complaint had been filed on 20th August, 2013, and the fresh compounding application, dated 8th October, 2015, was beyond the period of 12 months, the application is null and void.

The Honourable Court observed that it is not for the Income Tax Officer to decide the compounding application. Section 279(2) of the Act provides that any offence under chapter XXII of the Act may, either before or after the institution of proceedings, be compounded by the Principal Chief Commissioner of Income Tax or Commissioner of Income Tax or Principal Director General of Income Tax or Director General. The Income Tax Officer has no power to even state that the application is null and void.

There is no limitation provided under sub-section (2) of Section 279 of the Act for submission or consideration of the compounding application. What is relied upon by the Income Tax Officer is the Guidelines issued by the Central Board of Direct Taxes (CBDT). CBDT by the Guidelines cannot provide for limitation nor can it restrict the operation of sub-section (2) of Section 279 of the Act. The Guidelines are subordinate to the principal Act or Rules, it cannot override or restrict the application of specific provisions enacted by the legislature. The Guidelines cannot travel beyond the scope of the powers conferred by the Act or the Rules. It cannot contain instructions or directions curtailing a statutory provision by prescribing the period of limitation where none is provided by either the Act or the rules framed thereunder. Moreover, the explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main Section. The Court observed that just because the first application was rejected for default, does not mean the second application should be rejected.

The Court further observed that the compounding application cannot be rejected on the grounds of delay in filing the application. Moreover, there is also no restriction on the number of applications that could be filed. The only requirement under sub-section (2) of Section 279 of the Act is that the complaint filed should be still pending.

The Court directed the compounding application to be disposed of within eight weeks, the proceedings pending before the Additional Chief Metropolitan Magistrate, 38th Court, Mumbai shall remain stayed until the department disposes of the Petitioner’s compounding application, dated 8th October, 2015.

BCAJ Admin

Revision — Powers of Commissioner — Bonafide mistake by assessee including exempt income in the computation of income — Time for filing revised return barred — No restriction on the power of Commissioner to grant relief — Orders rejecting applications of the assessee for revision unsustainable — Matter remanded to Commissioner for reconsideration.

50. Ena Chaudhuri vs. ACIT

[2023] 455 ITR 284 (Cal.)

A.Ys. 2007–08 and 2008–09

Date of order: 18th January, 2023

Section 264 of ITA 1961

Revision — Powers of Commissioner — Bonafide mistake by assessee including exempt income in the computation of income — Time for filing revised return barred — No restriction on the power of Commissioner to grant relief — Orders rejecting applications of the assessee for revision unsustainable — Matter remanded to Commissioner for reconsideration.

For the A.Ys. 2007–08 and 2008–09 the assessee inadvertently offered to tax exempted income relating to dividend and long-term capital gains and realized this only upon receipt of the order passed u/s. 143(1) of the Income-tax Act, 1961. Since the filing of the original return itself was delayed she could not file a revised return u/s. 139(5) for claiming a deduction of the exempted income and therefore, she filed revision applications u/s. 264 before the Commissioner. The Commissioner held that since the orders passed u/s. 143(1) were not erroneous, that since the original returns of income were filed beyond the specified dates the assessee was debarred from filing revised returns and dismissed the revision applications.

The Calcutta High Court allowed the writ petitions filed by the assessee and held as under:

“i) On the facts, the Commissioner had committed an error in law in dismissing the revision applications of the assessee filed u/s. 264 by refusing to consider on the merits the claim of the assessee that the income in question was exempted from tax and not liable to tax and was included in her return as taxable income due to a bona fide mistake and which she could not rectify by filing revised return since original return itself was belatedly filed and that she had no other remedy except filing of revision applications u/s. 264.

ii) The Commissioner while refusing to consider the claim of the assessee had misinterpreted Goetze (India) Ltd and also the scope of jurisdiction conferred upon him u/s. 264 by equating it with that of the jurisdiction of the Assessing Officer in considering the claim of any allowance or deduction claimed by an assessee in the return of income or without filing any revised return.

iii) The orders of the Commissioner u/s. 264 rejecting the revision applications of the assessee for the A.Ys. 2007–08 and 2008–09 were unsustainable and accordingly set aside. The matters were remanded back to the Commissioner for reconsideration.”

BCAJ Admin

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