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Year: 2023

Recovery of tax — Stay of demand — Application for stay pleading financial hardship — Plea should be considered and speaking order passed thereon.

49. Tungabhadra Minerals Pvt Ltd vs. Dy. CIT
[2023] 455 ITR 311 (Bom.)
A.Y. 2008–09: Date of order: 30th September, 2022

Recovery of tax — Stay of demand — Application for stay pleading financial hardship — Plea should be considered and speaking order passed thereon.

Pursuant to search and seizure against the assessee u/s. 132 of the Income-tax Act, 1961, the assessment for A.Y. 2008-09 was completed u/s. 143(3) r.w.s. 153A of the Act after making an addition of R264.59 crores and consequently demand of R239.54 crores was raised. The assessment order was challenged in an appeal before the CIT(A) which was pending.

The assessee filed a stay application on 30th July, 2021 requesting for a stay of demand on the ground that the assessment order was bad and illegal. The assessee also pleaded financial difficulty. The assessing officer rejected the assessee’s application for stay of demand vide order dated 11th August, 2021 without assigning any reasons.

The assessee made an application before the Principal Commissioner largely on the grounds of financial stringency. However, vide order dated 17th November, 2021, the Principal Commissioner did not accept the plea of the assessee and directed the assessee to make payment of 10 per cent of the demand on or before 15th December, 2021. While passing the order, the Principal Commissioner did not deal with the assessee’s request for a stay on the basis of financial distress. Therefore, the assessee once again on 6th December, 2021 filed application before the Principal Commissioner categorically pointing out financial stringency and prayed for stay of demand. The application was once again rejected by the Principal Commissioner vide his order dated 29th December, 2021 and concluded that 10 per cent of the tax was required to be paid by the assessee.

The assessee filed a writ petition and challenged that order. The Bombay High Court allowed the writ petition and held as under:

“i) In an application for stay of demand, the aspect of financial hardship is one of the grounds which is required to be considered by the authority concerned and the authority concerned should briefly indicate whether the assessee is financially sound and viable to deposit the amount or the apprehension of the Revenue of non-recovery later is correct warranting deposit.

ii) In the assessee’s application dated 30th July, 2021 the assessee had asserted a categorical case of financial hardship. However, the Assessing Officer rejected the assessee’s application for stay of the demand, without assigning any reasons. The assessee approached the Principal Commissioner praying for the stay of the demand, reiterating the specific grounds in that regard contending that the Assessing Officer had not applied his mind to the aspect of financial stringency. However, the fate of the petition before the Principal Commissioner was not different. Although other issues on the merits had been considered by the Principal Commissioner, there were no reasons in the context of financial hardship, in both the orders passed by the Principal Commissioner being orders dated 11th August, 2021 and an order dated 29th December, 2021. Both orders were not valid.

iii) The Principal Commissioner of Income-tax is directed to hear the petitioner(s) on the stay application on the specific plea of the petitioner in regard to financial stringency and after granting an opportunity of hearing to the petitioner(s), pass an appropriate order on such issue. Let such exercise be undertaken as expeditiously as possible and in any case within two months from today.

iv) In the meantime, till a fresh decision on such an issue is taken, the impugned demands in question, relevant to these petitions, shall not be acted upon by the respondents.”

Recovery of tax — Interest for failure to pay tax — Waiver of interest — Effect of 220(2A) — Advance tax paid in time but mistakenly in the name and PAN of minor son — Amount credited to assessee’s account — Assessee co-operating in inquiry relating to assessment and recovery proceedings — Assessee entitled to complete waiver of interest.

48. FuaadMusvee vs. Principal CIT

[2023] 455 ITR 243 (Mad.)

A.Ys. 2009-10 and 2011-12

Date of order: 9th February, 2023

Section 220(2A) of ITA 1961

 

Recovery of tax — Interest for failure to pay tax — Waiver of interest — Effect of 220(2A) — Advance tax paid in time but mistakenly in the name and PAN of minor son — Amount credited to assessee’s account — Assessee co-operating in inquiry relating to assessment and recovery proceedings — Assessee entitled to complete waiver of interest.

The assessee, an individual, filed his returns of income for A.Y. 2009-10 declaring a total income of ₹88,37,380 and for A.Y. 2011-12 declaring a total income of ₹87,10,242. In the return of income, the assessee included the income of his minor son as per the provisions of section 64 of the Act. However, out of abundant caution, the assessee also filed the return of his minor son separately. The advance tax on the minor’s income was paid under the PAN of the minor son. The assessee, in his return of income, claimed credit of taxes paid of ₹21,27,450 and ₹25,41,037 which included the advance tax paid and tax deducted at source on account of the minor son also.

The return was processed u/s.143(1) of the Income-tax Act, 1961 and demand was raised since the credit for advance tax paid by the assessee in the PAN of the minor son was not granted. The assessee was informed that credit cannot be given for the amount paid under a different PAN and was asked to file a rectification application u/s. 154 of the Act.

However, since the assessee had paid the tax amounts, the assessee claimed a waiver of tax amounts and a total waiver of interest of ₹12,20,380 and ₹8,15,179 u/s. 220(2) of the Act for the period 29th December, 2012 to 25th November, 2018 as the assessee had paid the tax in 2011 itself, albeit under the PAN of the minor son. It was the contention of the assessee that since the amount was with the Department for all these years, there was no basis for the demand of interest. The Principal Commissioner, vide order dated 31st March, 2022 granted only a 20 per cent waiver of interest and directed the assessee to pay the balance of 80 per cent.

Aggrieved by the order of the Principal Commissioner, the assessee filed a writ petition before the Madras High Court. The High Court allowed the writ petition and held as follows:

“i) There was no lapse on the part of the assessee in the payment of his taxes and he had not committed any default; the taxes deposited under the assessee’s minor son’s account were duly credited to the assessee’s account immediately on the date of remittance. The petitioner had certainly suffered genuine hardship for no fault of his. Hence, interest could not be levied u/s. 220(2) of the Act when the advance taxes were in fact paid on time though mistakenly in the assessee’s minor son’s permanent account number.

ii) It was also not the case of the Department that the assessee did not cooperate in any enquiry relating to the assessment or any proceedings for recovery of the amount due from him. The Principal Commissioner had granted a partial waiver of interest to the assessee at 20 per cent without giving any reason as to how he arrived at that rate. There was no finding given by the Principal Commissioner that the assessee had not satisfied the three conditions required for waiver of interest u/s. 220(2A). He ought to have granted full waiver of the interest to the assessee, but, instead, erroneously had granted only a 20 per cent. waiver by non-speaking orders.”

Recovery of tax — Private Company — Recovery from the director — Non-recovery not shown to be attributable to neglect, misfeasance or breach of duty on the part of the assessee — Tax is not recoverable from Director.

47. Geeta P. Kamat vs. PCIT

[2023] 455 ITR 234 (Bom.)

A.Ys. 2008-09 and 2009-10

Date of order: 20th February, 2023

Sections 179 and 264 of ITA 1961

Recovery of tax — Private Company — Recovery from the director — Non-recovery not shown to be attributable to neglect, misfeasance or breach of duty on the part of the assessee — Tax is not recoverable from Director.

A show cause notice was issued upon the assessee u/s.179 of the Income-tax Act, 1961 (“the Act”) requiring the assessee to show cause why recovery proceedings should not be initiated upon her in her capacity as the director of Kaizen Automation Private Limited (KAPL) for the A.Ys. 2008–09 and 2009–10 due to non-recovery of taxes despite the attachment of the bank account.

In response to the show cause notice, the assessee submitted that the non-recovery of taxes could not be attributed to any gross neglect, misfeasance, breach of duty on her part in relation to the affairs of the company. The assessee contended that even though she was the director of KAPL, she neither had any control over the affairs of the company nor did she have any authority or independence to take decisions for the benefit of the company. Further, the assessee did not have any authority to sign any cheques on behalf of the company. No functional responsibility was assigned to her or her husband who was also a shareholder and director in the company.

The Assessing Officer passed the order u/s. 179 of the Act rejecting the contentions of the assessee and held that the assessee had failed to prove that she was not actively involved in the management of the company for the F.Ys. 2007–08 and 2008–09 and that there was no gross neglect misfeasance or breach of duty on the part of the assessee.

Against the said order, the assessee filed a revision application u/s. 264 of the Act which was rejected on the ground that the assessee was a director for the relevant assessment years and hence was liable.

The assessee filed a writ petition challenging the order passed u/s. 179 of the Act. The Bombay High Court, allowing the petition held as follows:

“i) If the taxes due from a private company cannot be recovered, then the same can be recovered from every person who was a director of a private company at any time during the year. Such a director can absolve himself if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

ii) The assessee had discharged its burden by bringing material on record to demonstrate a limited role in the company and lack of authority in the management of the company.

iii) The assessing officer had not placed any material on record to controvert the material placed on record by the assessee based on which the assessee could be held to be guilty of gross neglect misfeasance or breach of duty in regard to the affairs of the company.

iv) Theassessee having discharged the initial burden, the assessing officer had to show how the assessee could be attributed to gross neglect, misfeasance or breach of duty.

v) The order passed u/s. 179 by the assessing officer and the revision order passed u/s. 264 by the Principal Commissioner on similar grounds were unsustainable.”

Reassessment — Condition precedent — Service of valid notice — Notice sent to secondary email id though active primary email id given in the last return — No proper service of notice — Notice and subsequent proceedings and order set aside.

46. Lok Developers vs. Dy. CIT

[2023] 455 ITR 399 (Bom.)

A.Ys. 2015-16 to 2017-18: Date of order: 15th February, 2023

Sections 144, 144B, 147, 148, 156 of ITA 1961

Reassessment — Condition precedent — Service of valid notice — Notice sent to secondary email id though active primary email id given in the last return — No proper service of notice — Notice and subsequent proceedings and order set aside.

The petitioner a registered partnership firm which was carrying on a real estate development business. Notices u/s. 148 of the Income-tax Act, 1961 for reopening of assessment was served upon the secondary email id as per the PAN Card i.e., on LOKTAX2008@REDIFFMAIL.COM, and not on the primary registered email id i.e., loktax201415@rediffmail.com. The Petitioner filed writ petitions and challenged the reassessment notices dated 28th March, 2021, for the A.Ys. 2015–16, 2016–17 and 2017-18 issued u/s. 148 of the Act, the show-cause notice for proposed variation in the draft assessment order dated 25th March, 2022 and assessment order under section 144B read with section 144, notice of demand under section 156.

The Bombay High Court framed the following questions for consideration:
“Whether subsequent proceedings initiated by the Revenue authorities for non-compliance of notice under section 148 of the Income-tax Act would be vitiated on account of notice under section 148 of the Act being served on the secondary email id registered with permanent account number (PAN) instead of the registered primary e-mail id or updated e-mail id filed with the last return of income?”

The High Court allowed the writ petition and held as follows:

“i) The Assessing Officer ought to have considered the primary email id furnished by the assessee in the return filed for the A.Y. 2020–21 and had erred in issuing a notice on the secondary email id when there was a primary email id. The secondary email id had to be used as an alternative or in such circumstances when the authority was unable to effect service of any communication on the primary id. There was no prudence in issuing an email to the secondary email address. The Assessing Officer ought to have sent the notice under section 148 of the Income-tax Act, 1961 to both the primary email address and the e-mail address mentioned in the last return of income filed to pre-empt a jurisdictional error on account of valid service.

ii) The assessee was not wrong in refusing to participate in a proceeding vitiated by lack of valid service of notice. Accordingly, the notice u/s. 148 and all consequential proceedings including the notice for proposed variation in income and assessment order u/s. 144B read with section 144 were quashed and set aside. The Assessing Officer was at liberty to proceed with the assessment after issuance of fresh notice in accordance with law.”

Reassessment — Notice u/s. 148 — Limitation — Law applicable — Effect of amendments by Finance Act, 2021 — Notice barred by limitation under un-amended provisions — Notice issued on 30th July, 2022 to reopen assessments for A.Y. 2013-14 and A.Y. 2014-15 — Not valid.

45. SumitJagdishchandra Agrawal vs. Dy. CIT

[2023] 455 ITR 216 (Guj.)

A.Ys. 2013–14 and 2014–15: Date of order: 20th March, 2023

Sections 147, 148, 148A and 149 of ITA 1961

Reassessment — Notice u/s. 148 — Limitation — Law applicable — Effect of amendments by Finance Act, 2021 — Notice barred by limitation under un-amended provisions — Notice issued on 30th July, 2022 to reopen assessments for A.Y. 2013-14 and A.Y. 2014-15 — Not valid.

In the present petitions filed under article 226 of the Constitution, the respective petitioners have called in question the notices issued by Respondent No. 2. Assessing Officer u/s. 148 of the Income-tax Act, 1961 seeking to reopen the assessment in respect of A.Ys. 2013–14 and 2014–15 and the corresponding orders u/s. 148A(d) of July 2022. The challenge is on the basis of limitation. The notices u/s. 148 of the Act were originally issued under the un-amended provisions during the period April to June 2021 and were treated as show-cause notices u/s. 148A(b) of the Act in the light of the decision of the Supreme Court in Union of India vs. Ashish Agarwal [2022] 444 ITR 1 (SC); [2023] 1 SCC 617, and thereupon, the order u/s. 148A(d) was passed in July 2022.

The Gujarat High Court allowed the writ petitions and held as under:

“i) Section 147 of the Income-tax Act, 1961, empowers the Assessing Officer to reassess the income of the assessee subject to the provisions of sections 148 to 151 of the Act in case any income chargeable to tax has escaped assessment. Section 149 deals with the time limit for notice. By the Finance Act, 2021, passed on 28th March, 2021, and made applicable with effect from 1st April, 2021, section 148A was brought into force and section 149 was also recast. The first proviso to section 149 of the Act as introduced by the Finance Act, 2021, inter alia, stipulated that no notice u/s. 148 shall be issued at any time in a case for the assessment year beginning on or before 1st day of April 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provision as it stood immediately before the commencement of the Finance Act, 2021. Due to the pandemic of 2020 the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 was passed. Various notifications were issued from time to time extending the time limits prescribed u/s. 149 of the Act for issuance of reassessment notice u/s. 148. The 2020 Act is a secondary legislation. Such secondary legislation would not override the principal legislation, the Finance Act, 2021. Therefore, all original notices u/s. 148 of the Act referable to the old regime and issued between 1st April, 2021, and 30th June, 2021, which stand beyond the prescribed permissible time limit of six years from the end of A.Y. 2013–14 and A.Y. 2014–15, would be time barred.

ii) The notices u/s. 148 of the Act relatable to the A.Y. 2013–14 or the A.Y. 2014–15, as the case may be, were beyond the permissible time limit, and therefore, liable to be treated as illegal and without jurisdiction.”

Reassessment — Notice — Charitable purpose — Registration — Law applicable — Effect of amendment of section 12A Charitable institution entitled to an exemption for assessment years prior to registration — Reassessment proceedings for earlier years cannot be initiated on account of non-registration.

44. Prem Chand Markanda SD College for Women vs. ACIT(E)

[2023] 455 ITR 329 (P&H)

A.Y. 2015-16: Date of order: 31st January, 2023

Sections 147 and 148 of ITA 1961

Reassessment — Notice — Charitable purpose — Registration — Law applicable — Effect of amendment of section 12A Charitable institution entitled to an exemption for assessment years prior to registration — Reassessment proceedings for earlier years cannot be initiated on account of non-registration.

The assessee was a society registered under the Registrar of Societies, Punjab running a college exclusively for girls since 1973. The assessee got substantial aid from the State Government in the shape of reimbursement of staff salary and therefore, prior to A.Y. 2016–17, it was entitled to blanket exemption from income tax in terms of clause (iiiab) of s.10 (23C) of the Income-tax Act, 1961.

The assessee apprehended that it may not fulfill the condition given under Rule 2BBB, which required that for institutions to be substantially financed, the percentage of government grant should not be less than 50 per cent and therefore, the assessee applied for registration u/s. 12AA on 28th March, 2016, before the competent authority. The assessee was granted registration vide order dated 30th September, 2016, which was applicable from A.Y. 2016–17 onwards until withdrawn by the Commissioner. The assessee again applied for fresh registration as per 12AB of the Act. Vide order dated
15th October, 2021, the assessee was again registered for a period of five years from A.Y. 2022–23 to A.Y. 2026–27.

Subsequently, on 16th March 2022, the assessee received a notice u/s. 148A(b) of the Act for reopening the assessment for A.Y. 2015–16 on account of bank interest and cash deposit in two of its bank accounts. In response to the notice, the assessee relied upon the third proviso to 12A(2) to contend that there was a bar to take action u/s. 147 for A.Y. preceding the year in which registration was granted. The objections were rejected vide order dated 29th March, 2022 and notice u/s. 148 of the Act was issued.

The assessee filed a writ petition challenging the notices issued under 148A(b) and section 148 of the Act. The Punjab and Haryana High Court allowed the writ petition and held as under:

“i) Once the reply filed by the assessee pursuant to the notice had been rejected without examining the third proviso to section 12A(2) relegating the assessee to the alternative remedy would not be appropriate. After issuance of notice u/s. 148A(b) objections were filed by the assessee which were dismissed. A notice u/s. 148 for reopening the assessment u/s. 147 was issued wherein no reference was made to the third proviso to section 12A.

ii) Registration of the assessee was granted and was applicable from the A.Y. 2016–17. The registration was valid for claiming the benefit under sections 11 and 12. No proceedings u/s. 147 could be initiated for the A.Y. 2015–16. Hence, the show-cause notice u/s. 148A(b), the consequent order u/s. 148A(d) and the notice u/s. 148 being contrary to the third proviso to section 12A(2) of the Act, are set aside.”

Interest on refund — Additional Interest — Law applicable — Delay in granting refund pursuant to order of Tribunal as affirmed by the Court — Assessee is entitled to refund with interest and additional interest — Compensation awarded if process not completed within the prescribed period.

43. Bombardier Transportation India Pvt Ltd vs. DCIT

[2023] 455 ITR 278 (Guj.)

A.Y. 2005-06: Date of order: 23rd January, 2023

Sections 244 and 244A of ITA 1961

Interest on refund — Additional Interest — Law applicable — Delay in granting refund pursuant to order of Tribunal as affirmed by the Court — Assessee is entitled to refund with interest and additional interest — Compensation awarded if process not completed within the prescribed period.

The assessee filed an appeal against the order of penalty u/s 201(1) of the Income-tax Act, 1961. The CIT(A) confirmed the penalty of ₹ 97,59,312. The assessee paid an amount of ₹ 90,46,000 in the F.Y. 2006–07. The Tribunal vide order dated 17th April, 2009 quashed the penalty levied upon the assessee. The department’s appeal before the High Court was dismissed vide order dated 4th August, 2016.

The assessee filed a complaint before the CPGRAMS on 19th June, 2017 for not giving effect to the order of the Tribunal and the High Court and for non-issuance of the refund. Though the replies were received on 11th June, 2017 and 2nd August, 2017, there was no whisper on the refund. Thereafter, on 16th October, 2017, 28th February, 2018, 7th March, 2018, 12th March, 2018, 16th March, 2018, 10th April, 2018 and 11th April, 2018 yet another complaint was filed before the CPGRAMS. The assessee submitted the details for the processing of the refund. However, the refund was not granted.

In such circumstances, due to the non-action on the part of the Department despite several complaints, the assessee filed a writ petition before the Gujarat High Court and prayed that the Assessing Officer be directed to give the refund due to the assessee and the interest and additional interest u/s. 244A due to the assessee shall be paid to the assessee.

The High Court allowed the petition and held as follows:

“i) Sub-section (1) of section 244A of the Income-tax Act, 1961 provides for interest on delayed refund and sub-section (1A) inserted by the Finance Act, 2016 provides for additional interest.

ii) Two separate portals being available for day-to-day functions for the processing of returns of income and for the processing of the returns or statements of tax deducted at source could not be the reason for the court to overlook the period of five years that had been taken by the Department after the tax appeal had been decided by the court on 4th August, 2016 and there had been no further challenge by the other party. The Department was not sure of the exact outstanding demand against the assessee. Even if there had been a manual deposit prior to the online process sufficient time of five years had been taken by the Department.

iii) With regard to the refund to be returned with the interest, sub-section (1A) inserted in section 244A had to be applied prospectively for the period of delay after the introduction of the relevant statutory provision. Under sub-section (1) of section 244A the Department had to grant interest at the statutory rate and both the provisions, sections 244 and 244A, applied and the Department had to grant the refund accordingly.”

Charitable Trusts Exemption – Application in India or Purposes in India

ISSUE FOR CONSIDERATION

Under the provisions of section 11(1)(a), a charitable or religious trust is entitled to exemption of income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India.

An issue has arisen before the courts as to whether exemption is available for such trusts in cases where income is spent outside India for the benefit of charitable purposes in India. In other words, whether for a valid exemption, the application of income is required to be made in India or it is sufficient that the purpose for which the income is applied is in India in order to be eligible for the benefit of exemption.

While the Delhi High Court has taken the view that the spending or application has to be in India, a contrary view has been taken by the Karnataka High Court, holding that the application has to be for purposes in India.

NATIONAL ASSOCIATION OF SOFTWARE AND SERVICES COMPANIES’ CASE

The issue first came up before the Delhi High Court in the case of DIT(E) vs. National Association of Software and Services Companies 345 ITR 362.

In this case, the assessee, an association of Indian software companies, had spent Rs. 38,29,535 on
events / activities in connection with an exhibition in Germany. The assessee had claimed such amount as an application of income for charitable purposes, as it was in pursuance of its objects of promotion of the Indian software industry. The Assessing Officer (AO) did not allow such amount as an application of income, on the grounds that expenditure on activities outside India was not eligible to be treated as an application of income for charitable purposes under section 11(1)(a). The Commissioner (Appeals) upheld the order of the AO.

Before the Tribunal, on behalf of the assessee, it was argued that while the AO and the CIT(A) were of the view that the expenditure should have been incurred in India in order to be eligible for exemption, it was not the case of the Revenue that the expenditure incurred was not for the purpose of the charitable activities of the assessee. The fact that the expenditure was incurred for attaining the objects of the assessee’s trust was not in dispute and the dispute centred only on the issue that the expenditure had been incurred outside India and not in India. The provisions of section 11(1)(a) envisaged the grant of exemption with respect to income applied for attaining the charitable purpose. Even though section 11(1)(a) used the word “in India”, what was intended was that the income was to be applied to such purpose in India, i.e., the purpose of the expenditure should be to attain the charitable objects in India. The expenditure need not be incurred in India and the benefit of the expenditure incurred should give the charitable benefit in India. If any expenditure was incurred even outside India to achieve the charitable objects in India, it should be allowed as application, as it had been expended for advancing charitable objects in India and for fulfilling the charitable purpose in India. The assessee was primarily looking after the interests of software development and software growth in India. The expenditure had been incurred outside India for attaining the primary objects of the assessee’s trust for the promotion and export of software for India which, needless to say, was advancement of charitable object in India and the fulfilment of charitable purpose in India.

Before the Tribunal, it was further argued on behalf of the assessee that it was the software industry in India which benefited from the expenditure incurred by the assessee on the event in Hanover, Germany. In fact, by incurring the expenditure which had compulsorily to be incurred at the event in Hanover, Germany, no other person had got any benefit whatsoever, other than the Indian software industry on whose behalf and for whom the charitable activities were carried out. Further, it was pointed out that in section 11(1)(a), the words “in India” followed the words “to such purpose” and the words used were not “applied in India”. The legislature intended that the application should be in India, it would have specifically stated so, which was conspicuous by the absence of the words “in India” after “applied”. On behalf of the assessee, reliance was placed on the decision of the Tribunal in the case of Gem & Jewellery Export Promotion Council vs. ITO 68 ITD 95 (Mum), wherein it was held that even if the expenditure was incurred outside India, but it was for the benefit of charitable purposes in India, it was an application of income for the purposes of section 11(1)(a).

The Tribunal observed that the fact the legislature had put the words “to such purposes” between “is applied” and “in India” showed that the application of income need not be in India, but that the application should result in and be for the charitable and religious purpose in India. It noted that the Revenue did not dispute that the benefit of the expenditure was derived in India. It, therefore, held that expenditure outside India was an application of income for the purposes of section 11(1)(a).

Before the Delhi High Court, on behalf of the Revenue, it was argued that the expenditure, even if it was considered as an application of income, was outside India, and the mandate of the section was that the income should be applied in India to charitable purposes. The said condition not having been satisfied, it was urged that the Tribunal was wrong in holding that expenditure incurred outside India should be considered as an application of income of the trust in India.

The Delhi High Court referred to section 4(3)(i) of the Indian Income Tax Act, 1922, and its amendment with effect from 1st April,1952. It noted the observations of the Supreme Court in the case of H E H Nizam’s Religious Endowment Trust vs. CIT 59 ITR 582, where the Court noted and contrasted the differences pre- and post-amendment. The Supreme Court observed:

“Under the said clause, trust income, irrespective of the fact whether the said purposes were within or without the taxable territories, was exempt from tax in so far as the said income was applied or finally set apart for the said purposes. Presumably, as the state did not like to forgo the revenue in favour of a charity outside the country, the amended clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories.”

The Delhi High Court noted that prior to 1st April, 1952, there was no difference between an application of income of the trust within and outside the taxable territories. The amendment after 1952 made a reference to application or accumulation for application of income to such religious or charitable purposes as relate to anything done within the taxable territories. Dealing with the argument on behalf of the assessee that these words clearly showed that the charitable purposes must be executed within the taxable territories, and that it was immaterial where the income was actually applied, the Delhi High Court observed that it was difficult to conceive of a situation under which the charitable purposes were executed within the taxable territories but the income of the trust was applied elsewhere in the implementation of such purposes.

According to the Delhi High Court, the position was put beyond doubt by the proviso to section 4(3)(i) of the 1922 Act, which stated that the income of the trust would stand included in its total income if it was applied to religious or charitable purposes without the taxable territories. This was indicative of the object of the main provision — in the main part it was provided that the income should be applied for religious or charitable purposes within the taxable territories and in the proviso, an exception was carved out to provide that if the income was applied outside the taxable territories, even though for religious or charitable purposes, the trust would not secure exemption from tax for such income. The Delhi High Court also noted that the provisions of section 11(1)(c) of the 1961 Act were similar to the provisions of the proviso to section 4(3)(i) of the 1922 Act, and therefore, the Supreme Court’s observations applied to section 11(1)(c) of the 1961 Act as well.

The Delhi High Court was also of the view that the interpretation canvassed on behalf of the assessee was opposed to the natural and grammatical meaning that could be ascribed to the language of the section. The Court noted that the term “income applied to such purposes in India” answers three questions which arise in the mind of the reader: apply what? applied to what? and where? According to the Court, the answer to the first question would be: apply the income of the trust, the answer to the second question would be: applied to charitable purposes, and the answer to the third question would be: applied in India. Therefore, according to the Delhi High Court, grammatically also it would be proper to understand the requirement of the provision that the income of the trust should be applied not only to charitable purposes but also applied in India to such purposes. The Delhi High Court rejected the submissions on behalf of the assessee that the words “in India” qualified only the words “such purposes” so that only the purposes were geographically confined to India, stating that that did not appear to be the natural and grammatical way of construing the provision.

The Delhi High Court also observed that if the assessee’s interpretation was correct, then section 11(1)(c) would become redundant and otiose. If the income of the trust could be applied even outside India, so long as the charitable purposes were in India, then there was no need for a trust which tended to promote international welfare in which India to apply to the CBDT for a general or special order directing that the income, to the extent to which it was applied to the promotion of international welfare outside India, should not be denied the exemption. The Delhi High Court was, therefore, of the view that the words “in India” appearing in section 11(1)(a) and the words “outside India” appearing in section 11(1)(c) qualified the word “applied” appearing in those provisions and not the words “such purposes”.

Dealing with the assessee’s argument that the Court would be changing the group of words appearing in section 11(1)(a) by displacing the words “in India” and transposing them between the words “applied” and the words “to such purposes”, redrafting the clause as “to the extent such income is applied in India to such purposes”, the Delhi High Court observed that it would make no difference to the meaning to be ascribed to the group of words. In that case, perhaps the meaning would have been brought out in still more precise or clear terms, but there were different ways of expressing the requirement that the income of the trust should be applied in India in order to get an exemption. Even assuming that the language was not sufficiently expressive of the idea, the Court should be able to set right and construe the provision in the manner in which it made sense, unless by such construction, there resulted an absurdity which could not be countenanced at all. Looking at the history of the provision, according to the Delhi High Court, it could not be said that by construing section 11(1)(a) in the manner that the requirement was that the income of the trust should be applied in India for charitable or religious purposes, it was doing any violence to the provisions nor could it be said that the Court was condoning an absurd result.

The Delhi High Court referred to various decisions of the Supreme Court and the House of Lords for the proposition that the statute should be read literally, by giving the words used by the Legislature their ordinary, natural and grammatical meaning and the construction of section 11(1)(a) by the Court was in accordance with the rules laid down in the judgments cited by it.

The Court then dealt with the assessee’s arguments that the time had now come to take a fresh look at the section. Having regard to the globalisation of commerce and the vast strides made in cross-border trade and flight of capital, it was the need of the hour to shed conservative thinking on the subject and adopt a bold and innovative approach, by dispensing with the requirement that the application of the income of the trust should be in India in order to secure exemption for the trust. On behalf of the assessee, it had been claimed that this could be achieved by construing or interpreting the section in the manner suggested on behalf of the assessee. The Delhi High Court stated that what was contended by the assessee was not without force or merit, but that the Court was required to interpret the statute as it was, and not in the manner in which it thought the law ought to be. Further, according to the Court, in the matter of exemption from tax in an all-India statute, judicial restraint, and not innovativeness or novelty, might be the proper approach to follow.

The Delhi High Court, therefore, held that since the application of income was outside India, such expenditure was not eligible to be considered for exemption of the income as an application of income for charitable purposes in India.

A similar view was taken by the Madras Bench of the Tribunal, but in a reverse situation, in the case of Bharat Kalanjali vs. ITO 30 ITD 161 (Mad). In that case, the assessee had paid travel expenses in India to an Indian travel agency to send a troupe for dance performances abroad. The tour was organised by the Government of India at the request of the foreign government. In the said case, the Tribunal held that the expression “applied to such purposes in India” referred only to the situs of the expenditure and not to the place where the purposes were carried out, and the fact that the troupe gave the performance abroad was not a disqualification for treating the amount actually spent in India as application for charitable purposes in India.

OHIO UNIVERSITY CHRIST COLLEGE’S CASE

The issue again came up before the Karnataka High Court in the case of CIT(E) vs. Ohio University Christ College 408 ITR 352.

In this case, the assessee was a charitable trust registered under section 12A. It conducted MBA programs in India in collaboration with Ohio University, USA. The assessee trust had entered into an agreement with Ohio University, USA, whereby Ohio University sent its faculty to the assessee’s premises in India for teaching purposes, for which the assessee made payment to Ohio University for providing the faculty and other support services. In terms of the agreement, the assessee was required to pay a sum of USD 9,000 per student for the 18 months duration of the course (i.e., USD 3,000 per student for a 6-month period). At the end of the year, as the payments had not yet been made, the assessee had provided for / accrued the amount in its books of account, and the actual remittance was made in the subsequent year, from India to the overseas university. The assessee had claimed application of income in respect of expenditure incurred / provided by it, which included faculty teaching charges payable to Ohio University, USA.

The AO disallowed the claim of such faculty teaching charges payable to Ohio University on the grounds that mere making of an entry could not be considered as an application of income. The income had to be applied for charitable purposes only in India, and that the assessee had not proven that the payments made to Ohio University resulted in charitable purposes in India.

The CIT(A) allowed the assessee’s claim, observing that the application should be for charitable purposes in India, and if the payment was made outside the country in furtherance of charitable purposes in India, it could be counted as an application for charitable purposes in India.

Before the Tribunal, on behalf of the Revenue, it was submitted that the assessee had only made entries in the books of accounts in the relevant periods and had not utilised or spent the amount during the year. The actual payment of the same had happened in the subsequent year only, and as such, there was no application of income during the relevant year under consideration. It was submitted that the phrase “such income is applied to such purposes in India” appearing in section 11(1)(a) of the Act connoted “actual payment”, and since it had not happened, the assessee was not entitled to treat the provision as application of income.

On behalf of the assessee, it was urged that the assessee had actually incurred the said expenditure towards faculty teaching charges payable to Ohio University, USA, and therefore, it should be considered as having been applied under section 11(1)(a). It was submitted that the AO had misdirected himself in holding that the amounts had to be actually spent in the year under consideration for it to be considered as application of income. It was submitted that even if the payment was earmarked and allocated for charitable purposes, it should be taken to be applied for charitable purposes.

It was further submitted on behalf of the assessee, in response to the inquiry / contention that merely because the payment was made outside India, it did not mean that the charitable purpose was outside India. It was submitted that the charitable activities were rendered in India and just because the payment was made to parties outside India, it did not change the fact that the charitable activities were carried out in India. Reliance was placed on the decisions of the Income Tax Appellate Tribunal in the cases of Gem & Jewellery Export Promotion Council vs. Sixth ITO 69 ITD 95 (Mum) and National Association of Software & Services Companies vs. Dy. DIT (E), 130 TTJ 377 (Delhi).

The Tribunal noted that the services had been rendered by faculty members from Ohio University as the classes were taken in Bangalore. The services had been utilised for the trust’s objectives in India, viz., of imparting higher education in India. Ohio University had also offered the income earned by it from the assessee trust to tax in India. It was therefore clear that the activities of the assessee trust were conducted in India in accordance with its objects.

As regards the payments being made out of India, the Tribunal concurred with the view of the CIT(A) that merely because the payments were made outside India, it could not be said that the charitable activities were also conducted outside the country. The Tribunal further held that the decisions of the Mumbai and Delhi Tribunals (overruled on a different point) cited before it on behalf of the assessee squarely applied to the case before it.

The Tribunal further rejected the AO’s view that a specific exemption was required from CBDT for making a claim of application of income. The Tribunal noted that the said requirement had been specified only for those trusts that had as its objects, the promotion of international welfare. In the case of the assessee, the objects of charitable activities for imparting higher education in India had already been approved by the Department while granting the registration to the assessee trust.

Further holding that the amounts debited to the income and expenditure account, which were not actually disbursed during the year but in a subsequent year, amounted to application of income during the year, the Tribunal, therefore, held that the faculty charges payable to Ohio University amounted to an application of income for charitable purposes in India.

In further appeal, the Karnataka High Court took the view that the Tribunal had rightly held that section 11(1)(a) did not employ the term “spent” but used the term “applied” and the latter term had a wider connotation. The Karnataka High Court also held that the findings of the Tribunal, relying upon the decision of the Supreme Court in the case of CIT vs. Thanthi Trust 239 ITR 502 and High Court judgments in the case of CIT vs. Trustees of H E H the Nizam’s Charitable Trust 131 ITR 479 (AP) and CIT vs. Radhaswami Satsang Sabha 25 ITR 472 (All), were correct and justified. The Karnataka High Court, therefore, upheld the view taken by the Tribunal, holding that the amount of faculty charges payable to Ohio University amounted to application of income for charitable purposes in India.

OBSERVATIONS

The Delhi High Court, in holding that for an expenditure to be qualified as an application, the expenditure should be incurred in India, has decided the matter based on a strict grammatical interpretation of the language of the section and based on the history of the section. The Karnataka High Court, though not faced with a case where the activity for which expenditure was incurred was performed outside India, has adopted a more purposive interpretation in the matter by holding that the objective of the exemption was to encourage charitable organisations to do charity in India — i.e., to benefit beneficiaries in India, and therefore, the mere fact that the amount was actually disbursed outside India should not make any difference, so long as the purpose of doing charity in India was achieved.

As regards the history of the section referred to by the Delhi High Court, by referring to the Supreme Court decision, it is to be noted that the language of section 4(3)(i) was “in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories”. This language indicates that the action of the charitable activities for which expenditure is incurred has to be within India, and not the actual payment. As regards the distinction noted by the Supreme Court before the 1952 amendment and post the 1952 amendment, the words used are “to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories”. The present provisions of section 11 are not as explicit to exclude an overseas payment for an expenditure incurred for the benefit made available in India.

It is important to note that one of the observations made by the Delhi High Court while analysing these observations, which seems to have partially led it to take the view that it did, was that it was difficult to conceive of a situation under which the charitable purposes were executed within the taxable territories but the income of the trust was applied elsewhere in the implementation of such purposes. The classic illustration of this is the situation which was before the Karnataka High Court — where the teaching was actually in India to Indian students but only the expenditure was remitted outside India.

An angle, though not relevant to the issue under consideration, is a confirmation by the Karnataka High Court that application could arise on accrual itself, and actual payment may take place at a later point in time. What is relevant for the issue under consideration is where the accrual of the expenditure took place — if the obligation in respect of the expenditure arose in India, due to approval of the expenditure in India and agreement to incur the expenditure in India, the mere fact that the payee is outside India should not impact the fact that application of the income was in India.

In the context of the issue of accrual and payment, the decisions noted with approval by the Karnataka High Court in the cases of Thanthi Trust (supra), H E H the Nizam’s Charitable Trust (supra), and Radhaswami Satsang Sabha (supra) all support the view that application does not necessarily mean the same thing as actually paid — the mere fact of payment outside India in the context should, therefore, not impact the fact that application is in India, particularly where the decision to incur the expenditure is taken in India, is approved and agreed upon in India and the services or goods are actually utilised for activities carried out in India for the benefit of beneficiaries in India.

In conclusion, we notice that there are two distinct situations: one where the amount is paid outside India for an overseas activity, and a second where the amount is paid outside India for an activity performed in India. In our respectful opinion, once the benefit for the payment, wherever made, is located / received / found in India, the application should be treated as eligible for exemption from tax, and the place of receipt of payment and the performance of the activity should not be an obstacle in the claim.

Glimpses of Supreme Court Rulings

46. CIT vs. AbhisarBuildwell Pvt Ltd
(2023) 454 ITR 212 (SC)

Search and seizure — Assessment u/s 153A —Procedure – (i) In case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments / reassessments shall stand abated; (iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments, meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961 — however, the completed / unabated assessments can be reopened by the AO in exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged / mentioned under sections 147 / 148 of the Act and those powers are saved.

According to the Supreme Court, the question posed for its consideration was, as to whether in respect of completed assessments / unabated assessments, whether the jurisdiction of AO to make an assessment is confined to incriminating material found during the course of search under section 132 or requisition under section 132A or not, i.e., whether any addition could be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act or not.

The Supreme Court noted that it was the case on behalf of the Revenue that in case of search under section 132 or requisition under section 132A, the assessment has to be done under section 153A of the Act. The AO thereafter has the jurisdiction to pass assessment orders and to assess the ‘total income’ taking into consideration other material, even though no incriminating material is found during the search in respect of completed/unabated assessments.

The Supreme Court, at the outset, noted that various High Courts, namely, Delhi High Court, Gujarat High Court, Bombay High Court, Karnataka High Court, Orissa High Court, Calcutta High Court, Rajasthan High Court and the Kerala High Court have taken the view that no addition can be made in respect of completed / unabated assessments in absence of any incriminating material. The lead judgment was by the Delhi High Court in the case of Kabul Chawla (2016) 380 ITR 573 (Del), which had been subsequently followed and approved by the other High Courts, referred to hereinabove. One another lead judgment on the issue was the decision of the Gujarat High Court in the case of Saumya Construction (2016) 387 ITR 529 (Guj), which had been followed by the Gujarat High Court in the subsequent decisions, referred to hereinabove. Only the Allahabad High Court in the case of Principal CIT vs. MehndipurBalaji (2022) 447 ITR 517 (All) had taken a contrary view.

The Supreme Court observed that before the insertion of section 153A in the statute, the relevant provision for block assessment was under section 158BA of the Act. The erstwhile scheme of block assessment under section 158BA envisaged assessment of ‘undisclosed income’ for two reasons: firstly, there were two parallel assessments envisaged under the erstwhile regime, i.e., (i) block assessment under section 158BA to assess the ‘undisclosed income’ and (ii) regular assessment in accordance with the provisions of the Act to make assessment qua income other than undisclosed income. Secondly, the ‘undisclosed income’ was chargeable to tax at a special rate of 60 per cent under section 113, whereas income other than ‘undisclosed income’ was required to be assessed under regular assessment procedure and was taxable at the normal rate. Therefore, section 153A came to be inserted and brought into the statute. Under the section 153A regime, the legislation intended to do away with the scheme of two parallel assessments and tax the ‘undisclosed’ income also at the normal rate of tax as against any special rate. Thus, after the introduction of section 153A and in case of search, there shall be block assessment for six years. Search assessments / block assessments under section 153A are triggered by conducting a valid search under section 132. The very purpose of the search, which is a prerequisite / trigger for invoking the provisions of sections 153A / 153C is the detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in the ordinary course of regular assessment. Thus, the foundation for making search assessments under sections 153A / 153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of the search.

According to the Supreme Court, on a plain reading of section 153A of the Act, it was evident that once a search or requisition is made, a mandate is cast upon the AO to issue a notice under section 153A to the person. The notice would require such person to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year, relevant to the previous year in which such search is conducted or requisition is made, and assess or reassess the same.

The Supreme Court noted that as per the provisions of section 153A, in case of a search under section 132 or requisition under section 132A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years. However, as per the second proviso to section 153A, the assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate. As per sub-section (2) of section 153A, if any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or section 153A, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the CIT. Therefore, according to the Supreme Court, the intention of the legislation seemed to be that in case of search, only the pending assessment /reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period / block assessment period. The intention did not seem to be to reopen the completed / unabated assessments, unless any incriminating material is found with respect to the concerned assessment year falling within the last six years preceding the search. The Supreme Court, therefore held that, on the true interpretation of section 153A of the Act, 1961, in case of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material collected during the search and other material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income. However, in case during the search no incriminating material is found, in case of completed / unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147 / 148 of the Act, subject to fulfillment of the conditions mentioned in sections 147 / 148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case of block assessment under section 153A in case of unabated / completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147 / 148 of the Act has to be saved, otherwise, the Revenue would be left without a remedy.

The Supreme Court further held that if the submission on behalf of the Revenue in the case of search even where no incriminating material is found during the course of the search in case of unabated / completed assessment, the AO can assess or reassess the income / total income taking into consideration the other material, is accepted then there will be two assessment orders, which shall not be permissible under the law.

For the reasons stated hereinabove, the Supreme Court was in complete agreement with the view taken by the Delhi High Court in the case of Kabul Chawla (supra) the Gujarat High Court in the case of Saumya Construction (supra) and the decisions of the other High Courts taking the view that no addition can be made in respect of the completed assessments in absence of any incriminating material.
In view of the above and for the reasons stated above, the Supreme Court concluded as under:

(i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A;

(ii) all pending assessments / reassessments shall stand abated;

(iii) in case any incriminating material is found / unearthed, even, in case of unabated / completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and

(iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments / unabated assessments. This means, with respect to completed/unabated assessments, no addition can be made by the AO in the absence of any incriminating material found during the course of a search under section 132 or requisition under section 132A of the Act, 1961. However, the completed / unabated assessments can be reopened by the AO in the exercise of powers under sections 147 / 148 of the Act, subject to fulfillment of the conditions as envisaged/mentioned under sections 147 / 148 of the Act and those powers are saved.

47. Maharishi Institute of Creative Intelligence vs. CIT (E)
(2023) 454 ITR 533 (SC)

Charitable Trust — Registration under section 12A — The assessee cannot be denied the exemption in the absence of a certificate of registration, since the year 1987, i.e., from the date on which the assessee applied for registration under section 12A (when there was no requirement of issuance of a certificate of registration), it continued to avail the benefit of registration under section 12A at least up to the A.Y. 2007–08.

The assessee applied for registration under section 12A of the Act as per the provisions of law prevailing in the year 1987. Thereafter, the assessee continued to be granted the exemption under section 12A of the Act.

Till 1987 there was no requirement of issuance of any certificate of registration of section 12A. Only filing an application for registration under section 12A and processing the same by the Department was sufficient. However, in the year 1997, there was an amendment, which required the issuance of the certificate of registration under section 12A also.

Despite the above, the assessee even after 1997 continued to avail of the exemption under section 12A of the Act even post 1987 till the A.Y. 2007-08.

The AO considering the facts as in earlier years up to 2007-08 and based on the registration under section 12A in the year 1987, granted the benefit of exemption under section 12A and accordingly passed an assessment order for the A.Y. 2010-11.

The assessment order came to be taken under suomotu revision by the CIT in the exercise of powers under section 263 of the Act. The CIT set aside the assessment order on the ground that the AO mechanically granted the benefit of exemption under section 12A without in fact verifying whether any registration in favour of the assessee was issued under section 12A of the Act or not. Therefore, the CIT thought that the assessment order was against the interest of the Revenue.

In appeal, at the instance of the assessee, the Tribunal set aside the order passed by the CIT.

The order passed by the Tribunal was the subject matter of appeal before the High Court at the instance of the Revenue. Taking into consideration the amendment in the year 1997, the High Court allowed the appeal preferred by the Revenue and set aside the order passed by the Tribunal by observing that as the assessee had failed to produce the certificate of registration, the assessee was not entitled to the exemption under section 12A.

The assessee filed the review application which was dismissed.

The judgment and order passed by the High Court allowing the appeal preferred by the Revenue were the subject matter of the appeal before the Supreme Court.

The Supreme Court having heard the learned counsel appearing for respective parties noted that it was not disputed that since 1987 i.e. from the date on which the assessee applied for registration under section 12A, the assessee continued to avail the benefit of exemption under section 12A at least up to the A.Y. 2007-08. Even post-1997, the assessee continued to avail of the exemption under section 12A based on its registration in the year 1987.

In that view of the matter, the Supreme Court was of the view that the AO was justified in granting the benefit of exemption under section 12A for the A.Y. 2010-11. According to the Supreme Court, what was required to be considered was the relevant provision prevailing in the year 1987, namely, the day on which the assessee applied for the registration. At the relevant time, there was no requirement for the issuance of any certificate of registration.

The Supreme Court observed that for all these years after 1997 till the year 2007-08, the assessee continued to avail the benefit of exemption solely based on the registration in the year 1987. The Revenue and even the CIT never claimed that in the earlier years there was no certificate of registration or the registration was not granted at all. Even from the material on record, namely, a communication dated 3rd June, 2015 which was considered by the Tribunal, it was apparent that the assessee was granted registration on 22nd September, 1987. Therefore, it could not be said that there was no registration at all.

In view of the above, the Supreme Court held that the impugned judgment and order passed by the High Court was erroneous and unsustainable and was quashed and set aside. The order passed by the Tribunal was restored.

The appeal was accordingly allowed to the aforesaid extent.

BCAS — VOLUNTEERING — MAKING A DIFFERENCE

Dear Readers, BCAJ has completed over five decades of its illustrious journey. Publication of a monthly professional journal is a task in itself, as it entails wholesome responsibility and requires total commitment. BCAJ has had
10 editors so far. As the BCAS is celebrating its 75th year, it would be interesting to read what some of the editors have to share. In tune with the current Office Bearers’ Theme of “Change – Leaders – Charity” for the quarter ending December 2023, this issue carries a write-up by two of the editors who have shared their experiences of volunteering and leading the change. We hope that readers will find it interesting and youngsters will find it inspiring to volunteer with the highest degree of commitment and dependability.

ASHOK DHERE

Chartered Accountant

(Editor from August 2000 to July 2005)

Dear readers,

Our present editor CA Dr Mayur Nayak is making all-out efforts to popularise the journal amongst young professionals, and it is certainly a commendable effort in this special year for our BCAS. He has posed certain questions, and my job is to provide precise answers to the challenges which the B.C.A. Journal is going to face in the years to come. My thoughts are based on his questions but expressed randomly.

1. Immediately after qualifying in the CA examination, I became a member of the BCAS, thanks to the initial guidance and encouragement given by the seniors and active members of the BCAS like Shri Vasantbhai Kishnadwala, who was my teaching staff colleague in N. M. College of Commerce. Both of us were part-time lecturers. My initial attraction to the BCAS was the BCA Journal, which used to give a variety of knowledge and information in capsule form and in a manner helpful to young professionals. My association, therefore, with the BCAS and the journal is over 50 years old. I was first a member of the library committee and then the journal committee sometime in 1974 and the association continues even today, and certainly, it was a pleasure to work in different capacities for the journal.

2. Recently, I read a book on the classic epic Mahabharata. It depicts various characters in Mahabharata from a hitherto unknown angle. The principal lesson that we learn from the book is that the characters in Mahabharat are eternal and depict the sociology and psychology prevailing then and how it is present even today and will also be there tomorrow. It further states that your character is your destiny. By nature, I love working in an academic environment and the BCAS and BCAJ as I see it, is engaged in imparting professional education on a continuous basis. My own character is suited to this environment, and hence, my association with the BCAS was influenced by my character, and that is destiny. Monetary consideration for voluntary work in BCAJ was irrelevant, and its absence was never felt. I was, and I am, a happy and willing volunteer. There was a feeling that we must actively contribute to the educational activity here, and it does benefit us in the long run.

3. An editor of a professional journal has a tremendous responsibility, and it also becomes a delicate task because the principal participants and the contributors are rendering service voluntarily without expectation of any monetary reward. You sacrifice your time and energy because you want to be a partner in a professional development process.

4. Balancing one’s own professional work, the BCAS work and time for family and personal duties is always a tightrope walking. However, this is not only true for CAs, but it is also applicable in all walks of life. How one tackles this depends on an individual’s character. The best thing to do is work with pleasure; if you do it with pleasure, work becomes worship and does not remain a mere idiom.

5. The editor is actively involved in coordination between various contributors, printers and reviewers in a time-bound manner, and it is a task by itself. Each one is hard-pressed for time. Besides general difficulties, there are hidden egos. To manage all this is really the job of an editor. Fortunately, during my term of five years, I got a printer in Madhav Kanitkar who was also a keen student of English literature. Some of us write in vernacular English, which may contain grammatical errors. Madhav used to correct all this without any grumbling or extra charge. Our contributors are all devoted and fine people, but in their busy schedules, maintaining timelines used to pose problems. An editor has to maintain the timeline and also take care of the mood of the contributors. In such a situation, as a human being, at times, he is likely to lose his cool. How to remain cool and how to avoid tensions are things which are not available by way of guidance anywhere, and one has to learn it the hard way, and the editor is no exception to it. He needs to develop that skill. You succeed many times by efforts, but failure also must be tolerated. When I took over the charge, because of a variety of reasons, the monthly posting of the journal used to be delayed. Through the combined efforts of all, I was successful in restoring the timeliness of the journal.

6. My benefit as an editor is my own satisfaction, nothing else. You come in contact with various authors and prominent professionals with whom you develop a good rapport, and you remain updated with professional knowledge, and these are incidental but valuable benefits.

7. I honestly believe that this message to a younger generation is meaningless. This young generation is far more capable and knowledgeable and are masters in this digital world. It is enough that we should give them a feeling that in case they have any difficulty, we are always available for help. Such an assurance, in my opinion, is good enough.

8. The peculiarity of BCAJ is its ability to project the Chartered Accountant as not only a taxing and ticking professional, but as an ‘Independent Business Economic Advisor’. In my opinion, it enhances the reputation as a learned professional. The nature and the contents of the journal are such that it gives us a bird’s eye view of various professional issues.

9. At my age and in the time period I worked as an active professional, voluntary work did give satisfaction and other incidental benefits. The mindset of the younger generation will be different. In a new environment, it is a matter of further examination as to how the younger generation looks at the whole profession. The approach has to be different, and there should not be a cause to grumble.
10. Artificial intelligence is a certainty of the near future, and it is difficult to envisage in what way it will benefit. However, I would like to go with a belief that yesterday was bright, but tomorrow is pregnant with a new hope and a new life which is going to be brighter. There is no point in blowing the trumpet of the past.

11. Attracting youngsters to the journal would be a two-way traffic. We have no other alternative but to make constant improvements in the journal because everyone accepts that change is the only thing which is constant.

12. My best regards and best wishes for the journal.

GAUTAM NAYAK

Chartered Accountant

(Editor from August 2007 to July 2010)

At the request of the BCAJ Editor Mayur Nayak, I have put down a few thoughts on my journey with the Journal, and in particular, my period as the Editor.

I became a member of BCAS immediately after my qualification in January 1986, at the urging of my father, who was also a BCAS life member. I had, of course, become a fan of the BCA Journal during my articleship itself and aspired to one day write for the journal, which I so much admired.

I actually started my articleship two and a half years after my graduation and was therefore keen to learn as much as I could to make up for the lost time, as most of my contemporaries had already qualified as CAs one year after their graduation. While I was initially associated with the Publication Committee of BCAS, I also used to regularly attend study circle meetings as well as lecture meetings, besides attending as many seminars as I could.
Sometime in the late 1980s/early 1990s, I was fortunate to be requested to write reports in the form of summaries of these study circle discussions and lectures for the BCA Journal. Since this was something I was aspiring to do, I gladly took it up, jointly with other members who used to then contribute to these columns. This also gave me the benefit of gathering together and crystallising my thoughts on the subject discussed and cementing my knowledge on the subject. That was how my initial association with the Journal began.

In April 1996, I got the opportunity to join Pradip Kapasi as co-author of the column, ‘Controversy’, beginning a long inning, with both of us continuing as co-authors of this column till today. Writing for this feature has helped me immensely. Reading all case laws on a controversy, analysing the conflicting case laws and then applying one’s mind to arrive at a conclusion, besides discussing the complex issues with my co-author — though all this took a substantial toll on my time, it helped me be prepared for any client advice or representation before tax authorities since I was already aware of the intricacies of issues involved.

I was fortunate to take over the role of Joint Editor of the Journal after my term as President of BCAS, with Mr K C Narang as the Editor, for a couple of years. While I managed the editing of the text and production of the Journal, it was a privilege and treat to see the innovative thoughts and ideas that Mr Narang would come up with for the Journal. Every week, I would get three or four press clippings from him, with some news and his thoughts on how we could build on that for the Journal.

I was then the Editor of the Journal for a period of three years, from 2007 to 2010, with Sanjeev Pandit as my Joint Editor. It was indeed a challenge to live up to the exacting standards set by my predecessor, Mr Narang. When I started off, I was fortunate to have an experienced printer of the Journal, Mr Madhav Kanitkar, who took great pride in ensuring that the final product came out almost perfect in terms of language and layout. BCAS also had a Knowledge Manager, who was a CA Pinky Shah. The experienced Editorial Board, with stalwarts such as Mr K C Narang, Narayanbhai Varma, Kishor Karia, Ashok Dhere, and an enthusiastic convenor, Anup Shah, made my task easier in the initial stages.

Throughout my period as President of BCAS and then Joint Editor and editor of the Journal, I also continued my role as co-author of “Controversy”. Due to this, I ended up spending a substantial amount of time on the journal as a contributor writing for Controversy, chairing the monthly Journal Committee meetings and the Editorial Board meetings, and actually editing the journal every month. I spent about 15 to 20 per cent of my work time on the Journal! Fortunately, since I was by then part of a larger firm, I had a team to support my client work and could afford to spend that time.

More than half a day of the last few days and the first couple of days of each month were devoted to journal activities — writing the editorial, reading the proofs of the full journal, checking the index, coordinating with the printer, etc. Fortunately, being a speed reader, I could achieve all this. I had to plan all my travel to ensure that I was in Mumbai at that time of the month. Many times, my personal time on weekends (Saturdays as well as Sundays) would be taken up by this work. However, I found it thoroughly enjoyable since I would read the journal from cover to cover and thereby enhance my knowledge in the process, too.

The biggest challenge during my period as an editor was sometime in October 2009, when the long-time printer of the journal suddenly disappeared, possibly due to his financial difficulties. For the next two or three months, the production of the journal had to be managed directly with the staff of the printer, who could fortunately still continue with the proofreading, printing and mailing. Simultaneously, we had to finalise a contract with an alternative printer. Fortunately, we were introduced to an experienced printer, Spenta Multimedia, by Shri Narayan Varma. Spenta took over from the February 2010 issue, and we could continue publication of the journal without a break.

Editing the journal was indeed an enriching experience for me — not only in terms of enriching my knowledge, but also learning from and interacting with other stalwarts, contributors and members with whom I worked as a team. I had to necessarily review material on all areas of professional practice and different laws. Often, I would look up the relevant case laws or subjects on Google to verify a proposition or statement made by an author, the correctness of which I was unsure. Ultimately, it was the reputation of the Journal for correctness that was at stake. Today that would be much easier for an Editor with the aid of Artificial Intelligence. In those days, a large part of the production process, particularly the proofs were sent across manually for verification. Today, newer technologies facilitate sharing and speedier processing of data, e.g., online storage on Google Drive or MS One Drive facilitates simultaneous editing of a file by multiple persons working on different aspects of the same article.
The Journal may, of course, have to change to keep up with the changing times. With the younger generation now reading most literature online, with time constraints, and the desire for precise and concise material on any subject, the Journal also has been seeking to meet the challenge by catering to both — its older readership, who still need detailed analysis of a subject in physical form, as well as the younger online readership, who are more comfortable with a shorter, online version. Increasing specialisation has also meant that, sometime in the future, one may need to consider breaking up the journal into parts, each part dealing with a particular area of practice. That would also, of course, perhaps need multiple Editors, each dealing with their own area of specialisation.

Being a part of BCAS over the decades has been a thoroughly enriching experience in terms of gaining knowledge and making friends with other professionals. My experience has been that, so long as one wholeheartedly and sincerely contributes, you get more out of it in return than the loss of time that you devote to supporting it in its activities.

From The President

India is witnessing a telecom and IT revolution, and it is gaining prominence in its contribution to the world economy by providing state-of-the-art products and services to the world.

As per the NASSCOM report, the IT industry has a noticeable impact on improving the efficiency of almost every other segment of the economy.

The rollout of fifth-generation (5G) communication technology and the increasing adoption of artificial intelligence, cloud computing, Big Data analytics, and the Internet of Things (IoT) will further enlarge the size of the IT industry of India at the global level. India, with approximately 55 per cent of the world’s service-sourcing market, is poised to take a big leap in technology transformation in years to come.

However, certain myths about technology often arise from misconceptions, fears, or misunderstandings about how technology works and its impact on society. As technology is impacting our daily lives, it is time to clear certain myths about the use of technology. This myth-busting exercise is to provide insights to the readers on the ease of using technology and coming out of the fear syndrome while using technology in their daily lives.

TECHNOLOGY AND SOME OF ITS MYTHS

1. Myth: “incognito” and “private” keep everything secret
Fact: Incognito simply means the browser won’t keep track of your history, import your bookmarks or automatically log into any of your accounts. Basically, it’s good for keeping other people who use your computer from accessing links to what you’ve been doing. However, it won’t keep your identity hidden from the sites you visit or your ISP.

2. Myth: Leaving your phone unplugged the whole night destroys your battery
Fact: There’s no proof that this damages your phone’s battery in any way. Modern smartphones run on lithium-ion batteries, which are smart enough to stop charging when they’ve reached capacity.

3. Myth: More Megapixel means a better camera
Fact: The quality of an image is determined in large part by how much light the sensor is able to take in. Bigger sensors may come with larger pixels, and the larger the pixel, the more light it can absorb. So, it’s really the size of the pixels that matter as much or more than the sheer number of pixels.

4. Myth: You Shouldn’t shut down your computer every day
Fact: The truth is it’s actually good to turn off your computer regularly.

5. Myth: More Signal bar means more network
Fact: The bars just indicate how close you are to the nearest cell tower. But other factors impact how fast the internet on your phone performs.

6. Myth: Technology Always Makes Life Easier
Fact: While technology can simplify many tasks and improve convenience, it can also make life more complex and demanding. Constant connectivity, for example, can lead to information overload and stress.

7. Myth: Technology will solve all Education Problems
Fact: The belief that technology can completely revolutionise education and replace traditional teaching methods is a common myth. While technology can enhance learning, effective education also relies on skilled teachers and pedagogical strategies.

8. Myth: Technology may replace Chartered Accountants
Fact: Technology may not replace Chartered Accountants, but a technology-driven firm may, in the near future, replace a non-technology-driven firm.

The role of IT in India’s economic development is crucial. The Indian experts are most sought after across the world, and the future belongs to India with a great share of work from different parts of the world. Future education would also include courses being developed based on the latest technological advancements, knowledge, and skills. Our next generation will not just be job seekers but will be job creators.

BCAS AND ITS MYTH
As I kept meeting several chartered accountants in the last few months, a common query I hear from potential members is that the Bombay Chartered Accountants’ Society is for Chartered Accountants from Mumbai (formerly Bombay). To break this myth, I would like to share some data about the geographical coverage of our membership. We have approx. 5400+ members from Mumbai and 3200+ members from outside of Mumbai i.e. 60% from Mumbai and 40% from outside Mumbai.

BCAS has a presence in more than 350+ cities and towns of Bharat. This helps in breaking the myth that BCAS is only a Mumbai-based association. It is the largest voluntary body of professional Chartered Accountants in Bharat, and therefore, in essence, it is a “Bharatiya Chartered Accountants’ Society.”

REIMAGINE AND ITS MYTH
On the 4th, 5th, and 6th of January, 2024, BCAS is organising 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.

A myth regarding this event is that it is only for BCAS members. I would like to break the myth that this event is conceptualised keeping in mind, all kinds of finance professionals, whether Chartered Accountants or others, whether in Industry or in Practice, whether in Mumbai or outside, whether experienced or young, as this event talks about ReImagining the profession as a whole.

G20 SUMMIT 2023
Successful completion of the G20 Summit with a recommendation by India and acceptance of all members of G20 for inclusion of the African Union into the Group of nations, making the count G21 has established India’s prominence in driving the agenda of inclusive growth at the world level.

EVENTS AT BCAS
The theme for the July to September quarter was the impact of technology, and BCAS was at the forefront in organising a few workshops and Twitter Space Sessions related to the impact of technology on the profession.
A. Bombay Chartered Accountants’ Society organised a 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 Chartered Accountants increase the efficiency of their team and improve compliance.

B. The Tech I Committee took the initiative to organise the Twitter Space Session on filing ITR for A.Y. 2023-24 from the BCAS Twitter handle.

This Twitter Space Session was conducted with the objective of sharing the crucial precautions and best practices for filing ITRs that professionals need to observe.

C. BCAS has always been at the forefront of arranging programs and seminars when any new provisions or standards are issued. A full-day seminar on Forensic Accounting and Investigation Standards (FAIS) was held in physical mode at the Hotel Parle International to introduce the participants to the framework governing these standards, the basic concepts covered in the standards, the legal framework, and report writing.

D. In a dynamic financial landscape, the event “Investing in Amrit Kaal” organised by BCAS shed light on the shifting paradigms of investment. The speakers 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.

September month was the month of festivals, and I, on behalf of the entire BCAS, seek forgiveness and also forgive everyone from the heart, Michami Dukkadam. I also wish everyone a very happy Ganesh Chaturthi.

As we move into the October to December 2023 quarter, the theme will be “Charter for Change.”

Split Accounting – How Is A Convertible Instrument Accounted For?

This article deals with split accounting of a convertible bond into equity and financial liability. The CFO of the entity wants to do the split accounting basis the fair value of the liability and fair value of equity which according to him shall include the probability whether the liability would be settled or not and accordingly derive the value of the financial liability and equity. Would that be acceptable?

QUESTION

An entity issues 300,000 convertible bonds at the start of year 1 having three-year tenure, issued at par with a face value of Rs. 100 per bond, resulting in total proceeds of Rs. 30 million. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible, at any time up to maturity, into 20 ordinary shares (meets the fixed for fixed test). When the bonds are issued, the prevailing market interest rate for similar debt without conversion option is 9 per cent. Since the issue costs are negligible, the same may be ignored. The CFO believes that the chances of the bond being converted to equity are almost 99 per cent. Therefore, keeping in mind the high probability of conversion to equity and extremely low probability that the liability would be settled by cash, the amount attributed to liability should be negligible. Do you agree? How does the entity account for the bond?

RESPONSE

Extracts from Ind AS 32, Financial Instruments: Presentation

“29 An entity recognises separately the components of a financial instrument that (a) creates a financial liability of the entity and (b) grants an option to the holder of the instrument to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The economic effect of issuing such an instrument is substantially the same as issuing simultaneously a debt instrument with an early settlement provision and warrants to purchase ordinary shares, or issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents the liability and equity components separately in its balance sheet.

30 Classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders. Holders may not always act in the way that might be expected because, for example, the tax consequences resulting from conversion may differ among holders. Furthermore, the likelihood of conversion will change from time to time. The entity’s contractual obligation to make future payments remains outstanding until it is extinguished through conversion, maturity of the instrument or some other transaction.

31 Ind AS 109 deals with the measurement of financial assets and financial liabilities. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The value of any derivative features (such as a call option) embedded in the compound financial instrument other than the equity component (such as an equity conversion option) is included in the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from initially recognising the components of the instrument separately.

32 Under the approach described in paragraph 31, the issuer of a bond convertible into ordinary shares first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

AG31 A common form of compound financial instrument is a debt instrument with an embedded conversion option, such as a bond convertible into ordinary shares of the issuer, and without any other embedded derivative features. Paragraph 28 requires the issuer of such a financial instrument to present the liability component and the equity component separately in the balance sheet, as follows: (a) The issuer’s obligation to make scheduled payments of interest and principal is a financial liability that exists as long as the instrument is not converted. On initial recognition, the fair value of the liability component is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. ………………

Ind AS 32 states that the economic effect of issuing convertible instrument is substantially the same as simultaneously issuing a debt instrument with an early settlement provision and warrants to purchase ordinary shares or issuing a debt instrument with detachable share purchase warrants. [Ind AS 32.29].

The liability component of a convertible bond should be measured first, at the fair value of a similar liability that does not have an associated equity conversion feature, but including any embedded non–equity derivative features, such as an issuers or holder’s right to require early redemption of the bond, if any such terms are included. In practical terms, this will be done by determining the net present value of all potential contractually determined future cash flows under the instrument, discounted at the rate of interest applied by the market at the time of issue to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. [Ind AS 32.31].

The equity component is not (other than by coincidence) recorded at its fair value. Instead, in accordance with the general definition of equity as a residual, the equity component of the bond is simply the difference between the fair value of the compound instrument (total issue proceeds of the bond) and the liability component as determined in the illustration below.

The liability component is measured first by discounting the contractually determined stream of future cash flows (interest and principal) to present value using a discount rate of 9 per cent (that is, the market interest rate for similar bonds having no conversion rights), as shown below.

 

Rs.

PV of interest payable at the end of year 1- 1,800,000/1.09

1,651,376

PV of interest payable at the end of year 2- 1,800,000/(1.09)2

1,515,024

PV of interest payable at the end of year 3- 1,800,000/(1.09)3

1,389,830

PV of principal of INR 30,000,000 payable at the end of three years- 30,000,000/(1.09)3

23,165,505

Total liability component

27,721,735

Total equity component (residual)*

2,278,165

Fair value of bonds

30,000,000

* The equity component is a written call option that allows the holder to call for the shares on exercise of the conversion option at any time before maturity (American option). The difference between the proceeds of the bonds and the liability component’s fair value of the liability component (as computed above) ­— the residual — is assigned to the equity component.

The methodology of ‘split–accounting’ in IAS 32 has the effect that the sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from the initial recognition of the separate components of the instrument.

The amount credited to equity of Rs. 2,278,165 is not subsequently remeasured. The liability component will be classified, under Ind AS 109, either as a financial liability at fair value through profit or loss if that is appropriate or as another liability measured at amortised cost using the effective interest rate method.

The likelihood of conversion may change from time to time. The entity’s contractual obligation to make future payments remains outstanding until it is extinguished through conversion, maturity of the instrument or some other transaction. [Ind AS 32.30]. After initial recognition, the classification of the liability and equity components of a convertible instrument is not revised, for example, as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders.

Ind AS does not deal with how the equity is presented within the various components of equity, rather the same is determined by local legislation. In India, typically, if ultimately the bonds are converted to equity, the same may be attributed to shareholders equity. If on the other hand, there is no conversion and the liability is eventually paid off in cash, the equity component may be classified as reserves, thereby allowing the entity to treat it as a distributable reserve. However, legal opinion is advised, since this is a matter of legal interpretation.

‘Split accounting’ is to be applied only by the issuer of a compound financial instrument. The accounting treatment by the holder is dealt with in Ind AS 109 Financial Instruments and is significantly different. In the holder’s financial statements, under Ind AS 109, the instrument fails the criteria for measurement at amortised cost (in particular the ‘contractual cash flow characteristics test’) and is therefore almost always carried at fair value through profit or loss.

As per AG 31, the issuer’s obligation to make scheduled payments of interest and principal is a financial liability that exists as long as the instrument is not converted. On initial recognition, the fair value of the liability component is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. This makes it abundantly clear that in the split accounting the fair value of the financial  liability is determined on the basis of the present value of the contractually determined cash flows. The probability of these cash flows is not relevant. Once the fair value of the financial liability is determined as demonstrated in the illustration, the residual amount is  determined as equity. As already discussed above, the residual amount of equity is not the same as fair value of equity (though it may occur by coincidence). In conclusion, the view of the CFO is not tenable, as probability is not a basis under Ind AS 32 for split accounting under Ind AS 32.”

74th Annual General Meeting and 75th Founding Day

The 74th Annual General Meeting of the BCAS was held on Thursday, 6th July, 2023 at MCA The Lounge, Wankhede Stadium, Marine Drive, Churchgate, Mumbai 400 020.

The President, CA Mihir Sheth, took the chair and called the meeting to order. All the business as per the agenda contained in the notice was conducted, including the adoption of accounts and the appointment of auditors.

CA Kinjal Shah, Hon. Joint Secretary, announced the results of the election of the President, the Vice-President, two Honorary Secretaries, the Treasurer and eight members of the Managing Committee for 2023-24.

The following members were elected unopposed for the year 2023-24:

President                     CA Chirag Doshi

Vice-President            CA Anand Bathiya

Hon. Joint Secretary   CA Zubin Billimoria

Hon. Joint Secretary   CA Mandar Telang

Treasurer                     CA Kinjal Shah

 
       MANAGING COMMITTEE
           ELECTED MEMBERS
 

CA Anand Kothari     CA Bhadresh Doshi

CA Divya Jokhakar    CA Hardik Mehta

CA Jagdish Punjabi    CA Kinjal Bhuta

CA Rutvik Sanghvi    CA Mrinal Mehta

CA Mahesh Nayak

CO-OPTED MEMBERS

 

CA Dushyant Bhat    CA Preeti Cherian
CA Samit Saraf         CA Siddharth Banwat
CA Sneh Bhuta         CA Vishesh Sangoi
               EX-OFFICIO

(Outgoing President)           CA Mihir Sheth

Member (Editor – BCAJ)     Dr CA Mayur Nayak

 

Dr CA Mayur Nayak, Editor of the BCAJ, announced the ‘Jal Erach Dastur Awards’ for the Best Article and Best Feature appearing in the BCA Journal during 2022-23. The ‘Best Article Award’ went to Adv. Hardeep Singh Chawla, for his article ‘Revisiting Non-Discrimination Clause of The India – US Tax Treaty in Light of India’s Corporate Tax Rate Reduction’. The ‘Best Feature Award’ went to CA Yazdi Tantra for ‘Tech Mantra’. The Editor then announced the ‘S V Ghatalia Foundation Award’ for the “Best Article on Audit”. The award went to CA Deepa Agarwal for the article ‘Sustainability Reporting and Assurance’, and to CA Rajendra Ponkshe for the article ‘Vulnerability Assessment: A Tool For Internal Audit’.

Before the conclusion of the AGM, members, including Past Presidents of the BCAS, were invited to share their views and observations about the Society.

The July 2023 special issue of the BCA Journal on Economic Development in India was released by the guest of honour Mr Sajjan Jindal.

At the end of the formal AGM proceedings, the 75th Founding Day Lecture was delivered to a packed auditorium. Members and attendees benefitted from the astute deliberation on India @2030 by Mr Sajjan Jindal. The meeting formally concluded with CA Zubin Billimoria thanking the speaker for sharing his visionary thoughts on a relevant topic with the attendees.

[The video of the lecture can be accessed on the BCAS YouTube Channel, and a Report on the Founding Day lecture is provided in the ‘Society News’ section of this journal.]

OUTGOING PRESIDENT’S SPEECH

 

MIHIR SHETH: Exactly one year back, I made a solemn pledge to deliver you on certain promises. Now, when I take a final bow, it is time to review how this pledge has been redeemed; to reflect on how well the promises have been fulfilled. But before I get on with that, let me tell you the inspiration behind those promises. The inspiration came from the quote by Mirza Galib which says…….  Highly motivated by it, we let ourselves go unrestrained in deciding our goals. The idea was to set the task tall and then give blood and soul to achieve it no matter whether we succeed or not. As they say in Gujarati,  … From that standpoint, I am happy to say that in this one year, we have tried to give best to ensure that those wishes — some of them indeed wild — translate into reality.

Before I get on with the activities and the initiatives of the last financial year, let me acknowledge the three biggest takeaways from BCAS in my life. I have reckoned that this is the institution that has made my life richer, fulfilled and accomplished. Hence, I will be failing in my duty to express my gratitude if I do not acknowledge it.

The three takeaways I mentioned are:

a) Power of Volunteering & Selfless Giving, b) Power of Networking, and c) Power of Perfection.

Let me tell you how each one influenced me.

Power of Volunteering-Selfless Giving

 

BCAS has taught me what the power of true volunteering and selfless giving means. Rarely would you find an institution where so many volunteers give so much back to the profession. It reminds me of a Sanskrit subhashita:

This is when I realised that in giving, you receive… and indeed, I have received so much love, respect and help from people I did not know earlier that it ties me down to this belief that only by giving, you prosper in terms of friends, values and even material success.

That brings me to the Power of Networking…

Power of Networking
One thing I learned from the BCAS is that real power is in network and not net worth. This is an institution where there is no professional rivalry despite the best of the best in the profession working together; name one institution where the tallest in the profession meets the smallest and mentors him in the most avuncular way. This is an institution which gives you a platform to build a network of true friends. Today, unfortunately, we are living in an era of Facebook and Instagram, where we have lost the meaning of friendship. As someone has rightly said in Gujarati that Facebook BCAS is the institution where you make friends for life. These are the real friends who will stand by you come whatever it may. The opportunity to network that BCAS provides across platforms is amazing and has definitely contributed to my personal progress, even without seeking the same.

Power of Perfection
This is the third thing I have to acknowledge BCAS for. What one learns is the Power of exploring the depth of the matter, howsoever difficult it may sound. This is something one has to learn from the BCAS. Its tireless pursuit for quality, never say die attitude to improve its own standards, and challenge its own benchmarks for better, is the learning I will ever cherish. When I see many stalwarts tirelessly toil to make their events the best, their publications the hallmark, I feel perhaps this is the real meaning of Mansi Ekam, Vachasi Ekam, Karyeshu Ekam. It is this single-minded focus on perfection that has helped BCAS reach its pinnacle.

With this background, let me give you a brief snapshot of the activities and initiatives. The theme for the year was EASE, and hence, we focused our attention to see how EASE could be provided for accessing knowledge, embracing emerging opportunities, and ease for networking and reskilling.

I am happy to state that with the active support of all Committees, we had a busy year with activities aligned to the theme. During the year, not only all the flagship events like RRCs, RSCs, budget lecture and long-term courses were organised successfully but also, some bespoke events were held on diverse topics such as Artificial Intelligence, Audit Quality Maturity Model (AQMM), Metaverse, Power Summit, Leadership Chanakya Way, Chat GPT, Forensic Accounting & Auditing, Capital Market and Investments. Apart from these, Mentorship and Students Felicitation Programs, Jal Erach Dastur Students’ Talent Program etc., were all received with tremendous response. Under the auspices of the BCAS Foundation, apart from blood donation and Tree plantation, etc., we also focused on the education of underprivileged children and 25 digital classrooms were set up with preloaded education software. The recipients very well appreciated this. Also, there were six representations made to the various government departments.

I request you to look at the list of the events and activities given in the Annual Report.

There were also several other initiatives taken to ensure that the expectations of the theme are reasonably met.

Some of the important initiatives taken to meet the stated objectives were:

ISO 9001:2015: We were successful in getting BCAS certified as an ISO 9001:2015 compliant organisation.

Hybrid Facility: In response to the demand of giving access to knowledge to the audience across the country, BCAS equipped its auditorium with a state-of-art hybrid event setup. With this facility, it can now offer members facility for attending the event either virtually or physically. While the facility for virtual attendance helped save the travelling time of the members; gave access to the audience across the country, an option also to be able to attend the event physically provided a networking opportunity to those who wished to avail the benefit of expanding their circle.

Social Media: With our focused efforts BCAS Social Media platform has reached 50k+ followers.

Engagement with other Associations: During the year, we had an opportunity to engage with the Coimbatore CA Association, Tirupur CA Association, Nanded CA Association, Karnataka State CA Association, Shri Vile Parle Kelavani Mandal, Bombay Industries Association, and The Auditors Association of Southern India for sharing knowledge. By collaborating with these associations, BCAS has expanded its reach and impact in the profession, education institutions and industry.

The BCAS also signed an MoU with the Institute of Risk Management (IRM) India to felicitate its members to attend courses offered by the IRM at an affordable price. As a result, this year, BCAS has conducted its first workshop on Enterprise Risk Management.

Knowledge Partnerships: We associated with Utpal Sanghavi School for Financial Literacy programme as a knowledge partner. Also tied up with Mithibai College and M. L. Dahanukar College of Commerce to conduct a Professional Accountancy Course.

Library: BCAS library has recently been updated with new features to enhance members’ experience with a range of new books.

Website & Mobile App: The new beta BCAS website, in tune with the current trends, was launched. It will provide members/professionals ease of navigation. The BCAS also developed a mobile application that will facilitate seamless access to the members for various functions.

Expanding the reach at Suburbs: BCAS expanded its reach for knowledge dissemination by arranging a lecture meeting in the suburbs as an experiment and has also encouraged the Suburban study circle. It is expected to help the professionals based in suburbs to easily access the knowledge resource provided by BCAS.

Office: During the year, it was decided to shift the administrative office of the BCAS from its existing location in the basement of the Churchgate Chambers to the first floor of the same building. The new office is more compact in size but is more in tune with the changed reality. It was observed by us that with the hybrid facility for holding events, the load of physical attendance at the Jolly Bhavan has been substantially subdued. This opened up the possibility of optimising the space by rearranging the staff between the two offices. Hence, it was found that the current large office could be dispensed with in exchange for a smaller office. This move will save the cost of Rs. 1.31 crore in the next five years of leave & license fees.

Course Play (e-Learn platform): BCAS enhanced its focus on the unique initiative of “e-Learn” through course play. We updated the platform consistently in consultation with the Chairmen of the committees to disseminate knowledge at the convenience of members/ professionals by paying a small fee. We have, in seven months, collected more than Rs. 2 lakh from this initiative, with 143 participants taking the benefit. I must make special reference to Kinjal Bhuta for her stellar contribution in making this project a success.

Podcasts: For the first time, BCAJ, in its August 2022 issue, incorporated the Podcast feature for the special pages to commemorate the 75th year of India’s independence. It received a good response.

Digitisation of Journals: We now have the digital repository of the BCA Journal since its inception, i.e., from the year 1969. The content is complimentary to all in tune with the BCAS philosophy that knowledge does not have boundaries.

Publication: Apart from the Budget booklet and Referencer, which are published every year, this year saw the publication of the much-awaited book FAQs on Charitable Trust. It has received a very encouraging response, with almost 2000 copies booked in the very first month.

Well. All this is about the year gone by. Let me give you a snippet of the year ahead. BCAS is entering the 75th year of its foundation, and this historical feat holds a special place in the heart of all its members. The sheer fact of our society’s meaningful existence for more than seven decades and its successful transformation into a modern, progressive, and digital institution, speaks a lot about it. Appreciating the importance of the milestone, there are some great plans to celebrate the Platinum Jubilee with programmes befitting the occasion. Several events are planned on the bespoke themes throughout the year, culminating with a Mega Event in the month of January 2024. There will also be a special entertainment programme for the members to participate on this joyful occasion. We are surely looking at the exciting year ahead. Incoming President Chirag will touch upon those in detail.

Let me come to the most important part of my speech. Big Thank YOU.

I thank all PPs, my OB colleagues Chirag, Anand, Kinjal and Zubin, for enthusiastically helping me pursue the promised goals. Thank you, all Chairmen and Co-Chairmen of the Committees, Trustees of the BCAS Foundation, Seniors, Managing Committee Members, Editors, CG members, entire BCAS staff, our vendors and esteemed service providers, printers, and our youth brigade for enthusiastically taking up various initiatives. I also thank Office Bearers of all sister organisations for supporting the joint programmes. My special thanks to our octogenarian member CA Anil Desai who has contributed Rs 50 lakhs to the BCAS during the year, which makes a total of Rs 75 lakhs of contribution in the last three years. I can only say one thing, sir, you inspire us to work harder.

This brings me to the last part of my speech. When I reflect on my journey at the BCAS, I have realised how true Frederique Nietzsche was when he said, “These are the ways in which men part. If you strive for the peace and pleasures of soul then believe, if you want to be a devotee of the truth then enquire.” Ladies & Gentlemen, I chose the path of enquiry because I realised that every enquiry starts in doubt and fulfils the need. And from that standpoint, let me tell you that this institution has fulfilled my need abundantly….generously. This is what has prompted me to give my best. Whether I have succeeded or not, only you can say. As Gujarati shayar Mariz, said,

So, I hope I can see the glint of satisfaction in your eyes that I have met your expectations.

I wish Chirag and his team of OBs great luck.

Thank you and goodbye.

 

INCOMING PRESIDENT’S SPEECH

 

CA CHIRAG DOSHI: Respected Past Presidents, Outgoing President Mihir Sheth, Incoming VP Anand Bathiya, Jt. Secretaries Zubin and Mandar, Treasurer Kinjal, Managing Committee members, Seniors, Distinguished invitees from the sister organisations, Press, core group members, my Yuva Shakti, ladies, and gentlemen.I stand before this august audience today with immense pride and profound gratitude as we have assembled together here to celebrate a momentous occasion — the 75th Founding Day of our esteemed society, THE BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY. It is a milestone that fills our hearts with joy, reflecting upon the remarkable journey we have undertaken together in service to our profession and to society at large.

This is a momentous occasion that calls for reflection, celebration, and anticipation. It is an opportunity for us to acknowledge the achievements, contributions, and resilience of our association and its members over the years. It is a time to honour the legacy of excellence that has been our guiding principle throughout this incredible journey.

As we look back on the past 74 years, we are reminded of the visionaries and trailblazers who founded this association on 6th July 1949, with a membership of 29 members. Their commitment to professionalism, integrity, and ethical practices laid the foundation for our society’s success. We owe a debt of gratitude to those visionary individuals who had the foresight to establish an association that would become synonymous with excellence in knowledge sharing in the fields of tax and accountancy.

Friends, the accountancy profession has witnessed significant transformations over the past 74 years. Technological advancements, regulatory changes, globalisation, and dynamic economic landscapes have presented new challenges and opportunities. As an association, we have always adapted and evolved better to meet these changing demands, equipping our members with the necessary skills and knowledge to navigate the dynamic and complex financial landscapes.

Our commitment to continuous learning and professional development has been paramount to our success. We have invested in robust educational programs, training initiatives, and research endeavours to ensure that our members remain at the forefront of industry and regulatory developments. By embracing lifelong learning, our association has enabled our members to stay relevant, adapt to emerging trends, and maintain the highest standards of professional competence.

As we celebrate our 75th year, we must acknowledge the invaluable contributions of our members, past and present. It is the collective effort, dedication, and expertise of our members that have propelled our association to this remarkable milestone. Our members have demonstrated exceptional professionalism, leadership, and commitment to excellence, setting benchmarks for the profession and inspiring future generations.

Looking ahead, the path before us is filled with novel opportunities and challenges. We must embrace innovation so as to ride the technological developments and adapt to change so that we are sought-after professionals for guiding businesses in an ever-evolving regulatory environment. By staying ahead of the curve, we will continue to be at the forefront as the think tank of the accounting profession, driving positive change and making a significant impact.

My Journey

Dr APJ Abdul Kalam, the beloved former President of India, once remarked, “Dream, dream, dream. Dreams transform into thoughts, and thoughts result in action.”My journey at BCAS started in 2010 when one of the members late CA Manesh Gandhi, introduced me to CA Mukesh Trivedi, a core group member who introduced me to BCAS. I was invited by the Accounting and Auditing Committee to speak on the topic of IFRS implementation in India, and then I was invited to be a part of the committee. BCAS has played a significant role in my professional and personal development through active participation in various committees over the period of the last 13 years. In my journey at BCAS, I have delivered several lectures, contributed to Journals and Referencer of BCAS, and organised various RRCs, including youth RRC, non-technical events like Jhankar, Cricket, and much more.

Over the years, I have imbibed learnings from seniors of our profession at BCAS. I would request young CAs to be part of BCAS, and with your contribution and dedication, you can also achieve your dreams.

I take this opportunity to thank all my seniors who have always been pillars of support. I especially acknowledge, Past president Himanshu Kishnadwala, Shariq Contractor, Uday Sathe, Narayan Pasari, Nitin Shingala, Naushad Panjwani, Manish Sampat, the Presidents I worked with Abhay Mehta, Suhas Paranjape, Mihir Sheth, OB team Anand, Kinjal, Zubin. Thanks to my family for always supporting me, my Dad and my Mom, my wife Khushboo and my daughter Jhalak, thanks to my ex-partner, Pankaj Jain, for all his support during my initial years at BCAS, my friend Raj Mullick, colleagues at my office – Anirudh, Jay, Mohit, Richi Yash and my youth supporters…

Friends, coming to my today’s task of unveiling the logo of the 75th year and the plan for the forthcoming years.

The Logo depicts multiple elements of our Society, the Book at the top signifies the symbol of knowledge sharing, the tree represents the BCAS as a community/family, and the globe represents the overall development of professionals, which is the vision and mission of the Society.

The blue colour in the logo represents BCAS’s commitment to professionalism, expertise in financial matters, and maintaining high ethical standards, and the green colour symbolise financial prosperity, trustworthiness, and a focus on sustainable business practices.

One change we have made this year is to do away with the President’s yearly theme and to come up, jointly with the team by the Team Office Bearers, with a five-year plan for BCAS.

1. BCAS’s Five-Year Plan: REACH

a.    Increased Members, Leaners & Followers – Friends, we plan to increase our membership by organising more programs for members only and also plan to increase our reach on social media handles through various initiatives which shall be taken by BCAS through its technology initiative committee.b.    Geographic reach – We plan to reach 75 cities in person and also invite 75 BCAS Sherpas, one from each city, who would be entrusted with the task of coordinating the events in their cities and spreading various other initiatives of BCAS.

c.    Journal readership scale-up – Journal is one of the prestigious publications of BCAS with a wide readership. BCAS, in its coming year, would take many more initiatives to disseminate knowledge through its monthly journal.

2. PROFESSIONAL DEVELOPMENT

a.    Contemporary learning / event formats with relevant topics – More focused topics with the quarterly, theme-based approach.b.    Publications and Research – A research sub-committee is formed, and at least four to five research-based papers shall be issued in the coming year.

c.    Digital learning and crowdsourcing queries – BCAS is planning to come up with a strong digital library and also a community application dedicated to its members, establishing a digital platform or forum where members can post queries, seek advice and engage in knowledge-sharing discussions, job search and vacancy sharing and much more.

3. NETWORKING

a.    Embedded networking opportunities – We shall have many more networking opportunities embedded in our key programs and also the MEGA event planned for platinum jubilee celebrations.

b.    Digital networking initiative – BCAS community application will be launched.

c.    Enhanced engagement with industry / professional associations – We shall be reaching out to various Industry Associations like BIA, ASSOCHAM, FICCI, IMC, etc. and also many other professional organisations in India and abroad to have more engagement of our members with the outside world.

4. ADVOCACY

a.    Dedicated platform for focused advocacy.b.    Research-based advocacy – A sub-committee has been formed to do research-based advocacy.

c.    Engaging with regulators and tax authorities – Proactively engage with regulatory bodies, tax authorities, and government agencies to build relationships based on mutual respect and understanding.

5. YUVA SHAKTI

a.    Formalising the BCAS youth platform – BCAS community application.b.    Curated youth events (mixers, boot camps, hackathon, etc.) – Youth mixers and more events.

c.    Embedding more youth in the BCAS cadre/community – The average age of committees, OBS, and Managing committee.

6. CHARTEREDS’ FOR CHANGE

a.    Focussed efforts on financial literacy, education, etc.b.    Supporting CA students – Reading room, scholarships.

c.    Enabling NGOs.

BCAS theme for the next four quarters

1.    Technology and other updates (July to September).2.    Change – Leaders – Charity (October to December).

3.    Future Ready – Innovation, Growth & Succession (January to March).

4.    Partnering in Business Growth – Industry Focus (March to June).

BCAS MEGA event – 4th, 5th, 6th January, 2024 – ReImagine!!

On 6th July this year, BCAS completes 74 years of service to the community of Chartered Accountants and society at large and enters its 75th year. To celebrate this landmark year, events and initiatives will take place throughout the year. The jewel in the crown will be a grand three-day mega event on ReImagining the profession, which will be held at the prestigious JIO World Centre, Mumbai, on 4th, 5th, and 6th January, 2024.The three days of Manthan will include public eventsand community activities, as well as moments of reflection on BCAS’s 75 years of service. An exciting series of programs covering the future dynamics of the professionals, including a thought-provoking line-up of presentations, panel discussions, fireside chats, interviews, and leadership talks, will be the highlight of the event. There will also be cultural performances tostimulate your senses. The Celebrations will providea platform for knowledge dissemination, professional growth, and networking opportunities to make you future ready.

I would conclude my speech by saying that, as we all start the celebration for our 75th anniversary, let us take a moment to appreciate the remarkable journey we have undertaken together. Let us honour the visionaries who laid the foundation, the members who have contributed their expertise and dedication, and the countless individuals and organisations who have placed their trust in us. Let us also rekindle our commitment to the values that have guided us thus far — integrity, excellence, and lifelong learning. Let us renew our dedication to creating an environment that promotes intellectual growth, ethical leadership, and social responsibility.

Our association’s legacy of excellence will continueto guide us as we embark on the next chapter of our journey, the AMRIT KAAL, shaping the future of the accounting profession and making a lasting impact on the world.

Thank you, and let us celebrate this significant milestone with joy, gratitude, and a renewed commitment to our shared values.

Long live the Bombay Chartered Accountants Society!

JAI HIND

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

12. PCIT – 33 vs. Synergy Infrastructures
[ITA No. 442 Of 2018, Dated: 28th June 2023. (Bom.) (HC).]

Bogus Purchase — The profit element embedded in such purchases should be added to the income of assessee — Question of fact — No substantial question of law arises.

The issue arose as to whether the ITAT is justified in confirming the action of the Ld. CIT(A) in restricting the addition to 12.5 per cent of the bogus purchase amount without appreciating the fact that assessee failed to substantiate the claim of genuineness of purchases?

The Hon’ble Court observed that there are plethora of judgments to the extent of ad hoc disallowances to be sustained with respect to the bogus purchases, what should be the percentage of the profit margin that has to be added to assessee’s income etc. Courts have held that these are issues which would require evidence to be led. Whether the purchases were bogus or parties from whom such purchases were made were bogus are essentially questions of fact.
 
The Court further observed that the AO in all fairness stated that the purchases by assessee, per se, are not the issue and these were not being treated as bogus. He also admits that the goods have entered into the assessee’s regular business. But AO says, assessee has not been able to give any convincing or cogent explanation as to how these goods happened to come in his possession and therefore, the purchases are not being treated as bogus or sham rather, the expenditure incurred on such purchases is treated as unexplained.

The Court held that the CIT(A) and ITAT are correct in coming to the conclusion that only the profit element embedded in such purchases should be added to the income of assessee. No substantial question of law arises for consideration revenue appeal dismissed.  

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

11. Tech Mahindra Ltd vs. DCIT, Circle 2(3)(1), Mumbai and Ors.
[WP (L) No. 5317 Of 2023
A.Y.: 2018-19; Dated: 27th June, 2023 (Bom) (HC).]

Section 244A: Refund — Interest — Till actual date of payment — CPC failed to follow directions of Hon’ble Court — Contempt notice issued for non-compliance.

The issue involved in the petition before the Hon’ble Court was seeking relief in regards to nonissuance of refund due for A.Y. 2018-2019 of Rs.153.80 crores alongwith further interest under section 244A of the Income Tax Act, 1961 (the Act) till the date of actual payment.

The Hon’ble Court observed that the Department has filed an affidavit affirmed on 26th April, 2023 in which it is admitted that a net refund of Rs. 153.80 crores plus interest under section 244A of the Act became due to be refundable to Petitioner – Assessee. It is also admitted that the Petitioner made repeated representations to the Respondent – Department. According to the Respondent, there was an outstanding demand of Rs. 266.73 crores for A.Ys. 2012-2013, 2013-2014, 2014-2015 and 2017-2018 and admittedly, a stay has been granted to petitioner by respondent vide an order dated 27th December, 2022. By the said order, an adjustment of 20 per cent of the demand against the admitted due refund of A.Y. 2018-2019 of Rs. 153.80 crores has been granted and for the balance, a stay has been granted till 31st December, 2023 or till the disposal of appeal by CIT(A), whichever event occurs earlier. The Respondent has admitted that even after such an adjustment, the Petitioner is entitled to receive a sum of Rs. 100.49 crores being the balance refund for A.Y. 2018-2019.

The Petitioner stated that after the adjustment of refund of A.Y. 2018-19 indicated above, no income tax demands are pending against the Petitioner that can be recovered by the Revenue. Accordingly, for A.Y. 2018-19, manifestly, a net amount of Rs.100.49 crores, plus interest under section 244A of the Act is due to be refunded to the Petitioner which appears to be still not released by the CPC.

The Petitioner submitted that he has neither received the due refund nor has it heard from any of the Respondents with respect to the timelines within which the said refund will be issued to the Petitioner. Moreover, more than 14 months has elapsed since the refund was determined first by Respondent No. 1.

In view of the above circumstances, the Hon’ble Court directed Respondent No. 4, i.e., Director of Income Tax, CPC, to ensure that the refund amount of Rs. 100.49 crores alongwith interest, if any, in accordance with law, is credited to petitioner’s account within one week from the date this order is uploaded.

The Court further noted that the Department counsel submitted that the Centralised Processing Centre (CPC) in Bengaluru could not see the stay granted on 27th December, 2022 in its portal, that is not reflected in the affidavit in reply filed. Respondent no.4 is the Director of Income Tax, CPC, Bengaluru who also has chosen not to file any affidavit. It was noted that by an order dated 2nd March, 2023, Respondents were directed to refund the amount to petitioner immediately alongwith interest in accordance with law. The affidavit in reply dated 26th April, 2023 has been filed admitting Rs. 100.49 crores after adjustment as payable. Still the order dated 2nd March, 2023 has not been complied with.

The Hon’ble Court observed that since the affidavit in reply has been filed after the order dated 2nd March, 2023 was passed, there has been no legal impediment to pay the refund of Rs. 100.49 crores. In view of the affidavit being filed by respondent, the stand of Department counsel that the CPC could not see the stay order was not unacceptable. In view of the Court’s order and subsequent affidavit at least after the affidavit was filed, the CPC should have refunded the money.

Therefore, the Hon’ble Court issued a notice to Respondent No. 4, Director of Income Tax, CPC, returnable on 25th July, 2023, as to why contempt proceedings should not be initiated against him. The Petition was disposed off accordingly.

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

10. PCIT – 14 vs. M/s Godrej Industries Ltd
[ITA NO. 409 OF 201
Dated: 28th June, 2023
A.Y.: 2001-02 (Bom.) (HC)]

Section 154(1A) & 154(7) — Rectification of mistake — Limitation period — Order giving effect to the Appellate order — Issue sought to be rectified not subject matter of appeal — Period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

The Assessee-respondent filed on 30th October, 2001, its return of income for A.Y. 2001-02 declaring income of nil, after set off of brought forward losses and depreciation and declared a book profit of Rs. 33,13,25,132. The case was selected for scrutiny and notice under section 143(2) of the Act was issued to the assessee. In the assessment order made under section 143(3) of the Act, the AO made various additions and deletions. The assessment order dated 27th February, 2004 was impugned in the appeal filed by assessee before CIT(A). By an order dated 5th October, 2004, CIT(A) partly allowed the appeal of assessee. The said order dated 5th October, 2004, was challenged by assessee in appeal filed before ITAT. The revenue also filed an appeal before ITAT against order passed by CIT(A) which came to be disposed on 30th August, 2007. ITAT disposed the appeal filed by the assessee on 5th September, 2007 by giving partial relief.

Consequent to the order of ITAT, the order giving effect to ITAT’s order was passed on 25th August, 2008 by which the AO determined the total income in accordance with the normal provisions at nil and the book profit at Rs. 33,13,25,132. The AO passed an order dated 13th April, 2009, giving effect to ITAT’s order in department’s appeal in which he determined the total income in accordance with the normal computation at nil but increased the book profit to Rs. 33,51,66,399 on account of change in deduction that he allowed under section 80HHC of the Act.

On 29th March, 2014, the AO passed an order under section 154 of the Act rectifying the order dated 13th April, 2009 and redetermined the book profit at Rs. 53,02,83,061 — as he added the provision for depreciation in the value of the long term investment as a consequence of the retrospective amendment introduced by the insertion of clause (i) to Explanation 1 below section 115JB(2) of the Act.

This was challenged by the assessee in an appeal before CIT(A). The CIT(A) allowed the assessee’s appeal by order dated 10th April, 2015 and held that the notice under section 154 seeking to rectify the error ought to have been issued by 31st March, 2008 and, therefore, the same was barred by limitation. In doing so, he followed his order for A.Y. 2005-06. The order of CIT(A) was taken in appeal by Revenue before ITAT and ITAT, by order dated 7th April, 2017 dismissed the appeal of the Revenue. The ITAT held the rectification order was passed to give effect to the retrospective amendment made by the Finance Act, 2009. The issue which was sought to be rectified was never the subject matter of the appeal either before the CIT(A) or before the ITAT. The ITAT followed its earlier order in the case of ACIT vs. M/s. Godrej Sara Lee Ltd (now amalgamated into Godrej Consumers Products Ltd) and came to the conclusion that it was not permissible for the AO to rectify the order dated 13th April, 2009 on an issue which was not the subject matter of the appeal before it.

The Revenue contended that the AO was required to determine the correct total income as per the provisions of the Act. While doing so, the AO cannot ignore the clear provisions of the Act which even though may not be arising out of ITAT’s order but are vital for the determination of the correct total income. It was further submitted that the only requirement under section 154(7) of the Act is that the amendment under section 154 should be made within four years from the financial year in which order sought to be amended is passed, and since four years has not elapsed from the date of passing the order giving effect to the ITAT’s order, the notice under section 154 of the Act is not at all barred by limitation.

The assessee contended that period of limitation under section 154(7) of the Act in respect to the points not subject matter of order under section 154 of the Act will apply from the date of original assessment order and not from the date of assessment order of the AO giving effect to appellate order. It was submitted that the period of limitation will be reckoned from the date of original assessment order in respect of points not subjected to appellate jurisdiction.

“The Hon High Court observed that the settled position is that the AO, while giving effect to the ITAT’s order cannot go beyond the directions of the ITAT and since in this case, the issue of calculation of book profit qua diminution in the value of an asset was not the subject matter of the appeal, the Revenue was not justified in contending that the order is within the time limit. Because under section 154(1A) of the Act, the AO can rectify the order in respect of a matter other than the matter which has been considered and decided by the appellate/revisional authority. In the instant case, since the issue of diminution in value of an asset for calculating book profit was not a subject matter of appeal or revision, the original order under section 143(3) of the Act dated 27th February, 2004 is the order which can be rectified by the AO and since the order passed in 2004 cannot be rectified after a period of four years, the order passed under section 154 of the Act dated 29th March, 2014 is barred by Section 154(7) of the Act.”

In the circumstances, the Revenue Appeal was dismissed.

TDS — Payments to non-residents — Failure to deduct tax at source — Order deeming payer to be “assessee-in-default” — Limitation for order — No statutory period of limitation — General principle that in absence of statutory provisions, orders must be passed within reasonable time — Writ — Power of High Court under article 226 to fix reasonable period of limitation — Limitation prescribed for deduction of tax at source on payments to residents applicable to payments to non-residents.

34. Vedanta Limited vs. Dy. CIT(International Taxation)
[2023] 454 ITR 545 (Mad)
A. Ys. 2010-11 to 2015-16
Date of order: 24th February, 2023
Section 201 of ITA 1961

TDS — Payments to non-residents — Failure to deduct tax at source — Order deeming payer to be “assessee-in-default” — Limitation for order — No statutory period of limitation — General principle that in absence of statutory provisions, orders must be passed within reasonable time — Writ — Power of High Court under article 226 to fix reasonable period of limitation — Limitation prescribed for deduction of tax at source on payments to residents applicable to payments to non-residents.

The petitioner-company is engaged in the business of mining and exploration of metals and exploration of oil and natural gas. For the F. Ys. 2009-10 to 2014-15, i.e, A. Ys. 2010-11 to 2015-16, the respondent AO passed the orders under section 201(1) of the Income-tax Act, 1961 (respectively on 31st March, 2017, 31st March, 2017, 28th March, 2019, 22nd March, 2021, 27th March, 2021 and 30th March, 2022) deeming the petitioner to be an “assessee-in-default” and levying consequential interest under section 201(1A) of the Act in respect of payments to non-residents.

In writ petitions filed by the Petitioner challenging the said orders, the High Court considered the following two questions:

“(a) Whether in the absence of limitation being prescribed for the purpose of passing orders u/s. 201(1) of the Income-tax Act, 1961 deeming a person to be an ‘assessee-in-default’ in view of failure to deduct the whole or any part of the tax in relation to payments made to a non-resident it is permissible for the court to determine the limitation for passing such orders?

(b) If the answer to the above question is in the affirmative, a further question arises as to what would constitute reasonable period for passing such orders?”

The Madras High Court held as under:
“i)    It is trite law that in the absence of statutory prescription of limitation for passing an order, the order ought to be passed within a reasonable period. The authorities under the Income-tax Act, 1961 being creatures of the statute would not be able to determine this. Thus, it is for the High Court in exercise of its plenary jurisdiction under article 226 of the Constitution, to determine what would constitute reasonable time. Reasonableness forms the foundation on which courts would determine limitation in the absence of a legislative prescription for passing orders or taking action.

ii)    Section 201 of the Income-tax Act, 1961, as it originally stood did not prescribe any limitation for passing an order u/s. 201 of the Act. By the Finance (No. 2) Act, 2009, with effect from April 1, 2010 sub-section (3) to section 201 of the Act was inserted thereby providing limitation for passing an order u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to residents. No limitation was however prescribed in so far as passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to non-residents.
 
iii) The object behind deduction of tax at source is common for payments to residents and non-residents. It is to secure the taxes or a portion thereof at the earliest. The object of tax deduction at source being common for payments both to residents and non-residents, limitation prescribed by the Legislature to pass orders u/s. 201(1) of the Act, deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source in respect of payments to residents should be applied in respect of passing orders deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source even in respect of payments to non-residents.

iv) The limitation for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source on payments to residents must thus be adopted and treated as constituting ‘reasonable period’ for the purpose of passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct tax at source on payments to non-residents. The extended period of limitation of seven years would be available for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct taxes in respect of payments to residents. The sequitur is that the ‘reasonable period’ for passing orders u/s. 201(1) of the Act deeming a person to be an ‘assessee-in-default’ for failure to deduct taxes in respect of payments to non-residents shall also be seven years from the end of the financial year in which the payment is made or credit given with effect from 1st April, 2010.

v) As the challenge in these writ petitions were limited to the aspect of limitation which is clarified, it is left open to the petitioner to file appeals challenging the order on merits. If the petitioner raises the plea of limitation, the same shall be decided by the appellate authority in accordance with legal position clarified by this court. If the petitioner chooses to file an appeal, the time spent in these writ petitions shall stand excluded while reckoning limitation and the same shall be decided in accordance with law.”

Search and seizure — Assessment of third person — Condition precedent — Satisfaction note by AO of searched person — Limitation where no satisfaction is recorded will be taken as year of search.

33. PCIT vs. Gali Janardhana Reddy
[2023] 454 ITR 467 (Kar)
A. Y. 2011-12    
Date of order: 31st March, 2023
Sections 132, 132A, 153A and 153C of ITA 1961

Search and seizure — Assessment of third person — Condition precedent — Satisfaction note by AO of searched person — Limitation where no satisfaction is recorded will be taken as year of search.

On 25th October, 2010, a search was carried out in the case of R and others under section 132 of the Income-tax Act, 1961. During the course of search proceedings, certain incriminating materials belonging to the assessee were found and seized. Consequently, the AO of the searched person issued notice under section 153C against the assessee for the A. Ys. 2005-06 to 2010-11 and a notice under section 143(3) for the A. Y. 2011-12. Accordingly, assessments were completed.

The Tribunal set aside the assessment orders and held that there was no satisfaction recorded by the AO of the search person, which was mandatorily required for issuing a notice under section 153C.

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

“i)     In CIT v. Gopi Apartment [2014] 365 ITR 411 (All), the Allahabad High Court observed that in the case of an assessment u/s. 153C of the Income-tax Act, 1961, there are two stages: (1) The first stage comprises a search and seizure operation u/s. 132 or proceeding u/s. 132A against a person, who may be referred to as ‘the searched person’. Based on such search and seizure, assessment proceedings are initiated against the ‘searched person’ u/s. 153A. At the time of initiation of such proceedings against the ‘searched person’ or during the assessment proceedings against him or even after the completion of the assessment proceedings against him, the Assessing Officer of such ‘searched person’, if he is satisfied, that any money, document, etc., belongs to a person other than the searched person, shall hand over such money, documents, etc., to the Assessing Officer having jurisdiction over ‘such other person’. (2) The second stage commences from the recording of such satisfaction by the Assessing Officer of the ‘searched person’ followed by handing over of all the requisite documents, etc., to the Assessing Officer of such ‘other person’, thereafter followed by issuance of the notice of the proceedings u/s. 153C read with section 153A against such ‘other person’.

ii)    The initiation of proceedings against ‘such other person’ is dependent upon satisfaction being recorded. Such satisfaction may be during the search or at the time of initiation of assessment proceedings against the ‘searched person’, or even during the assessment proceedings against him or even after completion thereof but before issuance of notice to the ‘such other person’ u/s. 153C. Even in a case where the Assessing Officer of both persons is the same and assuming that no handing over of documents is required, the recording of ‘satisfaction’ is a must, as that is the foundation, upon which the subsequent proceedings against the ‘other person’ are initiated. The handing over of documents, etc., in such a case may or may not be of much relevance but the recording of satisfaction is still required and in fact it is mandatory.

iii)    In terms of section 153C of the Act, reference to the date of the search under the second proviso to section 153A of the Act has to be construed as the date of handing over of assets and documents belonging to the assessee (being the person other than the one searched) to the Assessing Officer having jurisdiction to assess that assessee. Further proceedings, by virtue of section 153C(1) of the Act would have to be in accordance with section 153A of the Act and reference to the date of search would have to be construed as the reference to the date of recording of satisfaction. It would follow that the six assessment years for which assessments or reassessments could be made u/s. 153C of the Act would also have to be construed with reference to the date of handing over of assets and documents to the Assessing Officer of the assessee.

iv)    The Tribunal was right in law in holding that the assessment year relevant to the financial year in which satisfaction note was recorded u/s. 153C of the Act, would be taken as the year of search for the purposes of clauses (a) and (b) of sub-section (1) of section 153A of the Act by making reference to the first proviso to sub-section (1) of section 153C. Therefore, the Tribunal was right in law in holding that no satisfaction was recorded by the Assessing Officer of the searched person and the notice issued by the Assessing Officer u/s. 153C of the Act would be taken as the year of search for the purpose of clauses (a) and (b) of sub-section (1) of section 153A. The Tribunal was right in law in setting aside the assessment order passed for the A. Y. 2011-12 under the facts and circumstances of the case holding that there was no satisfaction recorded by the Assessing Officer of the searched person in so far as section 153A in the case of the assessee.”

Reassessment — New procedure — Condition precedent for notice of reassessment — Assessee must be furnished material on the basis of which initial notice was issued.

32. Anurag Gupta vs. ITO
[2023] 454 ITR 326 (Bom)
A. Y. 2018-19
Date of order: 13th March, 2023
Sections 148 and 148A of ITA 1961

Reassessment — New procedure — Condition precedent for notice of reassessment — Assessee must be furnished material on the basis of which initial notice was issued.

For the A. Y. 2018-19, the petitioner’s return of income was processed under section 143(1) of the Income-tax Act, 1961. Subsequently, a notice under section 148A(b) of the Act dated 8th March, 2022, was issued by the AO suggesting that income liable to tax for the A. Y. 2018-19 had escaped assessment and called upon the petitioner to show cause as to why notice under section 148 be not issued. The basis for reopening was the information, which reads as under:

“1. In your case information has been received from the credible sources that a search/survey action u/s. 132 of the Income-tax Act was carried out on February 14, 2019 on Antariksh Group. It is seen that you have purchased warehouse from BGR Construction LLP for Rs. 70,00,000 as per sale list seized and impounded during the course of search. This amount includes sale consideration of land and construction cost and the on-money received by BGR Construction LLP. As per the information, it is observed that the payments made to M/s. BGR Construction LLP are not accounted for in its regular books of account. The cash payment on account of on-money of Rs. 70,00,000 was not accounted in its books of account which is evident and the same is received in cash by M/s. BGR Construction LLP. Thus, the source of cash paid by you of Rs. 70,00,000 to BGR remains unexplained.

2. As the above information has been received from the credible sources, and this office is contemplating proceedings u/s. 148 of the Income-tax Act, 1961 in your case, you are required to submit your explanation along with appropriate documentary evidence and reconcile the above information with the Income-tax return filed by you, if any. In case, no Income-tax return has been filed by you, you may submit the reconciliation of the above information with your books of account or computation of total income. Also, this may be treated as show-cause notice u/s. 148A(b) of the Income-tax Act, 1961 and final opportunity to submit the details. In the absence of any submission or details from your side with respect to the above, it shall be presumed that you have nothing to say in the matter and the same will be dealt with as per the provisions of the Income-tax Act, 1961.”

This show-cause notice was replied by a communication dated 14th March, 2022, wherein the petitioner totally denied that there was any transaction with BGR Construction LLP and that no warehouse had been booked or payment made to the said entity. The petitioner also denied any “on-money cash transaction” with the said entity and therefore, demanded that the proceedings initiated under section 147 of the Act be dropped.

On 21st March, 2022, the AO issued a clarification in regards to the notice under section 148A(b), this time, stating therein that the petitioner had also executed a conveyance deed with Meet Spaces LLP and, therefore, the AO required the petitioner to furnish payment details regarding this deed also. No response was filed by the petitioner to this communication dated 21st March, 2022. The AO passed the order under section 148A(d) on 25th March, 2022, stated to be with the prior approval of the PCIT, Thane. In the order under section 148A(d), for the purpose of issuance of the notice under section 148 of the Act, the AO proceeds to record its satisfaction, firstly, that cash payments had been made by the assessee to BGR Construction LLP as had been confirmed by the transferee of the said entity in the statement recorded during the survey action and, secondly, that the assessee had entered into a conveyance deed as a purchaser with Meet Spaces LLP for a consideration of Rs. 10,00,000, which remained unexplained.

The Assessee filed writ petition and challenged the notice under section 148A(b) dated 8th March, 2022, the order under section 148A(d) dated 25th March, 2022 and the notice under section 148 dated 26th March, 2022. The Bombay High Court allowed the writ petition and held as under:

“i)     Section 148A(b) of the Income-tax Act, 1961, envisages that the assessee must be provided not only information but also the material relied upon by the Revenue for purposes of making it possible to file a reply to the show-cause notice in terms of the section.

ii)    The reassessment proceedings initiated were unsustainable on the ground of violation of the procedure prescribed u/s. 148A(b) of the Act on account of failure of the Assessing Officer to provide the requisite material which ought to have been supplied with the information in terms of the section. The order dated March 25, 2022 passed u/s. 148A(d) of the Act, and the notice u/s. 148 of the Act were liable to be quashed.”

Educational institution — Exemption under section 10(23C)(vi) — Scope of section 10(23C)(vi) — Condition precedent for exemption — Institution should exist solely for purposes of education — Receipts and expenses outside India not covered — American trust established in India solely for educational purposes with permission granted by the Central Government — Trust in India supported by the organisation set up in USA — American organisation incurring expenses in support of Indian trust and repatriating amounts to it — Amounts received utilised for purposes of education in India — Assessee entitled to exemption under section 10(23C)(vi).

31. Laura Entwistle vs. UOI
[2023] 454 ITR 345 (Bom)
A. Ys. 2002-03 to 2005-06
Date of order: 8th March, 2023
Section 10(23C)(vi) of ITA 1961

Educational institution — Exemption under section 10(23C)(vi) — Scope of section 10(23C)(vi) — Condition precedent for exemption — Institution should exist solely for purposes of education — Receipts and expenses outside India not covered — American trust established in India solely for educational purposes with permission granted by the Central Government — Trust in India supported by the organisation set up in USA — American organisation incurring expenses in support of Indian trust and repatriating amounts to it — Amounts received utilised for purposes of education in India — Assessee entitled to exemption under section 10(23C)(vi).

The petitioners were the trustees of the American School of Bombay Education Trust. The Trust was constituted under the Indian Trusts Act, 1882, by the trust deed, as amended in July 1995 and August 2008. The Trust was set up after the embassy of the United States of America was granted specific permission by the Ministry of External Affairs, New Delhi. The Trust was set up solely for the purpose of education and not for profit. During the years relating to A. Ys. 2002-03 to 2005-06, the Trust was supported by the South Asia International and Educational Services Foundation set up in 1996 in the United States of America wholly and exclusively for charitable and educational purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of the United States of America, and the primary purpose was to provide financial assistance to educational institutions as provided in its constitution. The Foundation was a non-profit organisation, subject to scrutiny by the U.S. Government and exempted from tax payment by U.S. Federal Government under section 501(c)(3) of the Internal Revenue Code. The accounts of the Foundation were subject to detailed scrutiny by the Internal Revenue Service. By an order based on the said scrutiny, the Internal Revenue Service continued to approve the Foundation as a not-for-profit Foundation under section 501(c)(3) of the Internal Revenue Code. The Foundation would incur various expenses in support of school material and freight, salaries of teachers and administrators, education grants, etc. The surplus, if any, arising from time to time was entirely repatriated to the trustees in India and, thereafter, invested by them in accordance with the provisions of section 11(5) of the Act.

The Trust filed a writ petition to set aside the order dated 27th February, 2009 passed by the Chief CIT denying exemption under section 10(23C)(vi) of the Income-tax Act, 1961 and to direct the respondents to grant the exemption to the income, in relation to the A. Ys. 2002-03 to 2005-06. The Bombay High Court allowed the petition and held as under:

“i) The Supreme Court in the case of American Hotel and Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86 (SC) noted that the threshold condition for granting approval u/s. 10(23C)(vi) of the Income-tax Act, 1961 is to ascertain that the institution exists solely for education purposes and not for profit. The conditions as stipulated in the third and the thirteenth proviso to section 10(23C) of the Act are the monitoring conditions which may be looked at by the tax authority at a later stage. The Supreme Court observed that section 10(23C)(vi) is analogous to section 10(22). To that extent, the judgments of the court as applicable to section 10(22) would equally apply to section 10(23C)(vi). With the insertion of the provisos to section 10(23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes (which was also the requirement u/s. 10(22) but it has now to obtain initial approval from the prescribed authority. There is a difference between stipulation of conditions and compliance therewith. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the prerequisite condition of actual existence of the educational institution is fulfilled that the question of compliance with the requirements in the provisos would arise.

ii) It is not correct to introduce the word “India” into the third proviso to section 10(23C) of the Act. The plain words of the proviso do not require the application of the entire income to be in India.

iii) The Department could be concerned only with the application of income in the hands of the Trust or the trustees once received in India. This was because the Trust or the trustees were not transferring or repatriating any money outside India to any person or entity. Furthermore, it was not the case of the Department that having received the monies in India, the Trust or the trustees had not utilized the funds in accordance with the objects for which it was founded. The Department had not substantiated their bold statement that the Trust or the trustees had not invested the surplus money in accordance with law which in any event would not be a criteria at the initial stage of approval. The Foundation was an entity which repatriated money into India and did not receive any repatriation from India. Therefore, the money earned and expenses made by the Foundation in the U. S. A. should not and not ought to concern the Income-tax Department in India. There was absolutely no requirement to certify the correctness of the accounts of the Foundation.

iv) As a matter of record, the Department had granted the Trust or the trustees exemption u/s. 10(22) and 10(23C)(vi) of the Act since the A. Ys. 1999-2000 to 2002-03 and the A. Ys. 2006-07 to 2026-27. It was therefore substantiated that the Trust only existed for educational purposes and not for profit. Once it was established that the Trust or the trustees existed to provide education and not for profit, the exemption could not be denied, for the A. Ys. 2002-03 to 2005-06.”

Collection of tax at source — Scope of section 206C — Income from forest produce — Meaning of “forest produce” — Assessee working on sawn timber purchased from third person — Assessee not liable to collect tax at source.

30. Principal CIT(TDS) vs. Nirmal Kumar Kejriwal
[2023] 454 ITR 777 (Cal)
A. Ys. 2005-06 to 2009-10
Date of order: 2nd August, 2022
Section 206C of ITA 1961

Collection of tax at source — Scope of section 206C — Income from forest produce — Meaning of “forest produce” — Assessee working on sawn timber purchased from third person — Assessee not liable to collect tax at source.  

An order was passed against the assessee under section 206C(6)/206C(7) of the Income-tax Act, 1961 on the grounds that the assessee did not collect any tax on the sale of timber obtained by any other mode other than forest lease in terms of section 206C(1) of the Act. The assessee raised objections to the order. The AO rejected the objections.

The CIT(A) held that section 206C was not applicable to the assessee. This was upheld by the Tribunal.

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

“i) Section 206C introduced by the Finance Act, 1988 was intended to levy and collect presumptive tax in the case of trading in certain goods to remove hardship. The trades mentioned therein are alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under forest lease and any other forest produce not being timber, at different rates. The object of introduction of the new provisions for working out the profits on presumptive basis was to get over the problems faced in assessing the income and recovering the tax in the case of persons trading in these items. The provisions were brought into the statute not only to estimate the profits on presumptive basis but also to collect the tax on such transactions at specified rates mentioned in section 206C of the Act. What has to be borne in mind is that, the presumptive tax is collectible on a forest produce. Therefore, the test is whether the assessee had dealt with a forest produce. Basically, forest produce is the produce grown spontaneously.

ii) If timber was being sized, sawn into logs of different dimensions and shapes in activities carried out in saw mills authorised by the Government, it would amount to a different produce. Even in respect of timbers which are procured as described in the table, if it is used in the process of manufacturing, the provisions of section 206C(1) of the Act would not be applicable due to the fact that the product ceased to be a forest produce. Section 206C was not applicable to the assessee.”

Capital gains — Computation of capital gains — Effect of section 50C — Stamp value deemed to be full value of consideration for transfer of immovable property — Object of provision to prevent unaccounted cash transfers of capital assets — Not applicable in case of compulsory acquisition of land and buildings.

29. Principal CIT vs. Durgapur Projects Ltd
[2023] 454 ITR 367 (Cal)
A. Y. 2015-16
Date of order: 24th February, 2023
Section 50C of ITA 1961

Capital gains — Computation of capital gains — Effect of section 50C — Stamp value deemed to be full value of consideration for transfer of immovable property — Object of provision to prevent unaccounted cash transfers of capital assets — Not applicable in case of compulsory acquisition of land and buildings.

In the A. Y. 2015-16, the assessee had earned capital gain on transfer of land to the National Highways Authority of India on compulsory acquisition. The AO applied section 50C of the Income-tax Act, 1961 and added a sum of
Rs. 5,48,43,584 to the total income.

The CIT(A) and the Tribunal held that section 50C was not applicable and deleted the addition.

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

“i) Section 50C of the Income-tax Act, 1961, was inserted by the Finance Act, 2002 with effect from April 1, 2003 for the purpose of taking the value adopted or assessed by the stamp valuation authority as the deemed full value of consideration received or accruing as a result of transfer of a capital asset being land or building or both, in case the consideration received or accruing as a result of transfer is less than such value. The object and purpose behind insertion of the provision in the Act was to curb the menace of the use of unaccounted cash in transfer of capital assets. In a case of compulsory acquisition of land by the Government there is no room for suppressing the actual consideration received on such acquisition.

ii) The Legislature has used the words and expressions in section 50C of the Act consciously to give them a restricted meaning. Hence, the term “transfer” used in section 50C has to be given a restricted meaning and it would not have a wider connotation so as to include all kinds of transfers as contemplated u/s. 2(47) of the Act. The provisions of section 50C will be applicable in cases where transfer of the capital asset has to be effected only upon payment of stamp duty. In a case of compulsory acquisition of a capital asset being land or building or both, the provisions of section 50C cannot be applied as the question of payment of stamp duty for effecting such transfer does not arise.

iii) In the instant case, the property was acquired under the provisions of the National Highways Act, 1956. The property vests by operation of the said statute and there is no requirement for payment of stamp duty in such vesting of property. As such there was no necessity for an assessment of the valuation of the property by the stamp valuation authority in the case on hand. For the reasons as aforesaid it is held that the provisions u/s. 50C of the Income-tax Act cannot be applied to the case on hand.”

Business expenditure — Difference between contingent and ascertained expenditure — Capital or revenue expenditure — Premium payment on redemption of shares which has been quantified is revenue expenditure.

28. AdvocatesNitesh Housing Developers Pvt Ltd vs. DCIT
[2023] 454 ITR 770 (Kar.)
A.Y. 2011-12
Date of order: 2nd August, 2022
Section 37 of ITA 1961

Business expenditure — Difference between contingent and ascertained expenditure — Capital or revenue expenditure — Premium payment on redemption of shares which has been quantified is revenue expenditure.

The assessee was a private limited company engaged in the business of development of real estate and execution of engineering contracts. In September 2009, the assessee entered into a debenture subscription and share purchase agreement. The original agreement was modified under a first addendum agreement dated 15th May, 2010 where under, the option of HDFC to convert debentures to preferential shares at the time of redemption was deleted and the parties agreed that debentures shall be compulsorily converted into preference shares entitling HDFC to post internal rate of return of 25 per cent of the subscription amount. A second addendum agreement dated 12th November, 2012 was entered into between the parties whereunder, HDFC once again resumed the right to exercise the option of converting the debentures to preferential shares. For the A. Y. 2011-12, the assessee filed its original return on 30th September 2011 and revised return on 29th September, 2012. The second addendum agreement was executed on 12th November, 2012, prior to filing the revised returns. The AO held that the premium paid or payable on the redemption of preference shares would be arising out of the reserves and surplus and would constitute capital expenditure out of the accumulated surplus and therefore, it was not a revenue expenditure. He further recorded that the expenditure was contingent upon the issue of initial public offer and accordingly disallowed the expenditure of Rs. 28,83,17,552.

The CIT(A) however held that the amount was deductible. The Tribunal recorded that the premium paid on redemption of debentures is revenue expenditure and allowable proportionately during the period of debenture. Having so held, the Tribunal further recorded that the terms of the original purchase agreement may have been changed to suit the convenience of the parties and it was a “make believe” story to claim deduction. The Tribunal reversed the order of the CIT(A) and restored the order of the AO.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

“The issuance of the debentures was not in dispute. Deduction of tax at source was also not in dispute. The Tribunal had rightly recorded the correct principle of law that premium paid on redemption of debenture is revenue expenditure. By the second addendum agreement dated November 12, 2012, the HDFC’s right to exercise the option of converting the debentures into preference shares had been restored in consonance with the original agreement. The resultant position was, the HDFC, at its option, could cause the assessee to redeem all debentures on September 20, 2012. The adverse finding recorded by the Tribunal that the parties had changed the agreement to suit their convenience and that it was a ‘make-believe’ story was not supported by any cogent reason nor material on record and therefore, was untenable. The premium payable quantified on redemption of debentures was deductible as revenue expenditure.”

Indexation of Cost Where Cost Paid In Instalments

ISSUE FOR CONSIDERATION
In computing the long term capital gains on transfer of a capital asset, an assessee is entitled to certain deductions specified under section 48 of the Income Tax Act 1961, which provides for the mode of computation of the capital gains. This section, besides other deductions, allows deduction of indexed cost of acquisition of the asset in computing the long term capital gains. The term “indexed cost of acquisition” is defined in clause (iii) of the explanation to section 48 as:“indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later.

Generally, in the case of immovable properties which are agreed to be purchased before or during the construction period, payment for the asset is made in instalments spread over several years. Therefore, the cost of the asset is paid over several years.

The issue has arisen before the ITAT in such cases as to how the indexation of cost is to be computed – whether the entire cost is to be indexed from the year in which the asset has been agreed to be acquired, or whether the cost is to be indexed instalment wise from each year in which the part payment of the cost is made. Different benches of the Tribunal have taken conflicting views on the subject, with some holding that the indexation of the entire cost is available from the year of agreement for the acquisition of the asset, while some holding that the indexation is to be computed vis-à-vis payment of each instalment.

CHARANBIR SINGH JOLLY’S CASE

The issue first came up before the Mumbai bench of the Tribunal in the case of Charanbir Singh Jolly vs. 8th ITO 5 SOT 89.

In this case, relating to assessment year 1998-99, involving two brothers who had sold their respective houses at Powai, Mumbai during the year, the assessees had purchased their respective houses under agreements dated  31st March, 1993 but had made payments for purchase of the houses over a period of four years from July 1992 to June 1996. The assessees claimed indexation of the entire cost from the financial year 1992-93, being the year of payment of the first instalment under the agreement to purchase, in computing their long-term capital gains on sale of the houses.The AO treated the first instalment paid by the assessees as the cost of acquisition of the houses, and subsequent instalments paid as cost of improvement of the houses from time to time, allowing indexation for subsequent instalments from the respective years of payment. The result was that the total cost incurred by the assessees for acquiring the houses was not taken as the cost of acquisition for the purpose of indexation, but, on the other hand, cost was taken at static points corresponding to the instalments paid by the assessees. This resulted in a partial loss of indexation benefit to the assessees. The CIT(A) upheld the stand taken by the assessing officer.

Before the Tribunal, on behalf of the assessee, reliance was placed on the decision of the Ahmedabad bench of the Tribunal in the case of ITO vs. Smt Kashmiraben M Parikh 44 TTJ 68, for the proposition that the date of acquisition of the property was the date of booking of the property. In that case, the issue was as to whether the property was a long-term capital asset or short term capital asset, and on the basis of the date of booking, the property had been held to be a long-term capital asset. It was argued before the Mumbai bench of the Tribunal that even though that decision, technically speaking, covered the question of period of holding of property by an assessee, the date of acquisition had been accepted in that judgment, which was relevant to the question of cost of acquisition involved in the case before the Mumbai bench. Reliance was also placed on the decision of the Bombay High Court in the case of CIT vs. Hilla J B Wadia 216 ITR 376.

The Tribunal noted that the real question was what the cost of acquisition was for the purposes of section 48 – the amount of first instalment paid by the assessees, or the total amounts paid by the assessees for acquiring the properties. According to the Tribunal, every property has its own intrinsic/market value or price, irrespective of the mode of payment negotiated between the respective parties. The cost or the value of the property remained the same subject to minor variations of interest or discount factor, irrespective of the mode of payments. The cost or value of the property did not get diluted on account of the fact that the cost of acquisition was paid by instalments.

According to the Tribunal, the basic idea of bringing the principle of indexation was to give some sort of protection to the assessees from the onslaught of inflation.  The effect of inflation could be measured only with reference to the total cost of acquisition of a property. The Tribunal observed that if the effect of inflation was measured with the payment of the first instalment, the whole scheme became ridiculous. The factor of inflation was not with reference to the payments made by the assessee but with reference to the value of the asset vis-à-vis the cost of acquisition of the sale consideration of the property.

The Tribunal therefore held that the cost of acquisition of the houses for the purpose of long-term capital gains computation was the total cost incurred by the assessees and not the first instalment value, and that the assessees were entitled to indexation of the entire payment made for acquisition of the properties from the date of payment of the first instalment.

A similar view was taken by the Tribunal in the cases of Lata G Rohra vs. DCIT 21 SOT 541 (Mum), Divine Holdings Pvt Ltd ITA No 6423/Mum/2008, Pooja Exports vs. ACIT ITA No 2222/Mum/2010, ACIT vs. Ramprakash Bubna ITA No 6578/Mum/2010, Renu Khurana vs. ACIT 200 ITD 130 (Del) and Nitin Parkash vs. DCIT TS-734-Tribunal-2022(Mum), holding that the assessee was entitled to indexation of the entire cost from the date of booking, which was the date of acquisition of the property.

 

ANURADHA MATHUR’S CASE

 

The issue had also come up before the Delhi bench of the Tribunal in the case of Anuradha Mathur vs. ACIT ITA No 2297/Del/2011 dated 14th March, 2014.In this case, pertaining to assessment year 2006-07, the assessee sold a residential flat during the year. Payments of the cost of this house had been made from 1989 to 1996. The assessee became a member of the society and was allotted shares in 1989. The draw for allotment of flat took place in March 1996 and possession of the flat was given in August 1997. Assessee claimed indexation of the entire cost from 1989, i.e. the year of payment of the first instalment.

The AO took the view that the assessee was entitled to indexation of cost from the year of possession, and therefore allowed indexation of the entire cost from the financial year 1997-98 only, not even w.r.t the dates of payments.

Before the CIT(A), it was submitted that indexation was to be allowed from the year in which the asset was first held by the assessee. The assessee became a member of the society in 1989, acquired shares and held an interest in allotment of the flat, being a shareholder, by way of right for making payment for the flat as determined by the society. The word ‘held’ in ordinary parlance would include a right for acquisition of the flat, which was the case of the assessee.

The CIT(A) rejected the assessee’s appeal, holding that the assessing officer was right in treating the date of possession as the date on which the house came to be vested in the control of the assessee. It was held that mere ownership of the shares did not confer the benefit to enjoy the flat, unless the flat had been physically handed over to the assessee.

Before the Tribunal, on behalf of the assessee, the meaning of the term “held” was reiterated, and it was prayed that the indexation as was claimed by the assessee be allowed. It was argued that the assessee’s interest in acquisition of the flat itself amounted to an inchoate right of holding the right of acquiring the ownership of the flat. An alternative plea was raised that if the entire cost of acquisition was regarded as not related to the date of first instalment, then, since there was no doubt that the assessee had made the payments of these amounts for the acquisition of the flat by becoming the member and shareholder of the housing development cooperative society, and the payments made by the assessee over a period of time were towards the right of holding of the flat i.e. towards the acquisition of the asset, therefore these instalments needed to be considered for suitable indexation. It was argued that appropriate indexation of such part payment towards cost of asset would be in the interest of justice.

On behalf of the Department, it was submitted before the Tribunal that the assessee had not disputed the date of allotment and the date of possession. It was amply clear that the assessee became the owner of the flat on possession, and therefore indexation had been correctly computed by the AO.

Considering the submissions, the Tribunal observed that it was inclined to uphold the order of the lower authorities to the effect that the cost of the entire flat could not be indexed from the date of the first instalment. According to the Tribunal, the meaning of the word “held” could not be extended to the part of the payment which was not even made by the assessee till that date. The Tribunal was therefore of the view that there was no case for allowing indexation of the entire cost from the date of payment of the first instalment.

However, the Tribunal found merit in the alternative plea of the assessee. It observed that there was no dispute that assessee had made part payment by way of instalments towards acquisition of the flat by becoming shareholder and member of the society through a recognised and approved method of acquiring membership of a housing cooperative society. The payment of individual instalments made by the assessee amounted to payment towards holding of an asset, which deserved to be indexed from the date of actual payment of each instalment.

The Tribunal therefore held that the long-term capital gain was to be computed by taking the indexed cost of acquisition qua the actual payment of each instalment.

A similar view has been taken by the Tribunal in the cases of Praveen Gupta vs. ACIT 137 TTJ (Del) 307, Vikas P Bajaj vs. ACIT ITA No 6120/Mum/2010, Lakshman M Charanjiva vs. ITO ITA No 28/Mum/2017, and ITO vs. Monish Kaan Tahilramani 109 taxmann.com 156 (Mum).

OBSERVATIONS

In many of the Tribunal decisions (Anuradha Mathur, Praveen Gupta and Vikas Bajaj) in which it has been held that indexation should be allowed vis-à-vis each instalment of payment made, it may be noticed that these were either cases where the assessee himself had claimed indexation of cost on the basis of payments made, or taken that as an alternative plea, since the tax authorities had been claiming that the subsequent date of possession was the date of acquisition, and not the date of booking, and therefore had been allowing indexation of the entire cost only from the date of possession, though payments were made much earlier. In these cases, the Tribunal in a sense decided the issue in favour of the claim made by the assessee.The Tribunal in the cases of Lakshman Charanjiva and Monish Tahilramani (supra) has followed the decision of the Allahabad High Court in the case of Nirmal Kumar Seth vs. CIT 17 taxmann.com 127. In that case, the assessee had been allotted a plot of land in 1982-83 by paying a nominal advance, and had paid the remaining amount in instalments over a period of years. The allotment letter was issued in 1985. While the assessee had claimed a long-term capital loss, the AO had computed a short-term capital gain. The Tribunal had held that the gain was long-term, and that indexation of cost was to be computed with reference to the date of each payment made. The claim of the assessee before the Allahabad High Court was that the full benefit of indexation of cost was not given by the Tribunal.

The Allahabad High Court upheld the view of the Tribunal that the gain was long-term in nature since the letter of allotment was issued more than three years before. The High court also confirmed the order of the Tribunal on the issue of the base year of indexation by observing that the actual amount was paid from time to time after the date of issuance of the allotment letter, which had to be considered for the purpose of indexation with reference to the date of payments. The High Court noted that the Tribunal had rightly directed to compute the indexation of the cost as per the payment schedule, and that there was nothing wrong in the Tribunal’s order, which was based on the well-established legal position as well as the CBDT Circular, which had been mentioned in the order passed by the Tribunal.

The High Court noted that tax on the long-term capital gains had already been deposited as per the computation made by the AO, in the manner claimed by the assessee and that being so, nothing survived in the appeal. On that reasoning, it declined to interfere with the Tribunal’s order. In a sense perhaps, the Allahabad High Court did not really decide the matter, as the issue was no longer found to be relevant in the case before it.

The CBDT Circular referred to in this High Court decision is Circular No 471 dated 15th October, 1986. In this Circular, in the context of acquisition of a flat under the self-financing scheme of Delhi Development Authority, the CBDT has stated:

“2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee. Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the, D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.”

In fact, this CBDT Circular supports the case of the assessee, that all the instalments being paid are part of the cost of acquisition. In CIT vs. Mrs Hilla J B Wadia 216 ITR 376, the Bombay High Court, referring to the Circular, held that the CBDT confirmed that when an allotment letter was issued to an allottee under a scheme on payment of the first instalment of the cost of construction, the allotment was final unless it was cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality. The Board has directed that such an allotment of flat under such scheme should be treated as construction for the purpose of capital gains.

Explanation at the end of Section 48 defines the ‘indexed cost of acquisition’ vide clause(iii) as under “ ‘indexed cost of acquisition’ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001 whichever is later”. The definition of indexed cost of acquisition in the Explanation to section 48 is fairly clear – indexation would be available from the first year in which the asset is held by the assessee. The definition does not refer to payments, and in many such cases, the dates of payment are quite different from the dates of acquisition. Therefore, the date of payment should not really matter for the purposes of indexation of cost of acquisition, based on the clear language of the provision. What would be relevant would be the date from which the asset can be said to be held. The issue in many cases has really been as to what is the date of first holding of the asset – the date of booking/first payment when the right to acquire the asset has been acquired, or the date of possession of the asset.

This issue in a sense has been settled by various High Courts, holding that the date of allotment would be the date of acquisition for computation of the period of holding of the immovable property. This view has been taken by the Bombay High Court in PCIT vs. Vembu Vaidyanathan 413 ITR 248, with SLP against this decision being dismissed by the Supreme Court, reported as Pr.CIT vs. Vembu Vaidyanathan 265 Taxman 535 (SC). A similar view has also been taken by the Punjab & Haryana High Court in the cases of CIT vs. Ved Prakash & Sons (HUF) 207 ITR 148, Madhu Kaul vs. CIT 363 ITR 54, and Vinod Kumar Jain vs. CIT 344 ITR 501, Delhi High Court in the case of CIT vs. K Ramakrishnan 363 ITR 59, and Madras High Court in CIT vs. S R Jeyashankar 373 ITR 120 (Mad).

Once the asset is taken to be held from the date of allotment, indexation of the entire cost would be available from that date, i.e. when the asset is first held. Besides, all instalments paid constitute part of the cost of acquisition, irrespective of when they are paid. This is also clear from the fact that when the asset is agreed to be acquired, the amount of consideration is agreed upon, with only the payment being deferred.

The scheme of taxation of capital gains is also such that what is relevant is the date of acquisition and the date of transfer of the asset – the date of payment of cost of acquisition or the date of realization of consideration are irrelevant for that purpose.

Therefore, the view taken by the Tribunal in the cases of Charanbir Singh Jolly, Lata Rohra and other similar cases, that indexation of the entire cost would be available from the date of allotment, seems to be the better view of the matter.

Glimpses of Supreme Court Rulings

41. Jagdish Transport Corporation and Ors. vs.
UOI and Ors.
(2023) 454 ITR 264 (SC)

Settlement Commission — Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008, after specifically observing that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and to give adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act — The order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law — Matter was remitted to the Interim Board for fresh adjudication.

A search was conducted under section 132 of the Income-tax, Act, 1961 (for short “the Act”) on the business premises of the assessee firm as well as the residence of the partners.

Consequently, notices under section 153A were issued to all the assessees for the A.Ys. 1998-99 to 2004-05.

The return of income was filed by assesses under section 153A of the Act for the aforesaid assessment years.

An application under section 245C(1) of the Act was filed by the assesses before the Income Tax Settlement Commission (for short “the Settlement Commission”).

As per section 245HA, inserted by the Finance Act, 2007, the application was to be decided by the Settlement Commission on or before 31st March, 2008, failing which the proceedings before the Settlement Commission shall stand abated.

The High Court, by way of an interim order, directed the Settlement Commission to dispose of the application under section 245D of the Act by 31st March, 2008.

By order dated 31st March, 2008, the Settlement Commission disposed of the proceedings and settled the undisclosed income at Rs.59,00,000. The Settlement Commission also passed an order that theCIT/AO may take appropriate action in respect of the matters, not placed before the Commission by the applicant, as per the provisions ofsection 245F(4) of the Act.

The Settlement Commission passed the following order:

1. In the abovementioned cases, the Hon’ble High Court of Uttar Pradesh at Lucknow has passed orders dated 19th March, 2008 directing the Settlement Commission to complete the proceedings under section 245D(4) by 31st March, 2008.

2. The Rule 9 Report in this case has been received.

3. In all, the Principal Bench of the Commission has till 26th March, 2008 received more than 325 orders from various High Courts in the month of March, 2008, directing the Principal Bench to complete the cases by 31st March, 2008.

4. This would involve more than 1,500 assessments. The Settlement Commission deals with the assessments which only involve the complexity of investigation and the application is intended to prove quietus to litigation. For example, in one group of cases where 23 applications are involved, the paper book, filed before the Settlement Commission runs into 30,000 pages. It goes without saying that sufficient and proper opportunity is required to be given both to the applicant and the CIT 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 245(D)(4) of the Income-tax Act, 1961, is not practicable. However, to comply with the directions of the Hon’ble High Court, we hereby pass an order under section 245D(4) of the Income-tax Act, 1961, as under:

6. The undisclosed income is settled as under:

Jagdish Transport Corporation:    Rs.32,00,000
Surendar Kr. Tandon:                   Rs.6,00,000
Sandhya Tandon:                         Rs.6,00,000
Kiran Tandon:                               Rs.7,00,000
Virender Kr. Tandon:                    Rs.8,00,000
Total:                                            Rs.59,00,000

 

7. The CIT/AO may take such action as appropriate in respect of the matters, not placed before the Commission by the applicant, as per the provisions of section 245F(4) of IT Act, 1961.

8. Prayer for granting immunity from penalty and prosecution under all Central Acts. In view of the discussions in preceding paras, we grant immunity from prosecution and penalty under the Income-tax Act, 1961 only as regards issues arising from the application and covered by this Order.

9. Interest leviable, if any, shall be charged as per law.

10. It is settled that the amount of tax along with interest shall be paid by the applicants within 35 days from the date of receipt of intimation from the AO.

11. In view of the statutory time limit prescribed under section 245D(4A) of the Act, the Settlement Commission directs the Commissioner of Income-tax to compute the total income, income tax, interest and penalty, if any, payable as per this order and communicate to the applicant immediately along with the demand notice and challan under intimation to this office.

12. In case of failure to adhere to the scheme of payment, the immunity granted under section 245(H)(1) shall be withdrawn in terms of sub-section (1A) of the said section.

In the light of the observations made in para 7 by the Settlement Commission, the AO issued the show cause notice for re-assessment on the various transactions which are detected but were not disclosed by the Appellants before the Settlement Commission.

The show cause notice was the subject-matter of Writ Petition before the High Court. However, thereafter, during the pendency of the proceedings, the AO passed the Assessment Order, which was challenged before the High Court by way of an amendment.

The Division Bench of the High Court dismissed the writ petition on the grounds that the order passed by the Settlement Commission dated 31st March, 2008 was a nullity as the Settlement Commission itself observed that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act was not practicable.

According to the Supreme Court, considering the order passed by the Settlement Commission dated  31st March, 2008 and the manner in which the Settlement Commission disposed of the application under section 245, the High Court was justified in observing that the order passed by the Settlement Commission was a nullity and could not be said to be an order in the eye of law. The Supreme Court noted that the Settlement Commission specifically observed in para 5 of the order dated 31st March, 2008 that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and that even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) of the Act. However, thereafter, the Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31st March, 2008. The Supreme Court was of the view that the High Court ought to have remitted the matter back to the Settlement Commission to pass a fresh order in accordance with law and on merits after following due procedure as required under section 245D(4) of the Act.

The Supreme Court therefore set aside the impugned judgment and order passed by the High Court. It set aside the subsequent assessment/re-assessment order passed by the AO, which was the subject-matter of writ petition before the High Court. It also set aside the order passed by the Settlement Commission dated 31st March, 2008 and remanded the matter to the Settlement Commission for a fresh decision.

The Supreme Court noted that the Settlement Commission has been wound up and the matters pending before the Settlement Commission are being adjudicated and decided by the Interim Board constituted under section 245AA of the Act. In view of the above position, the matter was remitted to the Interim Board with a request that the matter to be taken up expeditiously and would be preferably decided within a period of six months from the date of first hearing and a reasoned order would be passed.

42. CIT vs. Glowshine Builders & Developers Pvt Ltd
(2023) 454 ITR 249 (SC)

Capital Gains or Business Profits — Assessee engaged in the business of building and development — Sale of land — ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade. It had also not considered the other relevant aspects which as such were required to be considered by the ITAT — The matter was remanded to the ITAT to consider the appeal afresh.

The assessee entered into an agreement dated 6th May, 2008 with one M/s Kirit City Homes Pvt Ltd. The development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500. As per paragraph 6 of the development agreement and as per the receipt of the deed, consideration of Rs. 15,94,06,500 was agreed and received by the assessee.

During assessment, it was noticed by the AO that the aforesaid was not disclosed while filing the return of income. The assessee did not enter the aforesaid income into his profit and loss account. It was asked to explain the transaction as it was not appearing in its profit and loss account. The agreement dated 6th May, 2008 was also furnished to the assessee along with the notice. In response, the assessee vide letter dated 4th October, 2011 stated that the transaction was duly offered to tax in A.Y. 2008-09 reflecting a consideration of Rs. 5,24,27,354. The assessee also stated that it had entered into a “rectification deed” with the said party on 30th May, 2008. By the said ratification, it was claimed that the value of the development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

According to the AO, as the transaction was pertaining to A.Y. 2009-10, a show cause notice dated 10th October, 2011 was issued under section 142(1) requiring the assessee to explain as to why the provisions of section 50C of the I.T. Act should not be applied and why the sale proceeds should not be treated at R15,94,06,500 and taxed in A.Y. 2009-10.

The assessee replied to the same. With regard to the applicability of provision of section 50C, he stated that he had sold its stock in trade and not the assets.

The AO made the addition of R15,94,06,500 by treating the same as short term capital gains and consequently, added the same to the income for the year under consideration.

The CIT(A), Mumbai dismissed the appeal and confirmed the addition made by the AO and upheld the view of the AO to treat the transaction as income for capital gains for the AY 2009-10. The CIT(A) also discarded the submissions made by the assessee that transfer of development rights were made in F.Y. 2008-09 pursuant to the MOU dated 27th December, 2007. In the absence of proof to buttress such claim, the CIT(A) also discarded the claim of the assessee that value of the transfer of development rights was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354.

The ITAT, after examining the chart submitted by the assessee pertaining to opening and closing balance for the assessment years 1996-97 to 2007-08 held that the assessee in all these years showed inventory and expenses. Consequently, ITAT held that the assessee was engaged in the business of building and development. The ITAT further noted that the assessee showed the cost of land along with related expenditure as work in progress/inventory since 1999-2000 and the assessment orders were subsequently made under section 143(3) of the IT Act, wherein the AO accepted the nature of business of the assessee. Therefore, ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset. The ITAT also held that the assessee had reduced the sale consideration from Rs. 15,94,06,500 to Rs. 5,24,27,354 during F.Y. 2007-08 on the basis of MOU dated 27th December, 2007 and the said amount of the income had already been declared in the A.Y. 2008-09 i.e., F.Y. 2007-08 and therefore, such income could not be declared in A.Y. 2009-10 i.e., F.Y. 2008-09. The ITAT also confirmed and/or agreed with the assessee that the sale consideration was Rs. 5,24,27,354 only. Based on these findings, the ITAT reversed the findings of the AO as well as the CIT(A) and allowed the appeal by deleting the addition made by the AO of Rs. 15,94,06,500.

The High Court dismissed the appeal filed by the Revenue by holding that none of the questions proposed by the Revenue were substantial questions of law.

The Supreme Court noted that the AO treated the transaction as capital assets. ITAT had reversed the said findings and held that the transaction was stock in trade. The AO specifically recorded the findings on examining the balance sheets for the A.Y. 2006-07 to 2009-10 that there was not even a single sale during all these years and that there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was one of transfer of capital assets and not one of transfer of stock in trade. However, the ITAT after examining the opening and closing balance for the A.Y. 1996-97 to 2007-08 observed that in multiple years, inventory was shown in the balance sheet and held that the transaction in question is sale of stock in trade.

According to the Supreme Court, ITAT neither dealt with the findings given by the AO nor verified/examined the total sales made by the assessee during the relevant time and during the previous years. The Supreme Court was of the opinion that merely on the basis of recording of the inventory in the books of accounts, the transaction in question would not become stock in trade. The Supreme Court observed that it is settled position of law that in order to examine whether a particular transaction is sale of capital assets or business expense, multiple factors like frequency of trade and volume of trade, nature of transaction over the years etc., are required to be examined. According to the Supreme Court, the ITAT, without examining any of the relevant factors had confirmed that the transaction was transfer of stock in trade.

According to the Supreme Court, the High Court had also failed to appreciate that even in the event of acceptance of claim made by the assessee, including the assertion that Rs. 15,94,06,500 was shown in the tax return in the earlier AY i.e., 2008-09, the differential amount of Rs. 10,69,79,146 on account of reduction in sale consideration of development rights was to be assessed in the current year as either capital gain or business income. The Supreme Court noted that as per the claim of the assessee and the entry made and reflected in the ledger account of the assessee as on 31st March, 2008, an amount of Rs. 15,94,06,500 was paid to a third party i.e., SICCL. However, thereafter, according to the assessee there was a rectification deed dated 30th May, 2008 and the amount was reduced from Rs. 15,94,06,500 to Rs. 5,24,27,354. According to the Supreme Court, the ITAT had not even questioned the factum of refund of differential amount of Rs. 10,69,79,146 to the purchaser on account of rectification deed dated 30th May, 2008. The ITAT ought to have appreciated that the moment the receipt of amount is received and recorded in the books of accounts of the assessee unless shown to be refunded/returned, it had to be treated as income in the hands of the recipient. The ITAT has also not considered the aforesaid aspect.

The Supreme Court therefore concluded that the ITAT had not considered the relevant aspects/relevant factors while considering the transaction in question as stock in trade and had not considered the relevant aspects as above which as such were required to be considered by the ITAT, the matter was therefore required to be remanded to the ITAT to consider the appeal afresh in light of the observations made hereinabove and to take into consideration the relevant factors while considering the transaction as stock in trade or as sale of capital assets or business transaction.

Accordingly, the impugned judgment and order passed by the High Court and that of the ITAT were quashed and set aside and the matter was remitted back to the ITAT to consider the appeal afreshin accordance with law and on its own merits, while taking into consideration the observations made hereinabove and to take an appropriate decision on whether the transaction in question was the sale of capital assets or sale of stock in trade and other aspects referred hereinabove.

43. CIT vs. Paville Projects Pvt Ltd
(2023) 453 ITR 447 (SC)
Civil Appeal No. 6126 of 2021 (Arising out of SLP (C) No. 13380 of 2018)

Decided On: 6th April, 2023

Revision — Prejudicial to the interest of the Revenue — Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue — If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue — However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under section 263.

The assessee was engaged in manufacture and export of garments, shoes, etc. It filed its income tax return for the A.Y. 2007-08 wherein it showed sale of the property/building “Paville House” for an amount of Rs. 33 crores.

The building “Paville House” was constructed by the assessee on the piece of land which was purchased in the year 1972. The said house of the company was duly reflected in the balance sheet of the company.

There had been litigation between shareholders of the Company being family members. Litigations in the Company Law Board and the High Court culminated in arbitration. In the arbitration proceedings, an interim award was passed whereby an amicable settlement termed as “family settlement” was recorded between the parties. As per the interim award, three shareholders namely, (1) Asha, (2) Nandita and (3) Nikhil were paid Rs. 10.35 crores each.

The assessee showed gains arising from sale of “Paville House” amounting to Rs. 1,21,16,695 as “long term capital gains” in the computation of their income for A.Y. 2007-08. The working computation of capital gains was accepted by the AO, whereby the cost of removing encumbrances claimed (Rs.10.33 Crores paid to three shareholders pursuant to the interim award) was taken as “cost of improvement” and the deduction was claimed to remove encumbrances on computation of capital gains. On the balance amount capital gain tax was offered and paid. The assessment was completed on 15th December, 2009 by the AO under section 143(3) of the Income-tax Act, 1961 (for short “IT Act”) accepting the “long term capital gains” as per sheet attached in computation of income.

Later, a notice dated 24th October, 2011 was issued by the CIT under section 263 of the IT Act to show cause as to why the assessment order should not be set aside.

The Commissioner vide its order dated 24th April, 2011 held that the assessment order passed under section 143(3) of the IT Act was erroneous and prejudicial to the interest of the revenue on the issue relating to deduction of Rs.31.05 Crores claimed by the assessee as cost of improvement while computing long term capital gains. The claim of the assessee that the said payment was made by them towards settlement of litigation, which according to the assessee amounted to discharge of encumbrances and required to be considered as cost of improvement, was not accepted by the Commissioner as according to him it did not fall under the definition of “cost of improvement” contained in section 55(1)(b) of the IT Act. According to the Commissioner, the expenses claimed by the assessee neither constituted expenditure that is capital in nature nor resulted in any additions or alterations that provide an enhanced value of an enduring nature to the capital asset. The Commissioner also held that the payment as contended was not made by the assessee to remove encumbrances. The Commissioner also held that provisions of sections 50A and 55(1)(b) of the IT Act were not complied with and the assessment order was not framed in consonance with the provisions of the IT Act and thus the assessment order was erroneous and prejudicial to the interest of the revenue. Consequently, the Commissioner set aside the assessment order passed by the AO with a direction to the AO to recompute the capital gains of the assessee in consonance with the provisions of the IT Act as discussed in the order.

On appeal, the ITAT relying upon the decision of this Court in the case of Malabar Industrial Co Ltd vs. CIT [(2000) 2 SCC 718: (2000) 243 ITR 83 (SC)] concluded that the Commissioner wrongly invoked the jurisdiction under section 263 of the IT Act. The ITAT also observed that there was no error on facts declared. The ITAT held that every loss of revenue as a consequence of AO’s order cannot be treated as prejudicial to the interest of the revenue, when two views were possible and AO took a view which CIT did not agree with. The ITAT also upheld the allowability of the assessee’s claim of deduction of payment made to the shareholders relying upon the decision of the Bombay High Court in CIT vs. Smt. Shakuntala Kantilal [(1991) 190 ITR 56 (Bombay)]. The ITAT relying on the Tribunal’s order (Bombay Bench) in Chemosyn Ltd vs. ACIT [2012 (25) Taxxman.com 325 (Bombay)] held that the CIT’s observation of expenditure incurred for payment of shareholders not being deductible as incorrect.

The Department’s appeal against the ITAT’s order was dismissed by the High Court wherein the High Court has confirmed the ITAT’s findings. The High Court agreed with the findings recorded by the ITAT that the claim for deduction of Rs. 31.05 crores was for ending the litigation and the litigation ended only when the building was sold and the payment was made as per the direction of the Company Law Board as well as the interim arbitral award and therefore, the same was deductible under section 55(1)(b) of the IT Act, as allowed by the AO.

On a further appeal by the Revenue, the Supreme Court observed that the assessee had heavily relied upon the decision of this Court in the case of Malabar Industrial Co Ltd (supra). In the said case it is observed and held that in order to exercise the jurisdiction under section 263(1) of the Income-tax Act, 1961 the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. However, if one of them is absent, recourse cannot be had to section 263(1) of the Act. The Supreme Court noted that “What can be said to be prejudicial to the interest of the Revenue” has been dealt with and considered in paragraphs 8 to 10 in the case of Malabar Industrial Co Ltd (supra). Understood in its ordinary meaning it is of wide import and is not confined to loss of tax but courts have treated loss of tax as prejudicial to the interests of the Revenue.

The Supreme Court noted that even as observed in paragraph 9 in the case of Malabar Industrial Co Ltd (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It was further observed that if due to an erroneous order of the ITO, the Revenue was losing tax lawfully payable by a person, it would certainly be prejudicial to the interests of the Revenue. However, only in a case where two views were possible and the AO had adopted one view, such a decision, which might be plausible and it had resulted in loss of Revenue, such an order was not revisable under section 263.

The Supreme Court applying the law laid down in the case of Malabar Industrial Co Ltd (supra) to the facts of the case on hand and even as observed by the Commissioner, held that the order passed by the AO was erroneous as well as prejudicial to the interest of the Revenue. In the facts and circumstances of the case, it could not be said that the Commissioner exercised the jurisdiction under section 263 not vested in it. The erroneous assessment order had resulted into loss of the Revenue in the form of tax. Under the Circumstances and in the facts and circumstancesof the case narrated hereinabove, it was held that the High Court had committed a very serious error in setting aside the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

The Supreme Court restored the order passed by the Commissioner passed in exercise of powers under section 263 of the Income-tax Act, 1961.

Note:

It is worth noting that by insertion of Explanation 2 by the Finance Act, 2015 [w.e.f. 1st June, 2015], the scope/powers of revisional jurisdiction of CIT/PCIT under section 263 is effectively widened by providing deeming fiction for treating order of the AO as ‘erroneous in so far as it is prejudicial to the interest of the revenue’ under certain circumstances.

Letters to The Editor

Dear Dr Mayur B Nayak

Editor, BCAS Journal,

I hope this letter finds you in good health and high spirits. Firstly, I would like to extend my heartiest compliments on the smooth and seamless transition of BCAS Journal’s editorship from CA Raman Jokhakar to your capable hands. I am certain that your expertise and dedication will continue to elevate the standard of this esteemed journal.

I am writing to express my sincere appreciation for the enriching content that BCAS Journal has been publishing. Over the past few months, I have had the pleasure of reading and rereading some exceptional articles that have truly captivated my interest. I would like to specifically mention a few articles in the July 2023 edition of the BCAJ that have left a lasting impression on me:

1.    The insightful interview of Dr. Brinda Jagirdar shed light on significant aspects that are pertinent to our field. Her expertise and perspectives were both enlightening and thought-provoking.

2.    CA Pinakin Desai’s article on the role of direct tax in economic growth provided a comprehensive understanding of this crucial subject. The author’s lucid explanations made a complex topic easily comprehensible.

3.    The YouTube video featuring Senior Advocate Arvind Datar was not only informative but also highly engaging. His expertise in the legal realm, combined with the dynamic presentation, made it a pleasure to watch.

4.    The article titled “Future of Audit – The Transformation Agenda” by CA P R Ramesh was an eye-opener, highlighting the evolving landscape of auditing practices. The author’s vision for the future of audits was inspiring.

A well-coordinated team effort is evident in the quality and variety of articles published, and I applaud the whole team for their dedication and hard work.

Lastly, I cannot conclude without mentioning the delightful touch of culture and tradition that “NAMASKAAR” by CA C. N. Vaze brings to the journal. It is like the icing on the cake, adding a sense of warmth and authenticity to each issue.

Once again, I want to express my gratitude to you and the entire team for consistently delivering valuable content to your readers. The BCAS Journal continues to be a source of knowledge and inspiration for professionals like me, and I eagerly look forward to each new edition.

Thank you for your time and commitment to maintaining the journal’s high standards.

With warm regards

CA Dilip M Jani

Mumbai

Article 5(3) and Article 5(4) of India — Singapore DTAA — The time for the calculation of 180 days does not start and end with the date of raising the first and last invoice. It depends upon the facts of each case. Time spent on different projects cannot be aggregated to compute the time threshold merely because the client and person performing work are the same.

4. Planetcast International Pvt Ltd vs. ACIT
[TS-389-ITAT-2023(Del)]
[ITA No: 1831/1832/Del/2022 & 451/Del/2023]
A.Ys.: 2018-19, 2019-20 & 2020-21     
Date of order: 18th July, 2023

Article 5(3) and Article 5(4) of India — Singapore DTAA — The time for the calculation of 180 days does not start and end with the date of raising the first and last invoice. It depends upon the facts of each case. Time spent on different projects cannot be aggregated to compute the time threshold merely because the client and person performing work are the same.

FACTS

The assessee received two orders from A (an Indian Company) for projects located in Gurugram and Bengaluru. He obtained a quote from Original Equipment Manufacturer (OEM), shared it with A and placed an order with OEM on receipt of confirmation from A. Assessee claimed that the supply of equipment is not taxable in India as the title passed outside India and fees for installation and commission is not taxable as 183 days duration threshold relevant for trigger of installation PE is not crossed. AO held that assessee’s presence constituted construction PE and supervisory PE in India. For the calculation of 183 days, AO calculated the period starting from the date of the first invoice for the supply of material to the last invoice raised. Also, both projects were treated as integrated for computing time threshold. DRP upheld AO’s order.

Being aggrieved, the assessee appealed to ITAT.

HELD

  •     Two separate purchase orders were issued for the purchase of different types of equipment to be installed at Bengaluru and Gurugram.

 

  •     Assessee did not manufacture the assets itself. Until manufacturing was complete and delivered to A, installation/commission services could not have commenced.

 

  •     Accordingly, the first date of invoice for the supply of material cannot be taken as the date of commencement of installation and commissioning of services at the project site.

 

  •     Two projects were independent of each other. Merely because installation at both sites was done by the same contractors, the project cannot be treated as a single project.

 

  •     In any case, from the evidence submitted, installation at the Bengaluru site was completed in 46 days and at Gurugram in 87 days. Thus, in any case, the aggregate threshold of 183 days was not crossed.

 

Article 12 of India — USA DTAA — Provision of architectural services for construction of Statue of Unity is not taxable in India as it does not satisfy make available condition in DTAA.

3. Michael Graves Design Group Inc. vs. DCIT
[ITA No: 7683/Del/2017 & 6007/Del/2018]
A.Ys.: 2014-15 & 2015-16          

Date of order: 18th July, 2023

Article 12 of India — USA DTAA — Provision of architectural services for construction of Statue of Unity is not taxable in India as it does not satisfy make available condition in DTAA.

 

FACTS

Assessee provided architectural design, drawing and master plan for the construction of Statue of Unity. AO held the assessee rendered technical and architectural design services which made available the technology, skill, experience, etc., and thus fell within the ambit of FIS under Article 12(4)(b) of the India-USA DTAA. DRP upheld the AO order.

Being aggrieved, the assessee appealed to ITAT.

HELD

  • Assessee rendered project-specific services involving creation of conceptual, aesthetic design and description of scope that would give the EPC contractor guidance for the design and execution of the project.
  • Design provided by the assessee was for the appearance of the project, and it was the responsibility of the EPC contractor to develop final design.
  • Assessee did not develop a technical design or transferred a technical plan. It only presented general conceptual designs and description to help EPC contractor visualise the project.
  • The design was specific for the project and cannot be applied independently. Thus, services do not satisfy make available condition.

 

‘सत्यमेव जयते’

Mr Mungeri, a Chartered Accountant, frustrated and aggrieved as always, was fed up with many things:

 

  • Clients coming at the 11th hour.
  • Clients not paying fees or delaying the payment.
  • Article – trainees not available.
  • Staff not sincere; taking leave at crucial periods.
  • Government changing the rules every now and then.
  • Government not clarifying many things, and their system not working.
  • Revenue department harassing for various reasons.
  • Clients expect him to sign their ‘untrue’ statement.
  • Own health issues – often neglected.
  • Wife unhappy since he is always available for clients(!), never for her!

…so on and so forth.

He was enduring this situation for many years. He found many CAs sailing in the same boat.

He thought to himself, “To hell with this humiliating life! What is the use of my education? Am I really my own boss? Can I enjoy my life like those friends who joined corporate jobs? Is my future secured?” He was feeling suffocated.

Once he read a short biography of Gandhiji. He saw the emblem of India on currency notes ‘Satyameva Jayate’ – Truth alone triumphs!

He recalled that as a professional, he should be independent and fearless. He got inspired and made up his mind to speak the truth.

So he sat down and created a very strong WhatsApp message, exposing everything and everyone. He cursed the Government, he cursed businessmen, he cursed revenue authorities, and became very outspoken like ‘Mungerilal’.

No wonder! The WhatsApp message became viral on social media. There was furore everywhere. Police took its cognisance, media persons came to meet him, Government Authorities got upset and planned strict action against him, and the Institute initiated disciplinary action.

Mungeri came to know all these reactions and was frightened! He lost his sleep and had to be hospitalised. He could not think of any way out. He thought that was the end of him.

His well-wishers consulted a lawyer. The lawyer advised that he should obtain a certificate from a Neurologist that he was a ‘mentally ill’ person, a lunatic and that he often behaved like a hysterical person.

A friend’s client was a neurologist. The certificate was ‘obtained’ and submitted everywhere. The Authorities got a little pacified.

But there was one difficulty. They asked him to produce precedents to show that he was not of sound mind. They wanted at least one proof of his ‘madness’.

The proof was obvious! His friends pointed out that he was in CA practice for so many years and still wanted to continue!!

NOTE

Mr C V Joshi (Chi. Vi. Joshi) was a noted Marathi writer and a leading humourist. He was a scholar in Buddhist philosophy and the Pali language. A Marathi serial, Chimanrao Gundyabhau was extremely popular even amongst non-Marathi speaking people. This serial was based on his famous book Chimanravache Charhat, which was replete with sophisticated humour. This story of CA Mungeri is adopted basically from a similar episode in the stories of Chimanrao Gundyabhau.

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

24. Information Technology Park Ltd vs. ITO
[2022] 99 ITR (T) 633 (Bangalore – Trib.)
ITA Nos.: 1357 & 1358 (BANG.) of 2018
A.Ys.: 2009-10 & 2010-11
Date of order: 24th August, 2022

Section 56 read with Rule 11UA of the Income Tax Rules — There was no fault in approach of assessee in considering guideline value of land and building to arrive fair value of preference shares that it would fetch in open market on valuation date and arriving at premium value for redemption of preference shares, hence addition made by TPO computing differential premium on basis of book value of assets was not sustainable.

FACTS

The assessee was a public limited company incorporated in the year 1994. It was engaged in the business of developing, operating and maintaining industrial parks/Special Economic Zones. The assessee was a subsidiary of Ascendas Property Fund (India) Pvt Ltd. [APFI]. The assessee had issued 0.5 per cent redeemable non-cumulative preference shares on 6th January, 2003 and the same was subscribed by APFI. The preference shares were issued at a face value of Rs. 100 per share and were redeemable at any time after 24 months but not later than 9 months from the date of allotment. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of the international transaction entered into by assessee with AFPI. The assessee had during the previous year relevant to A.Y. 2010-11 redeemed some of the preference shares at a premium based on the valuation done the expert valuer by adopting the Net Asset Value (NAV) method. The TPO accepted the method of valuation adopted by the assessee i.e., NAV method, but reworked the redemption value based on book value of assets. The TPO arrived at the redemption value at Rs. 286.80 per share which resulted in an adjustment of Rs. 29,95,66,000 that arose out of the difference between the redemption value adopted by the assessee and the TPO. The AO passed the final assessment order giving effect to the TP adjustment based on the letter filed by the assessee that the assessee would not be filing objections before the DRP and would prefer appeal with the CIT(Appeals).

The CIT(Appeals) held that the TP adjustment made by the TPO determining the value at which the preference shares should have been redeemed cannot be treated as income in the hands of the assessee by relying on the decision of the Bombay High Court in the case of Vodafone India Services (P.) Ltd vs. Union of India [2015] 53 taxmann.com 286/231 Taxman 645/[2014] 369 ITR 511. However, since the ALP of the share price determined by the TPO was lesser than the price determined by the assessee, the CIT(A) proposed to make addition to the extent of the same amount by treating it as deemed dividend. In this regard the CIT(Appeals) relied on the decision of the Tribunal in the case of Fidelity Business Services India (P) Ltd vs. Asstt. CIT [2017] 80 taxmann.com 230/164 ITD 270 (Bang – Trib). The assessee filed its response to the show cause notice before the CIT(Appeals) by submitting that the premium of redemption of preference shares cannot be considered as deemed dividend as per the provisions of section 2(22) of the Act and revenue authorities cannot re-characterize the transaction as deemed dividend. The assessee made detailed submissions before the CIT(Appeals) in this regard which were rejected by the CIT(Appeals) who proceeded to treat the premium on preference shares as deemed dividend. Aggrieved by the order, the assessee was in appeal before the Tribunal.

HELD

The Tribunal observed that a combined reading of the rule 11UA(1)(c)(b) with rule 11UA(1)(c)(c) can be taken to mean that for the purpose of valuation of preference shares also the immovable properties to be considered at guideline value since the value based on the guidance represents the economic and commercial value of the preference shares on the date of valuation.

The method of valuation adopted as NAV was not disputed as the TPO had also applied the same method and impugned addition had arisen only due to the value of land and building considered by the TPO for arriving at the NAV. The guideline value of land and building for the purpose of valuation of preference shares under NAV method was right. Therefore, the addition made by the TPO computing the differential premium basis the book value of assets was not sustainable. Since there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend under section.2(22)(e) also would not survive. The appeal was allowed in favour of the assessee.

Section 80-IB – Restriction on the extent of built up area of commercial space in housing project imposed by way of amendment to section 80-IB(10) w.e.f. 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005.

23. DCIT vs. Sahara India Sahkari Awas Samiti Ltd
[2022] 98 ITR (T) 634 (Delhi – Trib.)
ITA Nos.: 2481 & 2482 (Delhi) of 2011
A.Ys.: 2005-06 & 2006-07        
Date of order: 19th July, 2021

 

Section 80-IB – Restriction on the extent of built up area of commercial space in housing project imposed by way of amendment to section 80-IB(10) w.e.f. 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005.

 

FACTS

 

The assessee was a co-operative society of Sahara India Group and was engaged in the business of development and construction of residential and commercial units. A development agreement dated 21st September, 1999 was entered into between the assessee and Sahara India Commercial Corporation Ltd, wherein the assessee appointed SICCL to construct Sahara States, Lucknow and Sahara Grace, Lucknow projects. The project map was approved on 26th March, 2003 by the Lucknow Development Authority. The assessee claimed deduction under section 80-IB (10) in the return of income filed for A.Ys. 2005-06 and 2006-07. The AO questioned claim of deduction under section 80-IB (10) on the following grounds:

a.    the built up area of the shops and commercial establishments cannot exceed 5 per cent of the aggregate built up area or 2,000 sq. ft. whichever was less and the project developed by the assessee comprised of 30,300 sq. ft. of commercial establishment which exceeds the prescribed limit.

b.    the assessee was to obtain a completion certificate prior to 31st March, 2008 and the assessee did not produce such certificate.

c.    the assessee cannot be regarded as a developer since it was not actively involved in the development and construction works due to non-employment of capital and labor for the purpose of development and construction.
On appeal, the CIT (Appeals), allowed the claim of the assessee.

Aggrieved by the order of CIT (Appeals), the revenue filed further appeal before the Tribunal.

HELD

The Tribunal observed that so far as the first objection of the revenue was concerned that the built up area of shops and commercial establishments far exceeds the area prescribed under the statute was concerned, the issue stands settled in favour of the assessee by the decision of the Supreme Court in the case of CIT vs. Sarkar Builders [2015] 57 taxmann.com 313/232 Taxman 731/375 ITR 392 and CIT vs. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121/367 ITR 466 wherein it had been held that restriction on extent of commercial space in housing project imposed by way of amendment to section 80-IB(10) with effect from 1st April, 2005 does not apply to housing projects approved before 1st April, 2005 even though completed after 1st April, 2005. Since, in the instant case the housing project was admittedly approved before 1st April, 2005 therefore, the first allegation of the revenue that the aggregate built up commercial area far exceeds the prescribed limit was not applicable to the assessee.So far as the second objection of the revenue was concerned, i.e., completion of the project on or before 31st March, 2008 was concerned, the assessee contended that the project was completed before 31st March, 2008 in view of the following additional evidences:-
i.    Letter from Sahara India Commercial Corporation Ltd to the assessee dated 14th March, 2008.
ii.    Letter from the assessee to Sahara India Commercial Corporation Ltd dated 18th March, 2008.
iii.    Architect certificate dated 15th September, 2008along with the official translation.

 

Since these documents were never produced before the lower authorities and were filed before the Tribunal for the first time in the shape of additional evidences, therefore, Tribunal admitted the additional evidences filed in terms of rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 and restore the issue relating to completion of the project prior to 31st March, 2008 to the file of the AO for adjudication of this issue. The Tribunal held that the AO shall examine the documents and any other details that he may require and decide the issue as per fact and law after giving due opportunity of being heard to the assessee.

 

So far as the third allegation of the revenue that the assessee was not a developer was concerned, the Tribunal observed that condition of developer was decided and allowed in the initial years of claim, i.e., in the assessment years 2003-04 and 2004-05 which was evident from the order of the Commissioner (Appeals) for assessment year 2005-06. Therefore, same was not open for examination in subsequent year in absence of change in the factual position. Without disturbing the assessment for the initial assessment year it was not open to the revenue to make disallowance of such deduction in subsequent year by taking a contrary stand. Further, merely appointing SICCL as a contractor for development and construction of the project, cannot lead to the conclusion that the said activities were not carried on by the assessee society. Since the assessee was bearing the entire risks and responsibilities relating to the project and SICCL was appointed only to execute the project, therefore, in the light of the ratio of various decisions relied on by Counsel for the assessee, the assessee ought to be considered as a developer and cannot be denied the benefit of deduction under section 80-IB (10). So far as the allegation of the revenue that the booking application forms of the flats were addressed to the SICCL and not to the assessee and that the assessee had authorized SICCL to collect money from purchasers of flats directly on its behalf was concerned, merely because certain procedural formalities relating to collection of booking application forms and money from the buyers were delegated to SICCL, it would not render SICCL as the developer of the project since the money collected by SICCL was on behalf of the assessee only and on the authorisation of the assessee and not in its independent capacity. Therefore, delegation of certain formalities regarding collection of booking application forms and money on behalf of the assessee would not cease the assessee company as being rendered as a developer of the project.In view of the above discussion, objection Nos. 1 and 3 by the AO while denying the benefit of deduction under section 80-IB(10) are rejected since the assessee, had fulfilled the condition regarding built up area of shops and commercial establishments and the assessee was a developer. However, the third objection relating to obtaining of completion certificate prior to  31st March, 2008 was restored to the file of the AO for fresh adjudication in view of the additional evidences filed by the assessee.

Section 69A – Where cash deposited in bank by the assessee during demonetisation period was out of cash sales and realisation from trade debtors which was duly shown in books of account and AO did not point out any specific defect in books of account maintained by assessee and no inflated purchases or suppressed sales were found, such cash deposit could not be treated as unexplained money of assessee.

22. DCIT vs. Roop Fashion
[2022] 98 ITR (T) 419 (Chandigarh – Trib.)
ITA No.: 136 (CHD) of 2021
A.Y.: 2017-18
Date of order: 14th June, 2022

Section 69A – Where cash deposited in bank by the assessee during demonetisation period was out of cash sales and realisation from trade debtors which was duly shown in books of account and AO did not point out any specific defect in books of account maintained by assessee and no inflated purchases or suppressed sales were found, such cash deposit could not be treated as unexplained money of assessee.

FACTS

The AO during the course of assessment proceedings noticed that the assessee had deposited demonetised currency in its bank account. The Ld. AO asked the assessee to furnish information with necessary documentary evidences. The assessee furnished the financial monthly data and relevant documents. However, the AO held that assessee had introduced its own unaccounted money in the disguise of sale in the wake of demonetisation and he estimated the sales of the assessee and invoking the provision of section 69A made addition. The CIT (Appeals) observed that the assessee had submitted a chart which revealed that cash deposited in this year was far less than the cash deposited in the preceding years when there was no demonetisation and that the auditor had not pointed out any discrepancy in the books of account of the assessee which had not been rejected by the AO under section 145(3) and that the stock position depicted in the books of account had been accepted by the AO. Thus, CIT (Appeals) was of the view that when the sales recorded in the books of account had been accepted by the AO, the corresponding cash deposit made out of such cash sales and cash realisation from debtors could not be rejected. The CIT (Appeals) allowed the appeal of the assessee.

Aggrieved by the order of CIT (Appeals), the revenue filed further appeal before the Tribunal.

HELD

The Tribunal observed that the books of account maintained by the assessee in the regular course of its business were audited and accepted by the AO while framing the assessment through deep scrutiny under section 143(3). The AO did not point out any specific defect in the books of account maintained by the assessee, no inflated purchases or suppressed sales were found. Even the Investigation Wing asked the assessee to furnish the details which were submitted and on those details, no adverse comment was made by the Investigation Wing. It was also noticed that the assessee was having cash sales in all the years. The assessee was also having cash realised from the debtors and it was not the case of the AO that the debtors of the assessee were bogus or those were not related to the business of the assessee. The cash deposited in the bank by the assessee during the demonetisation period was out of the cash sales and the realisation from the trade debtors duly shown in the books of account which were accepted by the AO. The assessee had deposited Rs. 2,47,50,000 during the demonetisation period in the bank account. The AO accepted Rs. 1,50,00,000 as cash sale on estimated basis but no basis or method was adopted for that estimation. In other words the AO considered the aforesaid estimated sales only on the basis of surmises and conjectures which were not tenable in the eyes of law. The AO accepted the trading results and had not doubted opening stock purchase sales and closing stock as well as GP rate shown by the assessee. Therefore, the addition made by the AO on the basis of surmises and conjectures was rightly deleted by the CIT (Appeals).

In result, the appeal filed by the assessee was allowed.

Section 250, Rule 46A

21. DCIT vs. Ansaldo Caldaie Boilers India Pvt Ltd
ITA No. 1999/Chny/2019
A.Y.: 2015-16
Date of Order: 21st June, 2023
Section 250, Rule 46A

FACTS

The assessee filed its return of income for the A.Y. 2015-16 on 30th November, 2015 admitting NIL income and claiming current year loss of Rs. 7,87,45,865/-.

In the course of assessment proceedings, the AO noted that (i) the assessee has claimed a sum of Rs. 8,59,47,532 as finance cost for the year under consideration; (ii) the interest bearing funds borrowed by the assessee as on 31st March, 2015 include long term loans at Rs. 32,18,49,972 and the short term loans at Rs. 19,92,21,313 totaling to Rs. 52,10,71,285; (iii) the assessee has incurred interest expenses to the tune of Rs. 8,59,47,532 as finance cot in respect of the above borrowings and has charged off the same to profit and loss account; (v) the assessee has advanced a sum of Rs. 15,00,00,000 as advance for purchase of land for which an agreement has been entered into but no registration has been taken place and therefore, the asset has not put to use by the assessee; (vi) from the balance sheet, the AO has noted that the assessee has utilised interest bearing funds for the advance given for purchase of land.

The AO asked the assessee to show-cause as to why proportionate interest should not be disallowed under section 36(1)(iii) of the Act. After considering the submissions and examining the details furnished by the assessee, the AO held that the assessee has disguised an interest free loan to fellow subsidiary as an advance for purchase of land. As per section 36(1)(iii) of the Act, the amount of the interest paid in respect of capital borrowed for the purpose of the business or professional only shall be allowed as a deduction. However, since the assessee has claimed interest on sums advanced to fellow subsidiary which has no connection with the business of the assessee, as per section 36(1)(iii) of the Act, the AO disallowed the sum of Rs.2,47,41,586 [computed as Rs.8,59,47,532 x (Rs.15,00,00,000 / Rs.52,10,71,285] proportionate to the amounts advanced not for the purpose of business and added back to the total income. Aggrieved, assessee preferred an appeal to CIT(A) who after considering the particulars and evidences to substantiate the fact that the payment of advance of Rs. 15 crores were from the proceeds of the equity share capital, which were received from the parent company during the F.Y. 2010-11 as well as bank statements in support of assessee’s claim, allowed the ground raised by the assessee by deleting the disallowance made under section 36(1)(iii) of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal where it submitted that the CIT(A) has deleted the disallowance under section 36(1)(iii) of the Act based on the fresh evidences furnished by the assessee during the course of appellate proceedings without affording an opportunity to the AO to verify the additional evidences submitted by the assessee which is in violation of Rule 46A of the Income Tax Rules.

HELD

The Tribunal having heard both the sides and perused the materials available on record and gone through the orders of authorities below observed that the disallowance of interest made under section 36(1)(iii) of the Act has been deleted by CIT(A) by considering the fresh evidences furnished by the assessee during the course of appellate proceedings without affording an opportunity to the AO to verify the additional evidences submitted by the assessee which is in violation of Rule 46A of the Income Tax Rules. The Tribunal set aside the order of the CIT(A) on this issue and remitted the matter back to the file of the AO to verify the additional evidences/bank statements, etc. and decide the issue afresh in accordance with law by affording an opportunity of being heard to the assessee.

Claim for deduction under section 80IC cannot be denied in a case where tax audit report as also audit report in Form 10CCB under Rule 18BBB is filed on time but the return of income is filed late.

20. Canadian Speciality Vinyls vs. ITO
TS-301-ITAT-2023 (Delhi)
A.Y.: 2015-16
Date of order: 2nd June, 2023
Section 80IC

Claim for deduction under section 80IC cannot be denied in a case where tax audit report as also audit report in Form 10CCB under Rule 18BBB is filed on time but the return of income is filed late.

FACTS

 In this case the claim of the assessee for deduction under section 80IC of the Act was not allowed by the AO on the grounds that the assessee had filed the return of income beyond the due date. The assessee had filed tax audit report as also the audit report in Form 10CCB under Rule 18BBB on time.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO on the ground that the return of income was filed late.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the assessee had filed the tax audit report as also the audit report in Form No. 10CCB but it was only return of income which was filed late due to illness of the executive partner. It also noted that the CIT(A) had recorded a categorical finding that the assessee was prevented by sufficient cause in filing return of income on time.

The Tribunal further noted the ratio of the decision of the Nagpur Bench (AT e-Court, Pune) of Tribunal in the case of Krushi Vibhag Karmchari Vrund Sahakari Pat Sanstha vs. ITO (ITA No. 182/Nag./2019; A.Y.: 2009-10; Order dated 7th October, 2022) wherein the coordinate Bench of the Tribunal, after considering the provisions of section 80AC of the Act and considering the judgements of the Hon’ble Supreme Court in the case of CIT vs. GM Knitting Industries Pvt Ltd, (376 ITR 456) and PCIT vs. Wipro Ltd, 446 ITR 1 (SC) held that the Chapter III and Chapter VI-A of the Act operate in different realms and principles of Chapter III, which deals with ‘incomes which did not form part of total income’ cannot be equated with mechanism provided for deductions in Chapter VI-A which deals with ‘deductions to be made in computing the total income’. Therefore, it was held that the fulfillment of requirement for making a claim of exemption under the relevant sections of Chapter III in the return of income is mandatory, but, when it comes to the claim of a deduction, inter alia, under the relevant section of Chapter VI-A, such requirement become directory. In a case where the assessee claims deduction under Chapter VI-A of the Act, the making of a claim even after filing of return, but, before completion of the assessment proceedings and passing of assessment order meets the directory requirement of making a claim in the return of income.

The Tribunal held that even in a situation the return of income of the assessee for A.Y. 2015-16 is treated as belated return beyond the prescribed time limit provided under section 139(1) of the Act, then also, as per the judgement of the Hon’ble Supreme Court in the case of G.M. Knitting Industries Pvt Ltd (supra), which was followed by the coordinate Bench of the ITAT, Pune in the case of Krushi Vibhag Karmchari Vrund Sahakari Pat Sanstha (supra), the assessee is very well entitled to claim deduction u/s 80IC of the Act.

The Tribunal held that a logical conclusion is that the assessee is entitled to get deduction under section 80IC of the Act, as the claiming such deduction, which is part of Chapter VI-A of the Act, in the return of income filed within prescribed time limit is not mandatory but directory.

Order imposing penalty under section 270A passed in the name of deceased is void. Assessment order cannot be rectified on the basis of an order of the Apex Court which was not available on the date when the AO exercised jurisdiction under section 154.

19. UCB India Pvt Ltd vs. ACIT    
TS-377-ITAT-2023 (Mum.)
A.Y.: 2011-12
Date of order: 27th June, 2023
Section 154

Order imposing penalty under section 270A passed in the name of deceased is void.

Assessment order cannot be rectified on the basis of an order of the Apex Court which was not available on the date when the AO exercised jurisdiction under section 154.

FACTS

The assessee filed return of income, for assessment year 2011-12, declaring total income of Rs. 20,81,12,869. The case was selected for scrutiny and the total income assessed vide order dated 29th January, 2016 passed under section 144C(1) r.w.s 143(3) of the Act at Rs. 36,25,23,522. In the course of assessment proceedings, the AO raised specific query regarding sales promotion expenses and allowed the deduction claimed after considering the response of the assessee and also the fact that for A.Ys. 2002-03 and 2003-04 the Tribunal, in the case of assessee, has on identical facts allowed deduction of sales promotion expenses.

Subsequently, the AO issued notices dated 18th March, 2020, 20th December, 2020, and 23rd December, 2020 seeking to rectify the order dated 29th January, 2016 The assessee challenged the proposed order on jurisdiction and also on merits. However, the AO was not convinced and he disallowed the sales promotion expenses of Rs. 11,30,18,798.

The assessee being aggrieved by the action of the AO in passing an order rectifying the order dated 29th January, 2016 passed under section 144C(1) r.w.s 143(3) of the Act, preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the Calcutta High Court has in the case of Jiyajerrao Cotton Mills [(1981) 130 ITR 710 (Cal.)] held that a debatable issue on the question or which required investigation and arguments as to facts or law to find out if there was a mistake cannot be rectified under section 154. It observed that in the present case the issue relating to allowability of sales promotion expense in the hands of the assessee was not settled in favor of the revenue.

The Tribunal observed that on one hand there was Circular No. 5 of 2012, dated 01st August, 2012 issued by CBDT which provided that the deduction for sales promotion expense in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002 should be disallowed, and on the other hand there are two decisions of the Tribunal in assessee’s own case. Vide common order dated 06th February, 2009, pertaining to A.Ys. 2002-03 & 2003-04 [ITA No 428 & 429/Mum/2007], the Tribunal had allowed deduction for sales promotion expenses claimed by the assessee in identical facts and circumstances. Further, vide common order dated 26th February, 2016, passed in appeals pertaining to A.Ys. 2004-05 (ITA No. 6681 & 6454/Mum/2013), 2005-06 (ITA No. 6682 & 6455/Mum/2013 (and 2007-08 (ITA No. 6558 & 6456/Mum/2013), the Tribunal had deleted the adhoc disallowance made by the AO in respect of gift articles. The AO had made disallowance by placing reliance upon the aforesaid regulations and the circular, however, the Tribunal deleted the addition by placing reliance upon the decision of the Tribunal in the case of Syncom Formulation vs. DCIT (ITA No. 6429& 6428/Mum/2012, dated 23rd December, 2015) wherein it was held that the Circular No. 5 of 2012 issued by CBDT would apply prospectively with effect from 1st August, 2012. The Tribunal held that the issue was clearly debatable on law.

The AO did not have the benefit of the judgment of Hon’ble Supreme Court in the case of Apex Laboratories Pvt Ltd [(2022) 442 ITR 1 (SC)] at the time of exercising jurisdiction as the same came much later on 22nd February, 2022.

The Tribunal was of the view that, even on facts, the issue required investigation. The Tribunal noted that in the order passed under section 154, the AO had in a table given break-up of sales promotion expenses which table had a column captioned `broad nature of expenses’. On perusal of the column ‘Broad Nature of Expenses’ of the table forming part of Paragraph 4 of the Rectification Order (which table has been reproduced in the order of the Tribunal), the Tribunal observed that it was not apparent the all the sales promotion expenses were incurred on freebies. To the contrary, the broad nature of expenses given in the table suggested that the sales promotion expenses were not in the nature of freebies such as ‘Market Research Fee’, ‘Off Supplies Puch (Sales Promotion)’, ‘Printing & Reproduct (Sales Promotion)’, and ‘Documentation Books (Promotional Expenses)’. The balance expenses, according to the Tribunal, could have included expenses on freebies. However, this was a matter of investigation as it was not apparent that the sales promotion expenses of Rs.11,30,18,796 was incurred on freebies.

The Tribunal held that the issue of allowance of sales promotion expenses (including freebies) in the hands of the assessee was debatable and required investigation and arguments on facts and in law. The Tribunal held that it cannot be said that allowance of deduction of sales promotion expenses by the AO resulting in a mistake apparent on record.

The Tribunal quashed the order passed by the AO under section 154 of the Act as being without jurisdiction.

Restatement of Financial Statements — Auditor’s Considerations

INTRODUCTION

 

Events leading to the breakup of large accounting giants, corporate failures, and regulatory actions are evidence of financial reporting irregularities. Many of these irregularities involved restatement of financial statements due to error. Financial statements are prepared by the management as per the applicable accounting framework and GAAP to meet the expectations of various stakeholders. Schedule III to the Companies Act, 2013 requires companies to disclose the comparative period amounts as well in addition to current period numbers to ensure comparability between the periods presented.

The incidence and extent of restatements in various high-profile companies have created an image that the accounting process has failed more often than it really has. As per the ‘2021 FINANCIAL RESTATEMENTS – A TWENTY-ONE-YEAR REVIEW issued by Audit Analytics1’, the number of restatements filed increased significantly to 1,470, due to Special Purpose Acquisition Companies (SPAC) restatements. Excluding SPAC restatements, there was a 10 per cent year-over-year decrease. As per this study, revenue recognition had been the top issue in each of the past three years. Some of the examples include a change in the method (policy) of revenue recognition from over the period of time to the point of time, restatement originating from a failure to properly interpret sales contracts for rebate, return or resale clause, and reporting increase/decrease in revenue.

This article deals with the framework for restatement and auditor’s reporting considerations with respect to retrospective restatements to financial statements, i.e., in relation to misstatements identified in a prior period and considerations in auditing adjustments to comparative information in financial statements audited by predecessor or successor.

1   2021_Financial_Restatements_A_Twenty-One-Year_Review.pdf
(auditanalytics.com). The Audit Analytics Restatement database covers SEC
registrants who have disclosed a financial statement restatement in electronic
filings.

 

RESTATEMENT FRAMEWORK

 

Restatement is permissible under Indian Accounting Standards notified under section 133 of the Companies Act, 2013 (Act). While AS 5, notified under Companies (Accounting Standards) Rules, 2006, does not permit restatement, Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, permits restatement. AS 5 requires correction of prior period items by either including them in the determination of net profit or loss for the current period or to show such items in the statement of profit and loss after the determination of current net profit or loss.Material prior period errors need to be corrected in accordance with Ind AS 8. Ind AS 8 defines retrospective restatement2  as correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. Ind AS 8 requires an entity to correct material priorperiod errors retrospectively in the first set of Ind AS financial statements approved for issue after their discovery by:

(a)    restating the comparative amounts for the prior period(s) presented in which the error occurred; or

(b)    if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

2   Reference – Ind AS 8 on Accounting

Policies, Changes in Accounting Estimates and Errors and Educational Material
covering Ind AS 8, Accounting Policies, Changes in Accounting Estimates and
Errors. The Educational Material provides guidance by way of Frequently Asked
Questions (FAQs) and illustrations explaining the principles enunciated in the
Standard.

 

‘Material information’ is defined in Ind AS 8 as information if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions that the primary users of general-purpose financial statements make on the basis of the financial statements, which provide financial information about a specific reporting entity. Materiality depends on the nature or magnitude of information or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.Determination of materiality is a matter of professional judgement, and reference needs to be made to the standards and other guidance issued by the ICAI. Financial statements may not be restated for immaterial errors. Financial statements may also be restated due to material reclassification or for common control business combinations, as explained in Appendix C of Ind AS 103, Business Combinations.

The Act does not provide for restatement (except as stated above under Ind AS); it contains specific provisions for revision of the financial statements under sections 130 and 131 of the Act. It is discussed later in the article.

 

RESTATEMENT IN OFFER DOCUMENT UNDER SEBI REGULATIONS

 

The Securities and Exchange Board of India (SEBI) Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 (as amended from time to time) is the regulatory framework which governs the various aspects of public issues, including IPO. It lays down a set of guidelines relating to conditions for various kinds of capital issues. In terms of the SEBI (ICDR) Regulations, 2018, the company is required to submit a Draft Red Herring Prospectus (DRHP or Offer letter). One of the important processes involved in this activity is the preparation of restated financial statements. An issuer company is required to prepare the restated consolidated financial information in accordance with Schedule III to the Companies Act, 2013 for a period of three financial years and a stub (interim) period (if applicable) in tabular format. The restated consolidated financial information should be based on audited financial statements and required to be audited and certified by the statutory auditors who hold a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.The Regulations also require adjustment of audit modifications/qualifications, which are quantifiable or can be estimated in the restated financial information in the appropriate period. In situations where the qualification cannot be quantified or estimated, appropriate disclosures should be made in the notes to account for explaining why the qualification cannot be quantified or estimated.

ICAI has issued the Guidance Note on Reports in Company Prospectuses, which provides guidance to the practitioners/auditors in case of engagements which require them to issue their reports on financial information related to the prospectuses for the issue of securities by the companies. As per the aforesaid Guidance note, applicable reports/ certificates should be issued considering the accounting standards (Ind AS or Indian GAAP, as the case may be) used for the preparation of restated financial information.

It is the responsibility of the management to prepare restated financial statements in accordance with Ind AS 8 or to give effect to the common control business combination transaction or where the company is planning for IPO. The auditor is required to evaluate whether the restatement has been done in accordance with the applicable framework and evaluate reporting implications in case of deviation from the framework. The next section deals with the auditor’s responsibilities in case of restatement of the financial statements.

AUDITOR’S RESPONSIBILITIES IN CASE OF RESTATEMENT

SA 710 (Revised) on Comparative Information—Corresponding Figures and Comparative Financial Statements deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements. An auditor expresses an opinion on the current period financial statements and does not refer to the comparative information in the opinion (that is, on the corresponding figures). Typically, financial reporting frameworks in India use the corresponding figures approach for general-purpose financial statements.  EXAMPLES OF PRIOR PERIOD MISSTATEMENTS WOULD INCLUDE

  • Arithmetical error in the calculation of an accounting estimate or valuations.
  • Revenue recognition errors.
  • Incorrect application of an accounting policy, such as inventories carried at NRV instead of lower of cost and NRV.
  • Inadequate or incorrect disclosures required by applicable accounting standards, e.g., incorrect comparatives disclosures for discontinued operations and assets held for sale.
  • Incorrect capitalisation of an expenditure.

 

AUDITOR’S CONSIDERATIONS — KEY PROCEDURES IN CASE OF PRIOR PERIOD MISSTATEMENT

The auditor is required to check compliance with the applicable financial reporting framework, i.e., whether the financial statements include the comparative information required by the applicable financial reporting framework (e.g., comply with requirements of Schedule III of the Companies Act, 2013) and whether such information is appropriately classified. Auditor to evaluate whether the comparative information agrees with the amounts and other disclosures presented in the prior period; and whether the accounting policies reflected in the comparative information are consistent with those applied in the current period or, if there have been changes in accounting policies, whether those changes have been properly accounted for and adequately presented and disclosed.If the auditor becomes aware of a possible material misstatement in the comparative information while performing the current period audit, the auditor is required to perform additional audit procedures as are necessary in the circumstances to obtain sufficient appropriate audit evidence to determine whether a material misstatement exists. If the auditor had audited the prior period’s financial statements, the auditor is required to follow the relevant requirements of SA 560, Subsequent events. For example, if the matter is such that had it been known to the auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor will be required to discuss the matter with management and, where appropriate, those charged with governance; determine whether the financial statements need amendment and, if so, inquire how management intends to address the matter in the Financial Statements.

If the management amends the financial statements, the auditor will be required to either issue a new or revised auditor’s report as per SA 560. If management does not take the necessary steps and does not amend the financial statements in circumstances where the auditor believes they need to be amended, the auditor is required to notify management/ those charged with governance, that the auditor will seek to prevent future reliance on the auditor’s report. If, despite such notification, management or those charged with governance do not take these necessary steps, the auditor will be required to take appropriate action to seek to prevent reliance on the auditor’s report.

AUDITOR’S REPORTING

Modified opinion issued for the prior period:

If the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modification is unresolved, the auditor will be required to modify the auditor’s opinion on the current period’s financial statements.The following is an illustration of qualified reporting wherein the auditor refers to both the current period’s figures and the corresponding figures3:

“Because we were appointed auditors of the Company during 20XX, we were not able to observe the counting of the physical inventories at the beginning of that period or satisfy ourselves concerning those inventory quantities by alternative means. Since opening inventories affect the determination of the results of operations, we were unable to determine whether adjustments to the results of operations and opening retained earnings might be necessary for 20XX. Our audit opinion on the financial statements for the year ended 31 March, 20XX was modified accordingly. Our opinion on the current period’s financial statements is also modified because of the possible effect of this matter on the comparability of the current period’s figures and the corresponding figures.”

However, if the matter which gave rise to the modified opinion is resolved and properly accounted for or disclosed in the financial statements in accordance with the applicable financial reporting framework, the auditor’s opinion on the current period need not refer to the previous modification.

UNMODIFIED OPINION ISSUED FOR THE PRIOR PERIOD

If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued, the auditor shall verify whether the misstatement has been dealt with as required under the applicable financial reporting framework. For example, non-compliance with ‘material’ presentation or disclosure requirements in Schedule III in the previous year may require a restatement of financial statements of the current year as required by Ind AS 8 with adequate disclosures. This will require professional judgement.

3   Refer Illustration 2, SA 710 – Corresponding figures..

When the prior period financial statements that are misstated have not been amended, and an auditor’s report thereon has not been issued in accordance with the requirements of SA 560, “Subsequent Events”, but the corresponding figures have been properly dealt with as required under the applicable financial reporting framework and the appropriate disclosures have been made in the current period financial statements, SA 710 states that the auditor’s report may include an Emphasis of Matter paragraph describing the circumstances and referring to, where relevant, disclosures that fully describe the matter that can be found in the financial statements (refer SA 706).

However, if that is not the case, the auditor shall express a qualified opinion or an adverse opinion in the auditor’s report on the current period’s financial statements, modified with respect to the corresponding figures included therein.

ILLUSTRATIVE EXAMPLES — EMPHASIS OF MATTER PARAGRAPH FOR RESTATEMENT

“We draw attention to Note 3 to the consolidated financial results, which describe the impact of the restatements related to the non-recognition of deferred tax liabilities on the revaluation of certain property, plant and equipment and the reclassification of the amount of freight recovered from customers disclosed under ‘Other Expenses’ to ‘Revenue from Operations’. Our opinion is not modified in respect of this matter.”“We draw attention to Note 4, more fully described therein, of the Statement regarding certain errors in the consolidated financial information of the previous year/earlier years which have been rectified during the current year by way of restatement of the comparative financial information in respect of deferred tax liability on business combination, performance incentive and recognition of right of use assets. Our opinion is not modified in respect of this matter.”

COMMUNICATION WITH THE PREDECESSOR AUDITOR

The occurrence of a restatement implies not only that an irregularity or error has occurred earlier but also that it was detected in the current year. SA 710 requires that if the auditor concludes that a material misstatement exists that affects the prior period financial statements on which the predecessor auditor had previously reported without modification, the auditor shall communicate the misstatement with the appropriate level of management and those charged with governance and request that the predecessor auditor be informed. The board of directors are certainly responsible for overseeing the audit and adequacy of internal controls. The audit committee should be informed in all such cases and necessary action to be taken by the company.

 AUDIT CONSIDERATIONS WITH RESPECT TO THE RESTATEMENT OF COMPARATIVE INFORMATION DUE TO COMMON CONTROL BUSINESS COMBINATIONS

Where the comparative information has been restated pursuant to a common control business combination, the auditor needs to evaluate whether such business combination is in accordance with generally accepted accounting principles, including Ind AS 103.However, if the common control business combination is not accounted for as per the applicable accounting standard but accounted for in accordance with the Scheme approved by Court/NCLT, the auditor is required to verify that the financial statements adequately disclose such fact, e.g., Schedule III/ section 129(5) to the Companies Act, 2013 prescribes certain disclosures if the financial statements do not comply with the accounting standards. Where necessary disclosures have been made, an  Emphasis of Matter4 may be included in the audit report of the current year to describe the resultant deviation in sufficient detail.

ILLUSTRATIVE EXAMPLES OF RESTATEMENT — IND AS 103

“Note XX to the accompanying Statement, which describes the restatement of comparative previous periods presented in the Statement by A Ltd.’s management pursuant to the Composite Scheme of Arrangement and Amalgamation, approved by National Company Law Tribunal. A Ltd. has given accounting effect to these schemes from 31 March 20XX (closing business hours), being the appointed date of the said schemes as prescribed under Ind AS 103 Business Combinations, since the scheme of the merger will prevail over the applicable accounting requirements. Our opinion is not modified in respect of the above matter.”

4   Paragraph A4 of SA 706 and FAQ 29 of Implementation Guide on Reporting Standards issued by ICAI.

 

 REVISION OF FINANCIAL STATEMENTS

 

Section 131 of the Companies Act, 2013 deals with the provisions for the voluntary revision of Financial Statements and Board Report in certain circumstances. The directors of any company can opt to revise its financial statements and/or directors’ report after obtaining approval of the Tribunal when such financial statements and/or directors’ report are not in compliance with specified provisions of the Act. For example, in case of fraud or mismanagement, re-opening or recasting of financial statements becomes important for reflecting a true and fair view of the accounts. This section was introduced after the occurrence of the Satyam case in India, where recasting of accounts was mandated. One may argue that retrospective restatement of comparative amounts for the prior periods presented on account of prior period errors does not tantamount to revision of financial statements and, consequently, does not attract the provisions of section 131 of the Act. However, this is a legal matter.

BOTTOM LINE

Auditors play an important role in enhancing the stakeholder’s confidence in financial statements, and therefore, it is imperative that the auditor complies with the mandatory requirements while dealing with the restatement of financial statements. Material restatements often go together with material weakness in internal controls over financial reporting, and auditors should consider this aspect while opining on the financial statements. In rare cases, a financial restatement also can be a sign of fraud, e.g., intentional error. Such restatements may signal problems that require corrective actions.

Notice under Section 148 of The Income-Tax Act, Post Faceless Reassessment Scheme

INTRODUCTION
The provisions of the Income-tax Act, 1961 (“the Act”) dealing with the reassessment of income have undergone a change by virtue of various amendments inter-alia to sections 147 to 151A of the Act made by the Finance Act, 2021 w.e.f. 1st April 2021. The Explanatory Memorandum to the Finance Bill, 2021 states that the assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven, and therefore, there is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search-related cases.

The amendments made by Finance Act, 2021 were followed up by amendments made by the Finance Act, 2022 and also, to a certain extent, by amendments made by the Finance Act, 2023.

Any amendment made to the Act should normally be with a view to enlarge/curtail the scope of the provision being amended or to plug existing mischief or to make the law simpler, or to grant/take away discretion vested in an authority (which discretion Legislature believes is not being used in a manner it ought to be).

Experience, however, since the introduction of new provisions for reassessment, is that the amended provisions have brought in a flood of litigation, and much more is expected till the Apex Court settles the divergent views expressed by the High Courts.

ISSUE CONSIDERED IN THIS ARTICLE

Subsequent to coming into force of the e-Assessment of Income Escaping Assessment Scheme, 2022, notified by Notification dated 29th March, 2022 (“Faceless Reassessment Scheme”), a notice under section 148 of the Act has to be issued by the Faceless Assessing Officer (“FAO”), as is mandated by Faceless Reassessment Scheme. The issue for consideration is consequently whether all notices issued under section 148 of the Act, after coming into force of the Faceless Reassessment Scheme, by the Jurisdictional Assessing Officer (“JAO”), being contrary to the provisions of the Faceless Reassessment Scheme, are bad in law and need to be struck down?

JURISDICTIONAL CONDITIONS  FOR ISSUANCE OF NOTICE  UNDER SECTION 148

Under amended provisions of the Act, a notice proposing reassessment is issued under section 148 of the Act if income chargeable to tax has escaped assessment and the Assessing Officer (“AO”) has obtained prior approval of the Specified Authority to issue such notice. Approval of Specified Authority is not needed in cases where an order under section 148A(d) has been passed with the approval of the Specified Authority that it is a fit case to issue a notice under section 148. The provisions of section 148 are subject to the provisions of section 148A. Thus, the AO issuing notice under section 148 must necessarily:

(i)    have information which suggests that income chargeable to tax has escaped assessment;

(ii)    ensure that the provisions of section 148A have been complied with;

(iii)    have the approval of the Specified Authority, where required, to issue such notice.

The notice under section 148 is to be served along with a copy of the order passed, if required, under section 148A(d) of the Act.

For the purposes of sections 148 and 148A –

(i)    The expression “information which suggests that income chargeable to tax has escaped assessment” is defined in Explanation 1 to section 148;

(ii)    Specified Authority has the meaning assigned to it in section 151.
Since the provisions of section 148 are subject to the provisions of section 148A, compliance with section 148A becomes a sine qua non for issuance of notice under Section 148. The trigger for reassessment is ‘information which suggests that income chargeable to tax has escaped assessment’. The information is available through Insight Portal. It is the case of the revenue that this information is in accordance with the risk management strategy formulated by the Board. It is understood that such information is linked to the PAN of the assessee and is available for viewing to the AO having jurisdiction over the PAN of the assessee i.e., JAO. Once the AO has ‘information which suggests that income chargeable to tax has escaped assessment’, section 148A requires the following –

i)    with the prior approval of the Specified Authority, the AO must conduct an enquiry with respect to the information suggesting that the income chargeable to tax has escaped assessment;

ii)    having made an enquiry, the AO must then provide to the assessee an opportunity of being heard by serving upon the assessee a notice requiring him to show cause as to why a notice under section 148 should not be issued on the basis of the information which suggests that income chargeable to tax has escaped assessment in his case and results of an enquiry conducted, if any, as per clause (a) of section 148A and must give the assessee material which he has in his possession. The Assessing Officer must give the assessee a minimum time of seven days to respond to the show cause notice;

iii)    the AO must decide, on the basis of material available on record and also the reply of the assessee and after having provided an opportunity of being heard to the assessee, that it is a fit case to issue a notice under section 148 of the Act. This decision has to be in the form of an order under section 148A(d) of the Act, which needs to be passed with the prior approval of the Specified Authority. Order under section 148A(d) has to be passed within the time period mentioned therein.

EXCEPTIONS TO THE ABOVE PROCEDURE

The provisions of section 148A and, therefore, the above steps, are not required to be complied with in a case where a search is initiated under section 132 and also in a case where the AO is satisfied, with prior approval of PCIT or CIT, that any money, bullion, jewellery or other valuable article seized in a search under section 132 belongs to the assessee.

SANCTIONS TO BE OBTAINED

The following acts require the sanction of the Specified Authority to be obtained:
i)    conduct of an enquiry on the basis of information suggesting that income chargeable to tax has escaped assessment;

ii)    up to 31st March, 2022, for issuing a show cause notice to the assessee, as required by section 148A(b), as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment and results of enquiry conducted, if any, under clause (a) of section 148A;

iii)    passing an order under section 148A(d) of the Act, deciding that on the basis of material available on record, including reply of the assessee, that it is a fit case for issuance of notice under section 148 of the Act;

iv)    up to 31st March, 2022, for issuance of notice under section 148 of the Act in all cases;

v)    from 1st April, 2022, for issuance of notice under section 148 in cases where an order under section 148A(d) is not required to be passed;

vi)    in a case where, in the course of a search on any person other than the assessee, any money, bullion, jewellery or other valuable article or thing is seized and in respect of which the AO is satisfied that such money, bullion, jewellery or other valuable article of thing belongs to the assessee, and consequently provisions of section 148A are not applicable to such a case.

FACELESS ASSESSMENT OF INCOME ESCAPING ASSESSMENT –  SECTION 151A

Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 has w.e.f. 1st November, 2020, inserted section 151A in the Act, captioned ‘Faceless assessment of income escaping assessment’. This section empowers Central Government to make a scheme, for the purposes of:

i)    assessment, reassessment or re-computation under section 147; or

ii)    issuance of notice under section 148; or
iii)    conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or

iv)    sanction for issue of such notice under section 151.
The above powers are given to the Central Government so as to impart greater efficiency, transparency and accountability by carrying out the processes mentioned in clauses (a) to (c) of section 151A(1) of the Act.

Section 151A(2) empowers the Central Government to issue directions that any of the provisions of the Act shall not apply or shall apply with such exceptions, notifications and adaptations as may be specified in the notification. Such direction is to be issued no later than 31st March, 2022

While section 151A has been introduced w.e.f. 1st November, 2020, the amended provisions dealing with the new reassessment scheme have come into force w.e.f. 1st April, 2021. Simultaneous with the introduction of the amended provisions, section 151A has been amended by the Finance Act, 2021, to cover conducting of enquiries or issuance of show cause notice or passing of an order under section 148A.

While the section is on the statute w.e.f. 1st November, 2020, the Scheme has been framed and is effective from 29.3.2022.

Section 144B already provides for reassessment or re-computation under section 147 of the Act to be done in a faceless manner. Therefore, the Scheme makes a reference to section 144B.

Notification issued under section 151A(2) – On 29th March, 2022 a Notification No. 18/2022/F. No. 370142/16/2022-TPL(Part 1] had been issued notifying a scheme known as ‘e-Assessment of Income Escaping Assessment Scheme, 2022’ (“Faceless Reassessment Scheme”). The Faceless Reassessment Scheme has come into force with effect from the date of its publication in the Official Gazette i.e., 29th March, 2022. The scope of the Faceless Reassessment Scheme is stated in Para 3 of the said Notification dated 29th March, 2022. Para 3(b) provides that for the purpose of this Scheme, issuance of notice under section 148 of the Act shall be through automated allocation, in accordance with the risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of the assessee. (Emphasis supplied)

Section 144B does not deal with the issuance of notice under section 148 or conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or sanction for the issue of such notice under section 151. Therefore, the expression “to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of the assessee has to be read, only with making an assessment, reassessment or recomputation under section 147 and not with reference to other parts viz. issuance of notice under section 148; or conducting of enquiries or issuance of show cause notice or passing an order under section 148A; or sanction for the issue of such notice under section 151.

Does the scheme cover only cases covered by clause (i) of Explanation 1 to section 148 defining ‘information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment’ – The Scheme states that the issuance of notice under section 148 shall be through automated allocation, in accordance with the risk management strategy formulated by the Board as referred to in section 148 for issuance of notice. Reference to risk management strategy formulated by the Board is only in clause (i) of Explanation 1 to section 148 which defines the expression ‘information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment.’ Explanation 1 to section 148 has 5 clauses, each of which constitutes information with the AO which suggests that income chargeable to tax has escaped assessment. However, the Scheme covers only clause (i). In cases where the notice under section 148 is issued on the basis of clauses (ii) to (v) of Explanation 1, it is possible to take a view that such a notice cannot be issued in a faceless manner as the same is beyond the scope of the Faceless Reassessment Scheme. The cases covered by clauses (ii) to (v) of Explanation 1 to section 148 are cases where reopening is on account of:

(i)    an audit objection in the case of an assessee, or

(ii)    information received under an agreement referred to in section 90A, or

(iii)    any information made available to the AO under the scheme notified under section 135A, or

(iv)    any information which requires action in consequence of the order of a Tribunal or a Court.

ISSUES FOR CONSIDERATION

Para 3(b) of the Scheme provides that the notice under section 148 has to be issued in a faceless manner i.e., Faceless Assessing Officer will issue it. Therefore, a question which arises for consideration is whether all the notices issued under section 148 of the Act by the Jurisdictional Assessing Officer after the Scheme came into force are bad in law and, therefore can be challenged in a writ jurisdiction or otherwise.

In the alternative, is it that in view of the provisions of the Act, the Notification cannot be given effect to at all, or is it that the provisions of the Faceless Reassessment Scheme are to run concurrently with the normal provisions of the Act?

ANALYSIS OF THE ISSUE

Faceless Reassessment Scheme provides that a notice under section 148 of the Act is to be issued in a faceless manner. Therefore, the assesses are likely to challenge the notices issued under section 148 of the Act by JAO and contend that such notices are bad in law/illegal and need to be quashed since the same are not in accordance with the Faceless Reassessment Scheme, which requires notice under section 148 of the Act to be issued in a faceless manner.

Considering the recent trend of judicial decisions, it appears to be quite unlikely that the Courts will hold the notices issued by JAO to be illegal and/or without jurisdiction. The courts may try to harmoniously read the provisions of the Act and the Faceless Reassessment Scheme and may, for the following reasons, despite the Faceless Reassessment Scheme requiring a notice to be issued by FAO, hold that a notice under Section 148 issued by a JAO is to be upheld –

i)    information suggesting escapement of income, which is the trigger for the commencement of reassessment proceedings, is received by JAO;

ii)    the enquiry with respect to information which suggests that income chargeable to tax has escaped assessment is conducted, by JAO, with prior approval of the Specified Authority;

iii)    opportunity of being heard is provided to the assessee by the JAO by issuing a SCN required to be issued pursuant to section 148A(b) of the Act;

iv)    the assessee furnishes his explanation and explains the case to the JAO;

v)    it is the JAO who, on the basis of information which suggests that income chargeable to tax has escaped assessment and results of the enquiry conducted by him and also after considering the replies of the assessee, takes a decision that it is a fit case, for issuance of notice under section 148 of the Act and passes an order with the prior approval of the Specified Authority;

vi)    up to 31st March, 2022, issuance of notice under section 148 required prior approval of the Specified Authority. In case it is the FAO who is issuing the notice under section 148, then will it be approval of PCIT / CIT under whose jurisdiction the FAO is working who will approve the issuance of notice? If yes, then the approval for conducting an enquiry was given by PCIT / CIT under whose jurisdiction JAO works, but the approval for issuance of notice is by the PCIT/CIT under whose jurisdiction FAO works. If the answer is negative and, therefore, approval is to be obtained from the jurisdictional PCIT / CIT, then will the FAO be validly able to obtain such approval since, administratively FAO is not working under their jurisdiction?

vii)    Section 148 provides that the notice under section 148 should be issued along with copy of the order under section 148A(d);

viii)    from receiving of information till passing of the order under section 148A(d) it is the JAO who is satisfied that it is a fit case for issuance of notice under section 148, then can FAO issue a notice under section 148?

ix)    Assuming that it is FAO who is to issue a notice under section 148, then who will be the PCIT who will sanction issuance of notice?

x)    In view of the above, issuance of a notice under section 148 by FAO will only amount to being a ministerial act which is not what is envisaged by the Act.

POSSIBILITY OF HOLDING THAT JAO AND FAO HAVE CONCURRENT JURISDICTION TO ISSUE A NOTICE UNDER SECTION 148.

For the above reasons, which could be supplemented further by the courts/tribunals, the court may not strike down the notices issued by the JAOs. However, since such an interpretation may make the Scheme otiose, the Court may try and give meaning to the Scheme as well by holding that the provisions of the Act and the Scheme are to be read harmoniously. The Court may hold that both JAO and FAO have concurrent jurisdiction to issue notice under section 148 and therefore, in cases where information is with the JAO and the provisions of section 148A are complied with by the JAO, then it will be JAO who will be entitled to issue notice under section 148 and in cases where the information is with FAO and the provisions of section 148A are complied with in a faceless manner, then the notice under section 148 may be issued by FAO and sanction of Specified Authority under section 151 be obtained in a faceless manner as is provided in the Scheme.

THE SCHEME DOES NOT AMEND ANY PROVISIONS OF THE ACT, THOUGH FOR GIVING EFFECT TO THE SCHEME, SUCH AMENDMENTS COULD HAVE BEEN MADE.

Section 151A authorises the Central Government to make amendments to the provisions of the Act to the extent necessary to give effect to the Scheme. Such amendments could have been made till 31st March, 2022. The Notification dated 29th March, 2022 notifying the Faceless Reassessment Scheme does not amend any of the provisions of the Act, in the circumstances, can one say that the scheme is not to be given effect to. The Notification could have clearly amended the provisions of the Act to provide that the cases where information which suggests that income chargeable to tax has escaped assessment is with the JAO, and JAO has complied with the provisions of section 148A and has passed an order under section 148A(d), then the notice under section 148 shall be issued by JAO.

SEARCH CASES ARE ALSO COVERED BY FACELESS REASSESSMENT SCHEME.

The Scheme does not make any distinction between a search case and a non-search case. Can a notice under section 148 be issued in a faceless manner in the case of an assessee who has been subjected to an action under section 132 of the Act and in whose case even assessment is not done in a faceless manner?

THE SCOPE OF THE SCHEME IS NARROWER THAN WHAT SECTION 151A ENVISAGES.

Section 151A empowers the Central Government to make a scheme for the purposes of assessment, reassessment or re-computation under section 147 or issuance of notice under section 148 or conducting of enquiries or issuance of show cause notice or passing of order under section 148A or sanction for issue of such notice under section 151. The section does not provide for obtaining sanction for passing an order under section 148A(d).

Scope of the Scheme is provided in para 3 of the Scheme. For better appreciation of the issue, the said Para 3 of the Scheme is reproduced hereunder –

“3    Scope of the Scheme – For the purpose of this Scheme –

(a)    assessment, reassessment or re-computation under section 147 of the Act, or

(b)    issuance of notice under section 148 of the Actshall be through automated allocation, in accordancewith risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee.”

On a plain reading of para 3 of the Scheme, it is evident that the scope of the Scheme does not extend to conducting enquiries or issuing of show cause notice or passing of order under section 148A or sanction for issue of such notice under section 151.

The language of the 4 lines below clause (b) of Para 3 describing the process leaves much to be desired. The said lines are common for clauses (a) and (b), whereas the reference in these 4 lines to section 144B could be only for clause (a) and the reference to notice under section 148 is only for clause (b).

CONCLUSION

Litigation is time consuming and expensive both for the assessee as well as for the revenue, but more so for the assessee. In the circumstances, it would be desirable that a significant thought process is gone through before the schemes are formulated. Possibly, the Scheme could have been effective if there would have been corresponding amendments to the provisions of the Act and/or if the entire process of reassessment is to be implemented in a faceless manner. The Scheme ought to have been clear as to which of the functions/processes/steps are to be carried out by JAO, and which of the functions/processes/steps are to be carried out in a faceless manner. Schemes which are not well drafted often create results contrary to the legislative intent. It is desirable that suitable amendments be made at the earliest and/or steps taken to rectify the position and resolve the issues arising from the Scheme.

Input Tax Credit – Disputed Propositions W.R.T. Section 16(4) Of The CGST Act

INTRODUCTION
Goods
and Services Tax (GST) being a value-added tax, Input Tax Credit (ITC)
is a very pivotal link in its design. Any denial in respect of Input Tax
Credit results in tax on tax and affect the product pricing and
operating cash flow. Going by the justification provided in the First
Discussion Paper on GST in India published by the Empowered Committee of
State Financial Ministers on 10th November, 2009, regarding the
introduction of GST1, there is no dispute that the essence of GST law
lies in improvising ways to reduce the cascading effect of taxes by
increasing the possibility of set-off by maintaining a continuous chain
of set-off from the point of origination to the point of final sale to
the customer. Therefore, the set-off or ITC-related provisions are to be
interpreted keeping the said remedy in mind.The GST laws put
various restrictions on the entitlement of input tax credits. One such
restriction is the time limit within which the ITC can be taken. This
article deals with the possible interpretational disputes regarding
section 16(4) of the CGST Act.

OVERVIEW OF THE ITC PROVISIONS IN GENERAL

Chapter V of the CGST Act deals with Input Tax Credits. Section 16 of the CGST Act deals with the eligibility and conditions for taking input tax credits. Section 16(1) reads as under:(1) Every
registered person shall, subject to such conditions and restrictions as
may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax
charged on any supply of goods or services or both to him which are
used or intended to be used in the course or furtherance of his business
and the said amount shall be credited to the electronic credit ledger
of such person.

 

 

Sections 16(2), 16(3) and 16(4) put certain conditions on entitlement of the ITC.

1     Para
1.13 and 1.14 of Introduction Chapter

 

Section 16(4) provides for the time limit to take the credit (as one of the conditions) and reads as under:

(4) A registered person shall not be entitled to take input tax credit in
respect of any invoice or debit note for supply of goods or services or
both after the [thirtieth day of November] following the end of
financial year to which such invoice or [* * *] debit note pertains or
furnishing of the relevant annual return, whichever is earlier:

[Provided that the registered person shall be entitled to take input tax credit after
the due date of furnishing of the return under section 39 for the month
of September, 2018 till the due date of furnishing of the return under
the said section for the month of March, 2019 in respect of any invoice
or invoice relating to such debit note for supply of goods or services
or both made during the financial year 2017-18, the details of which
have been uploaded by the supplier under sub-section (1) of section 37
till the due date for furnishing the details under sub-section (1) of
said section for the month of March, 2019.]

It’s interesting to see that section 16(1) and section 16(4) use the expression ‘taking of the credit’.

Section 16(2) specifies the conditions for entitlement of the credit. The provisos below section 16(2) read as under:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further
that where a recipient fails to pay to the supplier of goods or
services or both, other than the supplies on which tax is payable on
reverse charge basis, the amount towards the value of supply along with
tax payable thereon within a period of one hundred and eighty days from
the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be [paid by him along with interest payable under section 50], in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax
on payment made by him [to the supplier] of the amount towards the
value of supply of goods or services or both along with tax payable
thereon.

The first proviso uses the expression ‘taking of the
credit’ whereas the second and third proviso uses the expression
‘availing of the credit’.

Section 17 also deals with the dis-entitlement of the credit (Apportionment of credit and blocked credits). Section 17(1) & (2) provide as under:

(1)
Where the goods or services or both are used by the registered person
partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2)
Where the goods or services or both are used by the registered person
partly for effecting taxable supplies including zero-rated supplies
under this Act or under the Integrated Goods and Services Tax Act and
partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Section
17(1) & (2) are, therefore, essentially quantification-related
provisions and do not use the expression ‘taking of the credit’.
However, section 17(4) uses the expression ‘availment of the credit as
under:

(4)    A banking company or a financial institution
including a non-banking financial company, engaged in supplying services
by way of accepting deposits, extending loans or advances shall have
the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Section 17(5) speaks about blocked credit (i.e. the cases where the credit is not available).

Section
18 speaks about eligibility of credit under special circumstances. The
said section also uses the expression ‘shall be entitled to take
credit…’ at various places and in particular in sections 18(1) (a), (b),
(c), (d) and section 18(2).

Section 18(2) also provides for the time limit to take credit in cases covered under section 18(1) and reads as under.

(2)    A registered person shall not be entitled to take input tax credit
under sub-section (1) in respect of any supply of goods or services or
both to him after the expiry of one year from the date of issue of tax
invoice relating to such supply.Section 18(4) on the other hand, uses the expression ‘availment’ as under:

(4)    Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount,
by way of debit in the electronic credit ledger or electronic cash
ledger, equivalent to the credit of input tax in respect of inputs held
in stock and inputs contained in semi-finished or finished goods held in
stock and on capital goods, reduced by such percentage points as may be
prescribed, on the day immediately preceding the date of exercising of
such option or, as the case may be, the date of such exemption.

Section
19 deals with taking input tax credit in respect of inputs and capital
goods sent for job work and thus uses the expression ‘taking of the
credit’. Section 20 and 21 deal with the ‘distribution of credit’ by
‘input service distributor’ (ISD) and does not use the expression
‘taking of the credit’.

The aforesaid overview of Chapter V of the CGST Act clearly suggests that the legislature has used the expression ‘taking
of the credit’ and ‘availing of the credit’ not in the same sense.
Taking of the credit decides the entitlement of the credit at a
threshold. It’s a benefit given to the taxpayer in the design of the
GST Act. Once the said threshold is crossed, the next question is the
determination of the quantum of benefit and how the actual realisation
of the said benefit be effected in terms of reporting and utilisation. The
author is of the view that ‘availment of the ITC’ signifies the
determination of the quantum of the benefit and its reporting in what we
know as an ‘electronic credit ledger’ through GST returns.

The
time limit prescribed in section 16(4) or as the case may be section
18(2) of the CGST Act is therefore qua the entitlement of the credit at
the threshold. A credit that is otherwise eligible in terms of section
16(1) or as the case may be section 18(1) and which fulfils the
conditions of section 16(2) of the CGST Act is regarded as eligible
credit only if it is taken within the statutory timeframe given in Act.
However, once the said credit is taken, there appears no time
restriction on its reporting and subsequent utilisation (i.e on its
availment) although there may be other restrictions on its availment
such as those mentioned in clauses (aa), (ba), (c), (d) or second
proviso to section 16(2), section 41(2) etc.

PROVISIONS SUPPORTING THE ABOVE INTERPRETATIONS

The
intention of the legislature in making a distinction between ‘taking of
the credit’ and ‘availment of the credit’ can also be inferred from the
subsequent amendments made to the Act, namely, the introduction of
section 43A2  and an amendment to section 41(1) of the CGST Act3  by
Finance Act 2022.Section 43A was incorporated to provide the
procedure for furnishing of return and availing of the input tax credit.
This was subsequently omitted by Finance Act 2022 w.e.f. 1-10-2022.
However, section 41 was simultaneously amended. The comparison of the
pre-amended and post-amended provisions is given below:

 

Section 41 before
Amendment

     Section 41 After
amendment

41. Claim of input
tax credit and provisional acceptance thereof.—

 

(1) Every registered
person shall, subject to such conditions and restrictions as may be
prescribed, be entitled to take the credit of eligible input tax, as
self-assessed, in his return and such amount shall be credited on a
provisional basis to his electronic credit ledger.

41. Availment of
input tax credit†

 

(1) Every registered
person shall, subject to such conditions and restrictions as may be
prescribed, be entitled to avail the credit of eligible input tax, as
self-assessed, in his return and such amount shall be credited to his
electronic credit ledger.

In the amended Section 41(1), changes are made in three places viz.

(i)
The heading of the section is amended – ‘Claim of ITC’ is replaced by
‘Availment of ITC’, and the expression ‘provisional acceptance thereof’
is omitted.

(ii)    The word ‘to take’ is replaced by the word ‘to avail’.
(iii)    The expression ‘on a provisional basis’ has been omitted.

2   Section 43A inserted by Central Goods & Services Tax (Amendment) Act 2018 dated,30-08-2018 w.e.f. 01-02-2019

3  Section 41 was amended by section 106 of the Finance Act 2022 w.e.f. 01-10-2022.

The concept of
‘provisional ITC’ was attributable to the matching concept provided in
sections 42, 43, and 43A of the CGST Act. By Finance Act 2022, the said
sections were omitted, and consequently, the reference to provisional
ITC in section 41 was also omitted. However, the author is of the view
that the substitution of the word ‘to take’ by the word ‘to avail’ was
done to cure the drafting error and bring section 41 more in line with
the design of the set-off mechanism designed in the GST law. To take
this further, as stated in section 16(1), the ITC is to be taken in the
manner specified in section 49. Section 49 deals with the payment of
tax, interest, penalty and other amounts.
The relevant provisions of section 49 read as under:(2)    The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41 to be maintained in such manner as may be prescribed.

(4)    The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act
or under the Integrated Goods and Services Tax Act in such manner and
subject to such conditions and within such time as may be prescribed.

From
above, it’s clear that the process of declaring the input tax credit
after its quantification on the self-assessment basis in the GST return
is regarded as ‘availment of ITC’ and it should not be confused with the
‘taking of the credit’. The change in the heading by replacing the word
‘claim of ITC’ with ‘availment of ITC’ is also thus consistent with the
above interpretation and has been carried out to bring more clarity to
the provision.

The author is thereof of the view, that amendment
in the section by replacing the words ‘to claim’ or ‘to take’ ITC with
the words ‘to avail’ the ITC is more of a clarificatory nature. The
present scheme of law recognises a difference between taking credit and
availment of credit. The time limit stated in section 16(4) or, as the
case may be, section 18(2) of the CGST Act is merely qua the taking of
the credit and not the availment of the credit. Both section 49 and
section 41 speak about the declaration of the self-assessed input tax
credit in the returns for the purpose of crediting such amount to the
electronic credit ledger (i.e. availment of credit). They do not speak about ‘taking of the credit’.
The taking of the credit precedes the availment of the credit. The
author is of the view that as per section 16(1) of the CGST Act, a
registered taxpayer is entitled to take the credit the moment the goods
and/or services are supplied to him as evidenced by the issue of a valid
invoice by the supplier of such goods or services. When such invoice
and receipt of goods and services is accounted for in the books of
accounts of the assessee maintained under section 35 of the CGST Act, it
would amount to the taking of the input tax credit. The ITC is accrued
to the taxpayer immediately when credit is accounted in books of
accounts after receipt of goods and underlying tax-paying documents.
After taking of the credit, the assessee is required to additionally
declare the said credit in his returns for the purpose of availment of
such credit in his electronic credit ledger. Only so much of the credit
which is availed by declaring the same in returns gets credited to the
electronic credit ledger of the taxpayer. The credit so availed (i.e.
credited to the electronic credit ledger) is allowed to be utilised for
the purposes of payment in terms of section 49(4) of the CGST Act. When
such credit is utilised for the purposes of payment of liability, the
electronic credit ledger of the assessee is debited. In this regard,
attention is also invited to Rule 86 of the CGST Rules which reads as
under:

“86. Electronic Credit Ledger

(1) The
electronic credit ledger shall be maintained in FORM GST PMT-02 for each
registered person eligible for input tax credit under the Act on the
common portal and every claim of input tax credit under the Act shall be
credited to the said ledger.

(2)    The electronic credit ledger
shall be debited to the extent of discharge of any liability in
accordance with the provisions of section 49
…”

It’s in
the above sense, section 16(1) of the CGST Act presupposes two phases
viz (i) taking the credit and (ii) availment of the credit – i.e.
crediting in the electronic credit ledger. It’s true that to make the
payment of tax under section 49(4) of the CGST Act, it’s necessary to
avail the credit in GST returns. However, in the opinion of the author,
to take credit, there is no such requirement of declaring the same in
returns. The only requirement is that the assessee should account for
the same in the books of accounts required to be maintained under
section 35 of the CGST Act within the time frame given in section 16(4)
of the CGST Act.

JUDICIAL PRECEDENTS

Hon’ble Supreme Court in the case of UOI vs. Bharati Airtel Ltd. 2021 (54) GSTL 257 (SC)
held that the supply of goods and services becomes taxable in respect
of which the registered person is obliged to maintain agreement,
invoices/challans and books of account, which can be maintained
manually/electronically. The common portal is only a facilitator to feed
or retrieve such information and need not be the primary source for
doing self-assessment. The primary source is in the form of agreements,
invoices/challans, receipts of the goods and services and books of
account, which are maintained by the assessee manually/electronically.
The Hon’ble Court further held that this was the arrangement even in the
pre-GST regime whilst discharging the obligation under the concerned
legislation(s) and that the position is no different in the post-GST
regime, both in the matter of doing self-assessment and regarding
dealing with eligibility to ITC and Output tax liability (OTL).The
Apex court, in the above decision, has categorically highlighted that
registered persons are under a legal obligation to maintain books of
account and records as per the provisions of the 2017 Act and Chapter
VII of the 2017 Rules regarding the transactions in respect of which the
output tax liability would occur.

Further, the following
observations of the Apex Court in Para 34 and 35 of the CGST Act,
dealing with the scheme of input tax credit under GST regime are also of
relevance.

“34. Section 16 of the 2017 Act deals
with eligibility of the registered person to take credit of input tax
charged on any supply of goods or services or both to him which are used
or intended to be used in the course or furtherance of his business. The input tax credit is additionally recorded in the electronic credit ledger of such person under the Act.
The “electronic credit ledger” is defined in Section 2(46) and is
referred to in Section 49(2) of the 2017 Act, which provides for the
manner in which ITC may be availed. Section 41(1) envisages that every
registered person shall be entitled to take credit of eligible input
tax, as self-assessed, in his return and such amount shall be credited
on a provisional basis to his electronic credit ledger.

35.
As aforesaid, every assessee is under obligation to self-assess the
eligible ITC under Section 16(1) and 16(2) and “credit the same in the
electronic credit ledger” defined in Section 2(46) read with Section
49(2) of the 2017 Act. Only thereafter, Section 59 steps in,
whereunder the registered person is obliged to self-assess the taxes
payable under the Act and furnish a return for each tax period as
specified under Section 39 of the Act. To put it differently, for
submitting return under Section 59, it is the registered person who has
to undertake necessary measures including of maintaining books of
account for the relevant period either manually or electronically. On
the basis of such primary material, self-assessment can be and ought to
be done by the assessee about the eligibility and availing of ITC and of
OTL, which is reflected in the periodical return to be filed under
Section 59 of the Act.”

The difference between taking
the credit in the books of accounts and the additional requirement of
availing the credit in an electronic credit ledger based on
self-assessment can be clearly borne out from the aforesaid observations
of the Hon’ble Apex Court.

In Osram Surya (P) Ltd vs. CCEx 2002 (142) ELT 5 (SC), the
issue before the Supreme Court was whether, after the introduction of
the second proviso to Rule 57G of the Central Excise Rules, 1944, a
manufacturer cannot take the Modvat credit after six months from the
date of the documents specified in the first proviso to Rule 57G of the
Rules. The said proviso read as under:

“Provided further that
the manufacturer shall not take credit after six months of the date of
issue of any of the documents specified in first proviso to this
sub-rule”.

The Hon’ble Court held that by introducing the
limitation in the said proviso to the rule, the statute has not taken
away any of the vested rights which had accrued to the manufacturers
under the Scheme of Modvat. That vested right continues to be in
existence and what is restricted is the time within which the
manufacturer has to enforce that right.

The restriction of the
time limit imposed under the statute for the purpose of ITC is,
therefore, not a new thing in the GST but was prevailing since the
Central Excise/ MODVAT regime. In the excise regime, in various cases,
the courts faced issues where the assessee availed ITC in RG-23A Part – I
on receipt of the goods but failed to avail the same in RG-23, Part- II
within a period of six months. Hon’ble Tribunal, in such circumstances,
has consistently held that the time limit of six months from the date
of issuance of duty-paying documents is applicable on receipt of the
goods in the factory and not to the process of taking the credit. Taking
credit starts with the receipt of goods in the factory, and the
subsequent procedure is only the process of availing the credit. If the
credit in the Part-1 register is taken, only entries remain to be made
in Part-II, which can be done after a gap of six months. As such, the
provisions requiring the assessee to avail the credit within a period of
six months from the date of issuance of the duty-paid documents are
connected with the movement and receipt of the goods, and once it is
established that an assessee receives the goods, he gets the vested
rights to avail the credit. If, for removing some lacunae in papers or
for the satisfaction of some procedural aspects, a period of more than
six months is taken, the same should not be made the basis for denial of
credit. For arriving at such a conclusion, Hon’ble Tribunal observed
that Title to RG-23A Part I read as — “Stock account of inputs used in or in relation to the manufacture of the final products”.
The said proforma reflects upon the description of the inputs, quantity
received, particulars of the documents under which the inputs stand
received and all other substantive requirements of the CENVAT Credit
Rules. The title of RG-23A Part II is — “Entry book of duty credit”. As
such, it is clear that RG-23A Part-II is only for the purpose of
reflecting upon the quantum of credit taken, utilised and balance of the
same. RG-23A Part II does not confer substantive right to the assessee
for availment of credit. It was further held that the limit of six
months in availing the credit has been introduced with the sole
objective of avoiding the evil of taking the credit in respect of inputs
which has been cleared by the input manufacturer more than six months
back. The said provision cannot be pressed into service to deny the
otherwise available substantive benefit of credit, to an assessee who
had received the goods within the period of six months from the date of
clearance from the input manufacturer’s factory and has duly made
entries in RG-23A Part-I record.

Various tribunals have thus
held that a manufacturer becomes entitled to take credit immediately on
receipt of the inputs without any further formality. The amount of
credit is to be simpliciter written in the records. It also noted that
provisions of sub-rule (7) of Rule 57G required a manufacturer to
maintain an account in form RG- 23A, Part I and Part II, and once the
assessee makes entries of inputs in RG-23A Part I, in terms of sub-rule
(2) of Rule 57G, they become entitled to take the credit. Only the
quantum of credit is required to be entered in RG-23A Part II. Inasmuch
as RG-23A Part I and RG-23A Part II are required to be maintained in
terms of sub-rule (7) of Rule 57G are two parts of the same register,
i.e., Form RG-23A, entries in RG-23A Part I itself would entitle an
assessee to avail the credit and the entries in RG-23A Part II is only
for accounting purposes.

Some of the decisions are cited below:

– BRAKES INDIA LTD. Vs. COMMISSIONER OF CENTRAL EXCISE, CHENNAI-II 2003 (162) E.L.T. 904 (Tri. – Chennai).

–    Banner Pharma Caps Pvt Ltd vs. CCEx 2009 (246) ELT 364 (Tri- Ahd) [ Para 8 ].

–    CRYSTAL CABLE INDUSTRIES LTD vs. COMMR. OF C. EX., KOLKATA-II – 2003 (159) E.L.T. 465 (Tri. – Kolkata) [ Para 4].

–    COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III vs. FORD India Ltd. 2012 (284) E.L.T. 202 (Tri. – Chennai) [ Para 6 to 11].

Besides
above, the Hon’ble MP High Court in the case of BHARAT HEAVY
ELECTRICALS LTD vs. COMMISSIONER OF C. EX., BHOPAL 2016 (332) E.L.T. 411
(M.P.) also affirmed that the right to the credit under the Modvat
Scheme accrued to the assessee on the date when they paid the tax on the
raw material or inputs and when such a right gets crystallized in their
favour once the input is received in the factory on the basis of the
existing scheme. It was further held that the act of the assessee in
making such receipt of input in Part-I of a single comprehensive RG-23A
action is evidence enough with regard to the crystallization of the
right to Modvat credit and merely because in the second accounting entry
of Part-II, there is some inconsistency, the right accrued already to
receive the credit cannot be taken away (para 10 to 14).

In the
GST regime, provisions relating to the statutory books of accounts are
contained in Chapter VIII. Section 35 provides for Accounts and Other
records. As per Section 35 (1) of the CGST Act, Every registered person
shall keep and maintain, at his principal place of business, as
mentioned in the certificate of registration, a true and correct account
of —

(a)    Production or manufacture of goods;

(b)    Inward and outward supply of goods or services or both;
(c)    Stock of goods;

(d)    Input tax credit availed;

(e)    Output tax payable and paid;

(f)    Such other particulars as may be prescribed

Based
on the above discussion and judicial pronouncement, the author is of
the view that it is possible to take the view that the entries in
respect of ITC in the books of accounts would be relevant in deciding
when the taxpayer takes the ITC.

HOW TO RECKON THE TIME LIMIT PRESCRIBED UNDER SECTION 16(4) OF THE CGST ACT?

In
the case of section 18(2) of the CGST Act, the time limit of one year
for the purposes of taking credit commences from the date of issue of tax invoice.
However, under section 16(4) no ITC can be taken after the 30th
November following the end of the financial year to which such invoice
or debit note pertains or furnishing of the relevant annual return,
whichever is earlier. In this regard, the CBIC press release
dated.04-10-2022 gave the following clarification:

“4.    In
this regard, it is clarified that the extended timelines for compliances
listed in para 2 are applicable to the compliances for FY 2021-22
onwards. It is further clarified that the said compliances in respect of
a financial year can be carried out in the relevant return or the statement filed/furnished upto 30th November of the next financial year, or the date of furnishing annual return for the said financial year, whichever is earlier.”

If
the taking of the credit is linked to the date of entry in the books of
accounts as discussed earlier, then irrespective of the fact that the
GST returns are filed after 30th November, the credit may not be
considered as beyond the statutory time period if it’s otherwise duly
accounted for in the books of accounts on or before 30th November.
Hence, to that extent, the author’s view is different from the said
clarification.

As regards ITC pertaining to FY 2017-18, the
original date beyond which the taking of ITC was not permitted was the
due date of furnishing the return under section 39 for the month of
September 2018. However, later on, a proviso was inserted to permit the
taking of ITC after the said date till the due date of furnishing of the
return under the said section for the month of March, 2019 in respect
of any invoice or invoice relating to such debit note for the supply of
goods or services or both made during the financial year 2017-18, the
details of which have been uploaded by the supplier under sub-section
(1) of section 37 till the due date for furnishing the details under
sub-section (1) of said section for the month of March, 2019.

CONCLUSION

The
author is, therefore, of the view that the time limit specified in
section 16(4) of the CGST Act for allowing ITC is to be observed qua
‘taking of the said credit’. So long as the ITC is reported in the books
of accounts maintained u/s 35 based on receipt of goods/ services and
taxpaying documents accompanying the said goods/ services before 30th
November following the end of the financial year to which such invoice
or debit note pertains or furnishing of the relevant annual return,
whichever is earlier, the actual claiming of the said ITC in the returns
after the said time limit may not disentitle the said claim as
time-barred.Before parting, the author, without expressing any
view, also wishes to point out that section 20 of the CGST Act, dealing
with the distribution of ITC by the Input Service Distributor (ISD),
does not contain any specific provision as to the time restriction for
taking the ITC by ISD. The applicability of section 16(4) in the hands
of ISD, is also, therefore, a disputable proposition that the readers
may examine.

Faceless Appeal Scheme – Way Ahead

Samudrika Shastra  is part of Ancient Indian Scriptures dealing with the study of face reading, aura reading, and whole body analysis1. The Sanskrit term “Samudrika Shastra” translates roughly as “knowledge of body features.” It is related to astrology and palmistry (Hast-samudrika), as well as phrenology (kapal-samudrika) and face reading (physiognomy, mukh-samudrika). It is now scientifically proven that humans communicate not only through words but also through gestures, actions, aura, thoughts, etc. Collectively they are known as “aids to communication”.

1. Samudrika Shastra. (2023, March 22). In Wikipedia. https://en.wikipedia.org/wiki/Samudrika_Shastra

“Communication” is an art, and it is difficult to master, especially when it comes to convincing a person on the opposite side of the table, having a different perception, focus, context and mandate.

We all have experienced how difficult it was to convince an Assessing Officer or a Commissioner of Appeals during our personal hearings / interactions. This was despite using all aids to communicate besides “words”.  Personal hearings are in the nature of ‘Active Communication’, which is perceived to be easier than ‘Passive Communication’ in the form of writing, in the case of faceless hearings. However, to get the best of both worlds, now the new Faceless Appeal Scheme, 2021 provides for video conferencing / video calling facility to the taxpayers.

One of the pain points in personal hearing for the assessments / appeals was “corruption”. And, therefore, the need was felt to have lesser / no personal interface/interactions between taxpayers and tax officials.

With the laudable objectives of bringing greater efficiency, transparency, and accountability to the functioning of the Income-tax Department, the Government introduced faceless assessment and faceless appeal schemes.

The Hon’ble PM, on 13th  August, 2020, while launching the Faceless Assessment and Taxpayers’ Charter as part of the “Transparent Taxation – Honouring the Honest” platform, had announced the launching of the Faceless Appeal Scheme (FAS 2020) on 25th September, 20202. The Press Release noted that on the date of launching the FAS, about 4.6 lakh appeals were pending at the level of the Commissioner (Appeals) in the Department. Out of this, about 4.05 lakh appeals, i.e., about 88 per cent of the total appeals, were expected to be handled under the Faceless Appeal Mechanism.

FAS 2020 was introduced during the time of the Pandemic, when physical movement was highly restricted. It had laudable objectives. However, the Scheme met with a lot of opposition as well. Many cases were filed, alleging denial of a fair hearing, contrary to the principles of Natural Justice. Some of the objections were sought to be resolved by making provisions for video conferencing, video telephony, etc. However, this facility was not available as a matter of right to the taxpayer and was subject to the request being approved by the concerned authority. This provision was challenged in the Supreme Court in the case of CBDT vs. Lakshya Budhiraja & Anr3. However, the government acted promptly and replaced the FAS 2020 by a new Faceless Appeal Scheme, 2021 (FAS 2021) on 28th December 20214. The FAS 2021 provides for mandatory virtual hearing through a video conference/video calling facility if demanded by the taxpayer. Here also, the identity of the CIT(A) hearing the case will not be revealed, but the taxpayer will be able to put across his arguments verbally and effectively.

2. https://pib.gov.in/PressReleseDetailm.aspx?PRID=1658982. Refer Notification No. 76 dated 25th September 2020, for the Faceless Appeals Scheme 2020 (2020) 428 ITR 1 (St).
3. Transfer Petition(s) (Civil) No(s).  1445-1446/2021. SC decision dated 10th January 2022
4. Notification No. 137/2021/F. No. 370142/57/2021-TPL(Part-1). Faceless Appeal Scheme, 2021 Notification No. S. O. 5429(E), dated 28th December, 2021

One of the advantages of the FAS is that CIT(A) can dispose of appeals on merits, even in cases of appeals against high-pitched assessments, as there are no direct interactions with the Appellant. Appellants, on the other hand, can expect transparency and efficiency in the system. Also, the establishment of the National Faceless Appeal Centre (NFAC) for the allocation of appeals, using Artificial Intelligence, will ensure impartiality and secrecy.

Faceless Assessments preceded Faceless Appeals. The practical experience of Faceless Assessments has been mixed. In some cases, contentious issues raised year after year have been accepted, while in some cases, even small issues have resulted in unreasonable demands/treatments. One of the advantages of Faceless Assessments is that every year the Assessing Officer is different, and hence, he is not under pressure to take a similar view of any contentious issue year after year and can decide the matter afresh based on merits.  It is learnt that Faceless Appeals have not yet picked up pace, and therefore, there is a huge backlog of pending appeals which has crossed five lakh mark as on 31st March 2023.  It is unfortunate that lakhs of appeals are pending, and taxpayers have to live with uncertainty. It is sending a wrong signal to the investor community worldwide. Let’s hope that Income-tax Department upholds it promise given in the Taxpayers’ Charter, where it is mentioned that “The Department shall take decision in every income-tax proceeding within the time prescribed under law.” It may be noted that justice delayed is justice denied, and therefore, a system may be devised to expedite the process and clear the pendency of appeals at the CIT levels. With an objective of disposing of a huge backlog of pending appeals at CIT levels, the Finance Act 2023 has inserted a new section 246 with effect from 1st April, 2023 providing for the filing of appeals before the Joint Commissioner of Income-tax (Appeals) [JCIT (Appeals)]. The need is to change in outlook on the part of officers and disposal of appeals boldly, solely on merits, irrespective of the sum involved. The government should focus on fair and equitable justice rather than revenue maximisation. This puts huge pressure on tax officials and results in high-pitched assessments/appeals.

One thing appears certain, i.e., Faceless Assessments and Faceless Appeals are here to stay, and both, the taxpayers and the Income-tax Department need to work in tandem to make these schemes work. Needless to add, in the Faceless Assessments and Appeals era, we professionals need to upgrade our drafting and presentation skills to put across our points of view effectively.

Having said that, it is also found that both sides are inclined to go back to the old system of personal hearings for Appeals. The government may consider the feasibility of both systems working in parallel, at least for some time, with objective criteria, like income or tax threshold or complexities of issues involved, just as certain exceptions are provided in the present FAS. It is earnestly urged that any scheme framed should factor in the principles of natural justice and give the taxpayer a fair chance to explain his case, which can only be achieved through a two-way hearing and dialogue.

In this context, it may be noted that there are differing views regarding the Faceless Appeal Scheme and its sustainability. In any case, such a Scheme should not be at the cost of laying down the proper law and defeating justice for the taxpayer. The legendary lawyer, Nani Palkhivala, in a letter to Soli Sorabjee congratulating him on being appointed as the Attorney General of India, quoted the motto of the Justice Department of the USA: “The United States wins its case whenever justice is done to one of its citizens in the courts”. Let’s hope that the mandatory virtual hearing at the request of the appellant would take care of various apprehensions and concerns regarding the effectiveness of the FAS 2021.

Wise men say change is painful. But the only thing certain is a ‘change’. There are four stages in acceptance of any idea: Ridicule, Oppose, Contemplate and Accept. If we look at the implementation of the “Digital Payments System” in India, we get the answer. The message to our readers is to rise to the occasion and be the proponent of change and not the opponent in your enlightened interest.  

Best wishes for the 77th Independence Day!

Focus On Revenue Maximisation — A Fundamental Flaw of India’s Tax Administration -Part 1

 

BCAS and the CA profession are entering into the 75th year of their existence. To commemorate this special occasion, the BCAJ brings a series of interviews with people of eminence from different walks of life, the distinct ones whom we can look up to, as professionals. Readers will have an opportunity to learn from their expertise and experience as well as get inspired by their personal stories.

Here is the text (with reasonable edits to put it into a text format) of an interview with Senior Advocate Shri Arvind Datar.

He is most well-known amongst the CAs by being a revising Editor of acclaimed legal commentaries: “Kanga and Palkhivala — The Law and Practice of Income Tax”, and “Ramaiya Guide to the Companies Act”. He has also authored other books such as “Guide to Central Excise — Law and Practice”, “Guide to Central Exercise Procedures” and “Datar on Constitution of India”.

His practice these days is focused mainly on constitutional and tax cases before the Supreme Court of India. He has appeared before the SC on several high-profile cases. He also appears as Amicus Curiae appointed by the Supreme Court and various High Courts, to assist the Court in matters on questions of constitutional and taxation laws.

He started his legal career before the Madras High Court and the Chambers of Mr N Natarajan, Senior Advocate, and Mrs Ramani Natarajan during 1980–81. He later joined the office of M/s Subbaraya Aiyer, Padmanabhan and Ramamani, where he mainly practised income tax before the ITAT, Chennai, from 1981 to 1984. In 1984, he set up his independent practice in income tax and central excise, customs, and company law matters. He was designated as a Senior Advocate by the Madras High Court in 2000.

In this interview, Shri Datar talks to BCAJ Editor Mayur Nayak and the past editors Gautam Nayak and Raman Jokhakar about his career, mentors, tax laws, litigation, gaps in lawmaking, bottlenecks in ease of doing business in India, best court-room moments, his message to youngsters and much more….

Q. (Mayur Nayak): Good evening, Mr Datar, and thank you very much for accepting our invitation for this interesting interview about your life journey, the legal systems in India, the Indian tax scenario and Indian tax litigations. To understand your journey, tell us something about the initial years of your life. How did you end up taking up law as a career?

 

A. (Arvind Datar): Before I start, I must thank the Bombay Chartered Accountants Society for this interview. I’ve been regularly reading the BCA journal ever since I was a junior. Mr Ramamani, a leading tax practitioner in South India, used to always tell us that this was one of the best and most informative journals. So, it’s a privilege to be giving this interview. On my journey as a lawyer, like in so many cases, I am a lawyer by accident. Law was the last thing on my mind in school or college. My father was a Captain in the merchant navy, and I, too, decided to follow his steps and I had planned to start my own shipping company by the name “Datar International Shipping Company”, abbreviated as ‘DISCO’! I have always dreamt big. Fortunately, I did well in school and had to write the entrance exam to do training with T.S. Rajendran Bombay, which was then necessary to join the merchant navy. But I had just undergone surgery, which was a disqualification as per the prospectus of T.S. Rajendra. This shattered my plans of a career in the sea. Then I tried engineering but had a medical problem the following year. So, I joined the B.Sc. Course at Ruia College, with Physics and Mathematics as my main subjects.

I was a very active debater in school. In college, too, I participated in many debates, which encouraged me to become a lawyer. In college, I used to attend the budget lectures of Mr Nani Palkhivala around 1973. This raised my interest in Economics and Finance. In 1975, I decided to become a tax lawyer and also learn accounting. However, I couldn’t do the CA course, as they clashed with my lectures at the Madras Law College. So, I decided to do ICWA in the evening college. This was the beginning of my journey as a lawyer.

I believe that everything happens for the better. I enjoy every single day, and I think I would not have been so happy as an engineer. I don’t know what difference founding my own shipping company would have made. Maybe, I would have been in the IBC or with a Committee of Creditors! But as a lawyer, I must say, I think I made the right decision in that respect.

After I became a lawyer, I immediately started teaching in the Southern India Regional Council of the Institute of Chartered Accountants of India (SIRC of ICAI), which had many eminent CAs like Mr Bhupathi, the then President, and several others. I used to teach Gift Tax, Wealth Tax, Estate Duty and also Capital Gains at the Institute. One important thing was to get money through lectures, as I had no brief at all. I used to get Rs. 25 for two hours of lectures at the SIRC of ICAI. The SIRC of ICSI and SIRC of ICWA used to pay Rs. 50 for a two-hour lecture. Can you imagine the value of this money at that time? A bus ticket was 15 paise, so Rs. 25–50 was a big amount. I had a very close association with Chartered Accountants from the beginning. I have always believed that lawyers should emulate Chartered Accountants, especially in relation to your continuing education programme.

Q. (Raman Jokhakar): As a first-generation lawyer, any mentors that you would like to mention, who directly or indirectly helped you to rise to where you stand today? 



A. I have been extremely blessed to have had wonderful seniors — the biggest blessing an advocate or a Chartered Accountant can have. In college, I started reading biographies of great lawyers, and fortunately, the Connemara Public Library in Madras had a complete shelf of legal biographies. So, I read the autobiographies of Motilal Setalvad, Justice Hidayatullah and other great English lawyers and judges. I was also a great believer in self-help books. These were very inspirational to me. For example, I read the biography of Lord Reading. I read that he used to get up every day at 4:00 am and work till 8.00 am. He used to work four hours every day on his briefs and then go to court and parliament. So, the habits and lifestyles of big lawyers were all great learning experiences for me. After I joined law, I decided to learn the basics of civil law before starting as a tax lawyer. So, I practised civil law for four years, before switching to tax. After that, I joined Mr Ramamani’s office. Mr Ramamani would appear in most of the leading tax cases. Several leading companies in Tamil Nadu were his clients. As a raw junior, I would often go and appear before the CIT(A) or before the ACIT(A). My mentors advised me that instead of assisting seniors, I should start arguing my own cases. Unless you jump into the water, you will not learn to swim, they said. I followed this advice, and this was immensely beneficial. 

 

Q. (Raman Jokhakar): I think that’s an important point for professionals to get into the minds of the brightest by reading their books. Books are the doorways into their minds.

 


A. What young Chartered Accountants can do is to analyse how these people became successful, and what steps they took. Can you take the same steps? Make them your role models. You don’t have to reinvent the wheel. You can follow the paths taken by these people, and you will be a success.

 

Q. (Raman Jokhakar): How difficult was it in those days to find clients? How did it pan out for you?

 

A. I had a very harsh struggle. I joined the bar and did civil law in 1980–81. I practised tax law from 1981 to 1984. Exactly, four years after I enrolled, I quit. I didn’t have any clients except one, which my late senior was kind enough to give me. This helped me because I had just got married, and the fees from that case kept me going for some time. Fortunately, I lived with my parents. So, the expenses for food, etc., were taken care of. Nonetheless, it was a terrible struggle. Secondly, I faced a big struggle because I was told that you never go to the client’s office as a lawyer; the client comes to you. I stuck to this, which resulted in me not getting any work at all for several years. I had set up a small office in my house and day after day, I would just sit there doing nothing. This worked in the long run. I bought my first typewriter six years after I joined the bar. I bought a car after 11 years. For 10 years, I travelled by bus. These were my struggles. But I had decided that there was no point compromising. So, I remained firm on my decision of not going to the client’s office. At this time, I wrote several articles, spoke at seminars and work started trickling in.

 Q. (Raman Jokhakar): As a citizen of India, what is your analysis, after all these years and fighting all these cases at various levels and reading about our present tax legislation, as well as the litigation system that sits under it? 



A. Having completed four decades and more of tax practice, I have realised that nothing has really changed. The laws are as complex as they were in 1981, and the attitude of the Department is also the same. Every time, there is talk of simplifying tax laws and making them citizen-friendly, but nothing has really changed. In my view, the fundamental flaw is our focus on revenue maximisation. By chasing absurd revenue targets, the whole income tax department works in its own silo. It has to recover as much tax as it targets, irrespective of the collateral damage done to the economy. I am told that 97 paise in the rupee comes from advance tax and TDS. For the balance 3 paise, we have all this litigation under the Income-tax Act, which now has 400 sections. How much of torture and time for the balance 3 per cent of revenue?Fortunately, retrospective taxation has been reduced. However, unfortunately, you keep on trying to collect more and more taxes at any cost instead of focusing on growth. It’s better to collect 20 per cent tax from a 6 trillion economy than try to keep on collecting 40 per cent at 2.5 trillion. When I speak to clients, both Indian and foreign, the biggest difficulty they face is with the tax system at the central level and with the regulatory system in the states. The number of permissions and licenses they need to start a factory is still horrendous. We have a long way to go and need to change our mindsets by looking at tax as a byproduct of growth and not as an end in itself.

 

Q. (Raman Jokhakar): The law must deliver fairness and justice to the citizens, especially to a taxpayer. We find that taxpayers keep fighting for years and years, and then one day, there is some retrospective amendment after they have won. Where does the taxpayer go in such a situation? How do you see this whole thing? And it is probably, happening over the years. And on the other hand, we see HNIs are leaving the country.

 

A.  I read that in the last five to six years, some 23,000 HNIs have left the country. This year alone, 6,000 have left. The essential part of a system of rule of law is fairness and justice. I say, where is the fairness, if you are going to start reopening thousands of assessments every year? Once an assessment is opened and a notice is issued, in how many cases has the officer dropped the proceedings? Once the reopening starts, then it goes on and on. Either you file a writ petition, or you go to the appeal route up to the Supreme Court. For appeals, you now have to pay 20 per cent of the amount due, which includes tax, interest and penalty. What kind of a system is this? Look at what have they done to charitable trusts. You are making life so miserable, and there is not even an exit option. I don’t want to be an exempt charitable trust; leave me alone. Every time you give some benefit, then you start taking it back on some ground or the other.

It is like the case of Vatika Township; you keep fighting up to the Supreme Court on whether a 1,000 square feet house will include a balcony or not. The whole system is to give you some benefit, and then start denying it on some pretext or the other. And what is very unfortunate is that when you reopen assessments, you don’t bother about the settled positions of law. How many cases have you reassessed on mere change of opinion? For the last 50 years, the Supreme Court has said that you can’t reopen the assessment as a change of opinion, but case after case, it’s a mere change of opinion. I have to meet the revenue target, so I will simply disallow something. In other cases, I will allege that you have not deducted TDS. Then, you disallow this expense under section 40, levy a penalty under section 201, and it just goes on. And the same thing is true with Central Excise. The five-year period is only for fraud and suppression. But, every case is opened for five years, even if there is no fraud. I think everyone is very mesmerised by Foxconn starting in India. Some PLI schemes are working and there is investment in startups. But then, what is happening to the manufacturing sector? Today, I bought a suitcase that is made in China, and balloons for my granddaughter’s birthday that are made in China. Should we not be ashamed of that? The government doesn’t want any unfavourable data. Everything has to be very nice and smooth, but that’s not the case. There are serious problems, one of them being that investors are scared of the uncertainty of our tax system. Even before the AAR, every application was opposed, as a tax avoidance scheme!

Q. (Gautam Nayak): So, one angle is the procedure, the way the officers go about it. But the other angle is also the law itself. When you succeed all the way to Supreme Court, then you find the law being amended. In fact, every year, there are over 100 amendments to the Indian Income-tax Act. Mr Palkhivala had talked about the Indian Income-tax Act being a national disgrace. What is your view on this?  

 A. That is exactly my point. Just because a few charitable trusts did something illegal, you hit at all the trusts. Now if some Chartered Accountant has not done their duty under the Act, you cannot hit the entire CA profession. Why should the CA profession come under PMLA? You look at the latest Supreme Court judgment in Deloitte and the other case. If there is a firm of 100 partners and even if two partners do something wrong, the entire firm can be disqualified. What are we doing? And as you rightly put it, as far as the Income-tax Act is concerned, I always used to say that if I go up to the Supreme Court and I win the case, then there would be a retrospective amendment. In one budget lecture, I said that we can have an amendment saying that if any case goes in favour of the assessee, it will be deemed to have been overruled with retrospective effect.

 

Q. (Gautam Nayak): In fact, why are the Budget amendments not put for public debate beforehand? In Excise, secrecy may be justified as clearance of goods may be affected due to changes in rates, but in the Income-tax, is there any logic in not having a public discussion before the amendments are brought about?
 



 A. Actually, here I can’t blame the government because, in the last three sessions, every budget session has been a washout because of the opposition disrupting the session. There has been no meaningful debate and it was ultimately just pushed through on the last day. What is more worrying is adding something significant on the last day, in two budgets. For example, the Equalisation Levy was added on the last day; we did not even know about it. This year also, many provisions were added on the last day. The entire GST provisions on tribunals were added on the last day. Nobody knew about them. They were not even tabled before Parliament. They were added and simply passed. I just wrote an article after the new Parliament building was inaugurated. The number of working days in Parliament has gone down and it is not even 60 days in a year, because of boycotts. I personally believe this secrecy of budget provisions should be done away with, and there should be debate and discussions beforehand. For example, you’re bringing 115 BAB to give relief to manufacturing companies. Why don’t you place the law in front? We can give suggestions. If you want to give some benefit to manufacturers, put the proposal to the CA Institute. You have so many eminent chartered accountants who can give suggestions and highlight all the practical difficulties that may arise. 

 

Q. (Raman Jokhakar): Sir, I viewed one of your YouTube videos on “Tribunalisation” during the Covid Pandemic. It would be nice if you tell us a little bit about this whole process of developing tribunals and then trying to dish out justice through them. Is it a real way to deal with disputes?

 

A. I started my income tax career working with my senior, who mainly used to go to the Income-tax Appellate Tribunal. I can tell you some of my happiest days were in the ITAT. We had very excellent tribunal members, we had George Cherian, TNC Rangarajan, and so many other very, very good tribunal members. I have no time to mention all their names and as a junior, I learnt a lot from them. Justice Easwar was also my senior at that time, and we had a wonderful time. Not many people know that when the Income-tax Tribunal was started in 1941, the British Government placed the Income-tax Tribunal under the Law Ministry to keep it independent. A 7-judge bench in Chandra Kumar’s case said that all tribunals should be under an independent nodal Ministry, preferably the Ministry of Law, so they are not part of the parent department. From 1997 to 2023, after 26 years, this has not been done. I’ve been fighting this tribunal battle since 1991 and I am against multiple tribunals being created. We succeeded in striking down the National Tax Tribunal. So, I used to keep saying that, look, the tribunal has to be independent. It should be like a Court. What’s the purpose of a tribunal? Up to CIT(A), he is a department official. He has got his own compulsions. Once it comes to a tribunal, you want an independent body to decide the case. Now look at your Board for Advance Ruling. What is the meaning of having a Board with three Commissioners? What’s its independence? What respect will it command? Justice Ranganathan once headed the AAR, and where are we now? So, the tribunal system has gone down a very, very unfortunate path. The government has treated tribunals as part of the executive and like a Department. I heard recently a senior Secretary saying that tribunals must “protect government interests”; tribunals are not to protect government interest, they are supposed to decide a dispute independently and function like a specialised court.

So, the entire tribunal system is an extremely unhappy state because it is not an independent system at all. The worst part is this term of four years for members. If a person joins the tribunal at 45 and retires at 62, he gets the domain expertise, whether it is PMLA, FEMA, or Income-tax. He will have a 15-year career, and then after retirement, he can do whatever he wants. Now, if a person is in office for only four years, what does he learn if he doesn’t have an income tax background? Therefore, this is a serious issue. We have specialised tribunals with people who have no specialised knowledge. And the shocking thing is that the GST tribunal stipulates that advocates are not eligible to become judicial members.

 

 Q. (Mayur Nayak): Another point from the taxpayers’ points of view is the contradictory judgments by various tribunals on almost identical or similar facts. As a result, assessees don’t know which tribunal to follow. Many times, officers do not accept orders of the jurisdictional tribunal, and pick up some unfavourable order from another tribunal and pass the assessment order. Is there any solution to this?
 



 A. Once you have tribunals, the difference of opinion is bound to be there. Even in Supreme Court, two benches can deliver contradictory judgments. This is part of the judicial process. That, in one way, is a healthy process because I may take X view, you may take Y view, and then the case goes to a special bench which decides the correct view. I would say that not even 5 per cent of cases ultimately go to a special bench. So, I am not very worried about people taking different views. Unfortunately, if the view is in favour of the Department, then a person from the Income-tax Department in Mumbai, will rely on something from a Guwahati Bench. But if it is in favour of the assessee, they will not follow it in Mumbai. I experienced this while dealing with a matter under section 2(15) in the case of the Ahmedabad Urban Development Authority before the Supreme Court. There was a Bombay ITAT judgment in our favour, but the officer followed a Jammu and Kashmir ITAT decision and confirmed the demand of thousands of crores. And he’s not accountable. An officer refuses to follow a direct Supreme Court judgment, he just ignores it, and he is not accountable.

 

Q.  (Gautam Nayak): You mentioned about some people in the department expressing opinions that tribunals should decide in favour of the department. Recently, in a matter before the Supreme Court also, it was argued that this case involves revenue of thousands of crore etc. And then, one comes across Supreme Court decisions which completely overrule the established law, which even earlier Supreme Court judgments or High Court judgments have taken. Sometimes one wonders, if it is being driven to a large extent by revenue considerations alone, and if it is so, then where does the taxpayer stand in all this?
 

 A. See, I’ve been repeatedly saying that it is very unfortunate that the revenue tries to portray that Rs. 5000 crore is involved in this case. So, as it is, you put mental pressure on the judge that if he decides against the Department, the government is going to lose ?5000 crore. But they don’t realise that what if the law has been settled for the last 15 years, and if you’re now going to overrule it, are you going to demand interest for the last 15 years? In fact, when I was a junior before Justice Ruma Pal, I was sitting for another case, and the government lawyer had told the court that Rs. 180 crores was involved in the case. She said that the Supreme Court is not bothered about the amount but the legal principle. Highlighting the amount shakes the confidence of the litigant, who thinks that if a large amount is involved, his chance of success is very, very low. That’s a very unfortunate part. Just see Vodafone; they didn’t bother about the amount when they held in favour of the assessee. In so many earlier old cases like Poona Electric Supply or Godhra Electricity, courts decided in favour of the assessee without bothering about the revenue implications. In fact, they can decide against an assessee also when they are deciding a principle of law. What I am saying is that, if the government doesn’t like it, make a retrospective amendment if something goes horribly wrong.

……To be continued

महाजनो येन गत: स पन्था:।

In this series, we have been trying to know about our ancient Indian wisdom expressed in Sanskrit verses. These thoughts are relevant even today and are capable of guiding us in our day-to-day life. Many of them are commonly quoted as ‘proverbs’.

Our country has completed 75 years of independence. Our Alma Mater Institute has entered into its 75th year, and so has our BCAS. In today’s ‘democratic’ set-up, the life journey for wise people is far from simple. Everywhere, mobocracy is becoming powerful. The culture is vitiated. One is often confused as to which path to follow. We (BCAS) have completed 75 years. Our profession has completed 75 years. Now, what is the way forward?

The text and literal meaning of the shloka are: –

Various streams of logic and reasoning (Tarka) often fail, the wisdom texts (Shrutis) carry numerous meanings, the Seers, and Sages (Rishi) propound differing viewpoints; the secret of Dharma (Divine Principle) is mysterious and deep; therefore, the path taken by the great persons (Mahajan) should be considered as the one leading to Dharma.

In such a scenario, the correct path is the one that is adopted by great personalities or leaders. Such personalities may be religious, spiritual, social, or political, but their conduct is consistent across every sphere of life and filled with virtues.

In Indian culture, the word ‘Dharma’ is always understood as ‘duty’ or as a divine principle which operates as the essence of the universe and not as a community or sect. It is a binding force and separating division. This principle of Dharma percolates into one’s duty and one’s purpose in life. There is a Dharma for every vocational or professional. For us CAs, there is a lot of confusion around us, with too many rules and regulations.

There may be a contradiction between the two sets of regulations. Experts’ opinions and interpretations may differ from one another. Certain laws are ‘mysterious’, i.e., difficult to understand and follow. The lawmakers and regulators who are bureaucrats may not be aware of the ground realities of business. Even if you want to follow the rules religiously, corruption may not permit you to do that!

Apart from legal scenarios, even in non-legal functions, there are always many dilemmas. It includes even the selection of areas of practice.

The principle is alright for an individual, but what if you are expected to perform the role of a leader?

Our BCAS is also perceived as a ‘leader’ of the profession. Naturally, BCAS itself will have to chalk out a path for others. We need to design the roadmap for progress. We may have to set right the ‘spine’ of the profession. Only then can the professionals walk straight!

Only then will our profession command ‘Namaskaar’ from all!

From the President

Dear BCAS Family,

Dr. APJ Abdul Kalam, the beloved former President of India, once remarked, “Dream, dream, dream. Dreams transform into thoughts and thoughts result in action.”

I start my journey as the 75th President of this august association, the Bombay Chartered Accountants Society, with my first interaction through this message with you all, fellow professionals. I take this opportunity to thank all of you for having reposed trust and confidence in me to assume this responsibility. The responsibility comes with the onerous duty to chart a path for BCAS to reach greater heights not only in the coming year but also through its reaching centenary and which we, too, consider as the Amrit Kaal of BCAS to coincide with that of our motherland India.

As we entered our 75th year, a special logo has been designed for this memorable milestone. The Logo depicts multiple elements of our Society, the Book at the top signifies the symbol of knowledge sharing, the tree represents the BCAS as a community/family and the globe represents the overall development of professionals, which is the vision and mission of the Society. The blue colour in the logo represents a commitment to professionalism, expertise in financial matters, and maintaining high ethical standards and the green colour symbolises financial prosperity, trustworthiness, and a focus on sustainable business practices.

I have expressed in my opening speech at the AGM, that from this year onwards BCAS Managing Committee shall be presenting a 5-year plan for the Society with a vision to increase its Reach, Professional Development of its members, Networking opportunities, Advocacy, Yuva Shakti and Chartered for Change initiatives.

To achieve the above, we plan to invite 75 Sherpas in 75 cities who would be entrusted with the task of coordinating the events in their cities and spreading various other initiatives of BCAS. The technology initiative committee is entrusted with the task of increasing the presence of the Society on all its social media handles with the help of experts. Increase the reach of the journal of the Society, which is one of the most  sought-after monthly publications amongst professionals.

Professional Development (harnessing talent) is the mission of our Society. It is always at the forefront as a think tank of the profession. All committees of the Society have planned several new initiatives to ensure that our members remain at the forefront in practice, in industry and are updated with the latest regulatory developments. Multiple events, seminars, lecture meetings, and online courses shall be planned to disseminate knowledge and the jewel in the crown would be the Mega Event – ReImagine which is planned on 4, 5, and 6th January, 2024 at the Jio World Centre, BKC, Mumbai to commemorate the 75th year of BCAS.

We plan to launch a members-only digital networking and crowdsourcing queries web-based community application. It shall be a networking platform for our members, wherein BCAS members can post their queries, seek advice and engage in knowledge-sharing discussions. Members can also post their achievements on their walls. In the future, it will also have a job search, membership renewals, work sharing, and many more features. This will be a real game changer for the members as it will increase the networking and visibility of members as thought leaders and domain experts. This will also provide a platform for young professionals to interact with ease with veterans of the profession.

To ensure that our members do take time out of their busy schedule for extracurricular activities and to provide opportunities to network, the Society shall be planning specific events like youth mixers, hackathons, cricket and also provide an organised platform to young Chartered Accountants to improve their soft skills.

The Managing Committee for the current year has planned 4 quarterly themes,  namely Technology and other updates (July to September 2023), Change – Leaders – Charity (October to December 2023), Future Ready – Innovation, Growth & Succession  (January to March 2024), Partnering in Business Growth – Industry Focus (March to June, 2024).

This year at the 75th Founding Day, we had leading industrialist, Mr Sajjan Jindal as the Guest Speaker, sharing his vision of India @ 2030.  He highlighted several reforms which the present government has undertaken, like GST, Swachh Bharat, IBC, and Digitization which have resulted in greater awareness and responsible behaviour amongst  citizens. He spoke about India’s demographics and young population, the digitisation drive, the energy transformation from fossil fuel to renewable energy, financial sector reforms undertaken, and the increasing global leadership role that would drive India towards a USD 30 trillion economy. He also appreciated CAs playing a very important role in providing a governance control mechanism to industry, which is of critical importance to be on the constant growth trajectory.

The first lecture meeting of the year was held on 12th July, 2023, on a very relevant topic of the “Role of Professionals in Governance” by CA Nawshir Mirza. He explained the importance of professionals in ensuring better governance. Accordingto him, protecting the environment and ensuring social security are important elements of society, however, governance is a process by which both can be achieved successfully. It was a very interesting and interactive session.

Technology is the theme of the quarter. I would like to state that role of technology in modern India has a strong focus on science and technology, realising that it is a key element for economic growth. India ranks third among the most attractive investment destinations for technology transactions in the world. With more and more multinational companies setting up their R&D centres in India, the sector has seen an uptrend in investment in recent years.

Recently I came across Compendium on “Responsible Artificial Intelligence” by the Comptroller and Auditor General of India, which defined the use of Artificial Intelligence in Audits; in Public sector management and it also dealt with AI – tools and technology frameworks. According to Mr Girish Murmu, Comptroller and Auditor General of India, AI could contribute up to USD 15.7 trillion to the global economy by 2030. It has the potential to lead socio-economic growth and can be used to benefit citizens and the country through targeted and timely interventions. As organisations increasingly rely on technology to manage their business processes, there is a strong perspective among the auditing fraternity too to review our role in this change and to align ourselves with the changing technological environment.

The compendium also states that Auditors can use the AI technology in many ways like classifying the transaction into high and low-risk categories, clustering transactions having similar characteristics, summarisation of transactions, identifying related entities across multiple levels, predictions, and Image Analytics. The AI technology can be used to identify circular trading transactions in taxation or to detect non-existent beneficiaries claiming benefits from government schemes.

Before concluding, I would like to invite all, to the Mega Event of 75th year Celebration – ReImagine. Let us all celebrate this significant milestone with joy, gratitude, and a renewed commitment to our shared values.

All our dreams can come true if we have the courage to pursue them.” ~ Walt Disney

Learning Events at BCAS

1. Direct Tax Laws Study Circle meeting on recent SC Rulings

The Direct Tax Laws Committee of the Society organised a virtual meeting on 9th June, 2023 to discuss the recent Supreme Court Rulings. Chaired by Speaker, Natwar G. Thakrar, the meeting discussed the following rulings:

i.    US Technology Intl Pvt Ltd vs. CIT [2023]

ii.    CIT vs. Mansukh Dyeing & Printing Mills [2021]

iii.    Singapore Airlines Ltd vs. CIT [2022]

iv.    New Noble Education Society vs. CIT & Ors [2022]

The speaker explained the rulings to the attendees in a simplistic yet detailed manner. He began the explanation with Facts of the Case followed by Issue before the Supreme Court and concluded by ruling of the Apex Court.

The speaker then took up questions from the attendees wherein possible arguments to the rulings, other judicial precedents were discussed. The session concluded with a vote of thanks.

2. Seminar on ESG by the Internal Audit Commitee

A full-day ESG seminar was conducted by the BCAS Internal Audit Committee on 9th June, 2023. Titled ‘Decoding ESG through an Internal Auditor’s lens, the meeting was organised in a hybrid mode by the Internal Audit Committee of the Society. It aimed to enable the current and future generation of internal auditors to capitalise on the next-wave of ESG. A total of 87 participants attended this seminar, with a good mix of experienced professionals, new CAs and young aspiring CA students.

The seminar featured a unique blend of speakers from the industry, practice and consultancy who showcased their in-depth knowledge and insights on the subject. Each session was thoughtfully curated to include practical illustrations, real-life case scenarios and interactive communication with all participants. The seminar covered the following key topics:

  •     ESG and the pivotal role of Internal auditors in today’s scenario

 

  •     Basic principles, challenges faced and reporting requirements under ESG framework in India

 

  •     Practical guide on driving and implementing the ESG agenda

 

  •     Adding value to ESG ecosystem as Internal auditors

The speakers at the seminar included CA Nawshir Mirza, CA Mukundan KV, Ms. Chaitanya Kommukuri, CA Abhay Mehta, CA Raj Mullick, CA Vijayalakshmi S, CA Ashutosh Pednekar

The seminar was very well received by all the participants as was evident from their enthusiastic participation during Q&A sessions.

3. Lecture Meeting on Succession Planning and Drafting of Wills

BCAS organised a lecture meeting on ‘Succession Planning and Drafting of Wills’ on 2nd June, 2023. The meeting was organised with an aim to serve the members residing in the western suburbs. It began with an insightful presentation by CA Anup Shah on the following important aspects of wills and succession planning:

  •     Scope of succession planning

 

  •     Assets to be consider

 

  •     Legal implications in case where a person dies intestate and what if he had a prepared a will under all personal law in general and Hindu Succession Act (HSA) in specific

 

  •     Daughter’s right under HSA – prior to and post 2005 amendments

 

  •     Creation, Partition and dissolution of HUF under HSA and under the Income Tax Act

 

  •     Estate planning options through-Trust, Wills and Joint nomination

 

  •     Effect of nomination for immovable property and shares

 

  •     Rights of Joint Holder vs. Nominee

 

  •     Wills – What is a will, Who can make, How to make a will, concept of beneficiary, administrator

 

  •     Some Myths about the Wills

 

  •     Registration of Wills and Probate

 

  •     Recent developments on the methodology of preparing the wills – Video will, digital will, social custom will, organ donation

 

  •     Tax implications on wills and inheritance

 

  •     Private trust

 

  •     Gift/ release deed/ revocation of gift

The speaker addressed the queries raised by the members. The meeting was attended by more than 125 participants.

4. Release of BCAS publication – FAQs on Charitable Trust

The eagerly-awaited BCAS publication – FAQ on Charitable Trust was launched at the lecture meeting held on 2nd June 2023 in Mumbai. Released under the Shailesh Kapadia Memorial Publication fund, the publicationn covers FAQs on various important topics under Bombay Public Trust Act, Direct Tax, Indirect Tax, FCRA and CSR.Drafted in the form of Frequently Asked Questions (FAQs), the publication helps readers find the information they need. The questions have been carefully selected from a wide range of topics to provide in-depth knowledge on each subject. Their answers have been written in simple and easy to understand language making it accessible to everyone regardless of their legal background. Besides the Charitable Trust, the publication is likely to benefit professionals like lawyers, chartered accountants and consultants who advise charitable trust on legal and regulatory compliances.

Conceptualised by Late CA Tushar Doctor, the publication is authored by CA (Dr) Gautam Shah covering the topic of direct tax and other laws, and CA Naresh Sheth on the topic of indirect tax. It is reviewed by CA Anil Sathe, CA Himanshu Kishnadwala, CA Sunil Gabhawala, CA Gautam Nayak and Mr Nasir Dadrawala.

5. TDS and TCS Provisions – A 360° Perspective

IMC Chamber of Commerce and Industry teamed up with the Bombay Chartered Accountants Society, and Chamber of Tax Consultants to organise a full day seminar on “TDS and TCS Provisions – a 360° Perspective” at its premises.Held on 2nd June, 2023, the inaugural session of the seminar was managed by Anant Singhania, President, IMC; CA Chirag Doshi, Vice President, BCAS; CA Parag Ved, President, Chamber of Tax Consultant with a welcome address by CA Rajan Vora, Chairman, Direct-tax Committee, IMC.

Hosted in a hybrid mode, the seminar was attended by more than 300 participants. Before initiating the sessions, Rajan Vora, Chairman, Direct Taxation Committee, IMC, highlighted the need to streamline and simplify the TDS and TCS provisions as well as the related compliances to enable Ease of Doing Business in the true sense.

The seminar also included an interactive session with the attendees to highlight key topics like Domestic TDS & TCS provisions, Penalty, Prosecution and Compounding procedures under TDS/ TCS regime, TDS from payments to non-residents, etc.

Sangam Shrivastava, erstwhile Pr. CCIT (IT & TP), West Zone delivered the keynote address where he explained that even after amendment to section 115A by FA 2023, benefit of lower rate as per DTAA will be available to taxpayer instead of 20 per cent. (SC+EC). He also emphasised on reducing of litigation and increase dialogue between taxpayer and tax department.

Brajesh Kumar Singh, CCIT (TDS), Mumbai urged professionals to act as guide to taxpayers to undertake TDS compliances. He advised them to caution taxpayer that delay in TDS payment is tracked centrally and flagged by system thereby leaving no scope for department to not to initiate prosecution even in smallest of cases.

Moderated by Samir Kanabar from EY, the first session discussed issues under Domestic TDS & TCS provisions. The issues discussed on TDS included those under section, 193, 194-O, 194R, 194-Q, 194 BA, etc, TCS provisions under section 206C particular 206C(1G) and 206C(1H) were also discussed. The panelists for this session included Vikas Aggarwal from Novartis and Yogesh Thar from BSM

The second session was moderated by CA Atul Suraiya. It discussed issues pertaining to Penalty, Prosecution and Compounding procedures under TDS/ TCS regime

Other issues like penal and prosecution provision and compounding of offences; belated filing of returns/ belated payment of taxes; interest under section 201 and 201(1A), etc were also discussed.

Moderated by CA Shabbir Motorwala, the third session discussed issues related to TDS under section 195 from payments to non-residents

Other practical issues discussed at the session included: Non-filers checking, Lower deduction of tax; Rectifications of returns filed; Excess deduction – refund; Penal provision and compounding of offences; Belated filing of returns/belated payment of taxes; Interest under section 201 and 201(1A); Mechanism for Clarifications; etc.

The session also discussed issues arising on account of increase in rate of royalty/FTS taxation under Act, by FA 2023 and issues arising for filing of form 10F.

The conference was graced by eminent tax experts from the corporate and professional sectors as well as from the revenue department. who as panelists provided a comprehensive perspective and a blend of theoretical and practical solutions to the questions posed.

Comprising panel discussions and presentation sessions on relevant TDS and TCS issue, the seminar ended on a high note.

6. Recent PMLA notification and its impact on professional service firms

The Society organised a virtual panel discussion on 30th May, 2023 on the impact of the recent PMLA notification on professional service firms. The Panelist for the session were R N Dash, IRS and Adv Ashwani Taneja while the moderator was CA Anand Bathiya.

In his opening remarks, the moderator noted that the recent PMLA notification has brought about a sense of anxiety amongst CAs and certain other professionals due to increasing reporting obligations and greater responsibilities. He referred to it as the “fear of the unknown” and hoped that the discussion would clarify a lot of such fears and doubts.

Thereafter, both the panelists Dash and Adv Ashwani Taneja outlined the rationale behind the notifications dated 3rd May, 2023 and 9th May, 2023, which primarily stemmed from the FATF guidelines. Further, they indicated that
the notification expects the Professional Accountants to focus on the KYC and beneficial ownership status of their clients and to maintain complete details of their transactions.

The summary of the amendments covering the following matters were also touched upon:

  •     The obligations of Reporting Entities.

 

  •     Manner of verification of the identity of the clients by the Reporting Entity.

 

  •     Record maintenance in respect of specified transactions (covering buying and selling of investments and properties, managing client money, managing bank and security accounts etc.) undertaken or attempted to be undertaken.

 

  •     Timelines for maintenance of records.

 

  •     Enhanced due diligence to be undertaken in respect of all specified transactions by the reporting entities.

Powers of the Enforcement Directors and FIU-Ind

The discussion covered various questions put forth by the moderator and also by the participants which were comprehensively answered by the speakers. Some of the major points covered are as under:

  •     Services like internal audit undertaken as an employee of the Company are not covered.

 

  •     Services like virtual CFO in the capacity of a consultant are covered.

 

  •     In respect of tax related services it is better to avoid collection and reimbursement on behalf of clients.

 

  •     Currently, statutory audit services are not covered.

 

  •     Professionals should not adopt a casual attitude going forward, since the cost of non-compliance could be very high in many situations.

 

  •     Providing assistance in writing of the books of accounts of entities involved in suspicious transactions are not covered.

 

  •     Whilst undertaking transactions and assignments on behalf of clients the arm’s length principle should be adopted.

 

  •     Not to get associated with Benami Transactions.

 

  •     No clarity on whether a CA in his individual capacity or a firm of CAs would be considered as a Reporting Entity.

 

  •     Whilst independent directors appointed in their individual capacity are not covered. If they are nominees or representatives of the specified entities who undertake suspicious transactions, they would be covered. Similar considerations would also apply to trustees appointed.

 

  •     Entities providing space for use as a Registered Office and indulging in suspicious transactions are also covered.

 

  •     Pending the notification of the rules on certain matters it is important for Reporting Entities to maintain proper record for all specified transactions.

YouTube links: https://www.youtube.com/watch?v=hYXfaTEReog

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7. Serious threat to the US Banking System and US Dollar- International Economics Study Group meeting

The International Economics Study Group organised a virtual meeting on 29th May, 2023 to discuss the serious threat being faced by the US’ banking system currently. Chaired by CA Harshad Shah, the meeting noted, currently all US mid-cap banks are ‘full of’ bad commercial property loans worth $5.6 trillion. Confidence in the world’s largest banking system (American) is shaken and this could spread as there are concerns about Asset Liability mismatch, holding securities which have lost value since interest rates have risen at a sharp clip with brutal 450 basis points rise in interest rate in just 1 year from a near zero levels. Banks are sitting on $1.7 trillion in unrealized losses. Many U.S. banks have $7 trillion in uninsured bank deposits lying with them, which if withdrawn can create sudden rush.Further, the meeting discussed the serious challenges being faced by the Petro Dollar as many oil exporting countries (like Saudi Arabia, UAE, Iran, Venezuela, Russia) are looking at dealing in local currencies and avoiding Dollar due to threats of US sanctions and misuse of SWIFT.

Dedollarisation is fast catching up as many countries are entering and negotiating alternative to Dollar like bilateral currencies due to threats of blocking in SWIFT & other sanctions.

CA Milan Sanghani shared his views on current state of markets.

8. Internal Audit Mumbai Pune Express # 1

The inaugural edition of Internal Audit Mumbai Pune Express was held at MCCIA Trade Tower, Pune on 26th May, 2023. The event was jointly organized by the Internal Audit Committee of Bombay Chartered Accountants’ Society and IIA Pune Audit Club.

This was the first event held by the IA Committee of the Bombay Chartered Accountants’ Society in Pune.

The keynote address was delivered by Satish Shenoy who shared his views on “The focus – leveraging external events to deliver exceptional value”.

Dr. Milind Watve, a data scientist, presented his thoughts on “Data Analytics & Statistics in IA – a scientific view.”

A panel discussion ensued thereafter, whereby the panelists included Milind Limaye, Sanjay Deodhar and Satish Shenoy. The session was moderated by Madhavi Bhalerao. The topic for the panel discussion was “IA Standards – Mandatory or Recommendatory?”

Sameer Maheshwari delivered his session on “Auditing when the going is good”.

The last technical session for the day was by Arnob Choudhuri, who presented on the topic “IA Role in Business Responsibility & Sustainability Reporting”.

A total of 38 participants attended the day-long event which recorded a positive feedback.

The next edition of the Internal Audit Mumbai Pune Express series would be announced in due course.

9. Indirect Tax Laws Study Circle Meeting Specific issues in Customs laws, SEZ

The Indirect Tax Laws Committee of the Society organised a virtual study circle meeting on 25th May, 2023 under the leadership of CA. Prerana Shah. Ms. Shah had prepared six case studies regarding interplay of Customs and GST laws. The presentation and discussion broadly covered the intricacies on the following topics:

1.    HSN classification and rates of custom duty on import of goods in India

2.    Anti-dumping duties and import under advance authorisation

3.    Related Party Transactions under Customs Laws in regard to valuation,

4.    Value of export of goods under customs Law and GST Law

5.    Special Economic Zones – Refund

6.    Duty drawback, manufacturing under bond and FTWZ

More than 80 participants from across India participated in the meeting. The meeting was mentored by CA Udayan Chokshi

 

10. Direct Tax Home Refresher Course – 4

The Taxation Committee organised the Direct Tax Home Refresher Course 4 with eight other sister organizations i.e. All India Federation of Tax Practitioners (CZ), Association of Chartered Accountants, Chennai; Chartered Accountants Association, Ahmedabad; CA Association of Jalandhar; The Chartered Accountants Study Circle, Chennai; Hyderabad Chartered Accountants Society; Karnataka State Chartered Accountants’ Association and Lucknow Chartered Accountants’ Society.Held from 15th May, 2023 to 27th May, 2023, the virtual refresher course consisted of 12 sessions covering varied topics of income tax. The topics covered were

1)    Charitable Trust Taxation including recent amendments

2)    Taxation of various Financial products including AIFs, REITs, INVITs etc, Recent amendments and issues (IFSC)

3)    Taxation and Regulatory Aspects of various perquisites under Salaries including ESOPs

4)    Recent Developments in Sec 195 covering issues in 15CA & 15CB

5)    Taxation of Partnership Firms and LLPs on conversion incl. Issues on Amalgamation of LLPs

6)    Taxation and Regulatory aspects of Start-ups

7)    56 (2) (x) – An Evolving Deeming Fiction along with 56(2)(viib), 50CA, 50B r.w.r. 11UAE

8)    Taxation aspects of Redevelopment of Societies both from developer and the flat owner’s perspective (50C/43CA etc.)

9)    Valuation Under Income Tax Law vis-à-vis other laws – How to solve this game

10)    Case Studies on certain important aspects of Business Organisation & Reorganisation including M&A and Demergers

11)    Notice & Assessments related to Foreign Assets vis-a-vis Black Money Act and it’s Interplay with PMLA and other Economic Offences Laws

12)    Law of Evidence vis-à-vis Tax proceedings incl  Examination and Cross Examination / Do’s & Dont’s of rendering Tax Advice  ( special  reference to handle  arrest in such cases)

All the distinguished speakers shared their thoughts on the subject and their views on the practical issues arising out of them. They also engaged in a QnA with the participants and provided their insights. There was an overwhelming participation to the course with more than 650 registrations from across India.

11. Case Study based discussion on MLI

The International Taxation Committee of the Society conducted a hybrid meeting on 11th May, 2023. Titled, ‘:Case Study based discussion on MLI,’ the meeting was led by Group Leader CA. Ganesh Rajgopalan who discussed various case studies that were a part of the BCAS ITF conference held at Gandhinagar.The group leader also discussed issues arising out of the amendment to the treaties on account of signing of the MLI by various countries (including India). He highlighted the nuances under select treaties and the compared the change in language thereof on account signing of MLI. During the meeting, the group leader also encouraged a discussion on various aspects besides addressing queries by the participants. The discussion provided great insights provided to the participants.

12. HRD Study Circle Meeting -”Narmada Parikrama”

The HRD Committee of the Society organised a hybrid Study Circle meeting on 9th May, 2023 to discuss the below-mentioned Flash Points/Glimpses from the Experience Shared at the above Meeting:

  •     The Speaker, CA Prasad shared his experience of the Narmada Parikrama during the four months of November 2019 to March 2020. The walk was through the terrain of approximately 3,500 Kilometres in the state of Madhya Pradesh and Gujarat.

 

  •     “NARMADE HAR” This is a Staple word used during the Narmada Parikrama. The speaker related the mixed emotions he experienced the Parikrama. He related his entire journey for the benefit of the Young Professionals. He said, today’s youth, whether CA’s or not, have a lot to learn about the decision making process. Practical decision to take a walk along with Maa Narmada Maiyya. It is the food for thought if one decides to walk the stretch of Ma Narmada and understand India.

 

  •     There is great difference between qualification and enrichment. If one wants to enrich his or her experience with life, then, Narmada Parikrima is the Best Solution.

 

  •     Narmada River is like a mother, walking around it is like being in the lap of mother Narmada River.

 

  •     The walk teaches humility, patience, compassion and tolerance.

 

  •     The walk teaches how the poor are very generous and always willing to give. The villagers around the Narmada will ensure that every pilgrim is well fed, though they have to go in the neighborhood far away to bring ingredients like flour to make chapatis. The villagers sometimes are so poor that they do not have both ends to meet, yet they think of the Pilgrims before themselves or their family members. Can we try to think of others in the world around us? This was first glimpse of “param artha”.

 

  •     On being asked, whether one feels Homesick during the parikrama, the speaker answered that, there are so many interesting things in the nature and the atmosphere, that, one never feels homesick at all. In fact, sometimes, the persons feel that they should remain on the banks of Maa Narmada and not go back home.

 

  •     Some of the questions raised by the audience included about reading books on Parikrama or see any movies. However, the speaker advised the participants to talk to less people and concentrate and work. Over study and over thinking leads to failure whether in exam or during this pilgrimage. The speaker gave examples of over study and failures in the CA exams which some might have experienced.

The session ended with a Pranam by the speaker to all the offline and online participants.

YouTube Link : https://www.youtube.com/watch?v=Iv4tdY-mKEE

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13. Bringing hope when there is none left.

 

  •     The HRD committee of the Society organised a meeting on 18th April, 2023 to spread awareness about Noble Social cause work carried on by Respected Mittal Maulik Patel, Founder  and Managing Trustee, Vicharta Samuday Samarthan Manch(VSSM) who has been Honoured with Nari Shakti Award at National Level for most significant work in the field of women empowerment by the hands of His Excellency President Ram Nath Kovind and also awarded Nari Shakti Award at State Level for most significant work in the field of women empowerment by the hands of Honourable Governor of Gujarat O.P. Kohli.

 

  •     She made detail presentation about VSSM, which is a non-profit organisation whose mission is to ensure and enable holistic development of the people belonging to the Nomadic, De-Notified Tribes and other marginalised section of the society addressing the interdependence and co evolution of human economies and biodiversity.

 

  •     VSSM is working to empower the nomadic and de-notified communities while striving to create an inclusive society as well as government policies for these extremely marginalised sections of our society. Actively working for the welfare of the most downtrodden Nomadic and De-Notified tribes on several socio-economic problem related to education, livelihood, health, human rights, environment, water management, empowerment, building hostel for school children, etc.

 

  •     The meeting ended with a heart-felt gratitude expressed by Mittalben, to the participants and prospective donors for their whole-hearted support to the organisation.

 

  •     She made a further appeal to the members present to spread awareness about VSSM to support and contribute towards the noble work carried on by VSSM. Donation to VSSM is eligible under CSR.

14. Human Resources Development Committee – “Graphology-Handwriting Analysis”.

The HRD Committee of the Society organised a hybrid meeting on 11th April, 2023 at its premises. Led by Bhupesh Singh Dhundele, Graphologist, the meeting imparted the below teachings:

1.    The participants were guided as to how they can analyse their own handwriting and those of others who they would like to know better.

2.    Our Handwriting records our accurate picture of our real self because it is the end result of our brain in action. When we write we think. Handwriting reveals our personality, presence, authority.

3.    Handwriting Analysis helps choose career.

4.    Discussed how to explore the secrets of an individual hidden in their handwriting.

5.    You are what you write. (Writing reflects your personal image)

6.    Your nature lies in your signature. (Signature reflects your personal image)

7.    Your writing is as unique as your thumb print.

8.    It represents your personality. It is instant pen picture/mental X-ray of your total personality of that moment.

9.    It is mind writing. People lost their hand in accidents/war, start writing with leg/mouth, achieve same handwriting after practice.

10.    Graphology is a subject dealing with Graphs.

Presented by Mr. Bhupesh Singh Dhundele (Graphologist)

YouTube Link: https://www.youtube.com/watch?v=24_eFjxBjMs

QR Code:

 

Corporate Law Corner : Part A | Company Law

7 M/s Assam Company India Ltd & Ors
vs. Union of India & Ors
The Gauhati High Court
High Court of Assam, Nagaland, Mizoram and Arunachal Pradesh
Case No. : WP(C) 2572/2018
Date of Order: 07th March, 2019The expression “Shell Company” had not been defined under any law in India. Therefore, before declaring any Company as a Shell Company, a notice or an opportunity of being heard shall be given having regard to its negative implications and serious consequences. FACTS

M/s ACIL was incorporated on 15th March, 1977 having its Registered Office at Assam, involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam.

M/s ACIL learned that respondent No.2, i.e., Securities and Exchange Board of India (‘SEBI’) had initiated proceedings against M/s ACIL by instructing the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock Exchange (collectively referred to as ‘Stock Exchanges’) to restrict and/or to suspend trading of shares of M/s ACIL. Further learned that, SEBI had initiated such proceedings on the basis of a letter dated 09th June, 2017 received from Government of India by the Ministry of Corporate Affairs (‘MCA’) forwarding the database of 331 listed shell companies for initiating necessary action. In the said list of 331 shell companies, M/s ACIL was listed at Serial No.2 with the source indicated as Income Tax Department.

M/s ACIL represented before SEBI on 07th August, 2017 contending that it was an on-going company and could not be included in the list of shell companies. It was pointed out that M/s. ACIL produces 11 million KGS of tea and employs about 20 thousand workers across the Tea Estates.

According to M/s ACIL, no steps were taken by SEBI on the representation by M/s ACIL. Therefore, an appeal was filed before the Securities Appellate Tribunal (‘SAT’), Mumbai which was registered as Appeal No.196/2017. The appeal was disposed of vide order dated 21st August, 2017 by directing the stock exchanges to reverse their decision expeditiously, while granting liberty to M/s ACIL to make a representation to SEBI, which was directed to be disposed of by SEBI in accordance with the law. It was further observed that the aforesaid order of appeal would not come in the way of SEBI as well as the stock exchanges from investigating the case of M/s ACIL and to initiate proceedings if deemed fit.

In compliance with the order of the SAT, M/s ACIL submitted several representations before SEBI and also sought for copies of documents on the basis of which M/s ACIL was declared as a shell company, which were handed over by SEBI on 25th January, 2018.

According to M/s. ACIL, based on the documents handed over, it was found that the aforesaid letter dated 09th June, 2017 was received from the Serious Fraud Investigation Office of Government of India, Ministry of Corporate Affairs (SFIO). The same included the database of 124 listed companies along with a Compact Disc received from the Income Tax Department, having been identified during various search/seizures.

From the database (Compact Disc) of the letter, it appeared that M/s ACIL was shown as a company controlled by Mr VKG against whom several Income Tax Proceedings were pending. A nexus was drawn between Mr VKG and M/s ACIL through Mr SK who was one of the Independent Directors of M/s ACIL and also a Director in one of such companies controlled by Mr VKG.

M/s. ACIL contended that the mere presence of Mr. SK as an Independent Director of M/s ACIL, who was also a Director in the companies controlled by Mr VKG, cannot be construed as there being any relationship between M/s ACIL and Mr VKG. Furthermore, Mr VKG had filed an affidavit before SEBI stating that he had no association with M/s ACIL in any manner.

In the meanwhile, SEBI passed an interim order dated 08th December, 2017. By the said order trading in securities of M/s ACIL was reverted to the status as it stood prior to issuance of the letter dated 07th August, 2017. It was ordered that Stock Exchanges would appoint Independent Auditors to verify misrepresentation of finance and business of M/s ACIL as well as misuse of funds/books of accounts. Also, the Promoters and Directors of M/s ACIL were permitted only to buy securities of M/s ACIL, prohibiting them from transferring the shares held by them.

Aggrieved by the order, present writ petition was been filed by M/s ACIL seeking the relief that passing of such order by SEBI was not justified and stated that M/s ACIL cannot be treated as a Shell Company.

The expression “Shell Company” had not been defined under any law in India. Therefore, there was no statutory definition of a Shell Company, be it in fiscal statutes or in penal statues. In addition, neither the Companies Act, 1956 nor the Companies Act, 2013 defines the expression shell company. In the interim order passed on 12th July, 2018, the Court observed that in the Concise Oxford English Dictionary, 11th Revised Edition, a Shell Company had been defined as a non-trading company used as a vehicle for various financial manoeuvres.

In popular parlance, a Shell Company was understood as having only a nominal existence; it exists only on paper without having any office and employee. It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly Shell Companies are identified as companies that are used for tax evasion or money laundering, i.e., channelising crime tainted money or proceeds of crime into the formal economy.

The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. In the said glossary, a Shell Company has been defined as a company which is formally registered, incorporated or otherwise legally organised in an economy, but which does not conduct any operations in that economy other than in a pass-through capacity. Shell companies tend to be conduits or holding companies and are generally included in the description of special purpose entities.

Mr AB, Assistant Professor in Law, Nirma University, Ahmedabad had carried out a study and published an article on the subject ‘Tackling the Menace of Shell Companies in India’. He had stated that there had been a spurt in economic crimes, such as, money laundering, benami transactions, tax evasion, generation of black money, round tripping of black money, etc. which not only causes revenue and foreign exchange loss to the Government, but also creates economic inequality in the society. It may compromise economic sovereignty of the State. According to him, such illegal activities are committed through the incorporation of companies which have neither any asset nor liability nor any operational businesses. These companies exist only on paper to facilitate illegal financial transactions, such as, money laundering and tax evasion. According to him, these kinds of companies are called shell companies.

However, it is no offence to be a shell company per se. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity. The Registrar of Companies can strike off the name of such a company from the register of companies. But, if such Shell Company is/was involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income-tax Act, 1961 and the Companies Act, 2013 would be attracted.

As per the study, SEBI had proposed to the Government of India that there should be a legal definition of Shell Company as there was no law in India which defines a Shell Company. Such definition besides giving legal clarity, would also enable the investigative agencies to carry out investigation more swiftly and in a structured manner. The Committee was of the view that all Shell Companies may not have fraudulent intention. Therefore, the expression shell company needs to be defined as having fraudulent intent as one of the characteristic features of such a company.

HELD

The Honourable Judge based on the above, deduced that though Shell Company was defined in other jurisdictions, in India there was no statutory definition of the term. However, the general perception was that with presence of shell companies there can be a potential use for such Companies for illegal activities that threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty.Thus, there was a prima facie view that since declaration of M/s ACIL as a Shell Company by itself would entail adverse consequences, M/s. ACIL should have been at least served a notice before being branded as a Shell Company. It was recorded that M/s ACIL was an old and reputed company owning 14 tea estates in the State of Assam producing 11 million KGS of tea every year and having a labour force of 20 thousand of its own. Therefore, branding such a company as a Shell Company was not justified.

Principles of natural justice would require that before such branding, M/s ACIL should have been put on notice and being provided a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a Shell Company. Only if the response was found to be not satisfactory, then such a finding could have been recorded. Besides, initiating proceedings after branding M/s ACIL as a Shell Company virtually amounted to giving a finding first and thereafter initiating a proceeding to justify the finding like a post-decisional hearing. One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold finding of such guilt. The letter dated 09th June, 2017 was very clear that M/s ACIL was a Shell company and not a suspected Shell company.

Therefore, upon thorough consideration of the matter, writ petition was not only maintainable but also deserved to be allowed.

Impugned letter dated 09th June, 2017 in respect of M/s ACIL was accordingly interfered with and was set aside.

8 M/s. Oscar FX Pvt Ltd
U72900TG2014PTC094237/Telangana/152 of 2013/2023/4139 to 4141
Adjudication Order
Registrar of Companies, Hyderabad
Date of Order: 24th January, 2023.

Order under section 454 read with Section 159 of the Companies Act, 2013 for the violation of section 152(3) of the Companies Act, 2013 i.e. in case of appointment of any person as director in the company who does not have a valid director identification number (DIN) at the time of his/her appointment.

FACTS

M/s OFPL (hereinafter referred as ‘Company’) is registered in the State of Telangana on 29th May, 2014, having its registered office in Telangana. M/s OFPL had filed an application in Form GNL-1 dated 16th January, 2023 along with its officers in default under section 159 for adjudication of violation of Section 152(3) read with Section 454 of the Companies Act, 2013 (the Act) seeking necessary orders.It was submitted that erstwhile Board of Directors of the Company comprising Mr. KKP (Managing Director) and Mr. RPK (Director) at its Board Meeting held on 30th March, 2021 had appointed Ms. VBP as an Additional Director with effect from 30th March, 2021. However, Ms. VBP did not have a valid Director Identification Number (DIN) at the time of appointment to become the director on the Board of the company, which was a violation of the provisions of Section 152(3) of the Companies Act, 2013; and liable for penalty under Section 159 of the Companies Act, 2013.

It was further submitted that such appointment of Ms. VBP was unintentional and inadvertent due to lack of knowledge of provisions of the Companies Act, 2013.. Immediately upon realisation, Ms VBP, had applied to the Ministry of Corporate Affairs (“MCA”) for allotment of DIN on 15th September, 2021 and was allotted DIN on the same day by MCA. Immediately upon allotment of DIN to Ms. VBP, M/s OFPL had filed e-form DIR-12 with the Registrar of Companies dated 28th September, 2021 to give effect to her appointment as additional director. Section 152(3) of the Companies Act, 2013 states the following:

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154:”

Section 159 of the Companies Act, 2013 contemplates the following:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156 such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupee for each day after the first during which such default continues “.

HELD

After considering the submissions made in the application made by M/s OFPL and the facts of the case it is proved beyond doubt that M/s OFPL and the officers of the company have defaulted in complying the provisions under Section 155(3) of the Act. In this regard, M/s OFPL being a small company, and its officers in default (within the meaning of section 2(60) of the Companies Act, 2013) are hereby directed to pay the following penalty from their own sources.

Name of the Company

Penalty under section 159 r/w s. 446B of the Act.

 

On default

On continuous
default, with a further penalty which may extend to R 500 for 169 days
(date of allotment of DIN).

Total penalty

Oscar FX Private
Limited

Rs. 25,000/-

169 @ 100 = 16,900/-

Rs. 41,900/- (Rupees
Forty-One Thousand Nine Hundred only)

Officer in Default

Penalty as per Act.

 

On default

On continuous
default, with a further penalty which may extend to five hundred rupees for
169 days (date of allotment of DIN).

Total penalty

Mr. KKP (MD)

Rs. 25,000/

Rs. 169 @ 100 =
Rs. 16,900/-

Rs. 41,900/- (Rupees
Forty-One Thousand Nine Hundred only)
It was directed that the penalty be paid within 30 days from the date of issue of the order.

Audit Trail – Key Considerations for Auditors and Companies

INTRODUCTION

 

Section 143(3) of the Companies Act, 2013 provides various matters on which auditors are required to report in their auditor’s report. Clause (j) of Section 143(3) states that auditor’s report shall also state such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 specifies such other matters that are to be reported by the auditor.The requirement with respect to audit trail was contained in Rule 11(g) with regard to auditor’s reporting requirements. The requirement was initially made applicable for the financial year commencing on or after the 1st April, 2021 vide notification G.S.R. 206(E) dated 24th March, 2021. However, the applicability was deferred to financial year commencing on or after 1st April, 2022, vide MCA notification G.S.R. 248(E) dated 1st April, 2021.

The corresponding requirement for companies has been prescribed under the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requiring companies, which use accounting software for maintaining their books of account, to use only such accounting software which has audit trail feature. This requirement for companies was initially made applicable for financial year commencing on or after 1st April, 2021. However, its applicability has been deferred two times and this requirement is finally applicable from financial year commencing on or after 1st April, 2023.

The respective requirement for companies under Rule 3(1) of Companies (Accounts) Rules, 2014 and for auditors under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 are given below.

Text of Proviso to Rule 3(1) of Companies (Accounts)
Rules, 2014

Text of Rule 11(g) of Companies (Audit and Auditors)
Rules, 2014

Provided that for the
financial year commencing on or after the 1st April, 2023, every
Company which uses accounting software
for maintaining its books of account, shall use only such accounting

Whether the company,
in respect
of financial years commencing on or after the 1st April, 2022, has
used such accounting software
for maintaining its books of
account which has a feature of recording

software which has a
feature of recording audit trail of each and every transaction, creating an
edit log of each change made in the books of account along with the date when
such changes were made and ensuring that the audit trail cannot be disabled.

audit trail (edit
log) facility and the same has been operated throughout the year for all
transactions recorded in the software and the audit trail feature has not
been tampered with and it has been preserved by the company as per the
statutory requirements for record retention.

The ICAI has issued an Implementation Guide on Reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 (IG) to enable the auditors to comply with the reporting requirements of Rule 11(g). The author provides additional insights through Q&As on the subject.

WHAT IS MEANT BY BOOKS OF ACCOUNTS FOR THE PURPOSES OF RULE 3(1) AND RULE 11(G) PRESENTED ABOVE?

The definitions are included in Section 2 of the Companies Act, 2013. These are given below.

(12) “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;

(13) “books of account” includes records maintained in respect of—

i.    all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

ii.    all sales and purchases of goods and services by the company;

iii.    the assets and liabilities of the company; and

iv.    the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

WHAT IS MEANT BY AUDIT TRAIL?

This is defined in the IG as follow: Audit Trail (or Edit Log) is a visible trail of evidence enabling one to trace information contained in statements or reports back to the original input source. Audit trails are a chronological record of the changes that have been made to the data. Any change to data including creating new data, updating or deleting data that must be recorded. Records maintained as audit trail may include the following information:

  •  when changes were made i.e., date and time (time stamp)

 

  • who made the change i.e., User Id/Internet protocol (IP)

 

  • what data was changed i.e., data/transaction reference; success/failure

Audit trails may be enabled at the accounting software level depending on the features available in such software or the same may be captured directly in the database underlying such accounting software.

The requirement for companies applies for financial year commencing on or after 1st April, 2023. On the other hand, the requirement to report on audit trail applies to auditors only w.e.f. financial years commencing on or after 1st April, 2022. For the financial year ended 31st March, 2023, should the auditor report on the audit trail?

For the year ended 31st March, 2023, it may not be appropriate for the auditor to comment on whether audit trail is maintained or not by the company, since the requirement for companies applies only in the following year. The auditor shall state in his report this fact and not make any other observations on whether the company has complied with the requirement of audit trail or not.

WHETHER THE AUDIT TRAIL REQUIREMENT APPLIES TO BOOKS OF ACCOUNT PREPARED MANUALLY?

The requirement applies only to books of account prepared electronically using an accounting software. It does not apply where the books of account are entirely maintained manually. In such a case, as the assessment and reporting responsibility under Rule 11(g) will not be applicable, the same would need to be reported as a statement of fact by the auditor against this clause. Wherever, some books of account are maintained manually, whereas other are maintained electronically, the requirement would apply to books of accounts maintained electronically.

WHETHER AUDIT TRAIL REQUIREMENT FOR BOOKS OF ACCOUNTS INCLUDE COST RECORDS?

Yes, it will include cost records because as per Section 2(13)(iv) of the Companies Act, 2013, books of accounts include cost records if it belongs to any class of companies specified under section 148 of the Companies Act, 2013. It may also apply to cost records of other companies, if the information generated by those cost records is used in some manner for the purposes of preparing the company’s trial balance or financial statements or is otherwise integrated with the financial records used for preparing financial statements.

WHETHER AUDIT TRAIL REQUIREMENT WOULD APPLY TO THINGS SUCH AS RENTAL AGREEMENTS OR CASH VOUCHERS, ETC?

The audit trail requirement applies to books of accounts and not books and papers. Therefore, the audit trail requirement would not apply to papers such as rental agreements or cash vouchers. In other words, if changes are made to the underlying cash voucher that was prepared digitally, there is no need to maintain an edit log for the same. However, from an internal control point of view, it is important that the authentication of the persons preparing and approving the voucher is appropriately documented on the cash voucher.

FOR AUDITOR REPORTING UNDER RULE 11(G), DOES THE REQUIREMENT APPLY TO STANDALONE FINANCIAL STATEMENTS (SFS) ONLY OR SHALL APPLY TO CONSOLIDATED FINANCIAL STATEMENTS (CFS)?

Section 129(4) of the Act specifically states that the provisions of the Act that apply to SFS with respect to financial statements, shall, mutatis mutandis, apply to the CFS. Therefore, the requirements apply both to SFS and CFS. However, while reporting on CFS, the auditor shall exclude certain components included in the CFS which are (a) either not companies under the Act, or (b) are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them.The reporting on compliance with Rule 11(g) would be on the basis of the reports of the statutory auditors of subsidiaries, associates and joint ventures that are companies defined under the Companies Act, 2013. The auditors of the parent company should apply professional judgment and comply with applicable Standards on Auditing, in particular, SA 600, “Using the Work of Another Auditor” while assessing the matters reported by the auditors of subsidiaries, associates and joint ventures that are Indian companies.

WHICH ACCOUNTING SOFTWARE IS COVERED UNDER RULE 3(1)?

Any software that maintains records or transactions that fall under the definition of books of account as per section 2(13) of the Companies Act will be considered as accounting software for this purpose. For e.g., if sales are recorded in a standalone software and only consolidated entries are recorded monthly into the software used to maintain the general ledger, the sales software should also have the audit trail feature because it is part of the financial records.

WHETHER ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) SOFTWARE AND ESG RECORDS ARE COVERED UNDER RULE 3(1)?

No, since ESG records do not constitute books of accounts as defined under Section 2(13) of the Companies Act, 2013.

WHETHER EDIT LOG NEEDS TO BE MAINTAINED FOR CREATION OF A USER IN THE ACCOUNTING SOFTWARE?

No, because creating a user account in the accounting software does not change the books of accounts. Nonetheless, from the perspective of internal controls, it would be necessary to have edit logs for creation of a user in the accounting software.

 

DOES TALLY PRIME LATEST VERSION HAVE EDIT LOG FEATURES?

Tally has made two different product releases, ‘TallyPrime Edit Log Release 2.1’ and the regular ‘TallyPrime release 2.1’. As per Tally, TallyPrime Edit Log Release 2.1 comes with an edit log feature enabled all the time, without an option to disable it. While TallyPrime Release 2.1 gives an option to enable/disable the edit log when required.It will be inappropriate to compare Tally to a sophisticated ERP such as SAP. Can the auditor rely on Tally as a tool on which reliance could be placed to review the inbuilt or digital controls relating to audit trail or should it be looked at as a black box? Tally’s representation that the edit log cannot be disabled or tampered with and that the inbuilt digital controls can be relied upon needs to be tested and validated by the auditor before drawing that conclusion.

Is the accounting software required to be hosted on a physical server located in India?

It should be noted that the accounting software may be hosted and maintained in or outside India or may be on-premises or on cloud or subscribed to as Software as a Service (SaaS) software. Further, a company may be using a software maintained at a service organisation. For example, the company may have outsourced its payroll processing with a shared service centre that may use its own software to process payroll for the company. On the other hand, back-up of books and papers are required to be maintained on a physical server located in India only.

IF COMPANIES (ACCOUNTS) RULES ARE NOT FOLLOWED, WILL IT TANTAMOUNT TO NON-COMPLIANCE WITH REGULATIONS AS PER SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS?

Yes, it will be a non-compliance with laws and regulations, but no additional qualification is required on this account alone if the penalty amount is likely to be insignificant. However, auditors need to consider the likelihood of frauds and conduct appropriate procedures. Also, the Audit Committee needs to be properly briefed.

DOES NON AVAILABILITY OF EDIT-LOGS IMPLY FAILURE OF INTERNAL CONTROL SYSTEM, AND WOULD AUDITOR NEED TO QUALIFY THE INTERNAL CONTROL REPORT?

The answer to this question would depend upon detailed facts and circumstances of the case. Sometimes mere non-availability of audit trail does not necessarily imply failure or material weakness in the operating effectiveness of internal financial controls over financial reporting. For e.g., due to some temporary glitch the audit trail may have not worked, that does not mean that the internal financial control system would deserve a negative reporting from the auditor. An important point to note is that the requirement of the audit trail applies throughout the financial year; however, as regards the internal financial control, any weaknesses if resolved prior to the end of the financial year would not attract any qualification or reservation from the auditor.

Food Co runs several restaurants, and the revenue includes a sizable portion collected in cash from the customers. The company does not have any system of edit logs associated with the cash collection process or with respect to the accounting in the sales ledger and general ledger. How should the auditor approach this situation?

This is a serious issue, and the auditor needs to consider several aspects, a few of which are listed below:1.    Should the auditor accept such a client and when already accepted, should the auditor continue doing an audit of such a client? This assessment needs to be carried out by the auditor.

2.    The auditor shall perform an assessment of risk of material misstatements due to fraud and would consider both qualitative and quantitative factors in assessing a deficiency or combination of deficiencies as a significant deficiency or material weakness. This audit procedure would accordingly require application of professional judgement while linking the reporting against Rule 11(g) and the internal control reporting requirements.

3.    The auditor may need to disclaim several clauses of CARO, such as with respect to reporting on the clause relating to fraud. The auditor would have to state that the occurrence of an error or fraud could not be established due to lack of maintenance, availability or retrievability of audit trails.

Ze Co maintains edit logs for each and every transaction; however, for a particular day during the financial year Ze could not produce any edit logs, as that system was down. What would be the auditor’s responsibility in such cases?

Audit report under Rule 11(g) is a factual reporting. The auditor will have to report the non-availability of edit logs for the particular day for reporting under Rule 11(g). The auditor will have to state in the report that edit logs were available throughout the financial year except for a particular day and provide the reason why the edits logs were not available for that day. Additionally, the auditor will also have to carry out detail procedures to validate if the absence of edit logs was or was not related to any fraud as well as evaluate the implications on the reporting on internal financial controls.

A company has outsourced its payroll processing to an external party. In such a case, whether the requirements of audit trail are applicable, and how does the auditor verify the same?

As per the requirements, the accounting software should be capable of creating an edit log of “each change made in books of account” and the audit trail feature has not been tampered with. In case of accounting software supported by service providers, the company’s management and the auditor may consider using independent auditor’s report of service organisation (e.g., Service Organisation Control Type 2 (SOC 2)/SAE 3402, “Assurance Reports on Controls at a Service Organisation”) for compliance with audit trail requirements. The independent auditor’s report should specifically cover the maintenance of audit trail in line with the requirements of the Act.

A company did not preserve audit trail for a few of its in-house application such as the payroll processing system for earlier years, though edit logs are fully preserved for the financial year commencing on and after 1st April, 2023. Whether any reporting is required by the auditor under Rule 11(g)?

The auditor is required to comment whether ‘the audit trail has been preserved by the company as per the statutory requirements for record retention’. Considering the requirement of Section 128(5) of the Act, which requires books of account to be preserved by companies for a minimum period of eight years, the company would need to retain audit trail for a minimum period of eight years, i.e., effective from the date of applicability of the Account Rules (i.e., currently 1st April, 2023, onwards). Therefore, if audit trail has not been preserved for earlier years, no reporting is required by the auditor under Rule 11(g).

As per Rule 3(1), the accounting software shall have a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled. Would the software ensure that the audit trail feature cannot be disabled or management has to ensure that the audit trail feature is not disabled?

Most of the commonly used accounting software, including Enterprise Resource Planning (ERP) software, has an audit trail feature that can be enabled or disabled at the discretion of the company. The management of the company may have put in place certain controls such as restricting access to the administrators and monitoring changes to configurations that may impact the audit trail. Auditors are accordingly expected to evaluate management’s policies in this regard and test such controls to determine whether the feature of audit trails has been implemented and operating effectively throughout the reporting period.

The requirement should not be interpreted to conclude that if the software has the feature to disable audit trail, it should be automatically treated as non-compliant with Rule 3(1). Most advanced business applications have many features that can be enabled and disabled as per client’s business requirements. This by itself, does not create a compliance issue.

In order to demonstrate that the audit trail feature was functional, operated and was not disabled, a company would have to design and implement specific internal controls (predominantly IT controls) which in turn, would be evaluated by the auditors, as appropriate. For e.g., these could relate to

  •     Controls to ensure that the audit trail feature has not been disabled or deactivated.

 

  •     Controls to ensure that User IDs are assigned to each individual and that User IDs are not shared.

 

  •     Controls to ensure that changes to the configurations of the audit trail are authorised and logs of such changes are maintained.

 

  •     Controls to ensure that access to the audit trail (and backups) is disabled or restricted and access logs, whenever the audit trails have been accessed are maintained.

 

  •     Controls to ensure that administrative access to the audit trail is restricted to authorised representatives.

 

  •     Periodic testing of controls relating to audit trail configuration by management or internal auditors.

HOW DOES AN AUDITOR, AUDIT THE AUDIT TRAIL?

There are many direct and indirect evidences that an auditor needs to collect / review to ascertain compliance with the requirements. This includes but not limited to management representation, review, on a sample basis, the audit trail records maintained by management for each applicable year and evaluate management controls for maintenance of such records without any alteration and retrievability of logs maintained for the required period of retention.The management should ensure that an internal control system is implemented and operates effectively throughout the year. A combination of prevent and detect controls, ITGC’s, ITAC’s, should be used, supported also by Entity Level Controls (ELC’s). The management should conduct proper tests to ensure that controls are operating effectively throughout the year and take quick remedial actions in case of defects and auditors should test those controls.

Some examples of how the auditor can verify controls relating to audit trail are given below:

Controls over changes in configuration of audit trails whether those are authorised and whether logs of such changes are maintained can be verified by applying the following steps

Obtain a log of changes made to audit trail configuration made during the year.

Select sample changes made.

Ask for approvals or authorizations for such changes made.

Controls to ensure that the audit trail feature has not been disabled or deactivated; the auditor can check this from change management log in SAP.

The management should ensure that every user is assigned a User ID; auditor can take a sample of new joiners and verify if they are allotted an ID; the auditor can also verify for every User ID if there is an employee identified and that there are no dummy IDs.

Controls to ensure that User ID’s and Passwords are not shared; e.g., auditor can check for instances where multiple users log-in from the same machine (IP).

CONCLUSION

The intent of the audit trail seems to be to prevent fabrication of books through overwriting the books of accounts. The trail is expected to easily track the changes made to the books of accounts,and would require the company to explain the reasons thereof. Globally, no similar reporting obligation exists for the auditors.In the past, several instances have come to notice, where senior executives of companies have tampered with the books of accounts, without leaving any footsteps on the changes made, and who made those and at what time. Hopefully, with these changes, such instances would be significantly curtailed or exposed.

UAE’s Corporate Tax Law – An Update

In the earlier article published in BCAJ February, 2023, authors had provided an overview of the United Arab Emirates’ [UAE] newly introduced Corporate Tax Law [CT Law].

In this article, the authors endeavor to cover further developments in this respect of the CT Law since the issue of Federal Decree Law No. 27 of 2022 on 9th December, 2022. Since the CT Law has become effective for financial years starting on or after 1st June, 2023, these developments assume lot of significance.

A. RECENT DEVELOPMENTS RELATED TO CT LAW

The Federal Decree Law No. 27 of 2022 on Taxation of Corporations and Businesses was signed on 3rd October, 2022 and was published in Issue #737 of the Official Gazette of the UAE on 10th October, 2022. The UAE CT Law can be found at the link https://mof.gov.ae/corporate-tax/.

FAQs

The law has been supplemented with FAQs originally released on 9th December, 2022 comprising of 158 questions and answers, by the Ministry of Finance [Ministry]. The FAQs have been updated and the current Corporate Tax FAQs contain 209 questions and answers that provide guidance on the UAE CT Decree-Law. The FAQs on the CT Law can be found at the link https://mof.gov.ae/corporate-tax-faq/.

‘EXPLANATORY GUIDE’ ON CT LAW

The UAE’s Ministry has on 11th May, 2023 issued the ‘Explanatory Guide on Federal Decree-Law No. 47 of 2022 on the ‘Taxation of Corporations and Businesses’.The CT Law provides the legislative basis for imposing a federal tax on corporations and business profits in the UAE. It comprises of 20 Chapters and 70 Articles, covering, inter alia, the scope of Corporate Tax, its application, rules pertaining to compliance and the administration of the Corporate Tax regime etc.

The Explanatory Guide has been prepared by the Ministry, and provides an explanation of the meaning and intended effect of each Article of the CT Law. It may be used in interpreting the CT Law and how particular provisions of the CT Law may need to be applied.

The Explanatory Guide has to be read in conjunction with the CT Law and the relevant decisions issued by the Cabinet, the Ministry and the Federal Tax Authority [FTA] (The information on the Corporate Tax topics can be found at the link https://tax.gov.ae/en/taxes/corporate.tax/corporate.tax.topics.aspx) for the implementation of certain provisions of the CT Law. It is not, and is not meant to be, a comprehensive description of the CT Law and its implementing decisions. The Explanatory Guide on the CT Law can be found at the link https://mof.gov.ae/explanatory-guide-for-federal-decree-law/.

CABINET DECISIONS

The CT Law in 18 of the total 70 articles, contains enabling powers to prescribe various conditions, determine persons, list entities, prescribe relevant dates, etc. in a decision issued by the Cabinet at the suggestion of the Minister.Accordingly, the following Cabinet decisions for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses have been issued by the Prime Minister of the UAE:

Sr. No. Cabinet Decision No. Cabinet Decision regarding Issued on Relevant Article of CT Law
1. 37 of 2023 Regarding the Qualifying Public Benefit Entities 7th April,2023 Article 9 – Qualifying Public Benefit Entity
2. 49 of 2023 On Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person subject to Corporate Tax 8th May, 2023 Article 11 – Taxable Person
3. 55 of 2023 Determining Qualifying Income for the Qualifying Free Zone Person 30th May, 2023 Article 18 – Qualifying Free Zone Person
4. 56 of 2023 Determination of a Non-Resident Person’s Nexus in the State 30th May, 2023 Article 11 – Taxable Person

The Cabinet Decisions contain a Standard Article ‘Implementing Decisions’ which provides that ‘The Minister shall issue the necessary decisions to implement the provisions of this Decision.’ Accordingly, necessary Ministerial Decisions are issued for implementation of the Cabinet Decisions, in addition to other Ministerial decisions prescribing, determining, specifying, etc under various articles of the CT Law.

MINISTERIAL DECISIONS

The Office of the Minister, Ministry of Finance of the UAE, for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, has issued the undermentioned Ministerial Decisions:

Sr. No. Ministerial Decision No. Ministerial Decision regarding Issued on
1. 43 of 2023 Concerning Exception from Tax Registration 10th March, 2023
2. 68 of 2023 On the treatment of all businesses and business activities of a government entity as a single taxable person 29th March, 2023
3. 73 of 2023 Small Business Relief 03rd April, 2023
4. 82 of 2023 On the Determination of Categories of Taxable Persons required to prepare and maintain audited Financial Statements 10th April, 2023
5. 83 of 2023 On the Determination of the Conditions under which the presence of a Natural Person 10th April, 2023
in the state would not create a PE for a Non-Resident Person
6. 97 of 2023 On requirements for maintaining TP Documentation 27th April, 2023
7. 105 of 2023 On the Determination of the Conditions under which a person continue to be deemed as an Exempt Person  4th May, 2023
8. 114 of 2023 On Accounting Standards and Methods 9th May, 2023
9. 115 of 2023 On Private Pension Funds and Private Social Security Funds 10th May, 2023
10. 116 of 2023 On Participation Exemption 10th May, 2023
11. 120 of 2023 On the adjustments under the transitional rules 16th May, 2023
12. 125 of 2023 On tax group 22th May, 2023
13. 126 of 2023 On the general interest deduction limitation rule 23rd May, 2023
14. 127 of 2023 On unincorporated partnership foreign partnership and family foundation 24th May, 2023
15. 132 of 2023 On transfers within a qualifying group for corporate tax purposes 25th May, 2023
16. 133 of 2023 On business restructuring relief for corporate tax purposes 25th May, 2023
17. 134 of 2023 On the general rules for determining taxable income for corporate tax purposes 29th May, 2023
18. 139 of 2023 Regarding qualifying activities and excluded activities 1st June, 2023

The Cabinet and Ministerial Decisions on the CT Law can be found at the link https://mof.gov.ae/tax-legislation/.

B. FREE ZONE CORPORATE TAX REGIME [FZCT REGIME]

In this Article, we have analysed and focused on the Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income’ and on 1st June, 2023 issued Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities’ related to FZCT Regime.The FZCT Regime is a form of UAE Corporate Tax relief which enables Free Zone companies and branches that meet certain conditions to benefit from a preferential 0 per cent Corporate Tax rate on income from qualifying activities and transactions.

Free zones are an integral part of the UAE economy that continue to play a critical role in driving economic growth and transformation both in the UAE and internationally. In recognition of their continued importance and the tax-related commitments that were made at the time the Free Zones were established, Free Zone companies and branches that meet certain conditions can continue to benefit from 0% corporate taxation on income from qualifying activities and transactions.

Natural persons, unincorporated partnerships and sole establishments cannot benefit from the FZCT Regime. Only juridical persons can benefit from the FZCT Regime. This includes any public or private joint stock company, a limited liability company, limited liability partnership and other types of incorporated entities that are established under the rules and regulations of the Free Zone. A branch of a foreign or domestic juridical person that is registered in a Free Zone would also be considered a Free Zone Person [FZP].

A foreign company can become a FZP by transferring its place of incorporation to a UAE Free Zone and continue to exist as an entity incorporated or established in a Free Zone.

The FZCT Regime does not impose any limitations or restrictions with regards to who can establish or own a FZP.

The FZCT Regime does not restrict or prohibit a Qualifying Free Zone Person [QFZP] from operating outside of a Free Zone either in the mainland UAE or in a foreign jurisdiction. However, the income attributable to a domestic or foreign branch or Permanent Establishment [PE] of the QFZP, outside the Free Zone, will be subject to the regular UAE Corporate Tax rate of 9 per cent.

In the case of a foreign PE, the QFZP can claim relief from any double taxation suffered under the Corporate Tax Law or the applicable double tax treaty.

FREE ZONE PERSON

Chapter 5 of the CT Law comprising of Articles 18 and 19 contains relevant provisions relating to FZP.A FZP is a legal entity incorporated or established under the rules and regulations of a Free Zone, or a branch of a mainland UAE or foreign legal entity registered in a Free Zone. A foreign company that transfers its place of incorporation to a Free Zone in the UAE would also be considered a FZP.

The FZCT Regime is available only to FZPs, and this term is also used to determine what income can benefit from the regime by treating income from transactions with other FZPs as Qualifying Income.

QUALIFYING FREE ZONE PERSON [QFZP]

Article 18(1) of the CT Law provides that a QFZP is a FZP that meets all the five conditions mentioned therein i.e.
a) maintains adequate substance in a Free Zone;
b) derives Qualifying Income;
c) has not made an election to be subject to the regular UAE Corporate Tax regime;
d) comply with arm’s length principle and transfer pricing rules and documentation requirements;
e) Prepare and maintain audited financial statements.

Failure to meet any of the conditions results in a QFZP losing its qualifying status and not being able to benefit from the FZCT Regime for five (5) Tax Periods.

On 30th May, 2023, the UAE Ministry of Finance issued Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income’ and on 1st June, 2023 issued Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities’. These two decisions seek to clarify the application of the UAE corporate tax framework to UAE Free Zone businesses, and whether a taxable person qualifies to be treated as a QFZP under Article 18 of the UAE CT law.

Where a taxpayer is classified as a QFZP, Article 3(2) of the UAE CT law states that the QFZP would be subject to tax at 0 per cent on its Qualifying Income, and at a 9 per cent rate on non-Qualifying Income that it receives.

The FZCT Regime apply automatically. A QFZP that continues to meet all relevant conditions will automatically benefit from the FZCT Regime. There is no need to make an election or submit an application to the FTA.

A QFZP that does not want to benefit from the FZCT Regime can elect to apply the standard UAE Corporate Tax regime instead.

A QFZP will need to maintain documents to evidence compliance with the conditions of the FZCT Regime. In addition to maintaining audited financial statements and adequate transfer pricing documentation, a QFZP will need to maintain all relevant documents and records to evidence its compliance with the conditions to be considered a QFZP. This includes documentation in relation to the substance maintained in a Free Zone and the types of activities performed and income earned.

A QFZP is responsible for ensuring that it continues to meet all the conditions to benefit from the FZCT Regime and for filing its Corporate Tax return on this basis.

The FTA is responsible for the administration and enforcement of UAE Corporate Tax. In this capacity, the FTA can verify and make a final determination of whether a QFZP has complied with all the conditions of the FZCT Regime.

QUALIFYING INCOME

Article (3)(1) of the Cabinet Decision 55 provides that for the purposes of application of Article 18 of the CT law, ‘Qualifying Income’ of the QFZP shall include income derived from transactions with:

1. Other FZPs (except income derived from Excluded Activities);
2. A Non-Free Zone person, only in respect of ‘Qualifying activities’ that are NOT Excluded Activities;
3. Any other income (i.e. income from Excluded Activities) provided that it is below the de minimis threshold.
However, such qualifying income should not be attributable to a Domestic PE or a Foreign PE or to the ownership or exploitation of immovable property in accordance with the Article (5) and (6), respectively, of the Cabinet Decision 55.

INCOME DERIVED FROM TRANSACTIONS WITH OTHER FZPS

Income will be considered as derived from transactions with a FZP where that FZP is the ‘Beneficial Recipient’ i.e. a person who has the right to use and enjoy the service or the goods and does not have a contractual or legal obligation to pass such service or goods to another person.

QUALIFYING ACTIVITIES

Article (2)(1) of the Ministerial Decision 139 states that the following activities conducted by a QFZP shall be considered as Qualifying Activities:
(a) Manufacturing of goods or materials.
(b) Processing of goods or materials.
(c) Holding of shares and other securities.
(d) Ownership, management and operation of Ships.
(e) Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
(f) Fund management services that are subject to the regulatory oversight of the competent authority in the State.
(g) Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
(h) Headquarter services to Related Parties.
(i) Treasury and financing services to Related Parties.
(j) Financing and leasing of Aircraft, including engines and rotable components.
(k)Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
(l) Logistics services.
(m) Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

EXCLUDED ACTIVITIES

Excluded Activities are defined in Article (3)(1) of the Ministerial Decision 139 which states that the following activities shall be considered as Excluded Activities:

(a) Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of the Decision.
(b) Banking activities subject to the regulatory oversight of the competent authority in the State.
(c) Insurance activities subject to the regulatory oversight of the competent authority in the State, other than the activity specified under paragraph (e) of Clause (1) of Article (2) of the Decision.
(d) Finance and leasing activities subject to the regulatory oversight of the competent authority in the State, other than those specified under paragraphs (i) and (j) of Clause (1) of Article (2) of the Decision.
(e) Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other FZPs.
(f) Ownership or exploitation of intellectual property assets.
(g) Any activities that are ancillary to the activities listed in paragraphs (a) to (f) above.

An activity shall be considered ancillary where it serves no independent function but is necessary for the performance of the main Excluded Activity.

The activities referenced in Clause (1) of the Article shall have the meaning provided under the respective laws regulating these activities.

Where income falls within Excluded Activities this will not be treated as Qualifying Income (irrespective of where this income is derived from).

DE MINIMIS THRESHOLD

Article (4) of the Ministerial Decision 139, contains provisions related to De Minimis Requirements.A QFZP can earn Non-qualifying income from (i) Excluded Activities or (ii) activities that are non-Qualifying Activities where the other party is a Non-Free Zone Person, provided that this does not exceed the De Minimis threshold, being the lower of either (i) 5 per cent of total revenue of the QFZP in the tax period or (ii) United Arab Emirates Dirham [AED] 5 million.

Certain revenue shall not be included in the calculation of non-qualifying Revenue and total Revenue. This includes revenue attributable to certain immovable property located in a Free Zone (non-commercial property, and commercial property where transactions are with Non-Free Zone Persons). It also includes revenue attributable to a Domestic PE (e.g., a UAE mainland branch) or a Foreign PE.

OTHER CONDITIONS

Where the De Minimis threshold is breached or the QFZP does not satisfy the eligibility conditions of Article 18 of the UAE CT law or any other conditions prescribed, then the FZP shall cease to be a QFZP for the current tax period and then the subsequent four (4) tax periods i.e. they will be treated as a Taxable Person subject to 9 per cent CT rate for a minimum of five years.The implication of the FZP ceasing to be a QFZP is that all of the Taxable Income of the FZP would be subject to 9 per cent (on the Taxable Income that exceeds AED 375,000).

DOMESTIC PE

The Decisions introduce the concept of a Domestic PE where a QFZP has a place of business or other form of presence outside the Free Zone in the State.Income attributable to a Domestic PE should be calculated as if the establishment was a separate and independent person and shall be subject to CT at 9 per cent. However, it will not disqualify the FZP from benefitting from a 0 per cent CT rate on Qualifying Income, or be factored into the de minimis test (as above).

For the purposes of determining whether a QFZP has a Domestic PE, the normal PE rules of Article 14 of the CT Law shall apply. A mainland branch of a QFZP will therefore generally constitute a Domestic PE and be subject to CT at 9 per cent.

REQUIREMENT TO MAINTAIN ADEQUATE SUBSTANCE

Article 18(1)(a) of the UAE CT law requires that, in order to be treated as a QFZP, the FZP has to have adequate substance in the UAE.

Article (7) of Cabinet Decision No. 55 provides that a QFZP is required to undertake its core income-generating activities in a Free Zone and having regard to the level of activities carried out, have adequate assets and an adequate number of qualifying employees, and incur an adequate amount of operating expenditures.

It is possible for this substance requirement to be outsourced to a related party in a Free Zone or a third party in a Free Zone, provided that there is adequate supervision of the outsourced activity by the QFZP. Therefore, it would not be possible for these activities to be outsourced to a UAE mainland party.

The FZCT Regime does not prescribe any minimum investment, job creation or business expansion requirements. However, a QFZP must have adequate staff and assets and incur adequate operating expenditure in a Free Zone relative to the Qualifying Income it earns.

This requirement is in line with the existing UAE economic substance regulations.

AUDITED FINANCIAL STATEMENTS

Article (5)(1)(b) of Ministerial Decision No. 139 confirms the requirement that if a FZP is seeking to be treated as a QFZP it is required to prepare audited financial statements for the tax year in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the CT law.Article 54(2) of the CT Law dealing with Financial Statements provides that the Minister may issue a decision requiring categories of taxable persons to prepare and maintain audited or certified financial statements.

Ministerial Decision No. 82 of 2023 on the Determination of Categories of Taxable Persons required to prepare and maintain audited Financial Statements, provides that the following categories of taxable persons shall prepare and maintain audited Financial Statements:
A Taxable Person deriving Revenue exceeding AED 50,000,000 (fifty million United Arab Emirates dirhams) during the relevant Tax Period.
1. A Qualifying Free Zone Person.
2. Thus, each QFZP is to prepare and maintain audited Financial Statements.

CONCLUSION

The release of Cabinet Decision No. 55 on Determining Qualifying Income and Ministerial Decision No. 139 on Qualifying Activities and Excluded Activities provide some clarity on the nature of a Free Zone Person’s income that will be taxed at 0 per cent, as well as the income that would disqualify the FZP (completely) from claiming the 0 per cent tax rate.The released Decisions present a huge shift in understanding of the Free Zone regime within the UAE CT framework. Notably, the introduction of a de minimis threshold will have an impact on Free Zone entities as they could be fully taxable under the new rules.

The definition of ‘Qualifying Activity’ captures a large number of domestic business activities and the provision of services to entities that are located outside of a Free Zone, as well as preserves a beneficial tax regime for the UAE headquarters functions (with headquarters and treasury services falling within the definition).

For Free Zone entities that earn income from individuals (such as earnings from e-commerce sales to individuals, retail businesses, restaurants, hotels, and to an extent professional service/consultancy firms) and UAE businesses that hold or exploit intellectual property (e.g., royalty and license fees from copyrights, trademarks), these income streams are included in the definition of ‘Excluded Activity’ income. This will result in the businesses needing to assess if this income falls within the De Minimis exclusion (being the lower of (i) 5per cent of total revenue or (ii) AED 5 million).

The regulations suggest that if the level of the Excluded Activity income falls outside the De Minimis threshold, then the entity affected would not be eligible to be treated as a QFZP and all of its income would be subject to tax at 9 per cent (under the UAE mainland tax regime). Furthermore, such a business would also be excluded from seeking to be treated as QFZP (i.e., claiming the 0 per cent rate) for the following four (4) tax periods.

It is, therefore, critical that a FZP assesses whether and the extent to which their income streams can be viewed as Qualifying Activity income (i.e., including if their Excluded Activity income falls within the De Minimis exclusion).

Free Zone businesses should ensure that they satisfy all of the requirements of Article 18 of the UAE CT law (which also includes the preparation of audited financial statements) to ensure that they continue to satisfy the conditions to be viewed as a QFZP.

With the release of these Cabinet and Ministerial decisions, and with UAE CT law now effective (accounting periods starting on or after 1 June 2023), businesses that are yet to assess the impact of UAE CT should commence this assessment, at the earliest. With the clarity now available on CT law for Free Zone, time is of essence for Companies to assess their readiness to register and comply with the new regime.

Novel 80-20 Rule for Residential Real Estate Projects (RREP)

Real estate development sector was criticised over the non-percolation of input tax credit benefit to end consumers as well as the prevalence of low cash output. The GST council took cognizance and devised a Composition scheme for residential and mixeduse projects in 2019. Though the legal process for implementing the scheme was complex, the math behind the introduction of this scheme was to augment taxes by restricting input tax credit and collecting output taxes in cash. All aspects of taxation (classification, valuation, input tax credit, reverse charge provisions, tax payment methodology, etc.) were meticulously taken up and a series of notifications were introduced. There was a concoction of multiple provisions integrated into a single notification. Among the various tax aspects introduced into the said scheme, was the novel 80-20 rule which restricted the source of procurements by real estate developers from persons not registered under GST. The said rule mandates the minimum ratio of procurements to be maintained by developers from registered (RPs) and unregistered (URPs) persons. In cases where the procurement from RPs falls short of the 80 per cent ratio (or URPs exceeds 20 per cent), a shortfall value is ascertained and tax is payable on such amounts under reverse charge basis by the Developer (can be termed as excess URP tax). Naturally, this rule was aimed to encourage procurements from RPs so that the net tax collections from residential development do not fall below the 18 per cent threshold.

ELABORATION OF RELEVANT NOTIFICATIONS

Real estate developers/ promoters (RE Promoters) engaged in the construction of residential / commercial apartments in real estate projects (RE project) were directed to comply with a composition scheme devised through a series of rate / exemption notifications1. The list of the relevant rate notifications introduced in 2019 and their specification of the 80/20 rule has been tabulated:

  1. The difference between a rate and exemption notification seems to be obscure since the Central Government is currently empowered with both the powers (i.e. rate specification and exemptions) and has issued notifications combining both the powers.

RCM Notification (N-7/2019) has been issued under section 9(4) imposing a liability on procurement of goods and services from specified categories of persons to the extent of excess URP procurements. The said notification has been linked to the RE construction services notifications (discussed below) which specifies the 80/20 rule as a condition for availing the benefit of lower rate. Though the liability is fixed under this notification, the manner of computation is with reference to RE Construction Services Notification.

RE Construction services rate/exemption Notification (11/2017 r/w 3/2019) is the master notification which specifies the rates for construction services of residential apartments. Different rates have been prescribed based on the nature of the residential project and its affordability (size and value). Five taxing entries have been introduced with the rate being subjected to certain conditions – in the current context the 80/20 rule. As tabulated above, the RCM obligation has been introduced as a ‘condition’ to the rate/ exemption entry i.e. RE promoter is required to comply with the 80/20 while availing the benefit of the lower rate of 5 per cent / 1 per cent on residential apartments. The source of this notification assumes some significance. It can be observed that the notification derives powers from multiple provisions:

Section Nature of Delegated prescription
Section-9(1) Power of fixation of rate of goods/ services (absolute power)
Section-9(3) Power to prescribe RCM tax on ‘specified categories’ of goods or services
Section-9(4) Power to prescribe a ‘class of registered persons’ who would be liable to pay RCM tax on ‘specified categories’ of goods or services
Section-11(1) Power to grant absolute or conditional exemptions
Section-15(5) Power w.r.t. determination of value of supply
Section-16(1) Power to impose conditions and restrictions for availment of input tax credit
Section-148 Special procedures for certain class of registered persons

The subject notification has derived powers from multiple statutory provisions including the provisions of section 9(3)/ 9(4) which impose RCM tax on taxable persons. While the said notification appears to have comprehensive provisions for RCM assessment (identification, valuation and rate of tax) on excess URP procurements, it should be appreciated that the RE construction services notification by itself does not impose RCM liability on URP procurements. The said notification merely provides the mechanism to comply with the RCM liability, while the liability is fastened only by virtue of the RCM notification (7/2019).

 

Goods Rate Notification (N-1/2017 r/w 3/2019) – A new entry 452P has been inserted specifying a 18 per cent rate for all goods (other than capital goods and cement) excessively procured from URPs. An explanation has been appended to entry 452P which attempts to override other entries and fixes the rate of 18 per cent on all goods excessively procured from URPs even though they may be covered by a more specific description or HSN heading. The purpose of this notification is to specify a standard rate of 18 per cent for the entire excessive procurement irrespective of the nature/ HSN of goods. An imposition of a default rate of 18 per cent for all goods on excess procurements obviates the requirement of identification of the HSN of goods which comprise the URP basket under the 80/20 rule.

 

Services Rate/Exemption Notification (N-11/2017 r/w 8/2019) – The services rate notification has also been amended with a new entry 39 specifying 18 per cent rate for all services excessively procured from URPs irrespective of their classification under the SAC schedule. Like the goods rate notification, an explanation has been appended to Entry 39 which imposes tax on excess procurement even though they may be covered by a more specific description or HSN heading. Again, the purpose of this notification is to specify a standard rate of 18 per cent irrespective of the nature/ HSN of services.

SUMMARY OF 80-20 RULE (EXCESS URP TAX)

A summary of the notifications leads to the following conclusions:

–   RE promoters availing the benefit of lower rate are permitted to procure their inputs and input services from URPs subject to a threshold cap of 20 per cent;

–   Any excess procurements from URPs (or shortfall procurements from RPs) would result in an RCM tax liability on the RE promoter to the extent of the excess/ shortfall i.e. minimum ratio of 80-20 (RP:URP) is to be maintained;

–   Any input or input service on which tax is already paid on RCM basis would be treated as part of the 80 per cent basket from registered persons;

–   Goods & Services rate notifications carve out a special entry pegging the rate at 18 per cent on the value of excess procurement;

–   Computation would have to be performed on a ‘project level’ for each financial year from commencement until the completion of the project;

–   Prescribed form (DRC-03) on the common portal would be available for reporting the shortfall of 80-20 rule tax;

–   Capital Goods and Cements must necessarily be procured from RPs and any procurement from URPs would be liable at the rate of 18 per cent / 28 per cent respectively;

–   The excess procurement tax would be payable in the month of June following the relevant financial year(s) – RCM tax on cement and capital goods would be payable on the month of receipt itself;

–   Value of input or input services in the form of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded.

PROCEDURE FOR 80/20 RULE COMPUTATION

The 80/20 Rule specified in the construction services entry has provided for certain enumerations for imposition of RCM liability. The following flowchart provides the manner of computation of the value which would be subjected to RCM:

Step 1 – Identification of inputs and input services

The first step in the said process would be ascertain the inputs and input services. The said terms are well defined as follows:

 

“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

Therefore, all goods (other than capitalised items) purchased by the RE promoter in respect of the business activity would be inputs. Even though cement procurements would be considered as inputs, they have been delineated for URP-RCM calculation in view of the higher rate applicable at 28 per cent. Capital goods (being goods which are capitalised) would be excluded from the calculation and liable to RCM irrespective of the quantum. Similarly, all services (irrespective of being capitalised or not) availed by the RE promoter would qualify as input services.

The scope of the term’s inputs and input service needs consideration. The definition seems to be very simple to include all goods and services used in the business activity to be included in the 80/20 formula. The definition of goods (under section 2(52)) and services (under section 2(102) would be applicable to this formula. Consequently, items which are neither goods nor services would fall outside the phrase inputs/ input service. Take for example salary and wages paid to URPs by the RE promoter in respect of the construction of the project. In terms of Schedule III, the said costs are neither supply or goods or services in view of the ‘employee-employer’ relationship. Cases which are outside the defined scope of good/ services would not fall for consideration in the 80/20 rule. The Government FAQ on this aspect also affirms this conceptual understanding –

 

FAQ – 15. The condition in Notification No. 3/2019 specifies that 80% of inputs and input services should be procured from registered person. What about expenditure such as salaries, wages, etc. These are not supplies under GST [Sl. 1 of Schedule III]. Now, my question is, whether such services will be included under input services for considering 80% criteria?

Services by an employee to the employer in the course of or in relation to his employment are neither a goods nor a service as per clause 1 of the Schedule III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees will not be relevant for the minimum purchase requirement of 80%.

 

Step 2 – Identification of supplier of such inputs / input services

This step requires identification of the registration status of the supplier of inputs / input services. A supplier could be unregistered under GST on account of (a) turnover falling below the taxable threshold (b) not engaged in any supply/ business activity (c) exclusively engaged in exempt activity (d) exclusively engaged in RCM activity where recipient is liable to pay tax (e) compulsory de-registration on account of non-compliance or fraudulent activity. All such suppliers would qualify as unregistered persons and supplies therefrom would fall within the 20 per cent basket. Certain challenges arise while identifying the registration status of a supplier.

 

Retrospective Cancellation – Logically speaking, the status of registration of a supplier would have to be ascertained on the date of the transaction. Now, let’s take a case where a RE promoter avails supplies from a supplier having valid registration but is subjected to retrospective cancellation under section 29(2). The RE promoter would have naturally aggregated the supplies from such person(s) in the RP basket and established compliance with the 80/20 rule. After the computation and payment of the RCM, it has come to the knowledge of the RP that the registration of the supplier has been retrospectively cancelled. Generally, the RP would have also charged taxes on such inputs/ input services.

One of the objectives of imposing the URP-RCM is to augment revenue by balancing the tax on inputs as well as output taxes. URPs would have not levied tax on their supplies and hence an obligation has been placed on the RE promoter as a recipient of URP supplies to discharge tax and balance the loss of revenue under the reduced rate. Where the cancelled RPs have charged the tax on their supplies (having registration at the relevant point of time), a view can be adopted that retrospective cancellation does not alter the tax status of the transaction and hence the condition of the notification has stands complied. Moreover, the notification lacks any provision to perform a ‘true-up adjustment’ akin to Rule 42 based on change in registration status. In the absence of any specific provision for consequential reworking of retrospective cancellation, it appears that retrospective cancellation may not warrant a re-working of the 80/20 rule.

 

Filtration of supplies which are from RPs and URPs – The recent experience from revenue audits suggest that officers have the tendency to take gross expenditure reported in the Profit & Loss account of the RE promoter (exclude the salary costs and depreciation) and compare the composition of RPs and URPs with reference to the input/ input services reported in GSTR-2A. Take for example the table below:

Particular Amount Ratio
Total Expense in P&L a/c 100
Less: Payroll Cost (20)
Less: Depreciation (10)
Less: Non-supply costs/ accounting provisions (20)
Input/ Input services of project 50 100 per cent
GSTR-2A inputs/ input services 30 60 per cent
Balance deemed as URPs 20 40 per cent

The revenue authorities are adopting a summary approach to ascertain the compliance with 80/20 rule. They believe that the only a credible source of information for RP procurements is the GSTR-2A. The balance is deemed to be obtained from URPs. This approach fails to appreciate that in many cases the suppliers report their invoices in B2C column and hence they do not reflect in the GSTR-2A. There is a burden placed on the RE promoter to prepare the expense register with corresponding GSTINs of suppliers involved. Since the burden of proof to establish compliance with an exemption notification is on the tax-payer, the cumbersome process would necessarily have to be followed by the tax-payers.

 

Step 3 – Identification of inputs or input services ‘used for supplying the service’

This is the most critical step and ambiguous leg in ascertainment of the GST liability under RCM. The said provision states that RCM liability would be imposed only on such inputs or input services which are ‘used for supplying the service’. This phrase is relatively ambiguous and leaves us with the question of whether RCM is imposable on the entire gamut of input or input services which are received the RE promoter. The specific questions in this regard are (a) whether all business related inputs/ input services are amenable to RCM or only such inputs/ input services which are having a nexus with the construction services of flats amenable to RCM (Nexus vis-à-vis construction activity or business activity); (b) what is the extent of nexus required with construction activity, whether indirect costs / apportioned costs would fall into consideration (Direct and/ or indirect nexus with construction activity); (c) whether there should also be a nexus with the exemption entry itself (Nexus with exemption entry);

 

Issue A – Nexus Issue vis-à-vis entire business activity: The rule provides for imposition of RCM on inputs/ input services used in supplying the service. On the other hand, the terms input and input services have been defined with reference to the ‘overall business activity’ of a taxable person. The business activity of a taxable person is wide enough to include all streams of supplies (construction services, other taxable or non-leviable supplies, etc.). Take for example a promoter who is engaged in construction activity of residential flats as well as engaged in sale of residential plots (which is a non-leviable activity) and residential project maintenance activity (a completely taxable activity). Though all business costs would form part of the definition of inputs/input services, only those inputs/ input services which are used for supplying the construction services
would fall into the 80/20 pool. To reiterate, only those inputs and input services which are ‘used in supplying the construction service of residential flats’ are to be considered. In the said example, inputs/ input services exclusively pertaining to the plotted development and the maintenance activity would fall outside consideration. Reference can also be made to the explanation to the proviso which mandates the promoter to maintain ‘project wise accounts’ for the RE project and RCM is to be discharge on a yearly basis for the relevant project only.

 

Issue B – Direct or indirect nexus with Construction costs – The RCM notification, which is the primary notification imposing RCM liability, makes a reference to the excess procurements from URPs for the purpose of ‘construction of the project’. Thus, reading the rate/ exemption notification and the RCM notification in tandem appears to lead to the conclusion that RCM liability is imposable only on such costs which meet both the criteria’s – i.e.

– Used for supplying the construction services; and

– Used for construction of the project.

Therefore, the expenses should not only be used for providing the construction service, it shall also be related to the cost of construction of the RE project. Inputs and input services exclusively related to other business activities or undertaken at the management or corporate level operations may not fall into the 80/20 pool. A tabulation of certain typical costs incurred
by a Promoter during his business activity may be analysed:

Nature of Costs Extent of Nexus Includability
CONSTRUCTION SERVICE RELATED COSTS
Civil construction costs Direct Nexus – exclusive to Construction costs Yes
Common amenities costs Direct nexus – exclusive to construction costs Yes
Goodwill for land Direct Nexus – Debate on being input services Debatable if in nature of development rights
Post OC Finishing costs Direct Nexus – exclusive to construction services Debatable since RCM is imposable only upto Project OC date
Marketing costs Having indirect nexus with construction costs but used for construction services May be
Government related costs Direct nexus with construction costs Yes
Rental accommodation for existing redevelopment projects Direct nexus with construction services but strictly not a construction cost May be
CORPORATE BUSINESS/ ENTITY LEVEL COSTS
Director Sitting Fees Common Excludible
Interest costs Common Excludible
Corporate office Rentals Common Excludible
Corporate administrative Costs Common Excludible
Brand promotion/ Marketing Common Debatable

The criteria for inclusion of the procurements are its linkage to the construction services and the ascertainment of whether they are ‘construction costs’. Evidently, the notification does not specify whether such nexus should be direct or indirect and exclusive or common. Moreover, where common costs are incurred for multiple projects/ business segments, the notification does not provide for an apportionment mechanism for such costs. The Government FAQ (extracted below) indicates that common costs should be apportioned among the various projects on a carpet area basis.

“FAQ – 5. In case of a Real Estate Project, comprising of Residential as well as Commercial portion (more than 15%), how is the minimum procurement limit of 80% to be tested, evaluated and complied with where the Project has single RERA Registration and a single GST Registration and it is not practically feasible to get separate registrations due to peculiar nature of building(s)?

 

The promoter shall apportion and account for the procurements for residential and commercial portion on the basis of the ratio of the carpet area of the residential and commercial apartments in the project.”

It is here where a decisive tax position may have to be taken by promoters to implement the rule. A conservative view would be to identify all direct project-related costs in terms of commercial principles (cost centre accounting). To this direct cost a reasonable apportionment of common costs (either based on carpet area or turnover etc.) may be adopted and such costs may be loaded onto the direct project costs. In the above table, if a RE promoter incurs common marketing costs for multiple projects, it may apportion the yearly marketing costs to each project on carpet area basis and then apply the rule against each project independently.

 

Issue C –Nexus Issue vis-à-vis construction services activity: One may recall that the 80/20 rule has been introduced as a condition to an exemption entry w.r.t construction services rendered by a promoter in a residential real estate project. The RCM notification parallelly imposes the tax liability on the promoter who avails the benefit of the exemption entry under the rate notification. This leads to a pressing conclusion that 80/20 rule is applicable only to such supplies which are availing the benefit of the exemption entry. Therefore, the question which may require consideration is whether the input and input service must have a nexus with the supply of construction service. Can one infer that only such supply activities taxable under the construction service entry of the rate/ exemption notification would be subjected to the 80/20 rule?

We are all aware that only under-construction booked flats are liable to tax by virtue of Schedule II – on the converse, flats which are un-booked/ in stock until issuance of OC and / or are sold after issuance of the OC are not considered as supply in terms of Schedule II read with Schedule III. Accordingly, these flats do not require the cover of an exemption entry.

The RE promoter would incur common costs for all flats comprised in the RE project. The exemption entry would operate only once the levy is attracted i.e. receipt of sums of money for under-construction flats. Consequently, the 80/20 rule should operate only to the limited extent of the residential flats which were booked/ sold by the RE promoter prior to OC date. If the exemption entry is said to operate only to the extent the project is booked, then inputs and input services pertaining to the flats which were lying unbooked or sold after OC would stand excluded from the RCM liability. Let’s understand this by way of an example – the progression of the flats booked by the end-customer in the RE project and the implication of the 80/20 Rule could be interpreted as follows:

Year % of flats booked Applicability of Exemption entry & 80/20 rule Remarks
Y1 Project Launch – 10 per cent On 10 per cent 10 per cent flats taxable
Y2 Under construction – 40 per cent On 40 per cent 40 per cent flats are taxable
Y3 Upto Occupancy Certificate – 80 per cent On 70 per cent 70 per cent flats are taxable
Y4 Post OC Sale/ Unbooked Flats – 20 per cent On 70 per cent Balance 30 per cent flats are not supplied

The above table depicts that the Company would be incurring common costs (in form of inputs and input services) for the entire project tenure from Y1 to Y4 for all the residential flats comprising the project. The simple reading of the proviso to the exemption entry implies that the 80/20 rule operates on the entire project costs. But one should also not lose sight of the fact that the 80/20 rule is a condition for an exemption entry. The RCM entry is also linked to such exemption entry. Therefore, in Y1 it appears that only 10 per cent of the project cost would be amenable to the 80/20 Rule; in Y2 only 40 per cent of the project cost would be amenable to the said rule and in Y3 70 per cent of the project cost would be subjected to this rule. Flats which remain unbooked or sold post OC do not require the shelter of the exemption entry and hence need not be subjected to the 80/20 rule.

Though this interpretation and its consequential apportionment is not explicit in the proviso or RCM notification, the fact that the RCM liability is tagged to the exemption entry gives legal credibility to this interpretation. A reasonable / rational approach would be to compute the RCM liability for the entire project under the 80/20 rule and then apportion them to the extent of the percentage of flats booked in the project. This approach would certainly face resistance from the revenue authorities who believe that RCM is an independent / stand-alone provision for taxation and hence the entire project is subjected to 80/20 rule.

Similar issue arises where certain RE promoters are offering the land owner’s share of flats as a works contract service rather than construction service and discharging tax at the head line rate of 18 per cent instead of 5 per cent. While RE promoters have a legal rationale for fixing the tax at 18 per cent, a connected complication emerges on the front of the 80/20 rule. Re-iterating the principle stated above, the RE promoter is discharging tax to the extent of land owner’s share as a contractor under works contract service category and is not availing the benefit of the exemption entry. Therefore, the 80/20 rule cannot be said to extend its domain of operations on other taxing/ exemption entries. 80/20 rule would have to be trimmed to this extent in such scenarios. The Government FAQ in this context may be relied for this purpose. It clearly excludes the applicability of 80/20 rule where the tax is being paid under a different entry of the rate/ exemption notification.

 

FAQ 17. – Whether the condition of receiving 80% of inputs and input services from the registered person shall be applicable if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project?

 

No, if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project, the condition of receiving 80% of inputs and input services from the registered person doesn’t apply.

 

POST OC COSTS/ COMPUTATION OF 80-20 RULE

RE promoters incur costs even after issuance of occupancy certificate. The said costs could be in the nature finishing costs (housekeeping, fittings, etc.), post OC receipt of invoices from contractor, etc. 80/20 rule provides that the RE promoter would have to compute the RCM liability for each financial year until the issuance of the OC. The literal wordings limit the operation of the rule only for inputs and input services received upto to OC. This is despite that the RE promoter is in the process of handing over possession/ registration of pre-booked flats during the construction stage and is yet to offer the said dues for taxation under the construction services entry. We reach a situation where the RE promoter would be availing the benefit of the exemption entry for Post OC receipts of under-construction pre-booked flats but is not under the obligation to discharge the RCM under the 80/20 rule. This is primarily because the time frame of applicability of the 80/20 rule is from the date of commencement of the project until issuance of the occupancy certificate. We may recall that the provisions of 13(3) which fix the time of supply on RCM activity at the time of making payments or sixty days from the date of issuance of the invoice by the supplier. Going by the time of supply provisions, all payments made to URPs after the OC would be outside the scope of the 80/20 rule.

Step 4 – Discharge of Tax / Rate and Value

Exemption entry under Exemption Notification vis-à-vis Rate notification

The other aspect is the inclusion of taxable and exempt supplies of goods and/or services. By taxable supplies we refer to those supplies which are leviable to specific rate under the rate/ exemption notification (say 5 per cent, 12 per cent, etc.). Exempt supplies are those which are wholly exempt under the exemption notification (NIL rate). The current structure of the notifications is framed as follows:

– Rates for goods are notified in N-1/2017

– Wholly exempt goods are notified in N-2/2017

– Rate for services / partially exempt services are notified in N-11/2017

– Wholly exempt services are notified in N-12/2017

The point for consideration is whether the RCM liability can be fixed at the headline rate of 18 per cent on all goods/ services including those which are partially / wholly exempt. Take for example, purchase of water (which is wholly exempt goods) and interest on borrowings (which is wholly exempt service). In literal terms the said goods / services would qualify as ‘inputs’ / ‘input services’ and hence form part of 80-20 rule computation. The supplier while supplying the goods would have claimed exemption under the goods / services exemption notification respectively. But by virtue of special entry (452Q of the goods rate notification and 39 of the services notification), the very same transaction at the recipient’s end appears to be subjected to imposition of a 18 per cent tax rate to the extent such costs along with other costs cross the 20 per cent URP threshold. Two concerns arise here (a) the transaction is being viewed differently at the supplier’s end (by grant of exemption) and differently at the recipient’s end (by imposing a 18 per cent liability). Moreover, the Government is taking away the benefit granted at the supplier’s end (which ultimately benefits the recipient) by imposing a tax at the recipient’s end. Is this permissible or legally intended? The Government FAQ in this context is below”

“FAQ – 18. Whether the inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold?

 

Yes. Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold.”

We take a step forward to understand the operation of the rate/exemption notification vis-à-vis RCM notification. The source of the rate/exemption notifications assumes significance. Section 9(1) imposes the liability of GST supplies at the rates notified by the Government. Section 9(1) is a charging provision which specifies the subject-matter of tax, its taxable value, its taxable rate and the taxable person. Section 11(1) is an extension of the said provision which provides for a partial or a full exemption to specified categories of goods/ services. By application of these sections, one ascertains the tax payable on supply transactions.

Sections 9(3)/ 9(4), on the other hand, are merely collection provisions whereby the recipient has been fastened with the last aspect of levy i.e. the person by whom tax is payable. These sections operate vis-à-vis the discharge of tax liability and not with respect fixation of the levy (i.e. fixation of rates / value on which tax is payable). To address this, the policy makers have inserted specific entries i.e. Entry 452Q in goods rate schedule and Entry 39 in services rate schedule. The said entries specifically state that despite goods/services being specifically classifiable elsewhere, in respect of the value representing the excess procurement from URPs, the said entry would prevail over all other specific entries. Therefore, there are conflicting rates in the rate schedule – one being the rate under which the goods/ services are classifiable and the other being the special entry introduced by virtue of the 80/20 rule. Going by the explanations to the special entry, the said special entry would prevail over default entry.

But it is important to carefully note that this overriding implication extends only to the rate schedule (i.e. Notification 1/2017 for goods or 11/2017 for services). The extract of the overriding explanation is worth noting:

 

“Explanation. – This entry is to be taken to apply to all services which satisfy the conditions prescribed herein, even though they may be covered by a more specific chapter, section or heading elsewhere in this notification.”

Emphasis should be placed on the phrase ‘this notification’ which clearly implies that the explanation does not extend its operations to other notifications (including the exemption notification 2/2017 for goods and 12/2017 for services). Keeping this inference in mind, we should apply the provisions of section 9(1) r/w 11(1). Now let’s go back to the water/ interest example which is specified as wholly exempt by virtue of 11(1). The baseline rate in the rate schedule would typically fall under the residuary category of 18 per cent. The special entry for RCM also imposes tax at 18 per cent and the said special entry could prevail over the default entry specified in the rate notification. But on the other hand, the exemption notification grants a complete exemption to water/ interest. Can these conflicting conclusions be reconciled? The possible answer would be that the special entry prescribed for imposition of tax at 18 per cent on all goods/services would extend only to the rates notification and cannot override the exemption notification. Though tax is payable at 18 per cent, by virtue of an exemption notification, the said goods would stand to be completely exempt in terms of section 11(1). Hence, RCM may not be payable on such exempt goods despite the special entry introduced for RCM purposes. The repercussion of this conclusion would give rise to the question of what is comprised in the excess value of URPs. The table below depicts the challenge:

Goods Rate Composition to Total Cost
Sand Taxable 5 per cent
Wood Taxable 10 per cent
Water Exempt 5 per cent
Jelly Taxable 5 per cent
Total URP composition 25 per cent
Excess URP purchase 5 per cent

The question here would be on the attribution of the 5 per cent excess URP purchase to a particular commodity to decide its taxability/ exemption. The law is clearly silent on this aspect and one reaches a dead-end to implementation of the Rule. While one may claim absence of a machinery mechanism, a conservative taxpayer would discharge the tax assuming that all taxable and exempt activities are includible in the 80/20 rule and subjected to the 18 per cent headline rate.

OTHER ISSUES IN IMPLEMENTATION OF 80/20 RULE

Interplay of section 9(3) – specified list of RCMs and 9(4) – RCM on URP procurements

 

The other interesting issue arises in the inter-play of RCM liability emerging from notification issued u/s 9(3) as well as 9(4). Take the table below as an example:

 

Services/ Goods Covered under notification 9(3) Covered under Notification 9(4)
Lawyer services Yes Yes, if the supplier unregistered
Goods transport services Yes Yes, if the supplier unregistered
Sponsorship services Yes Yes, if the supplier unregistered
Services from the Central/ State Government Yes Yes, if the supplier unregistered
Services of renting of motor cab in specific instances Yes Yes, if the supplier unregistered

 

Therefore, certain services are due for RCM liability under both notifications. One would simply believe that the consequence would be neutral as RCM is payable in either scenario. But such a belief is not true. Take for instance a case where these services are procured from unregistered suppliers but fall below the 20 per cent threshold. In such a scenario, the RE construction services notification read with the RCM notification issued under section 9(4) would not obligate the RE promoter to discharge the tax to the extent it falls below the 20 per cent threshold. We may also note that RE construction services notification contains a provision which reads as follows:

“Provided also that inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from registered person”;

Curiously, the said proviso only states that once tax is paid under RCM basis on certain inputs/ input services, they shall be deemed to have been purchased from registered persons even-though they have been actually purchased from URPs. The proviso operates only on such inputs/ input services where the tax is paid and does not conclude on whether tax is payable at all on such overlapping RCM provisions. The purpose of this proviso is two-fold (a) to avoid consequence of double taxation of RCM under section 9(3) and 9(4); (b) to treat the RCM tax paid on excess procurements as part of the 80 per cent pool and make an otherwise non-compliant service provider, a compliant service provider after payment of the RCM tax, thereby protecting the exemption. But the proviso no-where breaks the conflict arising from simultaneous operation of both section – 9(3) and 9(4).

A conservative view would be to hold that section 9(3) RCM liability would continue to be payable (being a specific entry and applicable to all persons without any exception). Moreover, the RCM notification is not intended to grant any exemption of RCM liability to inputs/inputs services which were previously taxable – the situation is status quo as regards lawyer/ GTA, etc. activities. RCM notification under section 9(4) was introduced to place a new liability on input/input services which are not previously taxable. Therefore, RCM would still be payable in terms of 9(3) and once the RCM liability is paid, the said amounts would fall within the RP basket by virtue of the proviso extracted above. Alternatively, an aggressive view would be that both notifications operate in tandem, but the notification 9(4) is more specific for RE promoters. Moreover, since such notification entry is subsequent to the introduction of entry in notification 9(3), the entry in Notification 9(4) would have overriding effect. Consequently, such lawyer and other specified services falling with the 20% threshold would not be liable for RCM to such extent.

INTER-PLAY OF INPUTS/ INPUT SERVICES WITH PLACE OF SUPPLY PROVISIONS

The basic tenets of imposition of GST liability involve ascertainment of the inter-state or intra-state character of a supply. Once this is decided, the supply transaction is to be legally examined within the confines of the respective statute and notification (i.e. intra-state supply would be subjected to CGST/SGST notifications and inter-state supply would be subjected to IGST notifications). Even in the context of RCM, the recipient has to assess the inter-state/ intra-state character of a supply and discharge its liability accordingly. Curiously the 80/20 rule does not lay down any guideline on this aspect. All RE promoters would charge CGST/SGST taxes on their output supplies on account of the POS provisions. Hence, they avail the benefit of the CGST/ SGST notification and do not have to draw any reference to the corresponding IGST rate/exemption notification.

But they may be availing inter-state inputs and services from both RPs as well as URPs2. Two challenges emerge herein: (A) Whether inputs and services specified under the RCM notifications include only those which meet the CGST/ SGST provisions (i.e. intra-state inputs/ input services) or even those which meet the IGST provisions (i.e. inter-state inputs/ input services); and (B) Can an intra-state notification impose RCM liability for an inter-state input/ input service? The RCM notification can be referred herein. While CGST is properly worded, the IGST notification and the corresponding RCM notification apply only when IGST exemption is being availed under the IGST Act:

Sl. No. Category of supply of goods and services Recipient of goods and services
(1) (2) (3)
1 Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges, etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 8/2017-Integrated Tax (Rate), dated 28th June, 2017, at Items (i), (ia), (ib), (ic) and (id) against Serial No. (3), published in Gazette of India vide G.S.R. No. 683(E), dated 28th June, 2017, as amended. Promoter 
2. Section 24 provides compulsory registration where the inter-state supply is a taxable supply and possibly exempt suppliers would not have availed compulsory registration despite inter-state supplies

A decisive answer to both the questions may be slightly elusive. One may interpret the IGST entry as having reference to inputs and input services only on application of the IGST statute and the IGST rate/exemption notification. Where the RE promoter is discharging tax under the CGST statute and CGST rate/ exemption notification, the input and inputs services having an inter-state character would stand excluded. This is apparent from the reading of the IGST-RCM notification (7/2019-IGST(R)) which imposes IGST-RCM liability only with reference to the prescription/ quantification as per the IGST exemption notification and falls short from referring to the CGST/SGST exemption entry. There is no apparent cross-linkage among the IGST and CGST/SGST act and their RCM and the rate/ exemption notifications. Thus, literal wordings lead to the pressing interpretation that IGST-RCM may not be payable when applying the CGST/SGST rate/ exemption entry. RE promoters would not be liable to include inter-state inputs/ input services while ascertaining the CGST/SGST liability under the 80/20 rule.

 

CONCLUSION

The fiscal benefits of a complicated rule such as this should be ascertained by policy makers from the revenue collection statistics. Where the tax collections are insignificant in comparison to the legal complexities and administrative burden, an attempt should be made to simplify the rate notification and ease the business enterprise from the burden of the 80/20 rule. This apart, the initial concerns of stakeholders that the RE notification is complicated and challenging to comprehend seems to have dwindled over the years and the RE promoters have accepted the composition scheme as the norm for the future thereby re-working their project costs with much more certainty. The RE promoters opting for this notification have experienced significant drop in their compliance burden in terms of ITC availment, 2A matching, vendor followup and most importantly project economics. The only urge of the industry is that since the industry is now following main-stream economy, it is time to reduce the overall impact of transaction taxes on this sector.

Future of Audit: The Transformation Agenda

 
BACKGROUND
The audit profession is as old as civilisation itself, but its relevance is being questioned today, perhaps more strongly than ever before. This article is an attempt to identify the root causes for the erosion of confidence in the audit function and actions required to transform this profession particularly in the context of India’s growth and the aspiration of the Indian Auditing Profession to be the world leader.

 

Having been part of the audit profession for over four decades my views may be somewhat biased in favor of the profession though I have tried to be impartial in my assessment of the state of the profession and the actions required to transform the audit function.

 

Auditing limited companies, made mandatory around a hundred years before, was always a check on the so-called ‘principal/agent problem’ inherent in the corporate form of business. As Adam Smith once pointed out, “managers of other people’s money could not be trusted to be as prudent with it as they were with their own”.

 

After more than seven decades of statutory recognition in India, the auditing profession is in the twilight zone transitioning from one era to another. There is a general feeling of concern, angst and helplessness. Critics of the profession believe there has been a significant delay, while hardcore loyalists passionately believe that its past glory is intact, if not enhanced and spoken glowingly about the profession’s contribution to nation building. The loyalists allege that a lot of criticism (including from its members) is biased and incorrect. I personally believe the condition of the audit profession world over and in our country is not as bad as the critics point it, nor is it as sparkling as loyalists profess it to be.

 

Whatever be the reality, it is time for introspection and taking corrective steps to make the audit function “fit for the future”. To determine the appropriate steps, we begin by:

 

  • Understanding the present situation, i.e., the current state
  • Analysing the trends, challenges, headwinds and tailwinds, and
  • Evaluating and considering the impact of external and internal factors.

 

CURRENT STATE
Ever since the dawn of the 21st century, the world has been plagued by several corporate failures, from Enron, Worldcom, etc., to the more recent Carillion in UK and Wirecard in Germany. In many of these, there are allegations of governance failures, frauds and audit failures.

 

Closer home in our country, too, we have witnessed failures and frauds in financial services entities and other companies in the business of technology, steel, jewellery, real estate, construction, etc.

 

Whilst laying the blame at the feet of the audit profession for what could be business failures and not necessarily audit failures may be inappropriate, it cannot be denied that in some cases, the auditors have failed to detect large craters in the balance sheet and not just holes in the balance sheet. A senior Indian Government official rightly remarked: “we don’t expect auditors to find a needle in a haystack, but surely their duty extends to finding the elephant in the room!”

Some concerns arising out of these failures are:

 

  • World’s most prominent companies with the best systems, reputed auditors, high profile boards collapsing suddenly overnight under the weight of shoddy accounting and auditing with no warning signals
  • Poor corporate governance
  • Lack of ethical behavior
  • Savings and retirement plans evaporating – in many cases, overnight
  • Investors experiencing complete erosion of the value of their investments
  • Erosion of credibility of oversight and enforcement actions
  • Auditors missing glaring signs

 

Tim Steer, in his book titled “The Signs Were There” states “….the dives in share prices and the company disasters that resulted in bankruptcy could have been predicted by a little more than a browse through the annual reports if you know where to look….the warning signs are regularly there in the form of accounting shenanigans or other clear signs that the business is changing direction for the worse, or that excellent results are being reported only because of one-off and non-recurring items. Often these red flags are either not seen or are ignored by investors and other stakeholders.

 

Tim Steer further states in the context of the failure of Carillion in the UK, “the collapse in January 2018 of Carillion, which had received enormous amounts of public money as one of the UK government’s favourite construction and support service companies, is just one in a long line of corporate disasters where even a cursory look at the balance sheet by anyone with a smattering of financial training would have evoked a feeling of dejavu and the realisation that the company was heading for a fall”.

 

In his Review Report on quality and effectiveness of audit, Sir Donald Brydon stated: “The quality and effectiveness of audit has become an increasingly contested issue …….Audit is not broken, but it has lost its way and all the actors in the audit process bear some measure of responsibility.

 

Regulators, too, have expressed similar sentiments. These statements correctly reflect the state of the auditing function in India and the rest of the world.

 

What are the causes? What should be done to fix it? What is the future? I will deal with these later in the article, as we must first also consider the trends, challenges, headwinds and tailwinds, if any, impacting the audit function.

 

TRENDS, CHALLENGES AND HEADWINDS
The future of auditing, if done the way it is presently, is indeed bleak, given the developments in technology and other changes in regulations, headwinds, etc. The audit function was designed in another century. Built to last, as the saying goes. It was not built to withstand rapid, radical change. A twentieth-century system cannot function forever and effectively in the 21st century.

 

So what is the conclusion? Has our audit function, which I was a part of for over four decades, suddenly decayed or have the audit professionals become cowboys or toxic? The answer is a firm ‘NO’. We are transitioning from another era and are undergoing the labor pains of a new birth. It will involve a lot of transformation effort with changes in mindset, skillset and toolset.

 

No one can predict the future. We are not soothsayers. Of course, one thing is certain and that is “change”. We can no longer function as in 1949 or in the way we have been doing so far. Disruption of the audit function is a certainty. It is not about ‘whether’, but ‘when’. Unfortunately, it can happen faster than we can expect or anticipate as it is not just ‘change’ which is happening but “exponential change”.

 

The Auditing profession is in a remarkable state of flux. In less than two decades, the way in which audit professionals work and what they will do will change radically. We saw auditors adapt during the pandemic, which for the first time demolished many myths. We are already witnessing many challenges, some of which we never imagined would happen after 73 years. Some examples are:

  • Disappearance of branch audits
  •  Remote physical verification
  • “Audit from home”
  • Same services being provided by other professionals
  • Moves to eliminate audits of smaller entities
  • Audits of sustainability reports and integrated reporting

Although everyone would be impacted, the unfortunate part is that the changes will impact the audit function earliest.

 

Even if we cannot predict the future, we need to be able to observe, understand trends, read the tea leaves correctly and smell the coffee brewing. No purpose will be served by criticizing or ignoring or resisting some of the developments. We need to understand the principles which are driving them.

 

As the saying goes, “We cannot direct the wind, but we can adjust the sails”

 

Some of the drivers of this change are:

  • Technology
  • Liberalisation
  • Exclusivity
  • Convergence
  • Corporatisation of professions
 I will briefly explain each of these.

 

Technology

 

We are told the average desktop computer will have the same processing power as the human brain which neuroscientists tell us is 1016 calculations per second.

 

By 2050, according to Ray Kurzweil, the average desktop machine will have more processing power than all of humanity combined.

 

Technology is growing exponentially in that it more than doubles in power while dropping in price on a regular basis. Moore’s Law is a classic example.

 

The developments in storage, speed of processing, connectivity, IOT, Big Data, Analytics, Robotics, Artificial Intelligence, etc. will undoubtedly disrupt what services are required, how services will be rendered, who will deliver the services, where services will be rendered and how services will be priced. The audit function cannot be immune to the disruption and will need to transform and adapt if it has to remain relevant and effective.

 

 
Liberalisation

 

As our country continues to liberalise and dismantle bottlenecks in doing business, we will witness decreases in attest requirements and more reliance on self-certification. The audit profession cannot seek legislations which are akin to ‘employment guarantee programmes’. The profession should earn its existence by creating a compelling need for audit services and delivering quality similar to other businesses or professions that have more number of persons dependant and operate in highly competitive environments where price, value and quality of service are some of the criteria which determines who succeeds.

 

Exclusivity

 

Alongside liberalisation we will witness actions to eliminate monopolies and eliminate exclusivity. This will further be facilitated by developments in technology which obviate the need for dependence on external professionals but will also shape environments functioning on sophisticated technologies where the traditional professional trained in a significantly manual environment would become extinct. If audit continues to be a relevant function and is expected to use technology and operate in complex technology environments designed by tech professionals questions would be asked as to why technology companies which designed such systems should not be eligible to audit those systems with the help of “techies” and other professionals proficient in accounting. After all, audit is about verifying data, exercising judgements and drawing conclusions. We may not wish that this happens but audit professionals who, perhaps, number 150,000+ in a population of 1.4 billion should justify their exclusivity to provide audit services.

 

Convergence

 

Increasingly we are witnessing a thirst for bundled services like a departmental store or a shopping centre. We have already discussed the impact of technology on the audit function and if we consider the increasing need for involvement of specialists in forensic, tax, valuations, technology, etc. in rendering audit services will mean that audit service providers will not only have to partner with other service providers but perhaps will have to house those skill sets under their roof. What will then be the identity of the audit firm? What changes are required in the regulations?

Corporatisation of professions

We have seen how audit services cannot be provided without the involvement of other service providers and the rapidly changing identity of an audit firm. Further, the need to invest in technology to render audit services and to house the specialists who will be involved will require huge investments. When I began my career more than four decades ago, the audit partner who attested the financial statements was a well-versed individual who was not only a specialist in audit but in corporate laws, taxation, valuation, etc. and there seldom was a need for involving anybody else. The changes we
are witnessing in other professions, for example, the medical profession where the delivery of medical services has shifted from individuals to multi-speciality institutions, and the investment required in building state-of-the-art facilities has resulted in the creation of a corporate form of organisations with the investors/financiers not being exclusively from the medical profession. The audit profession needs to introspect about this and seriously consider allowing financial and other strategic partners in audit firms.
FUTURE OF AUDIT: THE ESSENTIAL BUILDING BLOCKS

Let us come back to what needs to be done. We need to address and change:

  • The why and what of audit
  • Who does the audit
  • How audit is done and, finally
  • The output of the audit

We will need to address the perception of audit quality as well as the substance of audit quality

To succeed in this, we must:

  • Be willing to accept the present state instead of being in a denial mode.
  • Introspect and identify the root causes.
  • Identify possible actions with a clearly visualised end.
  • Be willing to transform (which is the most difficult of all) and, above all,
  • Develop the ability to implement and swiftly embrace change.

I would classify my suggestions into seven buckets or silos:

  • Purpose
  • Structural factors
  • Environmental factors
  • Execution of audit
  • Output factors
  • Oversight and evaluation
  • Other factors – frequency, timelines, fees, etc.

 

Purpose
Too long has the audit profession taken shelter behind the words “True and Fair” and the auditing standards which it wrote for itself and about which the users have little knowledge or care about. Any extra “asks” by the users have been rebuffed and rationalized as “Expectation Gap”.
If this rationalisation were to continue the ‘gap’ would widen and the audit profession and its users would be so far apart that audit services would become unnecessary and irrelevant. If the users’ expectation is that audit should address fraud, the profession must take appropriate steps to incorporate this in their audit approach. If the users’ expectation is that the audit should provide some form of assurance of the continuance of the entity in future, the auditor (who is the expert) should be willing to advance a few steps in this direction to meet the expectation.
Sir Donald Brydon, in his Review Report states: “the purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.
Our honourable Prime Minister, Shri Narendra Modi, in November 2019, said: “We must challenge the frauds. Both internal and external auditors need to find innovative methods to catch frauds. We need to encourage the core values of auditors for the same”.
Clearly, there is a case for revisiting the purpose of the audit. The sooner the profession addresses this, the faster it will prevent further erosion of confidence in the audit function.
Root causes
A survey conducted by IFIAR some time ago identified a number of causes for poor quality. Some of these are:
  • Failure to maintain/monitor independence.
  • Failure to evaluate non-audit services.
  • Deficiencies in auditing accounting estimates, internal control testing, audit sampling, revenue recognition, group audits, etc.
  • Inadequate training and learning of audit professionals.
  • Audit quality is not considered in performance assessment.
  • No timely supervision and review.
  • Insufficient depth of Engagement Quality Control Review (EQCR).

Inspections by regulators have frequently pointed out the above as root causes of audit failures.

Besides poor audit quality, there is an allegation that the audit profession has put ‘self interest’ above ‘public interest’.
The Building Blocks
The essential building blocks for the transformation of the Audit function are summarised in the table below:

Structural Factors

Environmental
Factors 

Execution of Audit

•   Profile of the Profession

•   Audit Market Profile

•   Choice and Concentration

•   Size of the Firms

•   Auditor Appointment

•   Auditor Compensation

•   Auditor Independence

•   Multi-disciplinary firms

•   Corporate Financial Reporting Eco-system

•   Internal Audit System

•   Independent Directors, Audit Committee,
Boards

•   Proxy Advisors, Credit Rating Agencies

•   Regulators and Regulations

•   Responsibility

•   Audit Procedures

•   Tools & Technology used

•   Evaluation of Audit test Results

 

Output Factors

Oversight & Evaluation

Other Factors

•   Mandatory Communication to Audit Committee

•   Audit Report

•   Form

•   Type

•   Reporting to Regulator

•   Enhancements

•   Management Letter

•   Group Audit

•   EQCR

•   Evaluation of Auditor’s performance by
Audit Committee

•   Inspection of Audit engagements by
Regulators

•   Peer Reviews, Quality Review Board reviews,
etc.

•   Frequency

•   Timelines

•   Transparency

Due to constraints of space, I will deal with some of the elements in the building blocks.w

STRUCTURAL FACTORS


Profile of the Profession and Audit Market profile
Every profession should have a profile consistent with the constituency it serves. Our country’s rapid expansion since liberalisation has created a situation where the audit market profile is inconsistent with the size of businesses and industries. There are a large number of sole proprietorships and very small firms involved in rendering audit service. With increasing complexity and investments required in technology and audit tools, these firms will find it exceedingly difficult to render audit service and pass regulators’ scrutiny of their work. Size enables strength and resilience. There is an urgent need for consolidation.
Choice and Concentration
Although the concentration in the Indian Audit Market is not as high as it is in many countries in the western world, yet it is not low enough to provide clients with a sufficiently wide choice. A number of suggestions have been made to address this, including auditor rotation, joint audits, etc., but these do not solve the problem. Rotation does not solve the problem, for the audits would continue to be rotated within the select few, And in some cases, the rotation would be a disincentive for an audit firm to invest in specialised resources required for a particular industry.
A joint audit is also proposed as a solution to widening professional opportunities and address concentration. In some banks, there are more than six joint auditors. The reality is that this only fragments the audit market and does not build firms of the size required to address concentration. Also, divided responsibility leads to divided accountability and impairs audit quality. If this argument is extended it means that appointing a hundred auditors for a large business would deliver better quality than a single firm carrying out the audit. Imagine if we were to have a law which mandatorily requires joint surgeries (by more than one surgeon) to enhance the quality of the surgeries and also provide opportunities for all practising surgeons!
 
Auditor appointment and Auditor independence
Appointment of auditors by an independent authority is often promoted as the panacea for the audit failures. This is on the mistaken belief that addressing auditor independence will miraculously enhance audit quality as it proceeds on the assumption that auditors are more likely to be compromised if appointed by the company they audit. If true, this is a sad reflection of the members of the audit profession. I do not believe that the manner of appointments have been the cause for audit failures including the recent failures in India and that we should amend the appointment process merely to deal with a few toxic professionals. In reality, besides independence and absence of nexus with the auditee, audit quality depends on a number of factors including size or the firm, quality and experience of audit professionals, ability to deploy the resources required to do a high-quality audit, audit methodology, auditor’s toolkit, etc.
There have been other proposals like (1) prohibiting auditors from providing non-attest services to their audit clients and (2) requiring audit firms to separate their non-audit businesses to create an “audit only” firm. While there is some merit in the former proposal as the audit firm has the rest of the market to render non-attest services, creating ‘audit only’ firms considerably weakens the audit firm and impairs delivery of quality audits.
Auditor’s compensation
If audits are to be carried out effectively by deploying experienced professionals using state-of-the-art tools and involving specialists then auditors have to be well compensated. Audit fees are presently very low in our country and this is further split into fragments by dividing amongst several joint auditors. Fixing of the audit fees by a regulator is not the solution. Entities vary by size, complexity, geographical spread, level of technology, nature of businesses, etc. and fees cannot be fixed or vary with reference to the results or any component of the financial statements. Equally, the audit profession must recognize that fixing fees on an ‘hourly rate’ model is flawed in a digital age when millions of transactions can be analysed by a mere press of a button using digital tools. Increasingly buyers of audit services will look for ‘value delivered’ rather than pay for the cost of input. Too often we have witnessed auditors seeking fee increases based on cost increases without delivering ‘incremental value’ or making efforts to reduce their input costs by using technology. Unfortunately, audit is not considered a ‘premium’ service and the enthusiasm to pay high fees is limited.
Multi-disciplinary firms

Audit in today’s complex and technology dominated environment requires a multi-disciplinary approach. This would be more efficient if the resources and capabilities are under one roof. The future, in my view, is multi-disciplinary firms and the profession should allow unlimited sharing of resources with non CAs even if it means that the CA firm is dominated or led by a non-CA. The bogey of difficulty in taking action when audit failures happen is often cited as an argument against multi-disciplinary firms whereas regulations can be shaped to take action against erring firms or erring professionals, whatever be their profession.

ENVIRONMENTAL FACTORS


Corporate Financial Reporting and Audit Ecosystem

 

The audit function cannot alone deliver quality audit. It is influenced and facilitated by the entire Corporate Financial Reporting System. The Financial Reporting and Audit Ecosystem comprise of many participants, each having a very distinct role in ensuring the veracity of financial information and ultimately the efficient functioning of the capital markets. These participants (see graphic below) include:

 

1. Preparers of financial information – Management, including key managerial personnel

 

2. Internal monitoring mechanism – internal auditors
3. Corporate governance – audit committee, independent directors, board of directors

 

4. External auditors

 

5. Other stakeholders – credit rating agencies, analysts, proxy advisors, specialists such as valuers and actuaries

 

6. Regulators

 

7. And last but not least, the users of financial reports – shareholders, lenders, other stakeholders, potential investors, etc.

 

Any deficiencies in the role played by any one or more of these participants could lead to sub-optimal functioning of the entire ecosystem.

 

In addition to the components and participants in the financial reporting ecosystem, there are also influences on the financial reporting ecosystem, which have an effect, both positive and negative, as they drive the behaviour of the participants. These, too, need to be reviewed and, if necessary, re-calibrated to produce the desired effect. Some of these are:

 

  • Provisions of various laws which deal with the roles, responsibilities and accountability of the participants in the ecosystem.
  • Penalty and prosecution provisions in the various laws.
  • Role and process of investigative agencies.
  • Multiplicity and overlapping investigative/regulatory agencies.
  • Whistleblower mechanisms.
  • Standards – accounting standards, auditing standards, secretarial standards, internal audit standards, etc.

 

Internal Audit System

 

The internal audit function plays an important role in assisting the board in providing assurance on the effectiveness and efficiency of the risk management, internal control and governance process in the company. It also plays a complementary role in facilitating external audit quality.

 

In order to improve the internal audit function:
  • Internal audit should be subject to regulation and oversight just as the statutory audit.
  • Minimum qualifications for the internal auditor should be prescribed, including membership of a professional body or the Institute of Internal Auditors.
  • Internal auditors, too, should be accountable for their work.
  • Education and training needs of internal auditors should be addressed, including continuing professional education requirements, as well as focus on skills of the future.

Other environmental factors

Some of the other suggestions to improve the reporting environment and supporting the audit function are discussed below:

 

CEOs and CFOs play a very critical role in financial reporting. Not only are they signatories to the financial system, but also acknowledge and confirm their responsibility for the financial statements being free of fraud and error. They are, in effect, the architects of all business transactions and reporting. Currently, there are term limits and rotation requirements for external auditors and Independent Directors but no term limits for internal auditors, CEOs and CFOs. We must critically examine if term limits and reappointment rules should be extended to these individuals too.

 

MCA, SEBI or NFRA should set up a data science department that will focus its efforts on the review of the financial statements and filings to detect reporting, disclosure and audit failures. The principal goal of the department should be the detection and prosecution of violations involving false or misleading financial statements and disclosures. The department should also focus on identifying and exploring areas susceptible to fraudulent financial reporting and should include the ongoing review of financial information and the use of data analytics.

 

A practical public document should be brought out detailing the various deficiencies, frauds, and misstatements noticed by ROC, SFIO, NFRA, etc. This would help corporates, auditors, regulators and other users.

 

EXECUTION OF AUDIT
 

Let me first begin with ‘who’ does the audit as audit quality is also influenced by who performs the audit. I believe the current model is flawed.Audit procedures are significantly carried out by trainees or fresh graduates. To expect them to discover frauds or interpret visible signals of misreporting or failure is similar to a medical student carrying out a surgery and the busy eminent surgeon coming in at the end when the sutures are to be done. Our experienced and qualified auditors spend disproportionately less time compared to that of trainees either because they are too busy or that spending more hours increases the cost of audit and erodes audit profitability. A first step towards correcting this is to ensure that articleship with specific focus on specialisation should begin only after passing the CA exam.

 

Having briefly dealt with who does the audit, I will touch upon the “how” of audit.

 

The audit has, over the years, moved away from a “thinking audit” to an “inking audit”. The focus has shifted to documenting the processes rather than effectively carrying out the processes.

 

 
Auditors seem to have lost their sense of smell. The focus on testing and reliance on internal controls through walk-throughs, etc., has diluted the effectiveness of audit. There is more emphasis on the correctness of the accounting and the disclosures rather than the propriety and genuineness of the transactions. With this and the sampling methods where a speck of the entire population is tested to form conclusions, the auditors seem to be losing their sight or vision too. Sampling methods, howsoever scientific, dilute audit quality. With the use of technology, it is today possible to scan the entire population, focus on outliers, identify questionable patterns, etc. It is time the auditing standard on “Sampling” is revised. It is also time the audit profession uses technology extensively. Additionally, disclosure in the audit report of the sampling methodology used may be considered.

 

Sir Donald Brydon, in his Review Report, recommended that auditors be required to undergo initial and ongoing periodic training in forensic accounting and fraud awareness. In my view, every audit team should include a forensic specialist.

 

Yet another issue is the focus of audit. Auditors today are rarely able to walk into a client’s office with an expectation of what they should be seeing. Instead, audit today is about verifying what is presented rather than confirming expectations. I am reminded about the Sherlock Holmes story about “the dog that did not bark”. The analytical review procedures carried out by auditors generally analyse the information presented to them. That too, the focus is on analysing variances beyond certain predetermined thresholds and documenting the reasons. The absence of changes in expenses or income when there should be a change is happily ignored. A case of not probing why “the dog did not bark”!

 

OUTPUT FACTORS
 
The Auditor’s Report

I read with interest the dipstick survey carried out by BCAJ in May 2021, seeking views on the format, size, utility, components and other contents of the Statutory Auditors’ Report. I was alarmed and disappointed when 83.6% of auditors responded ‘Yes’ to the question – “In your opinion, will additional reporting requirements prescribed in CARO 2020 be onerous and will increase responsibilities for the auditors (evergreening of loans, going concern, reporting on defaults, etc.)?” Are we so concerned about the increase in responsibilities? Isn’t this what is expected of an auditor? Should we not focus on these matters in our audit and report our findings for the benefit of users, including regulators? It would appear that getting an auditor to do more work to bridge the ‘expectation gap’ is more difficult than getting a tooth extracted by a dentist!Another shocking response to the survey is by 59% of auditors having > 5 years’ experience who responded “Somewhat, but needs improvement” to the question “Do you believe there is adequate, emphatic and clear guidance covering situations for auditors on preparing/issuing Audit Report? This response should have woken up the professional body and resulted in swift corrective action. 

I, personally believe, “sunshine is the best disinfectant”. Over the years, I have witnessed the profession resisting any changes to the bland, template-driven audit report. This is strange as the only visible output of the audit to the users is the audit report and if anything can influence the perception of audit quality, it is the audit report. Most audit reports are similar, if not identical, barring minor differences due to the recent inclusion of Key Audit Matters. Does this mean audit quality in all cases is uniform? It is time we brought out into the open the information on what and how the auditor has performed the audit, when the audit commenced, when it ended, the number of hours spent by each category of audit personnel, the number of qualified professionals involved in the audit, the time spent by the audit partner, the use of audit tools, the sampling methodology and the number of items tested, independent external confirmations obtained and the results thereof, experts consulted, errors the auditors found, materiality, etc. rather than the bland statements that the audit has been done in accordance with the auditing standards (written by the auditors themselves only known to and understood by only them)!
 

Audit reports contain lengthy statements pointing out the roles and responsibilities of management and boards, limitations of the audit and clearly describing the auditor’s responsibility. Has these deterred regulators and investigative agencies? Have auditors been absolved of the blame? Users of audit reports see these cautionary statements with the same disdain as smokers see the statutory warnings in cigarette packs which state “cigarette smoking is injurious to health”!

 

CONCLUSION

 


The future of “audit” is bleak, and there are dark clouds on the horizon. I have great respect for the audit profession and sympathy for they are being attacked from all sides – intense competition, unremunerative prices for their services, inability to attract talent to the audit function, demanding clients and society, disruptions due to technology, intense regulatory scrutiny, pursued by multiple investigative agencies for the same work, etc. I am confident that this, too, shall pass but that depends on how the profession addresses some of the matters highlighted in this Article.

 

The need for a thorough overhaul and transformation is urgent. The issues need to be brought out into the open, for discussion and debate and should not be only within the walls of the Council Hall of ICAI. Wisdom also resides outside the hallowed Council Hall! We cannot forever continue to be in denial mode and hope the present glory (or distrust) would continue. Regulators like NFRA, RBI, SEBI, IRDA, etc. provide a useful role and show us the mirror. We may not like the reflection but let us not throw stones at the mirror. Instead, let us address the image reflected. I have just written a few thoughts in view of space limitations. I have many more thoughts, which are for another time.

 

We must not attempt any quick fixes or band-aids, or address the issues on piecemeal basis. Code of Ethics, AQMM, UDIN, etc. are some examples of positive actions which are piecemeal and do not move the needle. Such fixes are like changing the dress on a mannequin and hoping it transforms into a live human being!

 

The future of audit is in our hands only, and I am confident the Audit Profession will reshape itself to be one of the premier professions in our country’s journey to be the third largest economy. We can hardly claim to the partners in nation-building without rebuilding the Audit Profession. Perhaps, what we need is a Review similar to one by Sir Donald Brydon in UK. Let me list some of the questions for debate:
Need for economies of scale – the importance of consolidation of SMPs.
  • Declining interest in an accounting career and its effect on the future of auditing.
  • Trend of questioning authority by the lay public. Experts are no longer thought to be beyond criticism or scrutiny.
  • The rise of NFRA and the end of disciplining by peers – some of NFRA’s orders indicate that the auditors did not know the accounting or auditing standards.
  • The days of government-mandated work are over – need to justify the value of work.
  • Recent developments in law enforcement e.g., tax fraud, shell companies and rising demands on accountants and auditors.
  • How should education change – curriculum, selection of students, exams, training, lifelong learning.
  • Audit reports in a language that a reasonably intelligent and earnest user can understand.
  • What kind of competition would the audit face?

It is said that people change, not when they see light, but when they feel the heat. I am hopeful my fellow professionals effect the changes swiftly without measuring the transformation action on the ‘popularity’ scale.

CA Profession and BCAS @ 75

Congratulations to all my esteemed professional colleagues in the Chartered Accountancy profession and members of the Bombay Chartered Accountants’ Society (BCAS) for completing 74 years and entering the 75th year. It is heartening to see the profession, and BCAS grow from strength to strength in these 75 years. We must salute the wisdom of our forefathers for having established the voluntary body of CAs, namely, BCAS, within just five days (i.e., 6th July, 1949) of setting up of the Regulatory Body, ICAI, on 1st July, 1949. BCAS has the unique distinction of being the oldest and also the largest (with over 8500 members pan India) voluntary body of Chartered Accountants in India pursuing academic activities for the benefit of the CA community at this scale and in diverse fields. BCAS has rendered yeoman services to the profession since its inception. Today it is rightly considered as the “think tank and the torch bearer” of the profession. Seventy-five years is a long-time span in the life of an individual, as also for a voluntary body of professionals.

The uniqueness of BCAS is the selfless services of its volunteers spread across the country and through generations. It is an amalgam of the wisdom of seniors and the enthusiasm of youth, where a generation nurtures and blossoms talents and then passes on the baton to the next generation. It is a place where the “Profession First” is practised by its committed members in letter and spirit. This has created a unique “BCAS Culture” over the years. Truly, BCAS is working relentlessly for its vision of harnessing talent, disseminating knowledge, building skills, and networking amongst its members and encouraging them to adhere to the highest ethical standards and professional integrity. Many other voluntary bodies of CAs are being motivated and inspired by the precedents set by BCAS.

Incidentally, the Nation completed 75 years of independence on 15th August 2022, and the BCA Journal carried a distinctive feature, “India @ 75”, in which past presidents who completed 75 years of their life shared their experiences of India @ 75. The articles by past presidents were accompanied by QR code-enabled recordings by a team of volunteers, which helped members to listen to the same, also in addition to reading them. This novel experience was well received by the journal subscribers and hence is repeated in this Issue also. Three patriotic poems in Hindi were the highlights of this special feature in the August 2022 issue of the BCAJ, which also happened to be the 750th Issue of BCAJ.

It is interes ting to note that the emblem of ICAI carries a Sanskrit verse  (Ya Esa Supteshu Jagarti) from a shloka from the Kathopanishad (Also known as “Katha Upanishad”). It literally means “A person who is awake in those that sleep.” This quote/verse was given by Sri Aurobindo at the time of the formation of ICAI in the year 1949.

When we look at the emblem of BCAS, we find yet another interesting Sanskrit verse, namely,  (Na Bhayam Chasti Jagratah) The literal meaning of this verse is “if you are alert, you will not have any fear.”

Both these quotes are apt in that a CA is expected to be more vigilant and aware of the latest developments in the laws and regulations to protect the interest of all stakeholders. In February 2022, while speaking at one of the ICAI’s award functions, the Union Minister Dr Jitendra Singh said that “Chartered Accountants are the conscience keepers of the nation’s account. Therefore, the integrity of their own conscience is vital for the health of a nation in general and the financial health of a nation in particular.” It reflects the trust that this profession enjoys from the various stakeholders, as also their expectations. Naturally, professionals, in turn, shoulder huge responsibility to meet these expectations.

Much has changed in the last 75 years in the CA profession. From handwritten notes, we have moved to smart writing pads; from manual counting to calculators and computers; from the manual filing of returns to electronic filings; from in-person assessments to virtual and faceless; and so on. Technology Transformation/disruption has been the biggest impactor in the last 75 years, more so in the last decade or so. The pace of technological developments is changing the face of the CA profession very fast. Auditing today without the aid of technology is unthinkable. Implementation of GST would not have been possible without the use of information technology. The income-tax portal is used not only for disseminating knowledge but also for rendering a variety of services to taxpayers. The advent of “Artificial Intelligence” has taken transformation/disruption to the next level. It will completely change human life and so also our profession in times to come. The profession will have to reinvent itself. New practice areas will emerge and are emerging, and traditional areas of practice will fade away or get extinct. Only those who will accept, adapt, and use technology will survive.

At BCAJ also, we have adopted and adapted to technology swiftly. After the initial cyclostyled ‘Bulletin’, the first printed issue of the “Bulletin” was published in December 1962. Thereafter the Bulletin was printed intermittently, owing to some difficulties. The first issue of the Journal was published in July 1967. However, the first monthly issue was published in January 1969  and since then, it has been regularly published till date. From the cyclostyled Bulletin, BCAJ has moved to modern printing and has also become digital.

Today India is one of the fastest-growing economies in the world. The scale and pace of growth is enormous. Today India is the 5th largest economy in the world and is expected to occupy the 3rd place latest by the turn of the decade, i.e., 2030. Both our country and CA profession are in the Amrut Kaal, and therefore, this year’s theme for the Special Issue of July 2023 is selected as “Economic Development”. Four eminent authors have contributed articles on the impact of four different areas, namely, Audit, Direct Tax, Alternative Dispute Resolution (Legal) and Technology, on the economic development of India. Besides these interesting articles, the special issue also carries a transcript of an interview with Dr Brinda Jagirdar, Economist. One can listen to these articles by scanning the respective QR code printed along with them.

All authors and interviewees have emphasised the role of technology in the economic development of the country.

As our PM Shri Narendra Modi said, truly, we have entered a “Techade” (A decade dedicated to technology), which will rule the world. However, a word of caution here is that along with the increasing use and impact of technology, let us not forget ‘humanity’. We will have to learn certain soft skills, such as the right attitude towards life, compassion, communication, human relations and most importantly, work-life balance. It is good to use technology, but we should not allow technology to use us. Before AI masters us, let us master ourselves!

Shareeramadyam Khalu Dharmasadhanam!

This is one of the most important messages for every human being. It underlines the importance of physical fitness. Health is wealth. We Chartered Accountants should take special note of this and implement it religiously. All of us merely say that ‘Health is Wealth’ but seldom follow it in our lives.

They say, one sacrifices one’s health to acquire wealth, but when the time comes to enjoy the wealth, he has to spend heavily to ‘regain’ or ‘maintain’ the health. Often, it is too late.

The quote is from the play ‘Kumara-Sambhavam’ (5:33) written by Kavi Kalidasa. All of us know the story that Parvati, the daughter of Himalaya, fell in love with Lord Shiva (Mahadev Shankar). Actually, her father, Himalaya, wanted to get her married to Lord Vishnu. So Parvati secretly went to a forest and did very rigorous Tapashcharya (Penance). She fasted so strictly that she did not eat anything – not even fruit or leaves! That is why Parvati is also called ‘Aparna’. Parna means a leaf. She didn’t consume even a leaf, hence ‘Aparna’.

Lord Shiva appeared before her in the guise of a Brahmin. He enquired about her health.
Meaning – whether the samidha (small wooden sticks used in Pooja) are easily available for ‘havan’ (i.e., fire, sacrifice) and whether enough water is there for your bath and cleanliness. Whether you are putting your efforts only within your physical limits (strength), or are you doing something excessive? After all, your body is the main instrument for achieving everything!

There are four purusharthas  Dharma, Artha, Kama and Moksha. These are the ‘tasks’ to be achieved by every man. Dharma is duty; and not religion as we commonly unders tand. Artha is money and resources. Kama means all desires. And Moksha is ultimate salvation. For achieving all these, your physical fitness is a prime ins trument.

Lokmanya Tilak realised it since his school days. He was very pale, weak and feeble. So, after his schooling, he sacrificed one full year to acquire physical strength through good exercise, a good diet, discipline, etc. Later, he performed magnificently in life and in my opinion, he was one of the most versatile persons India has ever produced.

Today, we find our children and youth obsessed with computers, mobile phones, social media and so-called careers. They hardly go on the ground to play, swim or do exercise. Yoga can give us not only physical fitness but also mental strength. Unfortunately, we realise this too late in our lives. Almost everyone is consuming some tablet or the other every day – be it for blood pressure or for diabetes! There is a pain in knees therefore, they can’t even walk easily. They are forced to restrict their diet! They cannot enjoy tasty food; they have to think twice before going on a tour. Often, they are prone to neurological diseases due to their present lifestyle.

There are premature deaths among professionals. Therefore, one needs to think very seriously in early life as to how one wants to shape one’s career and future. This mantra needs to be inculcated in early childhood, but we can do it only if we are convinced for ourselves.

Sir Salamat To Pagdi Pachaas!

So friends, let us follow this mantra without any delay to change our priorities.

Letter to the Editor

Dear Sir,

“Auditor – Whether a Watchdog or a Bloodhound “

I am in agreement with the views expressed in your Editorial of June, 2023 issue of BCAJ, entitled, “CA- From a Watchdog to a Bloodhound” and the penultimate paragraph of “ Namaskar” column by  Shri C. N. Vaze.

The responsibilities cast on a CA as the Statutory Auditor of a Company are very extensive and excessive, and ever increasing, enough to deter a CA from undertaking the vast and excessive responsibilities  cast on the Statutory Auditor under the Companies Act, 2013.

All the Regulators and Enforcement Agencies should understand that the Auditor’s Responsibility ends with making appropriate disclosures in the Audit Report and it’s Annexures. It is upto various Stakeholders to read, understand and take the necessary remedial action(s).

The Auditor should not be made a scapegoat for the lack of knowledge, understanding and necessary timely action on the part of the Management and various other Stakeholders.

Further, requiring the Auditor to Report on every contravention  of various Laws or Regulations  to various Law Enforcement Agencies is neither feasible nor practical.

An Auditor is not a Bloodhound.

And now, on top of everything, comes the latest Notification under the PMLA. One really wonders why the legal profession has not been brought under the ambit of the said PMLA Notification, as the lawyers also render many of the services which come under the purview of PMLA.

In view of ever increasing responsibilities cast on a CA under the Companies Act, PMLA and various other Financial Regulations by various Regulators, and  looking at the increasing tendency of the Enforcement Agencies to arrest the Chartered Accountants for the financial irregularities committed by their Clients,  it is hightime that we, the Practising CAs, should not get entangled in the financial transactions and business dealings/ activities of our Clients and instead, should keep ourselves restricted to our advisory / attest functions .

The time has come for the Finance Ministry to issue elaborate instructions and Guidelines to the Field Officials which need to be scrupulously followed before a CA/ Auditor is arrested or prosecution proceedings are launched against him, to ensure that innocent professionals are not threatened or harrassed in the quest for catching the real culprits who are generally very rich and powerful and politically well connected.

An unnecessary and premature arrest of a CA under PMLA or any other law tends to irreparably destroy and damage the personal, social and professional life and career of a professional.

Various Government Agencies and Regulators need to call a halt on further extension on reporting requirements/responsibilities of the Statutory Auditors. In fact, there is an urgent need to review the existing requirements with a view to weed out the unnecessary requirements.

Yours Sincerely,
CA. Tarunkumar G. Singhal

Disciplinary Proceedings – When They Start?

Arjun: O’Lord! There are problems, problems and problems! No solutions anywhere.

Shri Krishna: That’s life, Parth! Even as a God, I also have problems – very complex ones.

Arjun: Ah! How can you have problems, Krishna?

Shri Krishna: Don’t you remember? I was born in a jail when my parents were in prison of the tyrant Kaunsa. Immediately after my birth, during heavy rains, I was taken to Gokul, on the opposite bank of river Jamuna. And in my early childhood, many demons came to kill me. Even after I grew up and became a king, there were disputes among my community of Yadavas. In my family, there was friction between my wives!

Arjun: Yes, and we, as your cousins, also fought amongst ourselves. You had to mediate between us.

Shri Krishna: True. But tell me, what is your problem now?

Arjun: We CAs need to fill up forms for empanelment so that we can get audit assignments from Government authorities, banks and so on.

Shri Krishna: It has to be so!

Arjun: Even for private sector companies, we need to give a declaration every year for appointment or renewal.

Shri Krishna: Then what is wrong with that? What is your problem?

Arjun: In those forms and declarations, we need to write whether any of the partners have been held guilty of professional or other misconduct. We also need to write whether there are any disciplinary proceedings pending against any partner.

Shri Krishna: It is a factual thing. You have to write Yes or No.

Arjun: Agreed. But against a few of my friends, some people have filed complaints to the Institute for misconduct. At this stage, they don’t know what to write – whether proceedings are pending or not.

Shri Krishna: (smiles). This is a common problem, Arjun. The answer is simple. You know that after the complaint is received, you have to file your explanation.

Arjun: Written Statement (WS).

Shri Krishna: Correct. Your WS goes back to the complainant. On that, he sends his rejoinder.

Arjun: Yes.

Shri Krishna: Now, after scrutinising these papers, Director Discipline arrives at a Prima Facie Opinion, whether you are prima facie guilty on any of the allegations.

Arjun: I know. A few of my friends have received such Prima Facie Opinion (PFO).

Shri Krishna: Director has to place the PFO before the Board of Discipline, if the offence pertains to the First Schedule item. If it is from Second Schedule, he places it before Disciplinary Committee, right?

Arjun: Yes. Bhagwan.

Shri Krishna: Now, when BOD or DC concurs with DD’s PFO that a member is prima facie guilty, that is the point of time when they say disciplinary proceedings are pending. Understood?

Arjun: Okay. You mean, when merely a complaint is filed, or WS is submitted, that is not considered as pending disciplinary proceedings. Am I right/

Shri Krishna: Absolutely.

Arjun: But what it implies?

Shri Krishna: The appointing authority or the client company can then take a call on whether, despite such pendency of disciplinary proceedings, they want to appoint your firm as Statutory Auditors.

Arjun: Obviously, they will not!

Shri Krishna: Yes. But there is no rule of law to that effect. It is their discretion. But as a policy or practice, they may not appoint such a firm.

Arjun: Then what will the firm do? They may lose revenue.

Shri Krishna: Naturally. If he is a proprietor, he will suffer more. If it is a firm, that particular partner who is held prima facie guilty, may withdraw from the firm so that the firm does not suffer.

Arjun: And what will he do?

Shri Krishna: He continues to be a member. He can continue in practice. It is only when he is finally punished and his membership is suspended, he has to stop practising.

Arjun: Can a membership be restored?

Shri Krishna: Yes. But at that time, your seniority is Zero! You can’t take articles.

Arjun: So, he can sign audits even when he is prima facie guilty; but not yet punished. Right?

Shri Krishna: Yes. Once you are held prima facie guilty, it is referred to ‘enquiry’ before BOD or DC.

Arjun: It is logical. Otherwise, anybody can just file a complaint against a member and make him disqualified for the appointment. That would be disastrous. Now there is a comfort that until you receive PFO, you won’t have to bother. Big relief, Lord, to my friends.

Shri Krishna: But wisdom lies in doing the practice diligently, following all standards and norms.

Arjun: Agreed. But Lord, we are human beings. And now the Regulators are numerous, and Regulations so complicated, that even for Gods, it will difficult to escape disciplinary proceedings. Auditors are expected to be ‘Super Gods”

! Om Shanti !        

(This dialogue seeks to clarify the expression ‘pendency of disciplinary proceedings)

How to Spot and Avoid Fake News

These days, there is a plethora of News and Information bombarding us from all sides – be it Whatsapp, Facebook, Twitter, Instagram, TV Channels, News Websites, Newspapers or even Radio! Very often we come to know after a few days / months that an earlier report was false. Sometimes, we may not even come to know of this, until it is too late. Hence, an average layperson is perplexed over what is true and what is not. In this brief writeup, we will try and understand how to spot and avoid Fake News.

TYPES OF FAKE NEWS

Fake News can be of three types:

a)    An honest mistake – where the propagator genuinely believes something to be true and announces it or forwards it without verifying. This can be rectified easily by a simple, sincere apology

b)    Pranks – in this case, the propagator deliberately states something he knows to be false, just for the fun of it, to create mischief. He may even propagate it anonymously, since he knows the repercussions, but the purpose is solely to play a prank

c)    Fake News – this is an intentional propagation of something, knowing it to be false, with the intention to cause benefit or hurt – religious, political or commercial. Of late, the number of cases in this category has been steadily rising.

SO HOW DO WE SPOT AND COMBAT FAKE NEWS?

  • Apply Common Sense: There were several fake photos and videos circulating during the recent Biparjoy Cyclone news. Some even showed massive destruction even before the Cyclone had reached the land! Simple application of mind would be sufficient to call out such fakes!
  • Avoid Confirmation Bias – Not everything about someone who you admire, has to be true. So, when you read something about someone whom you adore, you automatically tend to believe it. Try and avoid the confirmation bias at all times.
  • Look for evidence / source – Always look for links to credible news portals or information websites. Never forward or like stuff if no evidence is provided by the sender. We often find Whatsapp forwards which mention “Forwarded as Received” This is a very strong indicator that the news is unverified and most likely to be false. So, when you get such a message, always ask the sender to quote a reliable source for the same – if a reliable, independently verifiable source cannot be identified, you can most certainly disbelieve the news item. In such cases, please do not forward it further and stop propagation of such false items.

Further, if the author is a known rabble rouser or propagator of fake news in the past, be wary to believe the same person, even if his name is quoted as authentic.

  • Beware of Websites with no physical contact details or the people or group behind them – When the source of the news is a website, please visit the About Us or Contact Page of the website. If you do not see a proper address (not just an email id) it is a red flag! Websites with no physical address and / or the names of people or organisation behind them, are most likely to be misleading and liable to be distrustful.
  • Google Baba to the Rescue – one easy way to fact-check a news item is to search for its title in Google. If it is true, you will find multiple stories around the same topic. If not, you may even find a story which mentions it to be false!
  • Google Reverse Image Search – if you find a horrifying or unbelievable image, just do a Reverse Image Search on Google – Go to Google.com and click on this icon.  It will allow you to copy paste an image and search for the image online. Just try it and you will be surprised at the results!
  • Fake News Debunker Extension – if you would like to frequently check news for its veracity, install the Fake News Debunker Extension in Chrome. Once installed, when you right click on any news item, it will confirm whether it is fake or not.
  • Poynter.org – and if you are concerned on the spread of Fake News, visit this website which offers a free course on identifying Fake News. The key points to consider are:
  • Is this important enough?
  • Is this fact-checkable?
  • Is this original?
  •  Is this reliable?

 

  • There are many sites which help you identify whether any news items are genuine or not. Some important of these are as under:
  • Altnews.in
  •  Boomlive.in
  • smhoaxslayer.com
  • https://timesofindia.indiatimes.com/times-fact-check
  • https://www.thequint.com/news/webqoof
  • https://fssai.gov.in/cms/myth-buster.php
  • Snopes.com
  • www.factcheck.org/
  • https://factly.in/
  • https://www.factchecker.in/

Most importantly

  • Question Everything
  • Ask the sender to provide evidence
  •  Do not forward if not credible
  • Educate Others – Schools, Colleges and Whatsapp Groups

DO NOT BECOME A FOOL / TOOL IN THE SPREADING OF FAKE NEWS!

Updated FAQS on Insider Trading Throw Light on Many Complex Issues

BACKGROUND

The Securities and Exchange Board of India (SEBI) has recently issued (on 31st March, 2023) comprehensive Frequently Asked Questions (FAQs) on its regulations relating to insider trading – the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the Regulations). It is good to see this practice continuing whereby, not just clarifications, even if not binding, are given on important and repetitive issues, but they are all updated and provided at one place. The Regulations are fairly complex with a series of deeming provisions. Insider trading violations are regularly caught through a fairly sophisticated data surveillance, coupled with good investigation and quick orders. Of course, some orders are found wanting on evidence or principles of law applied and do not stand up on appeal, but the fact that such Regulations exist and there is a close watch acts as a deterrent. Insider trading reduces the credibility of markets since investors would feel demoralised if, whether in purchase or in sale, the insiders are able to illegally profit from information they are entrusted with as fiduciaries.

The Regulations are also distinct, in the sense that many of the provisions have a note attached to them which explain the intention of the particular provision. The FAQs add further to this by explaining and clarifying many provisions.

BINDING NATURE OF FAQS

It would be axiomatic to say that the Act and the Regulations and even certain notifications/circulars have a binding effect but not the FAQs. Indeed, they bind not even the regulator, i.e., SEBI, as the FAQs themselves take pains to emphasise. Paragraph 4 of the FAQs, says that the FAQs “…are in the nature of providing guidance on the SEBI (PIT) Regulations, 2015 and any explanation/clarification provided herein should neither be regarded as an interpretation of law nor be treated as a binding opinion/decision of the Securities and Exchange Board of India”.

That said, the FAQs do reveal the mind of the regulator on certain provisions. They explain many concepts useful to the student, the compliance officer and practitioner. Often, the question may not be of technical interpretation but of understanding what a particular provision means to say. Importantly, the cautious compliance officer and companies may prefer to toe the line by following the interpretation given in the FAQs, since it is likely that SEBI may initiate proceedings. The appellate authorities, however, may not give more than a passing view to the FAQs, if at all.

There are 59 frequently raised questions that are answered in the FAQs. While it would not be possible to cover all of them, some of the important ones can be highlighted.

PLEDGE OF SHARES – THEIR CREATION, INVOCATION AND RELEASE

The concept of pledge of shares has to be seen, in context of the Regulations, from at least three perspectives. Firstly, what is pledge of shares and how it is created, invoked and released? Secondly, why is it relevant for these Regulations? Thirdly, who are the persons who have obligations when they pledge their shares or get the pledge released, etc?

Pledge of shares, as a concept is well understood. Shareholders may want to raise finance against the security of shares held by them. Such security may be in the form of hypothecation or pledge, with the latter being more preferred by lenders. Pledge is generally governed by the Indian Contract Act, 1872 but a detailed discussion on this would be beyond the scope of this article. Unlike earlier times when physical shares with duly executed transfer deeds were deposited with the lenders, the depository system requires a different method. The pledge has to be registered with the depository. Invocation of such pledge is easier. Some lenders may still want to go all the way and ask the borrower to actually transfer the shares to the lender’s DEMAT account. The implications of such a ‘pledge’ is a complex issue by itself and deserves a separate detailed discussion.

The Regulations deal with insider trading and the first reaction would be that pledge is not trading as commonly understood. However, the Regulations have learnt from history. A shareholder may pledge while being in possession of unpublished price sensitive information (UPSI) and realise a higher value of shares. Thus, the scope of the terms has been widened to include pledge, and therefore also their invocation and release. Note though that the Regulations provide for this widened meaning by way of a note to the definition of ‘trading’.

Thus, the Regulations require specified insiders not to carry out a pledge while being in possession of UPSI. In other words, the restrictions on trading also apply to the creation of a pledge.

DEALING IN SECURITIES OTHER THAN SHARES/CONTRA TRADES

Do the Regulations apply only to dealings in shares or do they apply to dealings in futures and options too? Do they apply to exercise of ESOPs and also to sale of shares arising on exercise of ESOPs?

To begin with, the Regulations make it clear that they apply to ‘securities’, the definition of which is wide enough to include futures and options. Since ESOPs are a form of options, it is clear that the Regulations apply to ESOPs too. The FAQs specifically deal with this issue to put this issue beyond any doubt.

The question then comes of contra trades. As a matter of principle, the Regulations prohibit trading while in possession of UPSI. However, in case of close insiders (i.e., ‘Designated Persons’ as identified by the company), a stricter rule is adopted. Trading by them at a short intervals, called contra trades, is banned altogether since such trading would typically be done only on basis of UPSI. But several questions arise.

Firstly, futures and options get reversed within a short period. The Regulations do not provide how to deal with this. The FAQs have provided a view as follows. If a person buys futures/options and then sells them (or vice versa) within the maturity period of less than six months, then it would be deemed to be a contra trade and hence prohibited. However, if such trades mature by physical settlement, then they will not be deemed to be contra trades and hence not banned.

Even entitlements to rights shares are treated as securities and hence trading in them would attract the contra trade ban.

As far as ESOPs are concerned, the view expressed is as follows. The first part relates to grant of ESOPs. These are not treated as ‘trading’ and hence grants can be made even when the trading window is closed. Similarly, exercise of ESOPs is also not treated, the FAQs say, as trading. Hence, the acquisition of shares on exercise of ESOPs can be done even while in possession of UPSI. There is yet another concession regarding ESOPs. If shares are acquired on exercise of ESOPs, they do not invite the six-month ban of contra trades and hence such shares can be sold within six months of acquiring the shares.

CHARTERED ACCOUNTANTS AND OTHER FIDUCIARIES AND THE REGULATIONS

Firms of Chartered Accountants render services to listed companies in many ways. They may act as auditors (statutory or internal or tax), they may act as advisors for many services. This is so also for other professionals such as company secretaries, lawyers, etc. They are very likely to have access to UPSI and hence would generally be deemed to be insiders.

However, they have a further and more elaborate role. They are required to frame a code of conduct which should contain at least the minimum requirements specified in the Model Code. This includes pre-clearance of trading in specified securities, ban on contra trades therein, etc.

Moreover, they are also required to maintain a structured database. Essentially, this is maintenance of prescribed details of persons to whom UPSI is shared with. And maintain such records for at least the minimum specified period. Such database “shall not be outsourced” and “shall be maintained internally”. On the question of keeping such a database on third party servers such as Amazon, Google, etc. which are also maintained outside India, the FAQs give a cryptic answer, instead of a clear ‘yes’ or ‘no’. The answer given merely reiterates the responsibilities of the Board and the Compliance Officer to ensure that all Regulations, laws, etc. are complied with. However, on the question whether the company can use the software provided by third party vendors, the FAQs state that such software and services are provided on a login basis. The vendor may have access to the data and this would be contrary to the requirements of the Regulations.

Professionals rendering services to listed companies and having access to UPSI may range from small proprietorship to a large multi-partner firm, but the requirements are the same.

The FAQs confirm that these requirements are to be complied with by all professionals who have an access to the UPSI.

RELATIVES OF INSIDERS

There is often a confusion on the extent to which persons connected with the insider are also covered by the Regulations. The FAQs speak about this on some aspects.

The term ‘insider’ is broadly defined to cover several groups of persons who may have access to the UPSI. However, apart from persons directly connected to the company, there may be persons who have connection with them. For example, there may be a CFO of a company. The question is whether the family members of such a CFO would also be deemed to be insiders. The Regulations have sought to strike a fair balance but in the process has created confusion. Apart from relatives, several entities connected with such persons are also covered as insiders unless proven otherwise. But we could focus on one term that creates some confusion and practical difficulties too.

‘Immediate relatives’ of specified insiders are also deemed to be insiders, unless proven otherwise. The term ‘immediate relatives’ is defined in a curious manner. It includes not only the spouse, but also parents, siblings and children of such a person or their spouse, but they should be either financially dependent on such a person or should consult such persons in taking decisions relating to trading in securities. On first part, identifying such relatives should be easy enough. The question is applying the two alternate conditions.

Firstly, the question is whether the relative is financially dependent on such a person. This should be generally easy in many circumstances such as a minor child or a non-working spouse, etc. However, there may be grey areas such as a relative who earns and contributes to the household. Whether such persons can be said to be financially dependent?

The other condition is easier to explain but difficult to prove. Does such a relative consult the insider for their decisions on trading in securities? Financial discussions in families are very likely to happen and it would be difficult to prove otherwise. This makes things particularly difficult when the relatives actually take an independent decision. Let us say one person is a partner in a firm of Chartered Accountants acting as statutory auditor and also an advisor to several listed companies. The spouse works in another company and manages their own investments without consulting or even informing the other spouse. If by chance, trading is done by such a spouse in securities of a company where the spouse has access to UPSI, it will be difficult to prove that there was no violation of the Regulations. Now take the matter further where the spouse is a lawyer rendering services to various listed companies. Now the difficulty becomes compounded.

CONCLUSION

The FAQs are welcome generally as they not only clarify several concepts but give a good starting point for taking a view. Many of the difficulties expressed above arise in spite of these FAQs and not because of them. And the Regulations are also complicated because insider trading is not only common, but is often done by while collar educated persons who can use many sophisticated methods including technology to evade the law. Caution then becomes the rule and applying the interpretation given by the FAQs can give a higher level of assurance that one is within the law, even if the clear fact is that they are not binding, not even on SEBI itself.

What’s In a Name? Immovable or Movable Could Be the Same

INTRODUCTION
Immovable property is the most ancient form of an asset which mankind has ever known. Its law and practice are multi-faceted, both from a legal and tax perspective.Different laws have defined the term ‘immovable property’ differently. These definitions are very relevant in determining whether or not a particular asset can be classified as an immovable property. For example, there is a difference in the rates of stamp duty on conveyance of a movable property and an immovable property. Similarly, GST is payable only in respect of sale of goods which are movable property and not on a completed immovable property. Recently, the Supreme Court in the case of the Sub Registrar, Amudalavalasa versus M/s Dankuni Steels Ltd., CA No. 3134-3135 of 2023, order dated 26th April, 2023 had an occasion to consider this issue in great detail. The Court analysed various definitions and propounded the settled principle that anything which is permanently affixed to land would also be immovable property. Let us examine this important proposition.

FACTS OF THE CASE

In the case of Dankuni (supra), under an auction, the assets of a company which consisted of land, building, civil works, plant and machinery and current assets, were declared to be sold to the highest bidder for a consideration of Rs. 8.35 cr. A sale deed was executed for this amount. Subsequent to the sale deed, a conveyance was executed for conveying the land, building and civil works. In the conveyance, the fact of the sale deed was mentioned and it was also stated that the market value of the land and building was Rs. 1.01 cr.Accordingly, the buyer tried to pay stamp duty on this amount of Rs.1.01 cr. and register the conveyance deed. The Sub-Registrar of Assurances did not agree with this value and held that the market value of the plant and machinery should also be included since it was immovable in nature. The matter reached the Division Bench of the Andhra Pradesh High Court, which held that the when the conveyance was only for the land and building, the Sub-Registrar could not force the buyer to pay stamp duty on the value of the plant when he does not seek its registration. The Court directed the registration of the conveyance deed as it stood and for the value recorded therein. Aggrieved by this decision, the Revenue appealed to the Supreme Court.

DEFINITIONS

The Registration Act, 1908 defines the term in an inclusive manner to include land, buildings, hereditary allowances, rights of ways, lights, ferries, fisheries or any other benefits to arise out of land, and things attached to earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops and grass.The General Clauses Act, 1897 defines the term to include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

The Transfer of Property Act, 1882, is the primary law dealing with immovable property. The Act merely defines immovable property as not including standing timber, growing crops and grass. However, it defines the phrase attached to the earth to mean-

“(i)      rooted in the earth, as in the case of trees and shrubs;

(ii)    imbedded in the earth, as in the case of walls or buildings; or

(iii)     attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached”.

Section2(ja) of the Maharashtra Stamp Act, 1958, defines the term immovable property as follows:

“Immovable property includes land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth.”

The Goods and Services Tax Act, 2017 does not contain any definition of the term immovable property or land. However, the definition of the crucial term “goods” states that it not only includes every kind of movable property other than money and securities but also actionable claims, 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.  Thus, in this case the definition under the Transfer of Property Act would come in useful.

From the above definitions, it would be evident that the main issue whether an asset is an immovable property or not would arise in respect of plant and machinery, power transmission towers, cellular towers, and similar assets.

JUDICIAL HISTORY

Various landmark decisions of the Supreme Court and High Courts have dealt with what is an immovable property. Key decisions are discussed below.The Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree.  The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

Further, the decision of the Supreme Court in the case of Duncan’s Industries Ltd vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished Sirpur’s case and held that whether machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent?  If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertiliser plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property.  In this case, a transfer took place on “as is where is” basis and “as a going concern” of a fertiliser business. This was preceded by an agreement which involved also expressly the transfer of plant and machinery. The Collector levied a stamp duty and penalty on the basis that since the transfer contemplated the sale of the unit as a going concern, the intention of the vendor was to transfer all properties in the fertiliser business in question.

Applying the above principles, the Apex Court agreed with the demand of the Collector. It was held that when the buyer contended that the possession of the plant and machinery were handed over separately to by the vendor, the machineries were not dismantled and given to the buyer, nor was it possible to visualise from the nature of the plant that such a possession de hors the land could be given by the buyer. Thus, it was an attempt to reduce the market value of the property the document by drafting it as a conveyance deed regarding the land only. The buyer had purported to transfer the possession of the plant and machinery separately and was contending now that this handing over possession of the machinery was de hors the conveyance deed. The Court relied on the conveyance deed itself to hold that what was conveyed was not only the land but the entire fertiliser business including plant and machinery.

In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Supreme Court held that generating sets consisting of the generator and its prime base mover are mounted together as one unit on a common base. Floors, concrete bases, walls, partitions, ceilings etc., even if specially fitted out to accommodate machines or appliances, cannot be regarded as a common base joining such machines or appliances to form a whole. The installation or erection of the turbo alternator on the concrete base specially constructed on the land could not be treated as a common base and, therefore, it followed that the installation or erection of turbo alternator on the platform constructed on the land would be immovable property.

The decision in the case of Mittal Engineering Works Pvt. Ltd. vs. CCE Meerut, 1996(88) ELT622 (SC) was on similar lines where it held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

In Quality Steel Tubes (P) Ltd vs Collector of Central Excise, 1995 SCC (2) 372 it was held that goods which were attached to the earth became immovable, and did not satisfy the test of being goods within the meaning of the Excise Act nor could be said to be capable of being brought to the market for being bought or sold, fall within the definition of immovable. Therefore, a plant of tube mill and welding head was regarded as immovable.

The Delhi High Court in Inox Air Products Ltd vs. Rathi Ispat Ltd (2007) 136 DLT 101 (DB) dealt with machineries which have been embedded in the earth, to constitute Cryogenic Air Separation Plants for the production of oxygen and nitrogen to be used in the production of steel. The machinery was erected with civil and structural works, viz., foundation, piling, structural support and pipe support, etc. for the installation of the plant, and the same could not be shifted without first dismantling it and then re-erecting it at another site. These were held to be immovable in nature. On erection, the machinery, ceased to be movable property. The Court held the machinery did not answer the description of “goods” or “movable property”, which by its very nature envisaged mobility and marketability on an “as it is, where it is basis”. Even though, the plant and machinery after dismantling could have been sold as scrap, but that was also the case with steel recovered from the rubble of an edifice.

The Karnataka High Court in Shree Arcee Steel P Ltd vs. Bharat Overseas Bank Ltd, AIR 2005 Kant 287, held that the meaning of the word “immovable” means permanent, fixed, not liable to be removed. In other words, for a chattel to become immovable property, it must be attached to the immovable property permanently as a building or as a tree attached to earth. Though a moveable property was attached to earth permanently for beneficial use and enjoyment, it remained a movable property. The Court gave an illustration that though a sugar cane machine/or an oil engine was attached to earth, it was moveable property. The degree, manner, extent and strength of attachment of the chattel to the earth or building were the main features to be recorded. Thus, the Court concluded that a centerless bar turning machine measuring 80’ in length and 10’ in width and 5’ height embedded to the earth by mounting the same on a cement base and fastened to it with bolts and nuts could not be called as immovable property.

The Central Board of Excise and Customs had, under the erstwhile, Central Excise Act 1944, after considering several Court decisions (including some of those mentioned above), clarified vide Order No. 58/1/2002 – CX that:

(A)    If items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B)    If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

(C)    The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are moveable or immovable.

The CBEC also issued clarifications for specific items:

(i)    Turn key projects like Steel Plants, Cement plants, Power plants, etc. involving supply of large number of components, machinery, equipments, pipes and tubes, etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site, will not be considered as excisable goods.

(ii)    Huge tanks made of metal for storage of petroleum products in oil refineries or installations: These tanks, though not embedded in the earth, are erected at site, stage by stage, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are therefore not moveable.

(iii)    Refrigeration/Air conditioning plants: These are basically systems comprising of compressors, ducting, pipings, insulators and sometimes cooling towers, etc. They are in the nature of systems and not machines as a whole. They come into existence only by assembly and connection of various components and parts. The refrigeration/air conditioning system as a whole cannot be considered to be goods.

(iv)    Lifts and escalators: Lifts and escalators which are installed in buildings and permanently fitted into the civil structure cannot be considered to be goods.

DECISION IN DANKUNI’S CASE

The Supreme Court considered the various statutory definitions of the term immovable property as well as its own decision in Duncans (supra). It also considered the sale deed in the present case. Accordingly, it was clear from the sale deed itself, that the total sale consideration was Rs. 8.35 cr., for the land, building, civil works, plant and machinery and current assets, etc. However, what had been done was that an amount of Rs.1.01 cr. had been taken as the value of the land, building and civil works. The Court held that what was purported to be conveyed, was, the land as defined in the Sale Deed and land was immovable property. However, Immovable property was defined in the General Clauses Act, 1897 as ‘including land, benefits to arrive out of land and things attached to the earth or permanently fastened to anything attached to the earth’. When it came to the definition of ‘immovable property’ in the Transfer of Property Act, it is defined as ‘not including standing timber, growing crops or grass’. In the Registration Act, 1908, immovable property included, apart from land and buildings, things attached to the earth or permanently fastened to anything attached to the earth but not including standing timber, growing crops or grass. In this respect, the Supreme Court made a useful reference to section 8 of the Transfer of Property Act which declared that in the absence of an express or implied indication, a transfer of property passed to the transferee all the interests, which the transferor was capable of passing in the property and in the legal incidents thereof. Such incidents included, inter alia, where the property was land, all things attached to the earth. Accordingly, the Apex Court laid down a very important principle, that when the property was machinery attached to the earth, the movable parts thereof also were comprehended in the transfer.A proper reading of the Sale Deed, indicated that what was conveyed was rights over the scheduled property, which, no doubt, was the land but it also included all the rights, easements, interests, etc., i.e., the rights which ordinarily passed on such sale over the land. The Court held that it was from a reading of this deed in conjunction with section 8 of the Transfer of Property Act that the intention of the parties become self-evident that the vendor intended to convey, all things, which inter alia stood attached to the earth. The mere fact that there was no express reference to plant and machinery in the Sale Deed did not mean that the interest in the plant and machinery which stood attached to the land was not conveyed. It held that the buyer had only considered value of the land, building and civil works and this was done to tide over the liability to stamp duty for what was actually, in law, conveyed. Thus, the Court concluded that it was clear that the sale deed operated to convey the rights over the plant and machinery as well, which were comprised in the land mentioned in the sale deed. However, it added that as far as plant and machinery was concerned, it would be only that which was permanently embedded to the earth and answering the description of the immovable property as defined above. Accordingly, the stamp duty valuation should be recomputed on that basis.

EPILOGUE

Apparently, the quote “What’s in a Name?” would hold true in this case. Even if an asset is called movable property, if it answers the description of immovable property, then instruments dealing with it would be subject to stamp duty accordingly. In this case, a “Rose by any other name would smell as sweet!” Although one may hasten to add that here, the smell would be far from sweet due to the higher stamp duty incidence.

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

9. PCIT – 6 vs. Kimberly Clark Lever Pvt Ltd
[ITA No. 123 Of 2018,
Dated: 7th June, 2023. (Bom.) (HC).]

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

The assessee is engaged in the business of manufacturing diapers and sanitary napkins. It also markets consumer tissue products and had filed a return of income declaring total income at Rs.30,01,43,006 on 31st October, 2007 for the A.Y. 2007-08.

The return of income was processed under section 143(1) of the Income Tax Act, 1961 (the Act). The AO made reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26th October, 2009. The TPO passed an order under section 92CA(3) of the Act on 29th October, 2010 making an adjustment on account of arms’ length price of the international transaction at Rs.12,17,43,370. The AO recorded reasons for re-opening the assessment and issued notice under section 148 of the Act on 14th January, 2011. The assessee vide its letter dated 28th January 2011 objected to the notice. It was the case of the assessee that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order, and hence there was no reason for re-opening the assessment on the basis of the said order of TPO. The reason why the assessee took this stand was because respondent’s return of income was processed under section 143(1) of the Act and there was no assessment proceeding pending under section 143(3) of the Act during which a reference could be made to the TPO under section 92CA of the Act. Hence, such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment. Admittedly, no notice under Section 143(2) of the Act had also been issued. The AO has in fact admitted that the case was not selected for scrutiny and no notice under section 143(2) of the Act was issued but in view of the findings of the TPO he has re-opened the case for the A.Y. 2007-08.

The assessee contented that where against the return of income filed by the assessee in time, no proceedings were initiated by issuing notice under section 143(2) of the Act, the reference made to the TPO by the AO under section 92CA(1) of the Act was invalid. Consequently, the order passed by the TPO under section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings. Where the AO had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the AO to commence the re-assessment proceedings. In the absence of the same, the assessment proceedings could not be re-opened.

The Honourable Court observed that it is judicially well settled that the belief of the AO that there has been escapement of income must be based on some material on record. There must be some material on record to enable the AO to entertain a belief that certain income chargeable to tax has escaped assessment for the relevant Assessment Year. In this case, the only material relied upon is the order of the TPO.

The issue which arose for consideration is the validity of the assessment proceedings initiated under section 147/148 of the Act. As noted earlier, admittedly reference was made to the TPO for determining the arms’ length price of the international transaction and no notice under section 143(2) of the Act was issued before making the said reference to the TPO. When no assessment proceedings were pending in relation to the relevant assessment year, the AO was precluded from making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arms’ length price in relation to the international transaction.

The entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in Sections 92 to 92F of the Act. Section 92CA of the Act provides that where the AO considers it necessary or expedient so to do, he may refer the computation of arm’s length price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing under section 92CA(3) of the Act determining the arms’ length price in relation to an international transaction. On receipt of this order, Section 92CA(4) of the Act requires the AO to compute the total income of the assessee in conformity with the arms’ length price so determined by the TPO. This means that the determination of the arm’s length price wherever a reference is made to him is done by the TPO under section 92CA(3) of the Act but the computation of total income having regard to the arm’s length price so determined by the TPO is required to be done by the AO under section 92CA(4) r.w.s. 92C(4) of the Act.

Therefore, the process of determination of arm’s length price is to be carried out during the course of assessment proceedings, may it be, under Sub Section (3) of Section 92C of the Act where the AO determines the arm’s length price or under Sub Sections (1) to (3) of Section 92CA of the Act, where the AO refers the determination of arm’s length price to the TPO. Reference may also be made to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, it is prescribed that the AO shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that the AO is obligated to compute any income arising from an international transaction of an assessee with associated enterprises, having regard to the arm’s length price.

The occasion which requires the AO to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The Central Board of Direct Taxes (CBDT) in Instructions No. 3 dated 20th May, 2003 has also stated that a case is to be selected for scrutiny assessment before the AO may refer the computation of arm’s length price in relation to an international transaction to the TPO under Section 92CA of the Act.

Therefore, the Honourable Court upheld the proposition that an AO can make reference to the TPO under section 92CA of the Act only after selecting the case for scrutiny assessment. The instructions of CBDT are also a pointer to the legislative import that the reference to the TPO for determining the arm’s length price in relation to an international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. Therefore, the Tribunal was correct to hold that when reference was made to the TPO by the AO for determination of arm’s length price in relation to the international transaction, when no assessment proceedings were pending, was an invalid reference. Consequently, the subsequent order passed by the TPO determining the assessment to the international transaction was a nullity in law and void ab initio. In view thereof, the AO could not have relied upon an order of the TPO which is a nullity to form a belief that certain income chargeable to tax has escaped the assessment for the relevant Assessment Year.

In view of the above, the revenue’s Appeal was dismissed.

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

8 Pr. CIT – 2 vs. Bank of Baroda
[ITA NO. 100 OF 2018,
Dated: 07/06/2023, (Bom.) (HC)]
[Arising from ITA No 3432/MUM/2014,
Bench: E Mumbai; dated: 9th November, 2016; A.Year: 2007-08 ]

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

The Assessee had filed return of income on 30th October, 2007 for A.Y. 2007-08 declaring total income of Rs. 997,10,30,681. Subsequently, a revised return declaring an income of Rs. 615,19,97,000 was filed on 19th March, 2009. The assessment was completed under section 143(3) of the Income Tax Act, 1961 (the Act) on 23rd March, 2009 assessing total income at Rs.1904,69,88,000. The Assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in the favor of the assessee. An effect to the CIT(A) order has been given by the AO on 7th March, 2012 resulting in revised income being accepted at Rs. 968,38,10,000. This resulted in a refund of Rs. 377,95,44,631.

On verification of the records, the PCIT noticed that the AO had failed to conduct proper enquiries and examine the issues in an appropriate manner. This gave rise to an erroneous assumption in as much as in the original return the assessee had claimed a refund of Rs. 21,19,54,764 as against the claim of refund of Rs. 337,74,22,347 in the revised return. The PCIT felt that the delay in claiming enhanced refund was attributable to the assessee and accordingly interest under section 244(A) of the Act was not allowable on the refund of Rs. 125,54,67,583 for 11 months, i.e., from 1st April, 2008 to 19th March, 2009. According to the PCIT, this resulted in an excess allowance of interest of Rs. 9,81,31,689. Consequently, a notice under section 263 of the Act was issued. The Assessee appeared, made submissions and PCIT passed an order which was impugned by assessee before the ITAT. The ITAT allowed the appeal vide order dated 9th November, 2016. It followed the coordinate Bench decision on the issue in case of State Bank of India vs. DCIT (ITA No 6817&6823/M/2012, A.Y. 2001-02 and ITA No 6818 & 6824, A.Y. 2002-2003)

Sub Section (2) of Section 244(A) of the Act reads as under:

(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final.

The Honourable Court observed that as per the provision if the proceedings resulting in the refund are delayed for the reasons attributable to the assessee, the period of delay so attributable to the assessee shall be excluded from the period for which interest is payable. The Court noted that there were no findings of the PCIT as to how the assessee delayed the proceedings that resulted in the refund or what reasons could be attributable to the assessee. It was true that assessee had initially filed return of income on 30th October, 2007, declaring total income of Rs. 997,10,30,681, and subsequently on 19th March, 2009 a revised return declaring an income of Rs. 615,19,97,000 was filed. The assessment was completed under section 143(3) of the Act on 23rd March, 2009 assessing the total income at Rs. 1904,69,88,000. Against the assessment order, the assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in favour of the assesse. In giving effect to CIT(A)’s order, the AO on 7th March, 2012 granted a refund of Rs. 377,95,44,631. Therefore it cannot be stated that proceedings resulting in the refund were delayed for reasons attributable to assessee wholly or in part.

The Court observed that, the ITAT has also, relied on a judgment in the State Bank of India vs. DCIT-2 (supra) case and come to a conclusion that the order passed by the AO was neither erroneous nor prejudicial to the interest of revenue, and the AO has allowed the amount of interest in question taking one of the possible views. The Tribunal had held that where two views are possible and the AO takes one of the possible views, the PCIT could not have exercised revisional jurisdiction under section 263 of the Act.

The Honourable Court after perusal of the ITAT order held that the entire issue is fact-based. The Tribunal having come to the factual conclusion on the basis of materials on record, decided that no question of law arises. In view of the same, the revenue’s Appeal was dismissed.

Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search

27. S. M. Kamal Pasha vs. Dy. CIT
[2023] 454 ITR 157 (Kar.)
Date of order: 2nd September, 2022
Sections: 132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search.

Pursuant to a search and seizure conducted under section 132 of the Income-tax Act, 1961 in the residential premises of the assessee, the AO issued notice under section 153A. The assessee declared a total income of Rs. 99,33,890 in his return filed in response to the notice. Thereafter, the AO passed an order assessing the total income at Rs.7,92,57,600.

The Commissioner(Appeals) set aside the order passed under section 153A. The Tribunal allowed the Department’s appeal.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

“The Tribunal was not justified in reversing the order of the Commissioner (Appeals) setting aside the order u/s. 153A when there did not exist any incriminating material found during the search u/s. 132 for issuing notice u/s. 153A. Hence the order of the Tribunal was set aside and the order of the Commissioner (Appeals) was restored.”

Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

26 Dinakara Suvarna vs. DCIT
[2023] 454 ITR 21 (Kar.)
A.Ys.: 2005-06 to 2007-08
Date of order: 08th July 2022
Sections: 69B, 132, 147 and 153C of ITA 1961

Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

The assessee was a contractor. A search was conducted under section 132 of the Income-tax Act, 1961 in the residential premises of one AK and a diary was seized. The diary contained details of payments made by AK to the assessee. Thereafter, on 21st April, 2009, a survey action under section 133A was conducted in the business premises of the assessee, and his statement was recorded wherein the assessee agreed to offer 8 per cent additional receipts as income. However, the assessee did not file his revised return offering additional income.

On 26th March, 2010, the AO issued a notice under section 148 of the Act and called upon the assessee to show cause as to why the amount agreed to be offered to tax was not declared in the return of income. On 12th April, 2010, the assessee filed his return of income and declared the same income as filed in the original return of income. The assessee vide letter dated 30th May, 2010 objected to the reopening on the grounds that there was no reason to believe that the income chargeable to tax had escaped assessment. On 24th December, 2010, the AO passed assessment orders for the A.Ys. 2005-06 to 2007-08 making the additions.

The CIT(Appeals) partly allowed the appeals. The assessee and the Revenue preferred appeals against the said order before the Tribunal. Against the appeal preferred by the Revenue, the assessee preferred cross-objections. The Tribunal partly allowed the appeals and cross-objections filed by the assessee. The appeal preferred by the Revenue for the A.Y. 2007-08 was partly allowed and dismissed the appeals for other years.

The following questions were framed by the Karnataka High Court in the appeal filed by the assessee:

“a)    Whether the Tribunal is correct in law in upholding the action of the Assessing Officer in reopening the assessment u/s. 147 of the Act for the A.Ys. 2005-06, 2006-07 and 2007-08 on the facts and circumstances of the case?

b)    Whether the Tribunal erred in law in not holding that there was no reason to believe that income escaped assessment and all mandatory conditions to reopen the assessment u/s. 147 of the Act were not satisfied on the facts and circumstances of the case?

c)    Whether the Tribunal was correct in law in reversing the deletion made by the Commissioner of Income-tax (Appeals) of the addition u/s. 69B in respect of alleged unexplained investments made in properties of Rs. 28,75,500 for the A.Y. 2007-08 on the facts and circumstances of the case?”

The High Court allowed the appeal and held as follows:

“i) The Tribunal had erred in upholding the reopening of the assessment u/s. 147 for the A.Ys. 2005-06, 2006-07 and 2007-08 and in holding that there was reason to believe that income had escaped assessment and all mandatory conditions to reopen the assessment were satisfied. No proceedings were initiated u/s. 153C. Thus, there was patent non-application of mind. The Assessing Officer had not recorded his satisfaction with regard to escapement of income. The assessee’s admission
during the survey u/s. 133A could not be a conclusive evidence.

ii) The Tribunal had erred in reversing the deletion made by the Commissioner (Appeals) of the addition made u/s. 69B for the A.Y. 2007-08. We have perused the order passed by the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal. It is held therein that the entries in the seized diary could not be relied upon because Smt. Soumya Shetty had passed away and there was no corroborating evidence. The Commissioner of Income-tax (Appeals) has held that it was travesty of justice that the relevant entry has not been used in Shri Ashok Chowta’s case but it has been used in the assessee’s case who is a third party to the proceedings. The Tribunal while reversing the finding of Commissioner of Income-tax (Appeals) has relied upon the signature of the assessee in the seized diary. Admittedly, the author of the diary had passed away. The addition has been made in the case of the assessee based on the entries in the diary but the said entries have not been used in the case of Shri Chowta. As recorded hereinabove, the Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. has held that admission is an important piece of evidence but it cannot be said to be conclusive. Shri Chandrashekar also placed reliance on CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad) and contended that a statement recorded u/s. 133A of the Act is not given any evidentiary value because the officer is not authorised to administer oath and to take any sworn statement. Therefore, in view of the fact that the author of the diary had passed away and relevant entry has not been used in the case of Shri Chowta himself, reversing the findings of the Commissioner of Income-tax (Appeals) by the Income-tax Appellate Tribunal is not sustainable.”

Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

25. ACIT Vs. Serajuddin and Co.
[2023] 454 ITR 312 (Orissa)
A. Ys.: 2009-10
Date of order: 15th March, 2023
Sections: 153A and 153D of ITA 1961.

Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

The search and seizure operation was carried out in the case of assessee and various other persons and concerns of the assessee. Subsequently, assessments were completed and orders were passed under section 143(3)/144/153A after making various additions/disallowances.

The assessment orders were challenged in appeal. One of the grounds for challenge was in respect of non-compliance with section 153D which required prior approval of the Additional Commissioner (Addl. CIT). Further, the approval had been granted in a mechanical manner without application of mind. The CIT(A) observed that a consolidated approval order given by the Addl. CIT for A.Ys. 2003-04 to 2009-10 and therefore held, partly allowing the appeal, that it was not necessary for the AO to mention the fact of approval in the body of the assessment order. The Tribunal concluded that the approval was granted without application of mind and the assessment orders were accordingly set aside.

The Orissa High Court dismissed the appeal filed by the Department and held as under:

“i)    Among the changes brought about by the Finance Act, 2007 was the insertion of section 153D of the Income-tax Act, 1961. The CBDT circular dated March 12, 2008 ([2008] 299 ITR (St.) 8) refers to the various changes and, inter alia, also to the insertion of a new section 153D. Even prior to the introduction of section 153D in the Act, there was a requirement u/s. 158BG of the Act, which was substituted by the Finance Act of 1997 with retrospective effect from January 1, 1997, of the Assessing Officer having to obtain previous approval of the Joint Commissioner/Additional Commissioner by submitting a draft assessment order following a search and seizure operation.

ii)    The requirement of prior approval u/s. 153D of the Act is comparable with a similar requirement u/s. 158BG of the Act. The only difference is that the latter provision occurs in Chapter XIV-B relating to “Special procedure for assessment of search cases” whereas section 153D is part of Chapter XIV. A plain reading of section 153D itself makes it abundantly clear that the legislative intent was for the Assessing Officer when he is below the rank of a Joint Commissioner, to obtain “prior approval” before he passes an assessment order or reassessment order u/s. 153A(1)(b) or 153B(2)(b) of the Act.

iii)    An approval of a superior officer cannot be a mechanical exercise. While elaborate reasons need not be given, there has to be some indication that the approving authority has examined the draft orders and finds that it meets the requirement of the law. The mere repeating of the words of the statute, or mere “rubber stamping” of the letter seeking sanction by using similar words like “seen” or “approved” will not satisfy the requirement of the law. This is where the Technical Manual of Office Procedure becomes important. Although, it was in the context of section 158BG of the Act, it would equally apply to section 153D of the Act. There are three or four requirements that are mandated therein: (i) the Assessing Officer should submit the draft assessment order “well in time”; (ii) the final approval must be in writing; and (iii) the fact that approval has been obtained, should be mentioned in the body of the assessment order. The Manual is meant as a guideline to Assessing Officers. Since it was issued by the Central Board of Direct Taxes, the powers for issuing such guidelines can be traced to section 119 of the Act. The instructions under section 119 of the Act are binding on the Department.

iv)    It was an admitted position that the assessment orders were totally silent about the Assessing Officer having written to the Additional Commissioner seeking his approval or of the Additional Commissioner having granted such approval. Interestingly, the assessment orders were passed on December 30, 2010 without mentioning this fact. These two orders were therefore not in compliance with the requirement spelt out in para 9 of the Manual of Official Procedure. The requirement of prior approval of the superior officer before an order of assessment or reassessment is passed pursuant to a search operation is a mandatory requirement of section 153D of the Act and such approval is not meant to be given mechanically. In the present cases such approval was granted mechanically without application of mind by the Additional Commissioner resulting in vitiating the assessment orders themselves.”

Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

24. Dev Multicom Pvt Ltd & Ors vs. State of Jharkhand
[2023] 454 ITR 48 (Jharkhand):
A. Y. 2017-18
Date of order: 28th February, 2022
Sections 276B, 278B and 279(1) of ITA 1961

Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

The assessee had deducted tax at source. However, this tax deducted at source had been deposited with delay. The assessee paid an interest on the delay in depositing of tax deducted at source. Prosecution notices were served on the assesses and complaint was lodged stating that the assessee and its principal officer had deducted tax but failed to credit the same to the account of Central Government and therefore committed offence punishable u/s. 276B of the Income-tax Act, 1961.

The assessee filed petition to quash the complaint. The Jharkhand High Court allowed the petition and held as under:

“i)    Instruction F. No. 255/339/79-IT(Inv.) dated May 28, 1980, issued by the CBDT that prosecution u/s. 276B of the Income-tax Act, 1961 shall not normally be proposed when the amount of tax deducted at source involved or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government. But no such consideration will apply to levy of interest u/s. 201(1A).

ii)    The tax deducted at source in all the cases was deposited with interest by the assessees and there was no reason to proceed with the criminal proceeding after receiving the amount with interest though a delay had occurred in depositing the amount. The continuation of the proceedings would amount to an abuse of the process of the court.

iii)    Apart from one or two cases, the deducted amount was not more than Rs. 50,000. While passing the sanction u/s. 279(1) the sanctioning authority had not considered the Instruction dated May 28, 1980 issued in this regard by the CBDT. Accordingly, the entire criminal proceedings and the cognizance orders in the respective cases passed by the Special Economic Offices whereby cognizance had been taken against the assessees for the offences u/s. 276B and 278B were quashed.”

Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

23. Principal CIT vs. Shalimar Pellet Feeds Ltd
[2023] 453 ITR 547 (Cal)
A. Y. 2008-09 to 2013-14
Date of order: 22nd February, 2022
Section 80-IB of ITA 1961

Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

For the A.Y. 2008-09 to 2013-14, the assessee claimed a deduction under section 80-IB(5) of the Income-tax Act, 1961 on the grounds that the activity of manufacturing poultry feed in their factory was a manufacturing activity. The AO was of the view that there was no manufacturing done and that the assessee only mixed various products, that each one of them had an individual identity and could not be construed to be an input for manufacturing of poultry feed. The AO rejected the asessee’s claim.

The CIT (Appeals) allowed the assessee’s claim and granted deduction. The Tribunal, on the facts and on the grounds that the Central Government had notified the poultry feed industry under section 80-IB(4) affirmed the order of the CIT (Appeals).

The Calcutta High Court dismissed the appeals filed by the Revenue and held as under:

“i)    For the A.Ys. 2008-09, 2009-10 and 2010-11 the appeals were covered by the circular issued by the CBDT and therefore were not maintainable since they involved low tax effect.

ii)    The process undertaken by the assessee in producing the poultry feed amounted to manufacture. The simple test which could be applied was to examine as to whether the individual ingredients which were mixed together to form the poultry feed could be recovered and brought back to their original position. After the process was completed, if such reversal was not possible then the final product had a distinct and separate character and identity. Though the individual ingredients were capable of being consumed by human beings, the end product, namely, the poultry feed could not be consumed by human beings. Therefore, the individual ingredients would lose their identity and get merged with the final product which was a separate product having its own identity and characteristics. Nothing contrary was shown by the Department against the factual findings recorded by the Commissioner (Appeals) after examining the process undertaken by the assessee as affirmed by the Tribunal. The Tribunal was right in confirming the order of the Commissioner (Appeals) granting deduction u/s. 80-IB for the A.Ys. 2011-12, 2012-13 and 2013-14.”

Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

22. Principal CIT vs. Brahmaputra Cracker & Polymer Ltd
[2023] 454 ITR 202 (Gau):
A. Ys. 2011-12, 2014-15 and 2015-16
 Date of order: 12th April, 2023
Section 4 of ITA 1961

Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

The assessee received a capital subsidy from the Ministry of Chemicals and Fertilizers for setting up Integrated a Petro-Chemical Complex. The assessee maintained a separate bank account for such capital subsidy and any excess amount not being utilised was temporarily parked in short-term deposits in banks and interest was earned thereupon. The assessee made these deposits in accordance with the guidelines of the Department of the Public Enterprises. Clarifications were received from the Ministry of Chemicals and Fertilizers indicating that the interest earned on the aforesaid deposits shall be treated as a part of the capital subsidy and will reduce the part of capital subsidy sought from the Government. The assessee claimed these receipts as capital receipts in the return of income. The AO treated these receipts as revenue receipts chargeable to tax.

The CIT(A) allowed the appeal of the assessee. The Tribunal dismissed the appeal of the Department.

The Gauhati High Court dismissed the appeal filed by the Department and held as under:

“Interest received by the assessee from short-term deposits made out of unutilized capital subsidy, unutilized debt funds, and unutilized equity funds received as capital during the formative years till the project was completed was rightly claimed by the assessee as capital receipts. No question of law arose.”

Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

21. Inox Wind Energy Ltd vs. Addl./Joint/Deputy/Asst. CIT/ITO
[2023] 454 ITR 162 (Guj.)
A. Y. 2018-19
Date of order: 31st January, 2023
Section: 143 of ITA 1961

Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

IR was incorporated on 11th October, 2010 under the Companies Act. For the A.Y. 2018-19 the return of income was filed declaring the total income at nil. The case was selected for scrutiny and the notice under section 143(2) of the Income-tax Act, 1961, was issued on 23rd September, 2019. Pending this assessment, on 25th January, 2021, the composite scheme of arrangement between IR and GFL and the assessee-company was approved by the National Company Law Tribunal and the appointed date for the merger of IR and GFL was fixed on 1st April, 2010 and demerger of the energy business to the assessee-company was from 1st July, 2020. The scheme since came into operation from 9th February, 2021, and the jurisdictional AO received the intimation through e-mail on 10th March, 2021. The assessee informed the respondent about the sanction of the composite scheme on 31st August, 2021 and on 19th September, 2021. Notices continued to be issued in the name of erstwhile company IR, which no longer existed from 1st April, 2020. The show-cause notice-cum-draft assessment order was also issued on 23rd September, 2021. Therefore, on 25th September, 2021, once again the assessee intimated and objected to the notice. However, an order was passed under section 143(3) r.w.s.144B of the Act, assessing the income in the name of IR for the A. Y. 2018-19.

The Gujarat High Court allowed the writ petition challenging the validity of the assessment order and held as under:

i)    The assessment in the name of a company which has been amalgamated and has been dissolved is null and void and framing of assessment in the name of such companies is not merely a procedural difficulty, which can be cured.

ii)    The amalgamated company had already brought the facts of amalgamation to the notice of the AO and yet he chose not to substitute the name of the amalgamated company and proceeded to make the assessment in the name of a non-existing company thereby rendering it void. The assessment framed in the name of the non-existing company requires to be quashed.

iii)    While disposing of this petition, as a parting note, it is being observed that this order of quashment against the non-existing company will not preclude the authorities to initiate actions, if permitted under the law against the amalgamated company.

Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

18 Trivitron Healthcare (P.) Ltd. vs. PCIT
[2022] 98 ITR(T) 105 (Chennai – Trib.)
ITA No.:97 (CHNY.) OF 2021
A.Y.: 2015-16
Date of order: 24th June, 2022

Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

FACTS

The assessee company was engaged in the business of manufacturing  diagnostic equipment. During the year, Kiran Medical System Pvt Ltd (KMSPL), which was a wholly-owned subsidiary of the assessee, had amalgamated with the assessee company and the entire assets of the amalgamating company were taken over by the assessee company. The assessee company treated the difference between net-value of assets of the amalgamating company and the value of investments in the shares of the amalgamating company, as goodwill arising on amalgamation and claimed depreciation on same as applicable to intangible assets.

The AO accepted depreciation on goodwill claimed by the assessee. Subsequently, the case was taken up for revision proceedings by the PCIT on the grounds that the AO had allowed depreciation on goodwill even though 5th proviso to section 32(1) had very clearly restricted claim of depreciation to successor company on amalgamation, as if such succession had not taken place.

Aggrieved by the order of PCIT, the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the fifth proviso to section 32(1) was inserted by the Finance Act, 1996, to restrict the claim of aggregate deduction which was evident from memorandum of the Finance Bill of 1996. As per the same, in case of succession in business and amalgamation of companies, the predecessor of business and successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets which in aggregate cannot exceed depreciation allowance in any previous year at prescribed rates. Therefore, it was proposed to restrict aggregate deduction in respect of depreciation during a year at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of fifth proviso to section 32(1), it was very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company were acquired by amalgamated company, then while claiming depreciation after amalgamation, the amalgamated company can claim depreciation only on the basis of the number of days a particular asset were used by them. Therefore, the said proviso only determines the amount of depreciation to be claimed in the hands of predecessor/amalgamating company and in the hands of successor or amalgamated company only in the year of amalgamation based on date of such amalgamation. However, it did not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it was very clear from fifth proviso to section 32(1), that effectively, scope of the said proviso was narrow as could be culled out for the purpose for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, fifth proviso to section 32(1)  was restricted to assets which belong to the amalgamating company and its application would not be extended to the assets which arise in the course of amalgamation to the amalgamated company.

The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets generated in the course of succession. It was very clear from the proviso that it referred to depreciation allowable to the predecessor and successor in the case of succession, and this should be understood as a reference to the assets that belong both to the predecessor and successor, and which  once belonged to the predecessor company. It did not apply to the assets generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In considered view, the fifthproviso applied only to those assets which commonly exist between predecessor and successor, however, it did not apply to an asset which has been created or acquired after amalgamation. The creation of the new asset by virtue of amalgamation like goodwill completely go out of reckoning of said proviso and thus, basis of PCIT to invoke his jurisdiction under section 263 was incorrect.

In the instant case, there was no dispute with regards to the fact that goodwill does not exist in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by assessee was first time recognised in the books of account of amalgamated company in a scheme of amalgamation approved by the High Court. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified as per which transferee company shall account for merger in its books of account as per ‘purchase method’ of accounting prescribed under Accounting Standard-14 issued by Institute of Chartered Accountants of India (ICAI). As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in the net-asset value of the transferee company, after reducing the aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date, is to be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortised in the books of transferee company as per principles laid down in Accounting Standard-14. Therefore, from the scheme of amalgamation and Accounting Standard-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of ‘purchase method’, then excess consideration paid over and above net-asset value of transferor company shall be treated as goodwill and can be amortized in the books of account of the transferee company.

In this case, net asset value of the transferor company (amalgamating company) was at Rs. 42.66 crores. Further, value of investments of transferee company i.e., in the instant case, the value investment of the assessee company in the shares of transferor company (in the present case amalgamating company) was at Rs. 114.30 crores. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between the net-asset value of amalgamating company and the value of investment held by amalgamated company would become goodwill in the books of account of the transferee company. In the instant case, the difference between net-value of assets of amalgamating company and the value of investments held by amalgamated company was at Rs. 71.63 crores and the same would become goodwill in the books of account of amalgamated company. Therefore, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company was nothing but the purchase of goodwill and, thus, the assessee had rightly claimed depreciation on said goodwill in terms of section 32(1).

In this view of the matter and considering facts and circumstances of the case, the assessment order passed by the AO under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had assumed jurisdiction under section 263 on the sole basis of application of 5th proviso to section 32(1), towards depreciation on goodwill. In view of the factual matrix and non-applicability of the fifth proviso to section 32(1), to the facts of the instant case, there cannot be an error in relation to the view taken by the AO while framing the original assessment. Therefore, in absence of any such error in the assessment order, assumption of jurisdiction under section 263 by the PCIT should be reckoned as invalid. Hence, the order passed by him under section 263 was quashed.

Loan – Whether A Capital Asset?

ISSUE FOR CONSIDERATION

Lending of money on interest or otherwise to other persons, on request or otherwise, in the course of business or as an investment, is normal. Some of the money so lent at times becomes bad and irrecoverable, besides inability of recovery of interest.

In such circumstances, the issue that arises for consideration is whether the loan is a capital asset within the meaning of section 2(14) of the Income tax Act. The definition includes property of any kind including the right, title and interest in property. Is loan not a property and a capital asset? Is it not an asset even under popular parlance? The case of the lender to hold it as a capital asset seems better.

The additional issue that arises is whether on recovery of loan becoming bad, whether there arises a transfer within the meaning of the term under section 2(47) of the Act. Can it be said that on write-off of the loan, there is a relinquishment or extinguishment of the asset or the right therein? Is it possible to hold that there is a transfer even where legal steps are not taken or where taken but not concluded against the lender? Will the claim of the tax payer for loss and its set-off be better in cases where a loan or a deposit or advance is exchanged for another asset or similar product or where it is assigned or transferred in the course of an amalgamation?

Is the amount invested in financial small savings instruments such as Kisan Vikas Patra a capital asset and whether on its redemption or maturity a transfer happens, entitling the investor to claim the benefit of indexation of the cost of investment?

The issues definitely are interesting and of importance, and have been presented before the courts for adjudication, resulting in conflicting views. A decade ago, the Bombay High Court held that the loss arising on the loans turning irrecoverable was not allowable under the head capital gains. A later decision of the same Court however has held that such a loss arising on assignment was allowable under the head capital gains.

CROMPTON GREAVES LTD.’S CASE

The issue had first come up for consideration of the Bombay High Court in the case of Crompton Greaves Ltd. vs. DCIT [2019] [2014] 50 taxmann.com 88.

In this case, the assessee was a company carrying on the business of manufacturing transformers, switch gears, electrical products, home appliances, etc. It was to receive amounts of Rs.17,87,31,508 and Rs. 17,25,46,484 from M/s Bharat Starch Industries Ltd and M/s JCT Ltd, respectively. Against the said dues, it had received shares worth of Rs. 60,00,000 only from M/s Bharat Starch Industries Ltd. Therefore, during the previous year relevant to the assessment year 2002-03, it had written off balance of Rs. 34,52,77,992, and claimed it as a capital loss, carried forward for set-off in subsequent years. The said write-off was in the course of schemes of arrangement, which were subsequently sanctioned by the Gujarat and Punjab and Haryana High Courts, respectively.

The AO rejected the claim of the assessee, by holding that in order to be eligible to carry forward of the capital loss, there should be a capital asset as defined in section 2(14) and the same should have been transferred in the manner as defined in section 2(47). Since, in his view, the deposits or advances given to M/s JCT Ltd. and M/s Bharat Starch Industries Ltd. written off were not capital assets nor was there any transfer, no capital loss was allowed to be carried forward to the subsequent year.

The CIT (Appeals) also held that the loss incurred by the appellant-assessee was not a capital loss in relation to the transfer of an asset. He agreed with the AO and held that the loss has been rightly determined as a capital loss.

Upon further appeal, the Tribunal concluded that it was clear that the loans were not given in the ordinary course of business. The assessee’s claim that the loan was in the form of an inter-corporate deposit, which was a case of capital asset and had been transferred, was also rejected by the Tribunal. The Tribunal found that there was no evidence to show that it was a case of an inter-corporate deposit, because before the AO, it was claimed that the loss was on account of writing off of the advances given to M/s Bharat Starch Industries Ltd and M/s JCT Ltd. There was no material to show that a case of intercorporate deposit had been made out. The loans, therefore, could not be termed or construed as capital assets.

Agreeing with the finding of the Tribunal, the High Court held that the said findings of fact rendered in the peculiar factual backdrop did not give rise to any substantial question of law. Thus, the High Court did not entertain the appeal filed by the assessee.

However, in fairness, the High Court dealt with the judgment cited before it in support of the argument that the definition of “capital asset” in section 2(14) of the Income-tax Act, 1961, was wide enough to include even an advance of money. The Bombay High Court held that the judgment of the Supreme Court in the case of Ahmed G.H. Ariff vs. CWT [1970] 76 ITR 471 (SC), was in the context of the provisions in the Wealth-tax Act, 1957. The question raised before the Supreme Court was that the right of the assessee to receive a specified share of the net income from the estate in respect of which wakf-alal-aulad has been created, was an asset assessable to wealth-tax. It was in that context that the definition of the term “asset” as defined in section 2(e) of the Wealth-tax Act, 1957, and section 6(dd) of the Transfer of Property Act were referred to. All conclusions which had been rendered by the Supreme Court, must be, therefore, read in the peculiar factual situation and circumstances. In dealing with the argument that the right claimed of the nature could not be termed as property, the Supreme Court had held that “property” was a term of the widest import and subject to any limitation which in the context was required. It signified every possible interest which a person could clearly hold and enjoy. On this basis, the High Court held that this decision of the Supreme Court was not relevant for the assessee’s case.

With respect to the decision of the Gujarat High Court in the case of CIT vs. Minor Bababhai [1981] 128 ITR 1 (Guj) which was cited before the Bombay High Court, it was held that it could not assist the assessee, because in the said case, there was no controversy that what was before the authorities was a claim in relation to capital asset. Further, it was also observed by the Court that what was argued before the lower authorities was that the loss of advance was a capital loss in relation to transfer of capital asset, and now what had been argued was that the advances were not as such but intercorporate deposits (ICDs). It was in relation to this alternative argument that the judgment of the Gujarat High Court was cited before the Court. In view of this, it was held that the said judgment was of no assistance as the issue advanced did not arise for determination and consideration of the lower authorities.

On this basis, the High Court dismissed the appeal of the assessee, by holding that it did not give rise to any substantial question of law.

SIEMENS NIXDORF INFORMATION SYSTEMSE GMBH’S CASE

The issue, thereafter, came up for consideration once again before the Bombay High Court in the case of CIT vs. Siemens Nixdorf Information Systemse GmbH [2020] 114 taxmann.com 531.

In this case, under an agreement dated 21st September, 2000, the assessee company had lent an amount of €90 lakhs to its subsidiary, Siemens Nixdorf Information Systems Ltd (SNISL). SNISL ran into serious financial troubles and it was likely to be wound up. Therefore, the assessee sold its debt of €90 lakhs receivable from SNISL to one Siemens AG. The difference between the amount which was lent to SNISL and the consideration received upon its assignment to Siemens AG was claimed as a short-term capital loss in assessment year 2002-03.

The AO disallowed the said short-term capital loss on the grounds that the amount of €90 lakhs lent by the assessee to its subsidiary SNISL was not a capital asset under section 2(14) and also that no transfer in terms of Section 2(47) had taken place on its assignment. Upon further appeal, the CIT (A) held that, although the assignment of a debt was a transfer under section 2(47) of the Act, but it was of no avail, as the loan being assigned/transferred, was not a capital asset. Thus, he confirmed the disallowance made by the AO.

On further appeal, the Tribunal held that in the absence of loan being specifically excluded from the definition of capital assets under the Act, the loan of €90 lakhs would stand covered by the meaning of the word ‘capital asset’ as defined under section 2(14) of the Act. The term ‘capital asset’ was defined under section 2(14) to mean ‘property of any kind held by an assessee, whether or not connected with his business or profession’, except those which were specifically excluded in the said section. The word ‘property’ had a wide connotation to include interest of any kind. The Tribunal placed reliance upon the decision of the Bombay High Court in the case of CWT vs. Vidur V. Patel [1995] 79 Taxman 288/215 ITR 301 rendered in the context of Wealth Tax Act, 1957 which, while considering the definition of ‘asset’, had occasion to construe the meaning of the word ‘property’. It held the word ‘property’ to include interest of every kind. In view of this, the Tribunal held that the assessee was entitled to claim short-term capital loss on assignment/transfer of the SNISL loan to Siemens AG.

1   In this case, it was held that the amount standing to the credit of the assessee in the compulsory deposit account was an 'asset' within the meaning of section 2(e) of the Wealth-tax Act.

Before the High Court, the revenue contended that the loan of €90 lakhs was not a capital asset in terms of Section 2(14) of the Act. Further, it was submitted that reliance placed upon the decision in the case of Vidur V. Patel (supra) was not proper for the reason it was rendered in the context of a different Act i.e. the Wealth Tax Act, 1957. Thus, it could not have application while dealing with the Income-tax Act.

The High Court held that section 2(14) of the Act has defined the word ‘capital asset’ very widely to mean property of any kind. Though it specifically excluded certain properties from the definition of ‘capital asset’, the revenue had not been able to point out any of the exclusion clauses being applicable to advancement of a loan. It was also not the case of the revenue that the said amount of €90 lakhs was a loan/advance in the nature of trading activity.

In so far as the reliance placed by the tribunal on the decision of Vidur V. Patel (supra) was concerned, the High Court noted that the revenue had not been able to point out any reason to understand meaning of the word ‘property’ as given in section 2(14) of the Act differently from the meaning given to it under section 2(e) of the Wealth Tax Act, 1957. The High Court disagreed with the contention of the revenue that the said decision should not be considered as relevant, merely because it was under a different Act, when both the Acts were cognate.

Further, the High Court referred to the decision in the case of Bafna Charitable Trust vs. CIT [1998] 101 Taxman 244/230 ITR 864 (Bom.)2  which was rendered in the context of capital assets as defined in section 2(14) of the Act and it was held that property was a word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. On this basis, the High Court held that loan given to SNISL would be covered by the meaning of ‘capital asset’ as given under section 2(14) of the Act. The High Court declined to entertain the question of law framed in the appeal before it, on the grounds that it did not give rise to any substantial question of law.

2.  In this case, it was held that advancing of money on English mortgage could be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A).

OBSERVATIONS

A loan or a deposit or an advance or an investment is a case of an asset for finance personnel and so it is for an accountant. It was also an asset for the purpose of the levy of wealth tax till such time it was leviable. The dictionary meaning of an asset includes any one or all of them, and so it is in popular parlance.

Capital Asset under the Income-tax Act, 1961 is defined under section 2(14) of the Act. While expressly excluding many items, it is inclusively defined to include property of any kind. Section 2(14) surely does not exclude a loan or a deposit or such other assets from its domain. In the above understanding, is it possible to contend that a loan is an asset but is not a capital asset? We think not. The term “capital” is perhaps used to isolate a trading asset from the other assets. It would not be possible to exclude an asset from section 2(14) once it is a property of any kind, unless it is one of the assets that are specifically excluded.

A loan, like many other assets or properties, is transferable or assignable; it is an actionable claim under the Transfer of Property Act; a lender can relinquish or release his rights to recover the same. All in all, it has all the characters of a capital asset.

A gain or loss arises under the Act only where a capital asset is transferred. The term “transfer” is inclusively defined in section 2(47) of the Act. An act of assignment of a loan is a transfer. In some cases, the loan becoming irrecoverable may be regarded as extinguishment or relinquishment. For this, support can be drawn from the decision of the Supreme Court in the case of CIT vs Grace Collis 248 ITR 323 (SC), where the Supreme Court, in the context of extinguishment of shares, held:

“The definition of ‘transfer’ in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. One should not approve the limitation of the expression ‘extinguishment of any rights therein’ to such extinguishment on account of transfers, nor can one approve the view that the expression ‘extinguishment of any rights therein’ cannot be extended to mean extinguishment of rights independent of or otherwise than on account of transfer. To so read, the expression is to render it ineffective and its use meaningless. Therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer.”

A loan can be exchanged for any other asset, including the shares of company or a promissory note and even a new loan. A contract to exchange is governed by the Indian Contract Act or the Transfer of Property Act or other relevant statutes.

In the above understanding and settled position in law, it is appropriate to hold that a gain or loss arising on transfer of a loan, is taxable under the head capital gains and likewise, a loss arising on its transfer will be eligible for the prescribed treatment under sections 70 to 79 of the Act.

In fact, the Mumbai Tribunal, in the dissenting case of Crompton Greaves Ltd. (supra), agreed that the company could not establish that the asset in question was not an inter-corporate deposit; had the company done so, the decision may have been different. The Tribunal also observed that the treatment could have been different for a loan advanced in the course of business. Importantly, the case of the company for a claim under sections 70 to 79 was better, in as much as the assets in question (loans) were extinguished and in lieu thereof, shares of the amalgamated company were issued in the course of amalgamation of the companies under the Court’s order.

In our considered opinion, there at least was a substantial question of law that required the High Court’s consideration. It seems that the later decision of the same Court has settled the controversy in favour of the allowance of the loss on transfer of the loan or such investments.

Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

17. Smt. Sanjeet Kanwar vs. Income-tax Officer
[2022] 98 ITR(T) 12 (Amritsar – Trib.)
ITA No.:67 (ASR.) of 2019
A.Y.: 2015-16
Date of order: 30th June, 2022

Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

FACTS

The return of income was filed on 3rd December, 2015 declaring a total income of Rs. 2,69,600. Subsequently, the case was selected for limited scrutiny under CASS for cash deposits in bank accounts being more than the turnover. The assessee and her husband appeared before the AO and submitted that the cash sales during the year was Rs. 8,31,625 and profit shown under section 44AD was Rs. 66,531. All the cash sales and purchases were first accounted in business cash account by the assessee and out of which the cash was deposited in the bank. The total cash deposits during the year were Rs. 8,57,000 out of which cash sales were Rs. 8,31,625. The excess amount of Rs. 25,375 was deposited out of profits earned by the assessee during the year. The Assessee submitted that the AO cannot blow hot and cold because at one hand he had accepted assessee’s returned income and on the other hand he had made addition of Rs. 8,57,000. The said amount had arisen out of cash sales of Rs. 8,31,625 and balance cash of Rs. 25,375 out of total profit shown amounting to Rs. 66,531.

The AO thereafter proceeded to frame the assessment under section 143(3) of the Act. Thereby, he made addition of Rs. 8,57,000 being the cash deposited in the bank account of the assessee.

Aggrieved against this, the assessee preferred appeal before CIT (A) who after considering the submissions and perusing the material available on record dismissed the appeal of the assessee and sustained the impugned addition.  Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the authorities ought to have given a clear finding regarding withdrawals made by the assessee during the year under consideration. Since there were debit entries in the bank statement of the assessee then the addition of entire deposits as unexplained was not justified. The assessee deserved to get the benefit of telescoping and the entire addition would not survive. The AO was directed to delete the addition.

Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified

16. R. S. Diamonds India (P) Ltd  vs. ACIT
[2022] 98 ITR(T) 505 (Mumbai – Trib.)
ITA No.: 2017 (MUM.) OF 2021
A.Y.: 2017-18
Date of order: 26th July, 2022

Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified.

FACTS

The assessee was engaged in the business of trading in diamonds. The AO noticed that the assessee had deposited a sum of Rs. 45 lakhs into its bank account during demonetisation period. In respect of the said amount, the assessee had furnished an explanation that the said amount represented cash balance available in its books of accounts which included advance received from the customers towards sale over the counter. The AO asked the assessee to provide details of customers who had given these advances. It was explained that each sale made to the customer was less than Rs. 2 lakh, and hence it had not collected complete details of the customers. The AO took the view that the assessee had failed to prove cash deposits made by it during the demonetisation period. Accordingly, he treated the cash deposits of R45 lakhs as unexplained cash deposits and assessed the same as income of the assessee under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”].

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

Aggrieved by the order of CIT (A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that deposit made into the bank account was from out of the books of accounts and the said deposits had been duly recorded in the books of accounts which were not disputed. Reliance was placed on the judgment in the case of Lakshmi Rice Mills vs. CIT [1974] 97 ITR 258 (Patna) wherein it was held that when the books of accounts of the assessee were accepted by the revenue as genuine and cash balance shown therein was sufficient to cover high denomination notes held by the assessee then the assessee was not required to prove the source of receipt of said high denomination notes which were legal tender at that time. Reliance was also placed on the judgment in the case of ACIT vs. Hirapanna Jewellers [2021] 189 ITD 608 (Visakhapatnam – Trib.) wherein it was held that when the cash receipts represented the sales been duly offered for taxation then there was no scope for making addition under section 68 of the Act in respect of deposits made into the bank account.

Accordingly, it was held that the addition of Rs. 45 lakhs made in the hands of the assessee was not justified since the said deposits had been made from the cash balance available in the books of accounts. Consequently, the order passed by the CIT (A) on this issue was set aside and the AO was directed to delete the addition of Rs. 45 lakhs.

In result the appeal filed by the assessee was allowed.

Impact of Technology on Economic Growth of India

A year ago, I was travelling in the US with a friend of mine. At one of the airports, we had to produce our Covid vaccination certificates. My American friend took out a soiled folded paper and produced it to the medical officer with a lot of disgust; while I just got my e-copy of the certificate, and both of them were quite impressed by India’s use of technology, something that developed country like the USA has not managed to achieve. Right from healthcare to EVMs, we seem to have used technology successfully not only for elites but also for 1.4 billion of the masses. I can say today proudly that India is known today for the use of technology for the masses. JAM1 is the classic buzzword around the globe to underline India’s use of technology for the economic upliftment of people. When we talk about technology, it’s not just Information Technology, but we are talking about Biotechnology, Nano Technology, Robotics, AI, ML, Block Chain, Augmented Reality, 3D printing and so on. It is a known fact that in the current era of knowledge economy, the only factor that will push the economy is the correct use of technology, not only for the select groups, but for masses of the country. In this article, we will see the amazing impact technology had on the Indian economy in the past decade. We will also discuss emerging technologies and their impact on our economy and our lives. We will see the impact on the Service sector, Manufacturing and Agriculture sectors, which together make our Gross Domestic Product (GDP). Economic growth is measured today mainly in terms of GDP growth. Yet there are a number of social and ESG (Environment, Social and Governance) factors that determine economic growth. Economic growth is sought to be achieved with balanced growth. Balance in terms of geographies, different classes of masses, employment generation ability of economy, spending on education and healthcare etc. If a country has imbalanced geographic growth, it may create social issues. Growth with increased unemployment is not considered healthy. An increase in GDP should enable governments to spend more on the education and healthcare of citizens to enable them to enjoy the fruits of the growth. Thus, it’s not merely the numbers of GDP growth that decide economic growth but carries a much wider perspective.
1. 1. JAM (abbreviation for Jan Dhan-Aadhaar-Mobile) trinity is the initiative by the Government of India to link Jan Dhan accounts, Mobile numbers and Aadhar cards of Indians to directly transfer subsidies to intended beneficiaries and eliminate intermediaries and leakages.

Last hundred years, there is tremendous growth in the application of innovations and technologies for the betterment of people and in improving the economic growth of countries. A million years back, ‘fire’ was considered as a revolution of technology, and humans started ‘cooking’ food on fire and used it for protection. We still use fire to cook our food and rely on the same age-old technology, though the sources of fire have changed. During the Neolithic Period, around 15000 years ago, several key technologies arose together. We moved from getting our food by foraging to getting it through agriculture. People came together in larger groups. Clay was used for pottery and bricks. Clothing began to be made of woven fabrics. The wheel was also likely invented at this time. In 950 AD, windmills got into use; in 1044 AD, compass navigated us, and in 1455 AD, Printing technology made a substantial revolution and then came the steam engine in 1765 AD. In 1876, the invention of Telephones changed our communication world, and today with cell phones and broadband and satellite connectivity, geography has become history. The world has come so close that the economies of most countries got interwoven for good and sometimes for bad. In 1937 Computers and in 1947, Transistors changed the world forever and had a deep impact on the economies. The Internet came in 1974, and the term Artificial intelligence (AI) was coined in 2017. Each one of these has impacted the economic growth of countries that adopted these technologies. Rather the difference between developed, developing, and underdeveloped countries depended on the speed and ease at which they adapted the technologies.

And then came the COVID pandemic. It dramatically affected the world economies and changed the way we live and work, and it has forced us to rapidly adopt new technologies to survive the economic effects of the pandemic. Many of them will last long after Covid has passed. We have increased remote working, advanced online learning, and adopted telemedicine to a greater degree, increased e-commerce, contactless payments and entertainment streaming in significant ways.

Technology innovation has advanced significantly in the past two years. To name a few,

  • Artificial Intelligence: AI has continued to advance rapidly, with major breakthroughs in natural language processing, computer vision, and autonomous systems.
  • 5G Technology: The fifth generation of wireless technology promises to be much faster and more reliable than its predecessor, 4G.
  • Internet of Things (IoT): The IoT has continued to expand, with more devices and systems connected to the Internet, allowing for greater automation and control.
  • Cloud Computing: Cloud computing has continued to grow in popularity, providing businesses and individuals with scalable and cost-effective computing power.
  • Blockchain: Blockchain technology has continued to gain traction, with new use cases emerging in areas such as supply chain management, finance, and healthcare.
  • Quantum Computing: Quantum computing has continued to advance, with new breakthroughs in quantum computing hardware and software.

INDIAN ADAPTATION OF TECHNOLOGIES

In India, we had a peculiar situation. When knowledge was applied to products, Europe got in too quickly. We call it the Industrial Revolution and it impacted economies of entire Europe. The manufacturing industry flourished and mass-scale production created economies of scale. This allowed them to export manufactured goods and got a real economic boost. India was under British rule and clearly missed the bus. Instead, Britishers procured raw materials from India, took them to their country and exported the finished goods to India and their other colonies. In fact, this time, technology had an inverse impact on the Indian economy.

Then came the era when knowledge was applied to processes and quality and ‘Total Quality’ became the buzzword. Countries like Germany and Japan got this era right and emphasised on quality production. This time, technologies gave tremendous impetus to these economies and German goods like engineering goods and automobiles became the world’s best products by quality. India missed this bus again as we were in a closed Nehruvian economy era. We had manufacturing with complete protection and Indian manufacturers ignored the quality aspect of production. Indian masses suffered from low-quality local products with short supplies. With protection from imported products and the ‘license raj’ that prevented global manufacturers to enter India, quality took a back seat. Remember those days of the 70s and 80s, when we had a choice between two cars and used to wait for months to get a telephone line? The world used knowledge of products and processes and applied new technologies, but India lagged behind, and its economy suffered heavily, which led to the 1991 situation. It forced India to get into globalisation and free entry for global industries with their technical know-how. The rate at which Indian industry adopted the new technologies benefitted consumers, industries and certainly the economy.

Then came the era when technology started getting applied to knowledge. This happened in the mid-90s. India, by then, was a globalised economy, a free democratic country and a large number of English-speaking technically qualified resources. Information Technology (IT) and Information Technology Enabled Services (ITES) grew remarkably in India. The growth was mainly export-oriented. Two fiber optic cables reaching the east and west coasts of India connected the world, and India saw this service sector, which was completely based on technology, flourished. This industry led the contribution of the Service sector to the total GDP. India is a unique example in the global economy, where manufacturing followed the service sector growth. Since the year 1998, one of the major factors that have given rise to the growing value contributed by the services sector to the GDP is the IT/ITES sector. Overall, India’s tech industry is estimated to touch $245 billion in the 2022-23 financial year, with an incremental revenue addition of $19 billion during the same period. Furthermore, the IT industry accounted for 7.4% of India’s GDP in FY22, and it is expected to contribute 10% to India’s GDP by 2025. As innovative digital applications permeate sector after sector, India is now prepared for the next phase of growth in its IT revolution. On the other hand, the IT industry has timely moved to remote working settings. Currently, India is one of the largest data generators, with an increasingly young and tech-savvy population. Therefore, emerging technology in economic development in India is playing a huge role.

ROLE OF EMERGING TECHNOLOGIES

Key Technologies Shaping the “Digital Transformation of India”

The new technology is codified knowledge in the form of routines and protocols. Technology helps to get enough knowledge about the use of economic resources to manufacture goods and render services more efficiently and effectively. Economic growth has increased and is becoming efficient due to the advancement of technologies. In business, starting from production to profits got enhanced due to technologies. It has also helped Government machinery as they are the enablers of economic growth. Indian Government is adopting technology in the form of e-Governance, which has brought in speed and transparency to a larger extent.

India is a good adapter of new technologies. In the past decade, especially during and after COVID, the growth in e-commerce and electronic payments has been phenomenal. The number of Fintech companies that have come up and grown in India has shown the world that India, too, has a local market and appetite for using the current technologies. The cloud services market’s growth in India is driven by the growing adoption of big data, Artificial Intelligence (AI), Machine Learning (ML) and the Internet of Things (IoT). IoT links multiple devices or appliances that need to be connected to the internet. This includes automation and real-time device control. IoT-connected devices such as connected cars, household appliances, and electronics use a cloud-based backend to interact and record information. This has given a significant boost to the manufacturing sector too.

Artificial intelligence (AI) refers to the field of computer science that focuses on creating intelligent machines capable of performing tasks that typically require human intelligence. AI involves developing algorithms and systems that can process information, learn from it, reason, and make decisions or take actions. AI systems aim to replicate human cognitive abilities, such as understanding natural language, recognizing objects and patterns, solving problems, and adapting to new situations. These systems can be designed to operate in various domains, including image and speech recognition, natural language processing, robotics, recommendation systems, and autonomous vehicles, among others. The growth of AI not only boosts the IT industry but also helps all three sectors of the economy, namely, the Agriculture, Manufacturing and Service Sector.

Emerging technology in India has influenced the Indian Economy to a larger degree. Emerging technologies and their adoption have escalated quickly with time and have contributed considerably to the Economy. Furthermore, several government policies and initiatives have driven technology adoption across various verticals. According to a recent report by the World Bank, Indian economy is expected to expand by 6.5 per cent. The economic impact of the COVID-19 pandemic in India has been quite disruptive. The digital era has caused an unparalleled change in technology, business, and society. Moreover, the situation is starting to break the inertia of digital adoption and the cloud and AI will continue to be significant as part of the transformation. Emerging technologies are influencing several sectors in India propelling its faster economic development. Businesses across verticals have been impacted by the worldwide crisis, but certain industries are standing out to change the game for the economy in the coming future.

Industries like Banking, Financial Services and Insurance (BFSI), healthcare and pharmaceuticals, e-commerce, retail, and manufacturing are adopting emerging technologies. Companies in these industries have reacted to difficulties presented by the pandemic and are aiming heavily on creating strategies in the new setup to change their game in the next five years. The string that ties together all these industries is modern technology. Also, the cloud plays an important role to help all these industries propel into a game changer for the Indian economy. New-age technologies will be offering India the possibility to carve itself a unique identity as a global hub for cloud solutions.

Industry 4.0, digital supply chain, digital assistance, digital payments systems and many more are some of the technologies that will aid economic development by 2025. Emerging technology on economic development in India is beginning to allow industries to rebuild the country’s economic status in a post-Covid world. Organisations relevant to these verticals are boarding on their journeys. The smarter organisations are taking advantage of the huge capability of emerging technologies to their benefit. Once the economy bounces back, these organisations will be the leaders and will capture a larger percentage of the market.

TECHNOLOGY TOUCHING ALL SECTORS

1. Natural Resources: Modern technology helps human beings in utilising the natural resources that are hidden in seas, lands, and mountains, like oil, gas, and metals. It also allows us to find water resources beneath the soil, as water is an important element for economic growth.

2. Agricultural: The technology has helped to introduce fertilizers for plants and agricultural land, tractors, the invention of High Yield and genetically modified seeds, threshers, and pesticides. The revolution resulted in the cultivation of good crops and became a profitable profession and helped in putting an end to the shortage of food and grains. The weather forecasts, which are so crucial to this sector, have improved predictability and have helped the economy by getting better agro-produce. Technologies in storage and preservation, too, have helped farmers and markets to keep stability in the prices.

3. Healthcare: Healthcare Industry has gained maximum benefits in terms of value delivery by adapting to new technologies. Biotechnology, Biochemistry, Molecular Biology and fields like that are constantly on the move with innovations. The speed at which we could get the COVID vaccination is a classic example of this. New medicines, new drug delivery systems, drug discovery simulations, and the use of robotics have truly helped doctors and patients. While it adds to the value of GDP, the healthy population of India contributes more to the economy.

4. Entertainment: Technology has completely changed this industry. Right from production to distribution, there is a revolutionary change in the way this industry was and now is. I have no doubts, this industry will be a different economic ball game in the next five years.

5. Manufacturing: Globally, manufacturing is going to be deeply impacted by the innovations and new technologies coming into the market. Robotics will bring a lot of precision and improved productivity, lesser rejections and so on. What will bring revolution in manufacturing is 3D printing technology. This will probably make large factories redundant, and manufacturing will be on mass-scale personalised manufacturing. 3D printing is currently used to create prototypes, and many start-ups have come up in India with 3D printing utilities to help large companies to create prototypes for their new products.

6. Logistics: During covid, Flexport (logistics startup, now huge) was able to share live data and tech support with LA port authority to resolve shipping traffic – they were able to help the mayor of LA to take real-time decisions. This is just a one-off example. In India, we require huge improvement in our logistic services. We have seen in the past few years, technology such as AI, and IoT are helping warehousing and transport companies to improve the efficiency of their services. Delivery for the last mile was always facing challenges in locating addresses when they started delivering couriers. To solve this, they added location tagging to their courier agent apps. The agent had to mark delivery at the delivery address – this captured the latitude-longitude of the address. Now they have built a database of addresses in India with very high accuracy. They do have apps that aggregate deliveries at the same locality to make the service time effective.

7. Efficient operations: Technology can optimise the operations of the industry. Technology plays an important role in the generation of efficient processes. It can help the industry to reduce or eliminate duplications, errors, and delays in the workflow, as well as accelerate the automation of specific tasks. Inventory technologies allow business owners to efficiently manage production, distribution and marketing processes. With the right technology in place, businesses can save time and money and make them more productive and competitive.

8. Expansion of Markets: Technology in business made it possible to achieve a greater reach in the global market. Globalization has been carried out thanks to the wonders of technology. Anyone can now do business anywhere in the world. Technology has driven the development of electronic commerce, which has brought new dynamics to the globalisation of companies. The diffusion of information technology has made production networks cheaper and easier and has been fundamental for economic globalisation. The adaption of technology affects both the quality and cost of manufactured goods in India and makes it more competitive in the global market.

PAYMENT, FINANCIAL AND CAPITAL MARKETS IN INDIA & TECHNOLOGY

In the last few years, we have seen various new and faster payment modes emerge and establish their presence in the Indian digital payment space. This has largely been possible due to regulators introducing new initiatives and products to push digital payments, and industry stakeholders encouraging customers to shift from paper-based to digital payment modes. The benefits of shifting towards digital payments are visible in India. These benefits will witness an upward trend, marking a significant change in how the Government, corporates and citizens adopt new technologies for their transactions. RBI is planning to introduce a “Lightweight Payment and Settlement System” (LPSS) that can operate from anywhere with minimal staff. The LPSS will be activated on a need basis and will operate independently of existing payment systems, such as RTGS, NEFT, and UPI. The Indian digital payment space has seen extraordinary growth in the last few years, with the volume of transactions increasing at an average compound annual growth rate (CAGR) of 23%. The launch of new and innovative payment products like Unified Payments Interface (UPI), National Electronic Toll Collection (NETC) and Bharat Bill Pay Service (BBPS) have firmly placed the digital payment industry on an upward growth trajectory.

Apart from UPI, BBPS and NETC have also grown at a similar pace. Both BBPS and NETC are growing at a CAGR of 500% and 123%, respectively, since 2018 with the help of a government and regulatory push. Banks and non-banking financial companies are now more focused on providing integrated solutions. Digital payments have evolved from being viewed as a cost centre for banks to a revenue centre and a key lever for customer acquisition. Financial companies have stepped up their efforts to strengthen their payment infrastructure and have started offering other adjacent services such as lending, wealth management, micro insurance, and the use of data analytics to offer more customised solutions for customers.

We witness today various Fintech platforms emerging for equity and fixed income securities. One latest that I have seen is www.harmoney.in funded by ‘y combinator’ and providing a platform for fixed income security trading. We have seen multiple platforms for equity trading, and NSE, with the help of technology, is one of the hi-tech exchanges in the world. Any economy needs matured capital and financial markets, and India has witnessed how technology has helped these markets to improve in quality and volumes of transactions.

GOING FORWARD

Millions of Indians hope for a better future, with well-paying jobs and a decent standard of living. To meet these aspirations, the country needs broad-based economic growth and more effective public services. Technology would play an important role in enabling the economic growth that India needs. The spread of digital technologies, as well as advances in Nano and biotechnology, can raise the productivity of the Manufacturing, Services and Agriculture sectors of the Indian economy. It will redraw how services such as healthcare and education are delivered and contribute to higher living standards for millions of Indians by raising education levels and improving healthcare outcomes.

The Indian government’s non-profit open e-commerce network, ONDC, has grown to 236 cities while bringing on 36,000 merchants to its platform in the past year. The platform, which enhances the digital commerce process for small business and retail shops in India, is slowly recording an uptick in transactions. India is now looking forward to newer platforms like ONDC, a new commerce-commerce platform where the consumer will have a seamless choice between various e-commerce sites. The Open Credit Enablement Network (OCEN) is an open network which codifies the flow of credit between borrowers, lenders, and credit distributors under a common set of standards. Technologies like blockchain will bring a revolution in banking and other services and make many old companies and maybe banks redundant.

However, like every change, humans and societies are apprehensive of adopting these new technologies. The fear of unemployment with AI coming in is one such fear. I saw this happening in the 90s when computers started getting into banks and offices. There were union strikes resisting computerisation. Looking back today, we would laugh at it. What we need to adapt is retraining ourselves with new technology. I firmly believe new technologies cannot eliminate the need for humans. What will change is the nature of the work and the workforce adequately trained to create and handle these new technologies. India has the youngest population, and hence I feel, India is most eligible to have newly trained resources to create and handle these new technologies not only in India but globally. I don’t believe it is a threat to the economy but an opportunity for Indian Economy to grow faster.

Impact of the Alternative Dispute Resolution Mechanism on the Economic Growth of India

INTRODUCTION
On
a recent trip back to Copenhagen, I was keen to revisit Christiania, a
social experiment where hippies squatted and rejected state control.
Originally set up in 1971 in a former military complex in Denmark’s
capital, it had continued in its existence and the population had grown,
but this hippie utopia was not thriving. Accommodation was in disrepair
and members of the community could not afford its repair costs. Rising
rents meant many were forced to leave the community and return to the
main state, one with law and order, whose economic prosperity could feed
them and their families.This is the impact that a state and its legal system can have on economic growth.

 

TYPES OF LEGAL SYSTEMS
I
am called to the bar in India, England & Wales and the DIFC in
Dubai. All three are common law jurisdictions where court judgments
become precedents binding on future judges of lower courts or hold
persuasive value for judges of courts having an equal ranking. The
common law system permits incremental advancement in law where every
judgment slowly builds on and adds to a nation’s body of law.Dubai,
however, is a bit of a mixed bag. The DIFC Court is a common law oasis
in what is otherwise a civil law system. The ‘on shore’ Dubai courts
outside the DIFC follow a civil law system and apply Sharia law, as
legislated by the UAE. Most of Europe and many countries around the
world that are not part of the commonwealth (previous British colonies)
also follow a civil law system.In civil law jurisdictions, there
is not much scope for advocacy and historic judgments do not hold
precedent value. In these countries, the letter of the law is closely
followed. This works too, but rather differently from common law systems
as there is less opportunity for a judge to tailor his / her ruling to
the specific facts and circumstances of a case.There are also
alternate dispute resolution systems such as arbitration and mediation. I
dare say arbitration has become rather mainstream and an integral part
of the legal system in India and other countries such as Singapore,
England, Nigeria, Kenya etc. Arbitration allows tremendous flexibility.
An arbitrator / arbitral tribunal derives its power from the consent of
parties. In the circumstances, if the parties want the arbitrator to
hear and rule on only one part of a dispute between them, they can
direct the arbitrator to do so. They can remove powers from an
arbitrator or add to them. Large volumes of civil procedure code that
one must follow if their case is before a court are replaced with a thin
booklet of arbitration rules (if the arbitration is governed by an
institution) or replaced with the simple procedure laid down in the
Indian Arbitration Act 1996 (if the arbitration is an ‘ad hoc’
arbitration).

 

THE BENEFITS OF ARBITRATION
What
is marvellous about arbitration is that one can appoint an arbitrator
truly suited to their needs. For example, in a cement arbitration seated
in London between an Indian and Spanish party that I had undertaken
some years ago, the clause required a cement expert to be appointed as
an arbitrator. Some commodities exchanges, such as the Refined Sugar
Association and GAFTA in the UK, only appoint industry experts as
arbitrators. Even if such arbitrators could be out of depth in terms of
the law, they can appoint a lawyer as an advisor to the tribunal.
Appointing experts such as accountants, engineers etc., as arbitrators
is a power that more Indian parties should be encouraged to adopt for an
award tailored to their needs.Likewise, the appointment of
younger arbitrators, if Indian parties can stomach the idea, could
revolutionise arbitration. I began to get arbitrator appointments at age
40 and my co-author, Kunal Katariya, began to get them at an even
younger age. Younger arbitrators are keen to establish their reputation
as arbitrators, are willing to take on disputes of smaller value and
since they are mid-career and extremely busy, they are far more likely
to hold fewer hearings and pronounce arbitration awards more quickly.Appointing
more women as arbitrators can also restore a balance. A study that was
undertaken in the US following the collapse of Lehman Brothers in 2008
revealed that a lot of major financial institutions that went under, or
nearly went under, had all-male boards. Those companies that had women
on their boards of directors were more resilient to risks and changes in
the economic climate. This is because ideas were challenged, and not
everyone in the boardroom held exactly the same view, which is healthy.Presently,
one of Western India’s best arbitration institutions, the Mumbai Centre
for International Arbitration (MCIA), has managed to appoint about 30%
women as arbitrators. This is one of the best ratios in India and ought
to increase. The Indian Arbitration and Mediation Centre, Hyderabad
(IAMC), another fabulously run institution, has, in the last year,
appointed over 80% women as mediators.Mediations, if popularised
as a method to resolve commercial disputes, can dramatically reduce
costs for parties. Mediations also diminish the time spent in resolving a
dispute to a couple of months. Mediations, however, require both sides
to compromise and come to a mediation leaving ego to one side. In my
experience, several private equity/shareholder disputes tend to stem
from ego clashes or the siphoning of funds, and such cases are less
likely to be resolved by way of mediation. When appointing a mediator,
one must not be shy of asking what percentage of previous mediations
undertaken by that individual has resulted in success.
 
THE LATEST CHANGES TO INDIA’S ARBITRATION LAWS
Since
arbitration only emerges out of contract, the starting position is that
only signatories to an agreement containing an arbitration clause can
be made parties to an arbitration. India has, however, taken a liberal
approach historically by allowing group companies to be brought into the
fold of an arbitration, and thereby be bound by an arbitration ruling,
even if the group companies were not signatories to the original
contract that contained an arbitration clause. The Supreme Court is
currently reviewing this group of companies’ doctrine1. Several ongoing
arbitrations are waiting for the outcome of this review. By comparison,
England takes a strict approach to the joinder of non-parties to an
arbitration agreement and Switzerland and other European civil law
countries have taken the more liberal view.Meanwhile, the NN
Global case2 has recently held that a court cannot appoint an arbitrator
or send parties off to arbitration even if an arbitration clause is
contained in their contract in circumstances where the underlying
contract is insufficiently stamped. One of the authors, Mr Katariya,
whose view is shared by the majority of arbitration practitioners in
India, believes this judgment has dealt a significant blow to India’s
pro-arbitration stance because it is a wriggle-out method and affects
the enforceability of an arbitration clause contained in an unstamped /
under-stamped agreement. The other author, Karishma Vora, holds the view
that the law on impounding/staying the enforcement of any under-stamped
agreement should be followed in the case of an arbitration agreement
too. If this needs to change, the legislature will need to amend laws to
carve out an exception for the stamping of arbitration agreements.Arbitration
law in India has also been evolving rapidly and much-needed reforms
were brought in by the 2015 and 2019 amendments, which added strict
timelines for completion of proceedings.

1 Cox and Kings v. SAP India 2022 SCC OnLine SC 570

2 N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors. 2023 SCC Online SC 495

 

WHAT DOES THE FUTURE HOLD?
Last
month, I was in court in London. It was a virtual hearing and
announcements were made at the beginning in the usual course that it was
being recorded by the court and that no one else could record the
hearing without the court’s permission. No permission had been sought
and we went about the hearing in the usual course. The following
morning, I received a frantic call from my instructing solicitors
informing me that a full transcript of the hearing had been circulated
to everyone who attended the hearing, including the judge.We
rang the client, who is a successful co-founder of a private equity fund
that specialises in investing in tech businesses. He explained that he
subscribes to an AI app called Firefly that automatically allows itself
into every zoom, Teams or other meeting on his calendar, transcribes it
and circulates it to all who were on the calendar invite. Quite
efficient but not so when one is in contempt of court.Although
the contempt was purged, the humorous judge asked the only pertinent
question that ought to have been asked – how accurate was the
transcription?International arbitrations and litigation that
take place in London, Dubai, Singapore etc. often engage expensive live
transcribers. The sums at stake justify the few lakhs spent per week for
live transcription. All parties, counsel, solicitors and the judge or
arbitrator have immediate access to every word that was spoken or
argued. Sometimes, to reduce costs, parties subscribe to transcription
that is not live and is circulated only at the end of the day.Bringing
this to an Indian context, arbitrations tend to be conducted only in
two-hour slots 5-7 pm, after court. Counsel asks his / her
cross-examination question, the witness responds, and both the question
and the response are dictated by the arbitrator to steno. Even the
quickest steno in the world slows down the process, and often, the punch
of cross-examination is lost in translation, even when it is English to
English.If technology-assisted transcription was brought into
the fold, Indian arbitrations (and court proceedings, if courts were
open to allowing live transcription) would see a dramatic improvement in
the efficiency with which cross-examination is conducted, judgments are
dictated etc. It would ensure all submissions made by advocates are
recorded, which can be rather useful at the stage of appeal.And
this is just for transcription. Technology and AI can have a
significant impact on India’s legal system, and thereby on India’s
economy. Take small claims, for example. There are hundreds of thousands
of people who probably, on a yearly basis, forgo money owed to them by
others. These could be resolved by replacing the judge with technology.
Let us take a leaf out of eBay’s book. ‘eBay’, a platform where one can,
for example, sell their old sofa, resolves 60 million disputes per
year. Most of these are low value, often under Rs. 2000 ($25) in
dispute.This is an example of how online dispute resolution
(ODR) can and should be the future of our struggling civil justice
system. ODR can provide access to justice for lakhs of Indian citizens
who may not otherwise have the means or the time to partake in the
nation’s court system at an incredibly fast pace.A vision of
the future of India’s justice system should also include smart
contracts. In basic terms, a smart contract is a self-executing
contract. Think about your order on a food app such as Swiggy. You place
an order, and Swiggy blocks the money on your card. Although the
restaurant has not received the money, it begins to prepare your order
on the faith that it will receive payment automatically once it carries
out its end of the bargain. At the time of execution, being the delivery
of the food, the payment is automatically released to the restaurant
and the delivery person, with a small cut being retained by Swiggy.
Although this is not exactly a smart contract, it is a good example of
the beginnings of what a legal system could look like in the future.
Traders could enter into self-executing contracts once the technology
associated with smart contracts and blockchain becomes more prevalent.When
making such technology an integral part of the legal system,
legislators need to think about the level of detail going into the
legislation. I find that a broad-brush approach enables a tech-related
law to remain relevant for a longer period of time. France is
legislating technology with a tedious level of detail. This carries the
risk of its laws becoming outdated soon. The UK, on the other hand, is
modernising old laws by setting out only a basic framework, in the hope
that the framework will not need to be changed even if underlying
technology changes.

For example, the UK has just drafted a bill
for electronic bills of exchange. It is called the Electronic Trade
Documents Bill and is presently going through its second reading in the
House of Commons (the equivalent of the Lok Sabha). The bill will reduce
the estimated 28.5 billion paper trade documents printed and flown
around the world daily3. Presently, bills of lading and bills of
exchange are required to be paper based. If this bill is passed,
paperless versions of these documents will be legally recognised in the
UK, allowing British businesses to trade faster and cheaper and reduce
employee time on needless paperwork and bureaucracy.

3 https://www.gov.uk/government/news/paperless-trade-for-uk-businesses-toboost-growth

 

This Electronic Trade Documents Bill4 has
only seven sections and says that if reliable technology is used to
secure that only one person can exercise control over / alter an
electronic document at any one point in time, then it would be accepted
in the manner that the older paper trade documents (e.g., bills of
exchange) were legally recognised. That’s it. No further detailed
definitions or complications. In other words, no matter what technology
is used, so long as an individual can demonstrate they are the only ones
in control of the electronic document, akin to a trader having physical
possession of, say, a paper bill of lading, the electronic document
would be legally recognised.Like France and the UK, India needs
to give some thought to how it wants to prepare itself for the enormous
digitisation of trade, which is inevitable. The Indian legal system must
start preparing itself now to ensure it meets the progress of the
economy step by step. Modernising laws or introducing new ones are in
the hands of the legislature and bureaucrats and may take some time, but
the enormous advantage of India’s common law judicial system is that
its judges can apply existing laws and adapt them to the changing
circumstances of the economy.A good example of this is when
courts began to allow service of court proceedings via WhatsApp when
other methods were not acknowledged, and the recipient’s chat showed a
double blue tick.5 Another issue that the Indian judiciary can think
about is permitting litigants who are victims of online fraud
perpetrated by faceless individuals to file cases against ‘persons
unknown6. The concept of bringing a case against someone whose name and
address the plaintiff does not know is alien, but this is one of the
many ways that the existing legal system, and the judiciary in
particular, can assist the economy.As for non-litigation work,
such as drafting documents, the use of artificial intelligence can be
pathbreaking. The drafting of property documents, hire purchase
contracts, franchise agreements, trademark agreements, shareholder
agreements etc., already have a revolutionary app in ChatGPT, and it is
only getting better. Once legal software companies build on the open AI
network of ChatGPT and enable lawyers to feed in historic drafts to
train the AI, very many young associates in law firms could lose their
jobs; but the drafting could easily be of an international standard and
enable lawyers to improve their efficiency.Presently, one
spends a few hours a day on administrative tasks, delegation of work,
reviewing work, team discussions etc. This will change as practitioners
will be able to spend less time on non-legal tasks and more time on the
law.A family court in Australia replaced its mediator with an AI
machine whose outcomes matched those of the family court judge by over
80% during a pilot that was conducted to test the AI. Parties were
positively influenced by this percentage, and many settled along the
lines of what the AI predicted in order to avoid the costs of a
full-blown dispute in the family court. This is the potential of AI
crossing paths with mediation.

4 https://publications.parliament.uk/pa/bills/cbill/58-03/0280/220280.pdf

5 Tata Sons v John Do CS (Comm) 1601/2016, order dated 27.04.17, Delhi HC. Kross Television v Vikhyat Chitra Productions 2017 SCC Online Bom 1433

6 CMOC Sales & Marketing limited v Persons Unknown & 30 others [2018] EWHC 2230 (Comm)

 

CONCLUSION
Contracts
are the foundation of commerce and nearly every Rupee that goes in and
out of a household or company is governed by a contract. From a bus
ticket to a large investment agreement, parties fall back on the terms
of their contract for interpretation and look to a breach of those terms
to bring cases against each other. A World Bank study revealed that
while it takes 165 days to enforce a contract in Singapore, it takes
about four years on average in India. I should admit that I find the
four years also astonishingly speedy. India has about 1.09 crore civil
cases pending, and this would be in addition to arbitrations. The Indian
legal system needs a serious shake-up if it needs to assist economic
growth.In addition to the tech-based solutions set out above,
other simple solutions can also be implemented. Senior counsels in every
court could be mandated to sit as judges for a minimum of, say, three
weeks per year, or for a minimum term of, say, three years at a stretch.
This would reduce the backlog. Every adjournment should have a large
cost associated with it, payable within one week of the adjourned
hearing.Statistics could be published revealing how many
adjournments were granted by every judge in the country per term, or how
many hearings were before a judge that did not result in disposing off
the matter.Presently, most Bar Councils around India have a
one-time enrolment. If an advocate was enrolled by the Bar Council of
Maharashtra and Goa in 2006, he/she would not need to renew their Sanad
for the rest of their lives. This should be changed to periodic
renewals, say every five years, and advocates should be mandated to pay a
small percentage of their last year’s earnings in order to renew. This
money could be re-invested in providing advocacy training to younger
advocates, which would, in turn, assist judges because the quality of
submissions being received by judges would improve. In December 2022,
the Bombay High Court taught senior juniors, including one of the
authors of this article, to impart advocacy training. Even though this
training was focussed on training the teachers, the very young students
who participated in this training showed a dramatic improvement in their
advocacy skills over the course of just one weekend. Another rule that
Indian Bar Councils may want to consider promulgating is no double
booking. In other words, if an advocate has accepted a brief to argue
one case on a day, he/she cannot accept a brief to argue any other case
on that day. Alternatively, they could accept a maximum of three briefs
per day. This will dramatically reduce adjournments and far more
advocates will get an opportunity to argue cases than the present system
where most briefs are concentrated in the hands of a few.With the hope of a better tomorrow, the authors now sign off.

Economic Growth – Role Of Direct Tax

1. Let me delineate the scope of this article
The
title “Economic Growth – Role of Direct Tax” has two different facets.
An economist will read this as nexus between economic growth and direct
tax by adverting to economic areas such as – what should be the tax
policy of India; how to ensure horizontal and vertical equity; how to
ensure buoyancy in tax revenue commensurate with GDP growth; relative
composition of direct and indirect tax; whether agricultural income
should continue to remain exempt; should income tax be supplemented by
other taxes like Gift Tax or Wealth Tax to address wealth disparity,
etc. etc.The brief from the organisation does, however,
surround the alternative facet of nexus. The brief is to analyse the
impact which currently applicable direct tax laws and their
administration have on the economic growth of the country or on the
morale of taxpaying community. The mandate is to examine legitimate
expectations which taxpaying community contributing fair share of tax
may have from the framers and administrators of direct tax laws as
enacted. Indeed, this is a highly significant area of discussion
inasmuch as the reasonableness, fairness and ease with which laws are
implemented will, in the long run, cultivate greater loyalty and a high
happiness index.

 

2. Realisation of legitimate expectations of taxpaying community – ever a dream?

The
realisation of legitimate expectations can contribute to the
enterprising spirit and strength of Indian Taxpayers in the competitive
global world. It is also an important factor to attract FDI. Some
legitimate expectations could be the enacted law as also tax
administration should treat taxpayers with respect which inspires
loyalty and patronage to the system; ensure certainty, predictability,
stability, and simplicity of law; smoothen/streamline process and
procedure of compliance, assessment, and collection; usher in
transparency and accountability of high standard. Some of these
parameters are commented further in this article.

 

3. Sermons of Kautilya: A Utopian World!!
The
Income tax Department’s website refers to the principles of taxation
laid down in Kautilya’s Arthasastra. These were cited by former Finance
Minister and President of India, Late Shri Pranab Mukherjee, in his
Budget Speech of 2010-11 as follows: –“Thus, a wise Collector
General shall conduct the work of revenue collection…. in a manner
that production and consumption should not be injuriously affected….
financial prosperity depends on public prosperity, abundance of harvest
and prosperity of commerce among other things.”There are
many other metaphors provided by learned economists on how tax should be
collected from the subjects. Say, like, how a honeybee collects nectar
from flowers without injuring it, how the Sun draws moisture from the
earth to give it back a thousand times, how a calf draws milk from a cow
and so on.On timing of taxation, Kautilya’s Arthasastra
recommends plucking the ripe fruits from garden and avoiding unripe
fruits. The ancient text wisely recommends accountability for the tax
collectors and the prevention of corruption.

 

4. Impact analysis of tax incentives
The
primary aim of a tax law and administration of tax law is to generate
revenue. But one of the variables of tax policy which influences overall
tax collection is a package of tax incentives offered to the taxpayers
to meet specific fiscal objectives like make-in-India or environment
protection. These incentives reduce effective tax rate payable by the
taxpayers.Much can be said about virtues and vices associated
with the basket of incentives. For long many years, corporate India was
subject to a tax model of relatively high rates of tax with a regime of
multiple incentives but tempered by Minimum Alternative Tax (MAT)
liability which partly neutralised the advantages of tax incentives. To
say the least, it was not at all easy to resolve intricacies of
incentives; it was as highly difficult to interpret MAT provisions with
added complexity of convergence to Ind AS. Taxpayer’s life today is far
more easier with a shift in policy which favours fewer incentives along
with moderate rate of tax and dispensation of MAT. This policy is
funnelled by global initiative insisting on minimum tax levy in each
jurisdiction, on profits accruing in that jurisdiction. This aims not
only to prevent race to the bottom but also relieves pressure of
offering “wasteful” tax incentives by developing countries1Frankly,
not all incentives are introduced with the prime object of relieving
tax liability. Many of them have different economic rationale and have
been retained in the selfish (though, noble) interest of the Government.
By grant of incentives, the attempt is to lure taxpayers to undertake
certain activities/investments which, in turn, relieve the pressure of
economic upliftment from the Government. The target sectors which
supplement the Government agenda are : growth of exports; realisation of
infrastructural development; generation of employment, development of
backward areas, encouragement of start-up eco-systems, research, and
development etc. These incentives are substitutes for subsidies which
may otherwise have been imperative to disburse. Amidst the trend of
withdrawal of incentives, those incentives which attract overseas
investments are still popular2.One submission to the tax
administration could be that once an incentive is agreed to be offered,
it may be implemented with grace. As one illustrative example, an
incentive such as an incentive in respect of expenditure on medical
relief to persons with disability should be formulated, perceived, and
implemented with compassion rather than by making it compliance heavy
with difficult conditions.

1. OECD’s report of October 2022 titled ‘Tax incentives and the Global Minimum Corporate Tax – Reconsidering Tax Incentives after the GloBE’s Rules’

2 Many of these incentives may be phased out at policy level after implementation of Pillar 2 initiative of OECD leading to implementation of Global Anti-Base Erosion Rules

 

5. Retrospective amendments can be counterproductive to economic growth
The
Legislature has power of using the magic stick of creating a law with
retrospectivity. It can create a fiction – say for example, it can
introduce a new law from a back date. A law may be introduced today but
the Legislature can mandate us to believe as if the law was always
legislated much before. On principles, this is a perfectly permissible
exercise – though, at times, the taxpayers may consider this to be an
unfair/avoidable exercise of power.In the celebrated case of
Vodafone International Holding BV [2012] (341 ITR 1), on the 20th
January2012, a 3-judge bench of the Supreme Court pronounced that a
non-resident taxpayer is not chargeable to tax on capital gains from
transfer outside India of shares of a non-resident overseas company,
even if such company (whose shares are transferred) may be deriving
value from its underlying operating subsidiaries in India. On the 16th
March 2012, the Legislature carried out a retrospective amendment to
nullify the impact of Supreme Court decision by offering a justification
that the amendment was carried out to clarify the law and for removal
of the doubts. It was not a convincing justification to offer after
the SC had laid down the law. No wonder that the amendment puzzled most
non-resident investors; and almost undermined their faith in the tax
system of the country. There was a scare among the investors whether
investment in the country was as safe.

The country paid the
price and lost some reputation when, under the shelter of BIPAs
(Bilateral Investment Promotion and Protection Agreements), the
International arbitral tribunals ordered the Government of India to pay
damages by way of compensation (including towards interest and legal
cost) pursuant to petitions filed by Vodafone International and Cairn
Group. Their grievance was that the action of Indian Legislature was in
breach of legitimate expectations of fair and equitable treatment, which
the investor from that country had from India. In reaching to the
conclusion, the arbitral tribunals noted the recommendation of Shome
Committee that retrospective amendments should occur in exceptional
circumstances, such as (i) to correct apparent mistakes/anomalies in the
statute (ii) to remove technical defects, particularly in the
procedure, which had vitiated the substantive law or (iii) to protect
the tax base if it is eroded through highly abusive tax planning schemes
that have the main purpose of avoiding tax.The arbitral
tribunals concluded that investors (Vodafone/Cairn) were not treated
fairly and there was violation of fair and equitable treatment promised
under the BIPA.

 

6. Resolve of new Government to stay away from retrospectivity
Upon
its installation in 2014, the new Government was quick enough to
promise to the people that it will refrain from any retrospective
amendment to the prejudice of taxpayers. To its credit, it has largely
lived up to its promise subject to some aberrations viz. that, of late,
every February, the Government has been introducing some amendments in
the budget which hit the transactions which may have taken during the
year up to the month of January basis the law in force up to the date of
budget. Clinically, such amendments are also retrospective in nature.
One would desire that this is avoided.

 

7. Why should an amendment be introduced as a surprise?
A more desirable approach may be to introduce an amendment after proper debate. There
have often been suggestions that the amendments could be de-linked from
the annual budget exercise and be enacted after examining the overall
impact, including the burden of compliance on the taxpayers. So long as,
however, the new practice is not introduced, the least which is
expected is to ensure that there are no surprise amendments directly at
the enactment stage without reference thereof in the Finance Bill.
For example, provisions relating to a controversial levy, viz.
equalisation levy on e-commerce transactions having significant impact
on non-residents and consequential impact on residents was introduced at
the enactment stage in 2020 to be effective from 1 April 2020 amidst
COVID-19 nation-wide lockdown. Interpreting these provisions was a
challenge even with the professionals. The software integration of
taxpayers was obviously not ready as well. Such surprises do certainly
belie expectations of taxpayers.What is also most desirable to
ensure is that each important and significant adverse amendment
introduced as part of the Finance Bill is referred and explained in the
budget speech. A taxpayer feels aggrieved when he finds that while the
budget speech appeared to offer favourable tax proposals like lowering
of tax rate, the fine print has a number of unpleasant surprises for him
in the form of criminalisation of TDS non-deduction default or
expansion in the scope of withholding of tax refunds.

 

8. Taxpayers’ charter
Every
organisation has a statement on its commitment to the stakeholders,
apart from its motto and mission statement. Taxpayers’ charter of the
Income tax department enlists multiple commitments to the taxpayers. In
terms of caption headings, the commitments extend to:1. Provide fair, courteous, and reasonable treatment2. Treat taxpayer as honest3. Provide mechanism for appeal and review4. Provide complete and accurate information5. Provide timely decisions6. Collect the correct amount of tax7. Respect privacy of taxpayer8. Maintain confidentiality9. Hold its authorities accountable10. Enable representative of choice11. Provide mechanism to lodge complaint12. Provide a fair & just system13. Publish service standards and report periodically14. Reduce cost of compliance

Text-wise,
the statement is impressive as also fairly broad. Taxpayers will truly
regard themselves as fortunate if they are able to enjoy the spirit of
commitments. But, very likely, the perception and belief of many – if
not most or all, may be to the contrary on some of the above captions
when viewed in terms of real-life experience. The taxpayers in a high
scale, may have a lot to lament on the performance of administration. It
is not uncommon to hear of grievances of high-pitched assessments,
hasty disposals in defiance of natural justice, re-opening notices being
issued without making base papers available to taxpayers, withholding
of refunds, increased cost of compliance, visible lack of accountability
etc.

While on this, the statistics may often be misleading.
Refunds being granted in less than a month in >95% of the cases is
not reflective of the challenges faced by taxpayers in relatively high
tax brackets. Multiple writs filed in high courts merely to obtain
refunds may not be a good sign to cherish. Pending rectifications for
multiple past years and adjustment of refunds against erroneous demands
are commonly heard grievances of taxpayers. And, while on refunds, a
disappointing development (which can potentially cover up denial of a
valid refund due to the taxpayer) is a recent insertion in S.245 of
Income-tax Act which permits tax authority to withhold refund on the
basis that the authority is anticipating some demand to arise in future
upon conclusion of pending proceedings. The status of such a
taxpayer may remain vulnerable, in terms of his ability to secure
refund, if pendency of one or the other proceedings is a regular feature
of his tax life.

A recommendation to the tax administration
may be to entrust, in each year, to a professional agency the
responsibility of soliciting responses on the success of taxpayer
charter (on a scale of 1 to 10) from stakeholders on a no- name basis
through the medium of a survey. The agency may seek evaluation from
2500 randomly selected samples of stakeholders such as – HNIs, large
corporates, medium to high range income/turnover taxpayers, tax
professionals, non-residents, tax judges before whom appeals travel,
officials of tax department etc. The tax administration should endeavour
to make such independent evaluation public.

9. A recent trend which can potentially be worrisome

In some sections of Income-tax Act, introduced in the recent past, one finds following provisions by way of two sub-sections:

“If
any difficulty arises in giving effect to the provisions of this
section, the Board may, with the approval of the Central Government,
issue guidelines for the purposes of removing the difficulty.

Every
guideline issued by the Board under sub-section (4) shall, as soon as
may be after it is issued, be laid before each House of Parliament, and
shall be binding on the income-tax authorities and on the assessee”

As
part of Income-tax Act, the first such text was found in S.115BAB
introduced w.e.f. 1 April 2020. The language has been replicated in
sections 206C(1G/H), 194-O, 194Q, 194R, 194S, etc. The trend appears to
be on the path of becoming regular.

The newly introduced
innovation is far different from provisions found earlier. For example,
provisions in sections 294A & 298 of Income-tax Act were far more
graceful. While they conferred power to issue Guidelines, there was a
clear warning that the action/order of the Central Government should
never be inconsistent with provisions of the Act. Therefore, there
seemed to be an express guarantee that none of the actions of tax
administration can operate in deviation of law.

Per contrast, the
new style of delegated legislation has the ill of tax administration
imposing its own interpretation of a provision in the name of binding
guidelines. There is no assurance that the power conferred by law will
be so delicately exercised that the impact of guidelines is necessarily
restricted to removal of administrative difficulty to redress taxpayer’s
grievance or concerns. For example, FAQ 4 of Circular 12/2022
issued in the context of S.194R states that cost of free medicine sample
given by a pharma company to a doctor with a narration ‘Not for Sale’
can be considered as a ‘benefit’/’perquisite’ provided to the doctor and
hence the pharma company providing free samples needs to deduct TDS
under s.194R. Even assuming that the tax administration may have that
view, it is unfair to presume that an alternative view has no basis. In
fact, most people in the industry subscribe to the alternative view.
There is room for another view. Yet, read with innovated text of S.194R,
the departmental view as expressed in the guidelines will unfairly
become binding on the taxpayers and carry the risk of prosecution if not
compiled. It would be a hard battle for the taxpayers to contend that
imposition of such interpretation through the medium of guidelines is in
excess of the power vested in the authority (Refer Madeva Upendra Sinai
[1975] 98 ITR 209 (SC). One hopes that the trend of such legislation is
reversed sooner than later.

In the same breadth, the
Legislature may also need to be judicious in conferring power to
prescribe rules or to issue notifications. Keeping a check over the
correct use of such actions is far more difficult.

10. Remarkable adaptation to technological innovations

All
the organs of the country connected with direct tax have recorded
enormous progress on the front of adaptation of technology in the last 5
to 10 years. The way all three organs (viz., tax administration,
taxpayers, and judiciary) responded to the challenges posed during the
COVID period is truly remarkable.The finance minister has done
away with the British-era style of bringing budget papers in a
briefcase. For some years now, the finance minister has been presenting
the budget in paperless format by using tablet of India make.To
the full credit of tax administration, the administrators have built up
huge digital infrastructure which can effectively collect, collate, and
handle data capacity, which is mind-boggling. It has made good
progress since the days of June 2021 when its new e-filing portal was
reported to have faced glitches from day one due to which statutory due
dates of returns had to be extended. It is, as of now, much better
equipped to receive and process the returns/transfer pricing data; can
handle e-hearings and e-assessments/appeals; has in-built AI, which can
handle selection of cases for scrutiny. It is claimed to have achieved a
peak processing capacity of 22.94 Lakhs returns in a single day on July
28, 2022. There are multiple cases where refunds are sanctioned in less
than a week, or a show cause notice requiring an explanation on the
mismatch of some data is received within a week. The continuing scaling
up of networking of IT infrastructure with other Ministries or other
countries will make the infrastructure all the more versatile and should
be a very effective check on tax avoidance or tax evasion. The youth of
the country has voted completely in favour of transition.The
judiciary, too, has kept pace with changes. There is live streaming of
court hearings. Time may not be far that we may have transcripts of
hearings as well on a concurrent basis. In an interesting example, the
Supreme Court reacted very sharply to NCLT when one NCLT member required
of a petitioner to make physical filing in addition to e-filing. The
Supreme Court, speaking through Chief Justice Dr D.Y Chandrachud (who is
himself a crusader favouring technology) observed as under:“The
judiciary has to modernize and adapt to technology. The tribunals can
be no exception. This can no longer be a matter of choice. If some
judges are uncomfortable with e-files, the answer is to provide training
to them and not to continue with old and outmoded ways of working.
If a lawyer or litigant is compelled to file physical copies in addition
to e-filed documents, then they will not resort to e-filing.It
is utterly incomprehensible why NCLAT should insist on physical filing
in addition to e-filing. This unnecessarily burdens litigants and the
Bar and is a disincentive for e-filing. This duplication of effort is
time consuming. It adds to expense. It leaves behind a carbon footprint
which is difficult to efface. The judicial process has traditionally
been guzzling paper. This model is not environmentally sustainable.”
(Emphasis supplied)The message will be as relevant to
Income-tax Appellate Tribunals and other authorities functioning under
the Income-tax Act. In turn, this message underscores that the tax
administration will need to impart training to its own personnel, while
the professional bodies may equip professionals across age groups.Indeed,
while the progress made on technology front is commendable, it is not
as if that there are no hiccups which are still present. For example, we
continue to hear of delays in disposal of rectification applications;
helplessness in securing TDS credits; also, the difficulty is envisaged
in locating the stage at which applications for processing of refunds
are pending. The goal may be to so design the platforms that it has an
in-built tracking mechanism with regard to each petition or each
assessment. Let the taxpayers verify for themselves where exactly is the
hold up.

 

11. Trends in direct taxation: Some positives to cherish – some negatives to remedy
There
are some positive trends which can have noticeable impact on economic
growth. One must appreciate the commitment of the Government to optimise
rates of tax. The corporate tax rate has been virtually brought down to
22% plus surcharge. There is no overbear of wealth tax nor any sign of
imposing any new form of tax. The impact on buoyancy of economy and
enthusiasm of taxpayers is visible.What is also noticeable is
that, at the Governmental level, there is a growing thrust on voluntary
compliance; a desire to ease the norms of doing business in India;
thrust on digitalisation which encourages data mining in a faceless and
transparent manner. As a result of digitalisation coupled with warnings
from the Government, tax evasion is becoming far more expensive day by
day, and the compliance is improving. Further, by actively participating
in OECD and other forums, the Government is privy to supporting
measures which would discourage storage of wealth or earning of income
in tax heavens.Amidst all the sincerities, there are some
negatives to be taken care of. We are almost reaching a stage of
excessive compliance. The stress of compliance is evident on taxpayers
and professionals. Despite his best efforts, there is no guarantee that
the honest taxpayer will be able to establish himself to be honest
without the drudgery of litigation. This ironical imbalance impacting
taxpayers can be somewhat mitigated with equal thrust on accountability
of the administration. The appraisal of accountability should be
self-driven with the use of technology rather than being assessed on the
basis of number of complaints received. It would be an incorrect
proposition to suggest that, absent a complaint, an administrator can be
presumed to be meritorious.One draconian provision of law,
in the context of prosecution, is that a taxpayer who has committed a
default is unfortunately (and unjustifiably) presumed to have defaulted
consciously or intentionally. The burden is on taxpayer to convince
the court that the default was innocent and was neither deliberate nor
with intent to avoid tax. On a parity of reasoning, an administrator
should be deemed to be accountable on the basis of some objectively set
benchmark standards. Just as one example, on the basis of technology, if
it appears that there has been a default in granting the refund as
directed by law, the presumption should be that the non-grant is
influenced by an intentional move. Could such be the parity of
standards?

 

12. Legislating for outliers? Is simplicity a dream?
More
than a majority will likely agree that, as of now, the direct tax law
is highly complex. Ironically, every attempt at simplification results
in it becoming more complex for people in business and high brackets.An
impression which is getting consolidated every year is that, on a
consistent basis, the law is legislated, keeping in view the
probabilities of outliers. Compliance expectation is built up to rope in
the outliers; in the process, the large community of honest taxpayers
has the suffering of compliance. This is a paradox in as much as
that, in the days of vigilance/presence of GAAR and technological
advancement, one would expect Government to spot and deal with outliers
as the responsibility of the Government.As one example, after
decades of litigation, the courts had provided clarity on the onus cast
on borrowers to explain the nature and source of cash credit. It was
working quite well. To the surprise, however, of taxpayers, the law
was recently amended to provide that the borrower has the onus of
explaining source of the source as well – a requirement or onus which is
impractical to fulfil in the commercial world. What is more, the
statutory provision as legislated expects that even a borrower from a
scheduled bank like SBI has to explain the source of source. The failure
to comply has the consequence of attracting punitive rate of tax of 60%
as increased by surcharge of 25%! Given the environment of
accumulated litigation, such unfair provisions can only lead to heavier
pile up of litigation. One wonders whether life may be easier if the
Legislature shifts the emphasis from an outlier to an honest taxpayer
and reconcile itself to some small loss of revenue. Balancing of
strength may justify that the Government may absorb some loss to itself
should it appear to a reasonable mind that the proposed remedy is likely
to cause injury or agony to multiple honest taxpayers.It may
be interesting and rewarding to study the opportunity cost of complex
legislation. The cost is invisible but enormous. The best of the
resources of the country (in and outside the Government) are drawn into
the understanding, implementing, resolving, and litigating the
intricacies – and dare say, not by choice. Life may be a lot more better
if talent is diverted for better national use. All this is apart from
the consumption of paper, which is associated with the publications and
administration of tax laws.

 

13. Maze of the TDS/TCS regime
Over
the years, a wide range of TDS/TCS provisions has overtaken the tax
world. The provisions are reflective of the responsibility vested in the
tax deductors to act as collection agents on a free-of-cost basis. If I
am right, almost around 85% of tax is collected through these
provisions. The deductors run the risk of disallowance of expense,
interest burden, risk of prosecution – all this, on the occurrence of
some defaults, at the root of which may be the inability to interpret
the complexities accurately. Not only the taxpayers themselves, but the
principal officers also carry the burden of stress. It is an area which
demands some correction. Firstly, it is time that the multiple rates
of tax are converted into some standardised rates of tax. Secondly, the
law relating to disallowance of expenditure and/or prosecution needs to
be humanised. Thirdly, there is a need to clarify some regular
controversies through the medium of FAQs, which are published by the
CBDT in consultation with external experts (may be, also the retired
judges) to provide guidance of practicality to the taxpayers. And
such guidance may be considered as binding on the tax authority while
conducting penal actions, even if the court were to eventually opine to
the contrary.

 

14. Some learnings of wisdom have eternal value
Resonating
with the ancient philosophy of collecting taxes without hurting the
citizens, the current Finance Minister Smt. Nirmala ji Sitharaman in her
maiden Budget Speech of 2019 cited Pisirandaiyaar’s advice to the King
Pandian Arivudai Nambi to the following effect – a few mounds of rice
from paddy that is harvested from a small piece of land would suffice
for an elephant. But what if the elephant itself enters the field and
starts eating? What it eats would be far lesser than what it would
trample over!I may only end this with a sense of optimism
that, in action and in deeds, the philosophy remains translated into a
perceptible reality. Let us all hope and pray that crop of paddy is
well protected as a collective responsibility and that paddy field is
not unknowingly run over either by the greed or apathy of taxpayers
themselves, or by the excessive compliances, maze of litigation with no
solution in sight or lack of accountability.

India Knows Where To Go, And Takes Everyone Along

 
 

BCAS and the CA profession are entering into 75th year of their existence. In order to commemorate this special occasion, the BCAJ brings a series of interviews with people of eminence from different walks of life, the distinct ones whom we can look up to, as professionals. Readers will have an opportunity to learn from their expertise and experience as well as get inspired by their personal stories.

The first interview is with Dr Brinda Jagirdar. She is an independent consulting economist with a specialisation in areas relating to Banking and Economics, including Agriculture Economics. She is an independent director on the boards of many companies and a scheduled bank. She retired as General Manager and Head of Economic Research at the State Bank of India, based at its Corporate Office in Mumbai. As part of the Bank’s Top Management team, her work at SBI involved leading the Department of Economic Research to track developments in the Indian and global economy and analyse policy implications for business. She has a brilliant academic record, with a PhD in Economics from the Department of Economics, University of Mumbai, M.S. in Economics from the University of California at Davis, USA, M.A. in Economics from Gokhale Institute of Politics and Economics, Pune and B.A. in Economics from Fergusson College, Pune. She has attended an Executive Programme at the Kennedy School of Government, Harvard University, USA and a leadership programme at IIM Lucknow.

In this interview, Dr Jagirdar talks to BCAJ Editor Mayur Nayak and the past editors Gautam Nayak and Raman Jokhakar about her career at SBI as Chief Economist, the Indian economy, her perspectives on the key factors which changed the Indian banking sector and drove economic growth in India, her advice to youths of India and much more…

Q: (Mayur Nayak): Can you tell us a bit about your childhood? What were your formative years like?

A: (Brinda Jagirdar): My father was in the army, so I am an army daughter. I was born in Punjab, though we belong to Tamil Nadu, and I spent most of my childhood in North India, Jammu & Kashmir, UP, Himachal, and then Delhi. The first language that I learned was Hindi. Initially, my schooling was at different places; however, later on, it was at Kendriya Vidyalaya. I joined Lady Sriram College, Delhi, for the Honours course in Economics, but then we moved to Pune, and I got a degree in Economics from Fergusson College and then did my MA from Gokhale Institute, Pune. After that, I joined the State Bank of India (SBI) in Mumbai.

Then I saw an ad in the newspaper from the Rotary Foundation for a one-year fellowship to study in the US. I applied and got selected. It took me to the University of California at Davis. As I was also a cultural ambassador, I got invited to speak at many Rotary Clubs and was happy to show them that there’s more to India than the Taj Mahal.

My entire career was with SBI. I was at their Nariman Point office, and I retired from there as Chief Economist. Post-retirement, I serve on a few Boards. I also like to talk to students mainly because I feel that they must know what’s happening in the real world, especially today when India is changing so much, and there are so many opportunities for them.

Q: (Mayur Nayak): You also did a Ph.D. in Economics, from Mumbai University.

A: Yes, that was mid-career. I had put in about 17 years of service in the Bank, and then there was always this restlessness – what next? Sometime in the mid-90s, the Bank came out with a scheme that allowed mid-career employees to take a 3-year sabbatical to do their PhD. I registered at Mumbai University under Dr Dilip Nachane. My topic was “Reforms in the Banking Sector”.

Q: (Raman Jokhakar): When you look at the first 10-12 years and the last 10-12 years in SBI, how do you see the landscape evolved during your career?

A: It has been a remarkably interesting journey, and I could see the way the banking sector in the country has changed and evolved. We started off with nationalisation. Then we went through a phase, where nationalisation did not seem to deliver the desired results, and there was a clamour for privatisation. Now we have a healthy mix of both, along with new institutions, new players and new regulations. There is a greater emphasis on efficiency, competition and performance. Initially, there were very few women officers in banking; now, there are so many.

Q: (Gautam Nayak): During your career with SBI, what exactly was your role and the things that you used to look out for from an Economist’s perspective for the banking sector? Any specific experiences from your banking experience of 35 years?

A: As an Economist, my role was to track changes in the financial landscape, including policies, budgets and regulations, prepare forecasts and highlight the implications for the Bank. We had to keep track of what is happening in the global economy, in the domestic economy, and in the banking sector. That is what economists are expected to do. Being in SBI, the Government and RBI would consult the Bank, and in this context, I had to interact with different departments, get their suggestions, and put them all together. That helped me learn about what is happening in other areas, including credit, treasury, forex, and agriculture. I was very fortunate to be guided by the best banking brains in the country and got to learn a lot from my seniors and colleagues. Interestingly, even after interest rates were deregulated, there was a lot of debate about deregulating savings bank interest rates. I think this was to prepare banks for the new competitive environment that was unfolding. The banking landscape was changing very rapidly – global norms for capital adequacy, asset classification, provisioning, and accounting were introduced. Bank mergers were happening, and banks were being allowed to move into new areas like capital markets, mutual funds, and insurance.

Q: (Raman Jokhakar): In the US these days, we are seeing well-ranked banks fail overnight. Why, in your view, are these banks failing? Anything that you see sitting here and looking at, say, the US, especially because you were in the US as well?

A: In my view, this shows that there is a weakness in their regulation and oversight. Also, the revolving door policy in the US has a conflict of interest – today, you are in the Treasury, and tomorrow you are in Wall Street. This doesn’t happen in India. US banks also put great pressure on making profits here and now, even at the cost of the banking system’s stability and safety. For example, in the 2008 financial crisis, they knew that something was happening. There was a lot of bubble and froth in the system, but nobody paid attention. Thanks to Dr Y. V. Reddy’s foresight, the RBI quickly ring-fenced the banking system. It was being said that there is so much opportunity in the booming capital market and real estate sector, and banks should be allowed to get into this space in a big way. But RBI saw the risks and laid down strict norms for bank exposure to capital markets and real estate. So, from a risk management perspective, we did an excellent job, which the US failed to do. Because we were prudent, the Indian banking system was not affected. I think it is wrongly called the global financial crisis because we didn’t have a financial crisis in India.

Our regulators have always been extremely prudent and cautious. And at the same time, they let the banks have their freedom but with risk management and all systems in place. Thanks to technology, now banks can also monitor their businesses in real-time and immediately know what is happening. The regulators, too, are in constant touch with all players, so supervision has become very ongoing. Now it’s not just an annual inspection, but there’s a lot of dialogue which happens between the banks and RBI all the time, which is the reason our system is so much more stable as compared to what we see abroad. Undoubtedly, it is RBI’s regulation and supervision, along with prudent policies, that has made the commercial banks so resilient and strong.

Q: (Raman Jokhakar): Despite all the knowledge, experience, and ways of the West, the Indian regulator hasn’t gotten swayed by the wave from the West. Do you think the regulator is still holding on to its prudent ways that are appropriate to our situation?

A: You are absolutely right – We must be thankful the regulator has remained focused and not gotten swayed by the West. They want India to open up our markets and open up our banking system rapidly. This pressure is there. But we need to build on our strengths and acquire the skills and size to compete globally. We move slowly, but I think there is some sense in moving at this pace, rather than rushing into anything. Also, doing what India needs should be our priority. That is how today we have the highest level of digital banking. We know where to go, and we take everyone along.

Q: (Raman Jokhakar): Did you ever imagine, 20 or 30 years ago, such a UPI, QR code, kind of revolution, will result in massive inclusion and formalisation? Did you imagine that a Shing/Chanawala, who would earlier collect cash, put it in his pocket, and go home in the evening, will directly get his day’s earnings in the banking system?

A: This is something truly phenomenal, and there were many like me, who did not imagine that a disruption like this would be so rapid, so widespread and universally accepted. Today, everyone has embraced digital payments, including small businesses and street vendors. They realise that banks are secure, and their money is safe in the bank. And for this assurance, I think we must give credit to the Prime Minister, his vision and the economic policies.

Q: (Mayur Nayak): Internationalisation of the Indian rupee: Rupee is accepted in other countries today. Do you see the Indian rupee becoming a global currency soon with the diminishing importance of the US dollar as the reserve currency?

A: De-dollarisation is what everybody is talking about, and I think that is already beginning to happen for sure. While the US Dollar will remain a very important currency, because it is traded and accepted in such a large number of countries, its importance is slowly diminishing. One reason is geopolitics and the rise of economies outside the Western sphere. When you are growing, you want your share of the pie, and also, you want your place at the high table. So, the Indian Rupee is certainly finding more acceptance, because a lot of countries are trading with India in rupee terms. That bilateral trade is already happening, and India’s role is growing. A lot of countries are looking to India because there is a trust factor, and they know that India will share the technology with them and help them. Already, many countries have reached out to India for UPI, and India has said we are ready to share the technology. So, the time has come for this hegemony of one power or one currency to be challenged.

Q: (Gautam Nayak): Being a director on a Bank Board, how do you see the role of auditors in the whole system? Do you feel that the audit system needs to change? Do auditors need to be more vigilant? Should the role of auditors change? Should it be more towards fraud detection? Should you have separate audits for separate purposes the way it is today – you have separate forensic audit, separate security audit, etc? So, what do you see happening in banks?

A: The regulators, RBI, SEBI, look at independent directors as the first line of defence. In turn, the independent directors look at the auditors as their first line of defence. So, the role of auditors, including internal audit, statutory audit, and secretarial audit is very, very important. Besides these, there are specialised audits like forensic audit and cybersecurity audit. Auditors are completely independent and report directly to the Chairman of the Audit Committee, who is always an independent director. Auditors have to ensure that the processes which are laid down and the policies adopted by the company are followed and confirm that these are followed. I think they have a very important role to play, and that role is only going to increase and expand into more and more areas, as we see the economy growing and the banks growing. I believe it is very important for auditors to be independent, and unbiased. Ethics and corporate governance in auditors are crucial.

Q: (Raman Jokhakar): The role of the PSBs over the years: At some point, they were all taken over and converted to the public sector, and now we are coming back to a lot more private sector participation. That whole private flavour that you get when you step into a private bank versus a public bank– going forward, how do you see the role of the public sector banks in the whole landscape of banking? Would that role shrink, or would it stay up to a point where we can overcome, say, poverty issues or certain other issues are overcome, and then maybe that role would probably shrink? Or would the character of the public sector bank itself change?

A: I would agree with bits of what you’re saying, but when you talk about flavour, just step into SBI or Bank of Baroda or, for that matter, any public sector bank, and you will find that the ambience, service, and products are no different from private banks. The public sector banks are also becoming more and more customer friendly and more inviting. Look at their branches – the way they are set up and look at the signage. In services, too, I think the difference is shrinking a lot, and that is mainly because of technology. So today, you are a customer of a bank rather than of a particular branch due to core banking – you can be anywhere, and you can do your banking transactions. Thus, the difference is shrinking between the public sector and the private sector.

Having said that, I think the public sector still has a lot of trust of the public, and they still have a big role in inclusive development. It was public sector banks that opened Jan Dhan Accounts and took them to the last mile with the help of business correspondents. They are also involved in each and every segment of the economy, however small or however far away. I think that role will still continue to be with the public sector banks, which is a good thing, because that’s what will help the economy to grow. We need that big push and support, and I believe only public sector banks can take on that role.

I agree that today we’ve come almost 180 degrees from nationalisation to now having banks in both the public and private sectors. In public sector banks, mergers have also helped to conserve capital and expand size. Today there are about 11 or 12 public sector banks from about 25-27 a few years ago. First, the subsidiaries of the State Bank got merged, and then some other bank mergers happened. So now we have a strong banking sector, and that’s what the Narasimhan Committee also recommended – we must have some strong large Indian banks, because if the economy is going to grow, then it must be supported by a strong and sound banking system. Indian banks must be able to support the movement of Indian businesses abroad and facilitate their growth.

Q: (Raman Jokhakar): If we were to become the third largest economy, which seems like the next or the closest goal, what are the changes that you feel should be brought about where 5-10 Indian banks will enter the top 100?

A: Banks need capital to grow. The FT’s Banker magazine brings out every year a list of the top 100 banks in the world based on capital size. This list is currently dominated by Chinese banks in the top 10 places, and only one Indian bank, SBI, figures somewhere in the middle. The Economic Survey for 2019-20 pointed out that being the fifth largest economy, India should have at least six banks in the top 100 global list, and at least eight would be required for a country having a $ 5 trillion economy. As we know, capital is brought in by the owner, and in public sector banks, the owner is the government. This is why the government is willing to reduce its shareholding. Because banks need capital to grow, they must have that intrinsic strength, and be able to raise money from domestic markets as well as international markets.

After the capital, it is risk management. Banks should have very strong risk management systems and very, very sound ethics, and that’s where there is role of auditors. It is very important to make sure that all the laid down policies of the bank are followed, laid down procedures and systems, which the board has mandated are followed – that will give confidence to investors, domestic and abroad, and they will bring in their capital and investment into the bank. Then the bank will also be able to attract that high-quality talent in terms of manpower.

The IBC and the changes that have happened have helped banks to recover their loans and improve their asset quality. NPAs have come down now because of the support from the legal system. But we need strong contract enforcement. The enforcement of contracts today in India is not so quick. We need judicial reforms. Some cases are taken overseas to adjudicate in those courts. That confidence should be there, that our courts will not take 10 or 20 years to decide on a case. And therefore, we need more legal reforms.

Q: (Mayur Nayak): When you talk about IBC, banks are getting some money back, but by and large, we see that banks are the major loser, in terms of higher haircuts. Are there any loopholes in IBC? How can it be plugged and how can banks’ interests be protected?

A: I would agree with you, but this was not the intention when it was started. They said it should be completed within 240 days or 240 + 90 days. So, cases must be settled speedily. This continued delay means something is wrong somewhere. There are some loopholes. Every time the borrower runs to the courts and that should be avoided completely. I don’t know whether we need more courts or whether we need more tribunals, but whatever it is, the enforcement of contracts is very important. If the lender has not been able to recover his money, then the system should support him to get it back from the borrower. However, there is no denying that because of IBC, NPAs have come down, and bank balance sheets are clean. In fact, the borrowers are saying take the principal, take the interest, but leave us. That fear is there; that’s very good for the system. But unfortunately, banks have been able to recover only a very small amount, but that was not the intention. The loopholes need to be plugged in quickly.

Q: (Raman Jokhakar): If you look at some best practices overseas, because top banks outside India have grown to such a massive scale, what would be some of those practices, which facilitate this recovery process – make it faster and more effective?

A: What comes to my mind is the speed of resolution. You go there, you declare bankruptcy, and it’s all very set and happens quickly. It doesn’t drag on, and it’s not an appeal after appeal. It doesn’t go that way. It’s finished very fast. I think that is what we need to do as well.

Q: (Mayur Nayak): Being in SBI you were a witness to 40 crores plus bank accounts being opened in record time. Everything you saw and felt happening in front of your eyes, because we, as lay readers, just read it in newspapers as statistics. You were probably right inside the truck that was driving it.

A: The biggest change was the small man felt that he could walk into the bank branch. Earlier, he would be somewhat diffident about how he will be treated. But now he can just walk in, show his Aadhar card, open an account, get his money, and walk out with his head held high. If he can’t go to the bank, there’s a business correspondent, who would come to him with the handheld machine, and he can do his transaction. You will be surprised to see how readily the common man has embraced technology and is comfortable doing his banking transactions on his mobile. I think that is the biggest change in the banking sector – the common man and also women feel empowered. And I think this is the perfect example of inclusive growth. This kind of revolution, I don’t think, has happened anywhere in the world. Jandhan-Aadhar-Mobile, the JAM trinity, has enabled the Direct Benefit Scheme. People have confidence in the banking system, especially now when they are able to get all their money, whether it’s a pension, whether it’s a fertiliser subsidy or a scholarship, they get it directly into their account, and it comes on time. It comes without any cut, and they are able to access their account and do their transactions anytime, anywhere. The Jan Dhan zero balance accounts have mobilised Rs. 1,97,082 crores as on 31st May 2023 in 49.12 crore bank accounts. People are keeping money in the bank, which was lying outside the formal banking system.

Q: (Gautam Nayak): When we talk about the future of the Indian economy, we talk about a $5 trillion economy. Going forward, what largest trends do you see, and how fast can India develop?

A: Today, India is the fastest growing economy among the G20 countries, it is the only country with zero prospect of recession and India’s growth is being seen as not only healthy for India but also positive in a world where growth slowdown is a major problem. So, let’s see what kind of economy we have today. In terms of PPP, we are the third largest economy, and in GDP terms, we are the 5th largest. Germany may go into recession, and soon we could become the 4th largest economy. It took us 60 years after independence to become a $1 trillion economy in 2008. Growth gained traction and doubling was much faster. In the next 6 years, we became $2 trillion, and it would have doubled in the next six years and become $4 trillion, but for the disruption caused by COVID. Today we are at about $3.8 trillion, so $5 trillion is not so far away. In fact, today, nobody is focusing on $5 trillion. We’re talking about $10 trillion, and we have the scope to become that. Why? Internally, we have all the resources. In terms of food, we are completely self-sufficient. We have the capability in space technology; we are the 4th nation with ASAT technology, we are the fifth country to launch its own GPS (NAVIC), soon we will be the fifth country to manufacture jet engines, we have our own indigenously designed and manufactured modern high-speed trains, we have the 3rd largest tech start-up base, India is 3rd largest in automobile production, and is an exporter in the defence sector. India has also demonstrated its capability in the manufacturing of pharmaceutical products with the production and export of indigenous COVID vaccines.

Do you remember PL 480? There was a time in 1965 when India didn’t have sufficient wheat and was at the mercy of big powers. There was a famine-like situation after the war. This is when India decided to be self-sufficient in food grains and we had the green revolution. After that, there’s been no looking back. We are the second-largest producer of rice and wheat, the largest producer of sugar, and the largest producer of milk, fruits and vegetables. Look at the variety we have. We are also making significant progress in terms of literacy, skilled manpower, and space research. We are taking commercial satellites to space. When India joined the space club, with satellites and rockets totally made in India and on such a small budget, there was a cartoon in the New York Times – the fellow peeping into that window with the cow. The fat people sitting there, no place inside. So, that is the kind of mindset which we broke through.

We are exporting defence products, but we can become big players when we make, say, missiles, and aircraft fully. In electronics, for instance, smartphones are now being made in India. iPhone already has one plant and is going to set up another plant. Tatas and Cisco, I think, are starting to manufacture iPhone 15. We are now an exporter of electronics and mobiles. We were a strong manufacturing country. But slowly, we allowed China to take over. Many companies closed down because it became cheaper to import. Somewhere we lost sight of what was needed for the country, and we allowed China to take that space. Now with the PLI scheme, logistics and infrastructure development, inflow of foreign investment and technology, ease of doing business and other initiatives, we are moving seamlessly into the global supply chain.

Q: (Gautam Nayak): As an economist, if you look back at the last 75 years, what do you think has been the decision which has impacted the economy the most positively and the decision which has impacted the economy most negatively?

A: Positively, I would say the 1991 deregulation and liberalisation have had the biggest impact on the economy. Earlier, when you were manufacturing two-wheelers, you could do only two-wheelers. There was a capacity you could manufacture and sell at a certain price. All that has gone now! I think the freedom, and openness that has been given to the industrialists, along with incentives and government support, have helped the manufacturing sector. That has created more opportunities not just in manufacturing – each manufacturing job will create about five or six other secondary jobs not only in manufacturing but also in audit and accounts, design, planning, transportation, etc. I think, deregulation certainly helped the economy to grow.

The hindrance, I would say, is that you want the small to remain small. Why not let them grow? There will always be a role for MSMEs, but incentivising them to remain small will stunt their growth. In China, for example, the average textile unit would employ 500 people. In India, it would be 50. When industries are allowed to expand, they can take advantage of the economies of scale and economies of scope, create more jobs and overall is good for the industry and good for the economy.

Q: (Mayur Nayak): What would you advise to youngsters?

A: I would tell them, first of all, have confidence in yourself. Have confidence in the country and its policies. Don’t get swayed by hearsay. What you see in front of you is the full truth. So first, have confidence; second, skill yourself. And even if you’re a chartered accountant, learn about other areas. Learn about economics. Learn about technology. Make yourself a little broad-minded and broaden your vision. See what’s happening in other countries, and what new developments are taking place in India and abroad. Stay abreast, read a lot, and read outside your work. Prepare yourself. And then, of course, have a balanced life. Work-life balance should be there. Don’t spend too much time on WhatsApp, Facebook, or gaming. Don’t waste your time on all that. See how you can use technology to increase your productivity. The future of work is going to change, and there will be a lot of disruption caused by AI.

 

From The President

Dear BCAS Family,

On 6th July, 2023, I will complete my term as President of this esteemed institution. My heart is overwhelmed with emotions while I am writing this last communication. It looks as if just yesterday, I assumed the august office of the President of the BCAS. On the one hand, there is an emotion of joy that I could give my best to fulfill the promises made to the best extent possible, on the other hand, there is a hollowness on realising that I will miss out on the energy effervescing out of the 24X7 commitment to the BCAS. It was this energy that kept pumping adrenalin to my brain, driving it to work harder, longer and smarter. There is also an emotion of gratitude for having received so much love, affection and support from such a large community of seniors, stalwarts, colleagues, staff and members. As I look back, I realise that this was a journey of joy, learning, giving and, above all, self-discovery.

Having spent more than fifteen years with the BCAS in different positions, when I became President, I felt that there was a need to make certain things ‘easy’ for the members to help achieve the BCAS vision better. That is how I happened to choose the theme for the year 2022-23 as “EASE”, which promised to bring about required systemic changes. The idea behind this theme was to empower the members to have easy access to knowledge, emerging opportunities, as also ease of networking and reskilling. I am happy to say that I bid farewell to all of you with a great sense of satisfaction that I could fulfill most of the promises made. During the year gone by, we took a number of initiatives, various committees organised excellent events that aligned well with the theme. The events like Income Tax ki Paathshala, Online 5th Long Duration Course on the GST, Workshop on Practical Aspects of Audit for SME Practitioners, M&A Masterclass, Lecture Meeting on “Inflation Dynamics – India v/s USA Approach” and many such events were aligned to give easy access to the knowledge. Many bespoke events were also organised on emerging areas like ChatGPT, Process Automation under GST, Use of Technology in Audit, ‘Value Investing’ etc., for members to embrace the emerging opportunities. For providing ease for networking and reskilling, several residential conferences were organised. Also, for the new members, felicitation and mentoring sessions were organised to help them in their careers and expand their networks.

In addition, numerous initiatives were also taken to achieve the desired goal. During the year gone by, BCAS was certified as an ISO 9001:2015 compliant organisation, hybrid facilities were made available for meetings, engagement with existing and new organisations with a similar vision as BCAS was enhanced, social media presence increased with calibrated strategy and the beta version of the new website and mobile app was launched. Entire journal archives were digitized, and focus was given on making past premium events available to members at a reasonable cost. Under the auspices of the BCAS Foundation, we could carry on good humanitarian work by equipping some schools in backward areas with the facility of digital education through pre-loaded software on the television screens. Tree plantation and blood donation drives were also carried out with great zeal, matched by an equally enthusiastic response. This year BCAS published its long-awaited publication on ‘FAQs on Charitable Trust’, which was very well received by the readers.

Focus was also put on improving the administration by continuous monitoring and training of the staff. You may find the complete details of the activities and the initiatives in the Annual Report which can be downloaded from the site. To summarise, we did find fruition with ‘EASE’.

You will agree that we are at a very exciting time in the history of our institution. BCAS is entering the 75th year of its foundation and this historical feat holds a special place in the heart of all its members. The sheer fact of our society’s meaningful existence for more than seven decades and its successful transformation into a modern, progressive and digital institution speaks a lot about it. Appreciating the importance of the milestone, great plans are on anvil to celebrate the Platinum Jubilee with programmes befitting the occasion. Several events are planned on the bespoke themes throughout the year, culminating with a Mega Event in the month of January 2024. There will also be a special entertainment programme for the members to participate on this joyful occasion. We are surely looking at the exciting year ahead.

Just as I conclude my message, I convey my gratitude to the Chairmen and Co-Chairpersons of the ten committees through which BCAS’s activities were carried out throughout the year. Their dedication and guidance enabled us to provide very relevant and critical events and publications throughout the year. Under their able leadership, the conveners of each committee left no stone unturned to leave a mark of excellence and ensure smooth functioning. I would like to thank all the Past Presidents who have been pillars of strength and a source of inspiration throughout the year. A big thank you to the BCAS staff who have dedicatedly performed their duties and co-operated for new initiatives embarked on during the year for the effective functioning and serving the members of the Society. The year has been made memorable by my Office Bearer colleagues, who spearheaded various goals set at the start of the year. I thank all members and readers of the President’s message, who have, from time to time, showered their compliments, expressed their disagreement, pointed out anomalies and gave their suggestions to make it more effective. I have no hesitation in admitting that without their feedback, I would not have been inspired to do better. Lastly, I thank Almighty to have put me in this privileged position to know and interact with some of the best minds in the country. I hope I have been able to meet their expectations.

There will be a change of guard on the 6th July which also happens to be the 75th Founding Day. I wish incoming President Chirag and his new team all the very best for the coming year. I am sure under his able leadership and creative visualisation, backed up by the youthful energy and mature experience of his team, BCAS will achieve greater heights.

Goodbye to you all, and a big THANK YOU for your support and affection.

Thank You!
Best Regards,

CA Mihir Sheth
President

Corporate Law Corner Part A : Company Law

5 M/s Herballife Healthcare Pvt Ltd
No. ROC/D/Adj/2023/defective/HerbalLife/1622-1624
Office of Registrar of Companies, Delhi & Haryana
Adjudication order
Date of Order: 21st April, 2023

Adjudication Order for penalty pursuant Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014

FACTS

M/s HHPL was incorporated at New Delhi. Registrar of Companies, Delhi & Haryana (“RoC”) received an application from Ms. SY, Director of M/s HHPL regarding adjudication of the defect in filing of E-form DIR-11. In this regard, it was observed that as per column 4 of the E-form, date of filing of resignation from M/s HHPL, was shown as 30th November, 2016 but in resignation letter attached therewith the date of submission of resignation to M/s. HHPL was mentioned as 9th September, 2020.

RoC on examination of the document/information submitted observed that a default /non-compliance of the provisions of Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 had been made and there was no specific penalty under relevant rule. Thus, provisions of section 450 of the Companies Act, 2013 get attracted.

Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 provides 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.

RoC issued a show cause notice to M/s. HHPL and Ms. SY in response to which, Ms. SY submitted a reply vide email wherein it was admitted that default has occurred due to some inadvertent typographical error.

It was noted that E-Form DIR-11 had been filed with wrong date of resignation. M/s. HHPL fulfils the requirements of a small company as defined under section 2(85) of the Companies Act, 2013. Thus, the penalty would be governed by Section 446B of the Act.

HELD

RoC, in exercise of the powers conferred vide Notification dated 24th March, 2015 and having considered the reply submitted imposed the penalty of Rs. 5,000 on the signatory for defect in e-form DIR-11 pursuant to Rule 8(3) of the Companies (Registration Offices and Fees) Rules, 2014 read with relevant provisions of the Companies Act, 2013.

6 M/s Chaitanya India Fin Credit Pvt Ltd
9/23/ADJ/SEC.161/2013/KARNATAKA/RD(SER)/2022/5496
Office of the Regional Director (South East Region)
Appeal against Adjudication order
Date of Order: 29th December, 2022
Appeal against Adjudication order under section 454 passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

FACTS

M/s CIFCPL had appointed Mr. SB as the Managing Director and CEO of the Company (KMP) vide its Board Resolution dated 27th February, 2020 for a period of five years from 6th March, 2020. However, by inadvertence, the Board omitted to co-opt him as Additional Director before appointing as Managing Director.

As a consequence of the Board having so omitted to appoint Mr. SB as Additional Director, the approval for the appointment by the shareholders (regularisation) at the annual general meeting of the company held on 18th August, 2020 was omitted to be obtained. Consequently, Mr. SB was deemed to have vacated the office with effect from 18th August, 2020 in terms of Section 161 of the Companies Act, 2013. However, M/s. CIFCPL did not notice this omission till 18th October, 2021 and took on record the cessation of the office of Mr. SB with effect from 18th August, 2020 in its Board Meeting held on 19th October, 2021. M/s. CIFCPL had thus violated the provisions of Section 161 of the Act from 06th March, 2020 to 18th October, 2021.

Registrar of Companies, Karnataka (‘RoC’) had levied a penalty on M/s CIFCPL of Rs. 3,00,000, Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV, CFO (KMP), Ms. DS, Company Secretary, Mr. AS, CFO (KMP), Mr. AA, Additional Director and Mr. AKG, Company Secretary of amounting to Rs.1,00,000 each. M/s CIFCPL filed an appeal under section 454(5) of the Companies Act, 2013 against the adjudication order passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 161 of the Companies Act, 2013.

An opportunity of being heard was given on 27th October, 2022. The authorised representative Mr. SR, Practicing Company Secretary appeared and reiterated the submissions made in the application and requested to reduce the quantum of penalty as levied by RoC.

HELD

The Regional Director, after considering the submissions made by Mr. SR, facts of the case and taking into consideration the Order of Adjudication of Penalty under section 454 of the Companies Act, 2013 issued by RoC, deemed that it would meet the ends of justice if the penalty levied by the Registrar of Companies, be appropriately reduced, as a mitigation.

The order of the RoC was modified and penalty was reduced for violation of section 161 of the Companies Act 2013, as mentioned below:

Penalty imposed
on

Penalty imposed
by Registrar of Companies, Karnataka

Penalty imposed
by the Regional Director (South East Region)

M/s CIFCPL

Rs.
3,00,000

Rs.
1,00,000

Mr. AR, Managing Director, Mr. SB, CEO (KMP), Mr. SCV,
CFO (KMP), Mr. AA, Additional Director Ms. DS, Company Secretary

Rs.
1,00,000
each * 5 = Rs. 5,00,000/-

Rs.
50,000
each * 5 = Rs. 2,50,000

Mr. AS, CFO (KMP) of M/s CIFCPL

Rs.
1,00,000

Rs.
5,000

Mr. AKG, CS of M/s CIFCPL

Rs.
1,00,000

Rs.
20,000

Total Penalty

Rs.
10,00,000

Rs.
3,75,000

Two Kids

Leo Tolstoy was a great Russian thinker and writer. His short stories are very famous. The following story is based on one of Tolstoy’s short stories which I vaguely remember. This is an adaptation of his theme.

Bunty and Pinky – both studied in the first standard in the same school. They liked each other and did many things together. Occasionally, they used to quarrel since they were good friends!

Once they quarrelled on occupying the first bench in the classroom. Pinky got angry since Bunty ran to capture the first bench. She wrote in her note book that ‘Bunty is a mad boy’; and showed it to him. Bunty wrote –‘Pinky is a dull girl’ and showed to her.

Bunty opened her tiffin box and ate something. Pinky took his water bag and poured half the water on the floor! Pinky hid Bunty’s pencil; Bunty threw away her eraser. Likewise, the fight went on!

Both walked separately back home without talking to each other. They were in ‘katti’. They narrated everything to their respective mothers. Mothers got furious! In the evening, after their husbands came back from office, parents of both of them met each other. They were staying quite close to each other. The ladies held their swords on the tongues! Husbands merely escorted them. Bunty and Pinky also accompanied them.

The ‘war’ started! Bunty’s mother blamed Pinky’s parents for lack of culture. Pinky’s mother retaliated by calling unty’s parents ‘uneducated’ and ‘mannerless’! The fathers just stood beside them discussing cricket, politics, and so on. In between, they watched the fight, cursorily intervening from time to time.

The passers-by on the road stopped for a while and got entertained. Both the mothers exaggerated what their respective kids had told them. When they wanted to verify certain facts from the kids, they were shocked! The kids were not around. They were missing. Now, their anger got converted into anxiety. They started searching for them. Mothers were in tears.

Suddenly they saw the kids in a park nearby. They were amazed to see them playing with each other with complete love and affection! They had forgotten all the quarrels. While playing in the mud, they spoiled the clothes of each other. They enjoyed it and laughed loudly!

Parents watched their innocence and felt ashamed on their dispute on the road!

SAT Dumps SEBI’S Pump-and-Dump Order in Bollywood Celebrity’s Case

BACKGROUND

A Bollywood celebrity and his family/associate were widely in the news recently because of a judgment SEBI made against them. SEBI held, in an interim and ex parte order, that they were allegedly involved in a pump-and-dump stock scam and made illicit profits. While this celebrity, Arshad Warsi (AW) and family/associate (together ‘AWS’), were alleged to have made Rs. 76 lakhs, the total profits made by the whole ‘group’ were about Rs. 41 crores. The 21 parties including AWS were debarred from stock markets, directed to impound these allegedly illicit profits in an escrow account and their bank accounts, and assets frozen in the interim.

This case is an example of how good intentions, and quick and extraordinary efforts can still result in serious injustice. While SEBI’s order shows quick action on all fronts including pursuing internet giants like YouTube for information and meticulously collating all information, it also shows how conclusions in law and facts ended up being flawed. The Securities Appellate Tribunal (‘SAT’) came down harshly on the order and even laid down several prerequisites for future orders. The parties, at least some of them, clearly suffered due to this order, for which SAT repeatedly said, it had no evidence whatsoever. However, hopefully, since SEBI will be required to follow the pre-requisites and prove the basic assertions, other parties may not suffer in the future and if they do, they have this precedent to cite and get quick justice (the order of SEBI is dated 2nd March, 2023 and the order of SAT is 27th March, 2023).

QUICK SUMMARY

At the outset, it may be stated that the whole matter is still under investigation. The SEBI order is interim in nature. Such interim and ex parte orders are passed to ensure that a wrong is not being continued and also parties are not able to take actions in the meantime to frustrate justice. Being ex parte, it also obviously means that the parties have not been given any prior opportunity to present their case. Thus, all the assertions and ‘facts’ and statements made here are provisional and need to be taken as allegations.

That said, this was one of the countless cases that, if the findings are true, are serious and daring, almost brash, scams. It is not as if they have started with the invention of the internet. But the internet has given more opportunities to reach a wider audience, to audio-visual techniques of psychological manipulation, and also use anonymity. On the other hand, using digital methods also means leaving digital footprints which can be speedily tracked, collected and collated. Instead of using laboured methods of investigation, making calls, going door to door, etc., SEBI too can use digital means to fight digital-based scams.

The findings/allegations of SEBI as per the order are as follows. There were two companies whose share prices were ‘pumped’ up by a barrage of false information and reports mainly through YouTube. Though the modus operandi and even some parties were common in both the cases, here, we are concerned with one of these companies – Sadhna Broadcast Ltd (SBL). The perpetrators uploaded several videos on YouTube in channels having a following of lakhs of people. Their reach was further widened by paying crores of rupees to Google Ad sense, which helped in reaching people interested in investing. This was also supplemented by creating artificial trading, leading to an impression that there are numerous people eagerly interested in buying the shares. Thus, the combination of targeted messaging of good prospects of the company accompanied by such false trades and rising prices created a rush amongst gullible investors looking for quick and easy profits, and who feared missing the proverbial bus.

The scam ended like all other scams. The perpetrators started selling their holding at the artificially raised prices, pocketed the profits of tens of crores of rupees, leaving investors holding the shares at the price which then crashed back.

ALLEGED INVOLVEMENT OF ARSHAD WARSI, FAMILY, ASSOCIATE (AWS)

SEBI found that, amongst others, AWS had also purchased shares at relatively low prices and sold them at higher prices, thus making, in all, net profits of about Rs. 76 lakhs (this was very likely an erroneous calculation by SEBI, as discussed later). SEBI held that AWS, like some others, was a party to the scam and thus the strictures were passed against them too. SEBI also pointed out that call data records showed that AW had telephonic contact with the person accused to be the primary perpetrator of the scam.

Accordingly, AWS were required to impound the profits so made in an escrow account with a lien in favor of SEBI. Till they did that, their bank accounts were frozen and they were barred from alienating any of their assets. Further, they were barred from dealing in securities markets and their demat accounts were also frozen.

SEBI NEGLECTING A FUNDAMENTAL ACCOUNTING CALCULATION OF PROFITS/LOSSES?

SEBI did show that AWS had purchased and sold shares of SBL. This made their profits, as alleged by SEBI, illegal. However, the SEBI order itself showed certain significant other information. While AWS did buy and sell these shares, they again purchased more shares. These purchases were made not only at a higher price but also of a larger quantity. These shares remained, it appears from SEBI’s order, with AWS. SEBI consciously ignored these shares in stock since it stated that it was concerned with the profits made.

To some extent, this approach by SEBI may be justified if other facts also pointed to intimate involvement in the scam. It is common for parties engaged in volume creation to buy and sell shares in a circular manner. Thereafter the group can sell most of the shares but some shares need to remain in their hands. For the purposes of the scam committed by the group as a whole, the fact that there were shares in hand in one or more of the parties, even out of their purchases, may not be material.

However, in case of AWS, no other factor was present showing intimate involvement. These shares that remained in hand were purchased at a high price, and if one considered the value of the shares at the post scam rates, AWS actually suffered a significant loss. The net loss even after adjusting the earlier profits was very likely at least Rs. 1 crore.

However, as stated earlier, SEBI ignored this aspect.

APPEAL TO SECURITIES APPELLATE TRIBUNAL (SAT) AND REVERSAL OF ORDER BY SAT

AWS filed an appeal with SAT. SAT went through the order and also heard both the sides. It noted several intriguing aspects. AWS was not involved at all in creation of the YouTube videos. Also, they did not feature in them. Neither did they recommend the shares to anyone. They had no connection (except one, discussed later) with either the main perpetrators or the other parties in terms of such scam. SAT repeatedly pointed out that there was not even an iota of evidence of guilt against AWS.

It was noted though that AW had a professional connection with the main alleged perpetrator. Such person, MS, had retained AW for a professional assignment in a film.

SAT noted yet another interesting aspect. AWS had purchased shares not from the public but from parties named in the order as being allegedly involved in the scam. Further, their sales too had counter parties named in the SEBI order. In other words, their profits were not made at all from any of the public investors.

Taking all the above into account, SAT ordered that the directions against AW and family to be reversed substantially. SAT repeatedly pointed out said that there was no evidence whatsoever against AWS of any involvement. However, it noted that considering the professional relation, even if this did not amount to any guilt, the fact remained that it did not totally rule out the guilty. SEBI had yet to complete the investigation and therefore it could not be ruled out that SEBI may find and present some evidence that would stand up, unlike the present situation where there was none. Accordingly, SAT ordered that AW and family should deposit 50 per cent of the profits in escrow and provide an undertaking to deposit the remaining 50 per cent in case of finding of confirmed guilt. As far as the associate of AW was concerned, there was no order of impounding of any profits. In view of this, all directions against her were reversed by SAT.

LESSONS AND CONCLUSIONS

In its order, SAT repeatedly pointed out the dangers of hastily placing restrictions such as freezing of bank accounts, demat accounts, debarring persons from trading, etc. in ad interim, ex parte orders. Even if such restrictions are provisional, there have to be a certain level of evidence which point out to guilt. In the present case, there was none against AWS. SAT cited copiously from the order of Supreme Court (in Radha Krishan Industries vs. State of Himachal Pradesh (2021) 6 SCC 771) which had made detailed observations on the preconditions of making provisional attachment of bank accounts. These were applied in this case too. These should help not only guide SEBI in making orders in the future but also would help parties who have faced such directions from SEBI.

Having said that, it is also notable that this case received wide publicity because of the celebrity name and hence this order received detailed attention and analysis which otherwise possibly may not have received. Also, the celebrities, possibly unlike ordinary persons, could afford competent legal advice and also file an urgent appeal. This obviously helped them get relief in barely a month. The fact is that SEBI often passes such orders and the parties find that much of the restrictions continue for a long time till SEBI finally completes the investigation, issues show cause notices, and final orders. Till that time, parties continue to suffer.

Further, freezing of bank accounts and directions to deposit in the escrow account, the alleged profits are often made on a group basis, imposing joint and several liability. Thus, each person suffers such restrictions unless the whole profit is deposited, even if the profit may not be with him.

All in all, the order of SAT is welcome and an important precedent for future application.

Cross-Border Succession : Foreign Assets Of An Indian Resident

INTRODUCTION

We continue with our theme of cross-border succession planning. Last month’s Feature, examined issues in the context of a foreign resident leaving behind Indian assets. This month we explore the reverse situation, i.e., succession issues of an Indian resident leaving behind foreign assets. In the age of the Liberalised Remittance Scheme (LRS) of the RBI, this has become a very important factor to be considered.

APPLICABLE LAW OF SUCCESSION

The first question to be addressed is which law of succession applies to such an Indian resident? Here the Indian Succession Act, 1925 would not be applicable. The relevant law of succession of the country where the assets are located would apply. It would have to be seen whether that country has a law similar to the Indian Succession Act which provides that succession to movables is governed by the law where the deceased was domiciled and succession to an immovable property is governed by the law of the land where the property is located. For instance, England has a law similar to India.

There are two basic legal systems in International Law ~ Civil Law and Common Law. Certain Civil Law jurisdiction countries, such as, France, Italy, Germany, Switzerland, Spain, Japan, etc., have forced heirship rules. Forced heirship means that a person does not have full freedom in selecting his beneficiaries under his Will. Certain close relatives must get a fixed share. This is a feature which is not found in Common Law countries, such as, the UK and India. Thus, an Indian has full freedom to prepare his Will as per his wishes and bequeath to whomsoever he wishes. This issue has been elaborated eloquently by the Supreme Court in its decision in Krishna Kumar Birla vs RS Lodha, (2008) 4 SCC 300 where it has held:

“Why an owner of the property executes a Will in favour of another is a matter of his/her choice. One may by a Will deprive his close family members including his sons and daughters. She had a right to do so. The court is concerned with the genuineness of the Will. If it is found to be valid, no further question as to why did she do so would be completely out of its domain. A Will may be executed even for the benefit of others including animals.”

Countries in the Middle East, such as, the UAE, follow the Sharia Law. According to the Sharia Law forced heirship rules apply, i.e., a person does not have complete freedom in bequeathing his assets under a Will. The Federal Law No. (28) of 2005 on Personal Status applies in the UAE for all inheritance issues. When a non-Muslim dies intestate, the Sharia Law as applicable in the UAE would apply to his assets located in the UAE. Sharia Law provides more rights to a son as opposed to a daughter. However, if the non-Muslim were to make a Will and follow the necessary procedure, such as, translation to Arabic, attestation by authorities, etc., then the Sharia Law would not apply. In addition, certain free trade zones e.g., the DIFC in Dubai, gives the option of getting the Will registered with Courts located within their zone. This registration also results in Sharia Law not applying to the UAE assets of the deceased.

Since January 2023, the forced heirship in Switzerland has reduced from 3/4th share in the estate to ½ share. Thus, a person can now make a Will according to his choice for ½ of his estate located in Switzerland and the rest must go according to the law to the spouse and parents of the deceased. Louisiana in the US is the only State which has forced heirship rules since it was at one time a French colony. Trusts could be a solution for avoiding forced heirship rules.

ONE INDIAN WILL OR SEPARATE WILLS?

Is it advisable to make one consolidated Indian Will for all assets, wherever they may be located or should a person make a separate Will for India and one for each country where the assets are situated? The International Institute for the Unification of Private Law or UNIDROIT has a Convention providing a Uniform Law on the Form of an International Will. Member signatories to this Convention would recognise an International Will if made as per this Format. Thus, a person can make one consolidated Will under this Convention which would be recognised in all its signatories. This would preclude the need for making separate Wills for different countries. However, only a handful of countries such as, Australia, Canada, Italy, France, Belgium, Cyrpus, Russia, etc., have accepted this Convention. Countries, which have a major Indian diaspora such as, UAE, Singapore, Hong Kong, Malaysia, etc., are not signatories. Further, in the US, only 20 states have ratified this Convention, with the major states being, California and Illinois. Conspicuous by their absence are key States such as, Texas, Florida, New York, New Jersey, etc. Considering the limited applicability of the UNIDROIT Convention, it is a better idea to have horses for courses approach, i.e., a distinct Will for each jurisdiction where assets are located. For example, an Indian with assets in Dubai, could get his Will prepared according to the format prescribed by the Dubai International Financial Centre and register it with the DIFC Courts to avoid the applicability of Sharia Law.

International Wills would require probates/succession certificates/inheritance certificates as per the laws of the country in which the assets are located. Some nations that require a Probate / Certificate of Inheritance ~ US, Singapore, UAE, France, Switzerland, Germany, Canada, Malaysia, South Africa, etc. Further, states in the US have their own Probate Laws and Probate Fees. For instance, Probate Costs are very high in the states of California and Connecticut. Thus, if a person dies leaving behind assets in these states, he would have to consider the costs as per the State Law.

Indian residents should examine whether their foreign Wills for foreign assets need to follow forced heirship rules if that country is governed by such rules.

FEMA AND FOREIGN ASSETS OF A RESIDENT

The Foreign Exchange Management Act, 1999 provides that a person residing in India may hold, own, transfer or invest in currency, security or any immovable property situated abroad, if such currency, security or property was acquired, held or owned by such person when he was a non-resident or inherited by him from a person who was a non-resident. Thus, a resident can own, hold and transfer such assets inherited by him.In addition, the Overseas Investment Rules, 2022 permit a person resident in India to acquire immovable property outside India by way of inheritance from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition. Hence, if a person has acquired a foreign property under LRS then his heirs can inherit the same from him. A person resident in India can also acquire foreign immovable property from a non-resident.

Further, a resident individual may, without any limit, acquire foreign securities by way of inheritance from a person resident in India who is holding such foreign securities in accordance with the provisions of the FEMA or from a person resident outside India. Again a person who has invested in shares under LRS can bequeath them to his legal heirs.

TAX PROVISIONS

Inheritance Tax / Estate Duty is applicable in several nations, such as, the US, UK, Germany, France, Japan, Netherlands, Switzerland, Thailand, South Africa, etc. These provisions apply to the global assets of a resident of these countries and should be carefully scrutinised to understand their implications. Belgium has the highest slab rate of estate duty with the peak duty touching 80 per cent! While there is no duty on movables located within Belgium, Belgian immovable property is subject to inheritance tax even for non-residents.Popular countries where Indians have assets and which do not levy estate duty include, UAE, Singapore, Hong Kong, Malaysia, Saudi Arabia, Mauritius, Australia, etc.

The US has the most complex and comprehensive Estate Duty Law. An Indian resident (who is neither a US citizen nor a Green Card holder) is subjected to estate duty on the US assets after a basic exemption limit of only US$60,000. On the other hand, a US citizen has a basic estate duty exemption limit of $12.92 million. However, the peak estate duty rate is the same for both at 40 per cent! Thus, consider an example of an Indian resident who has been regularly investing under the LRS in the shares of Apple Inc. His portfolio has now swelled up to a value of $3 million. On his demise, his estate would get an exemption of $60,000 and the balance sum of $2.94 million would be subject to US estate duty with the peak rate being 40 per cent. Add to this the US Probate costs and you could have a huge portion of the estate snipped off to taxes and duties.

Further, in the case of a US citizen who is living abroad, say, in India, while the basic exemption limit is $12.92 million, any inheritance to his estate by his non-US spouse is exempt only to the extent of $175,000. If it was a case of US citizen to US spouse estate transfer (even if both were residents of India), there would be no estate duty since marital transfers are exempt from duty.

The UK also levies Inheritance Tax @ 40 per cent after a basic exemption limit (known as the nil-rate band) of £325,000. In addition, one UK house up to £175,000 is also exempt. These limits apply also to foreigners owning assets in the UK. There are certain exemptions, such as, inter-spousal transfers. In addition, the UK and India have a Double Tax Avoidance Treaty in relation to Estate Duty. The UK also has look-back rules of up to 7 years and thus, in the case of certain gifts if the donor does not survive for 7 years after the gift, then the gift would also be subject to Inheritance Tax. Most countries, including the US, have a look back period of 3 years, the UK is quite unique in pegging this period at 7 years.

Switzerland has a unique system where the inheritance taxes are regulated by Cantons. Each Canton has the power to determine their own inheritance tax rate.

There is no Estate Duty/Inheritance tax in India on any inheritance/succession/transmission. Section 56(2)(x) of the Income-tax Act also exempts any receipt of an asset/money by Will/intestate succession. This exemption would also be available to receipt of foreign assets by Indian residents. There is no condition that the receipt under a Will/Succession/Inheritance must be from a relative. It could even be from a friend.

Residents who inherit any foreign assets must be careful and file Schedule FA in their income-tax Returns. They should also pay heed to whether the asset inherited by them consists of an undisclosed asset as per the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The decision of the Calcutta High Court in the case of Shrivardhan Mohta vs UOI, [2019] 102 taxmann.com 273 (Calcutta) is relevant in this respect. Four undisclosed offshore bank accounts were found during a search on the assessee and action under the Black Money Act was initiated against him for non-disclosure of these accounts. The explanation given by the assesse was one of inheritance. The Court held that “Inheritance did not prevent him from disclosing. It is just an unacceptable excuse.” Thus, it would be the responsibility of the beneficiary to include foreign assets within his disclosure on receiving the same.

CONCLUSION

Estate planning, per se, is a complex exercise. Throw in a cross-border element and one is faced with a very dynamic, multi-faceted scenario which requires due consideration of both Indian and foreign tax and regulatory provisions.

Ind AS/IGAAP – Interpretation and Practical Application

COMPANIES (ACCOUNTS) RULES ON BACK-UPS
The Ministry of Corporate Affairs (MCA) vide its notification dated 5th August, 2022 has amended the Companies (Accounts) Rules, 2014 regarding books of accounts. Here, we discuss only the matters relating to back-ups, the change in back-up rules, management and auditor’s responsibility with respect to the same.

Rule 3(5) of the Companies (Accounts) Rules pre-amendment and post-amendment are set out below.

RULE 3(5) PRE-AMENDMENT

There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law:

Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.


RULE 3(5) POST-AMENDMENT

There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law:Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.

As a result of the amendment, the back-up is now required to be maintained on a daily basis instead of a periodic basis. Given below are a few Q&A’s relating to the rules and the amendment.

QUERY

What is the purpose of the rules and the amendment?

RESPONSE

Back-ups are an important feature of any disaster recovery plan. Pre-amendment, the requirement to take periodic back-up could have been complied with by the entities by taking a back-up once in a financial year, say, at the end of the financial year. By changing the back-up rules to requiring it on a daily basis, the objective of a disaster recovery plan is better met. Besides, regulators have ensured that up- to-date information is available from a company in an investigation.

QUERY

Is back-up required for books and papers which are maintained manually?

RESPONSE

Back-up is not required for books and papers which are maintained manually. Back-up is only required for books and papers maintained electronically.

QUERY

Back-up is required of books and papers. What does that include?

RESPONSE

As per Section 2(12) of Companies Act, 2013 – “book and paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.

As per Section 2(13) of the Companies Act, 2013 “Books of Account” includes records maintained in respect of—

(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

(ii) all sales and purchases of goods and services by the company;

(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

As per the above definition, back-up is required for the following:

1. All books of accounts that result in the trial balance and financial statements for an entity need to be backed-up on a daily basis. They not only include the primary ledger but also subsidiary ledgers. Therefore, general ledger, sales ledger, purchase ledger, payroll ledger, etc will all be included. Let’s consider a simple example. An entity maintains employee master ledger that contains the salary break-up and leave details for each employee. The payroll computation is performed using such details from the master ledger. In such a situation, the master ledger would constitute books of accounts. If, however, the facts were such, that the master ledger only comprised appraisals and other personal details, but not any financial information such as the salary break-up or details relating to leave taken, etc., the master ledger would not constitute “books of accounts.”

2. Cost records prescribed under section 148 are also required to be backed-up on a daily basis.

3. Back-up requirements apply to papers as well, which are maintained in an electronic form, which may include, vouchers or invoices that support an entry in the books of accounts.

QUERY

Why is the requirement for daily back-up considered to be highly onerous?

ANSWER

Very often, a daily back-up may fail due to numerous reasons, such as the network may be down on certain days, or the volume of transactions on certain days may be too high which may create an impediment for a back-up or the system may have got corrupted or crashed, etc. This may result in non-compliance with the rules and a potential penalty.

QUERY

Can the back-up be maintained on cloud?

Response

Yes, the back-up can be maintained on cloud provided it is on an identified physical server that is located in India. If an entity uses a cloud service provider to do a back-up, the entity should have an arrangement with the cloud service provider requiring the back-up to be maintained on an identified server physically located in India.

If an entity uses the mirroring technique to maintain immediate back-ups, the mirroring should happen on a physical server located in India.

QUERY

As per Section 143(3) of the Companies Act

The auditor’s report shall also state—

(b) Whether, in his opinion, proper books of account as required by law have been kept by the company;

(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 system in place and the operating effectiveness of such controls;

Is there a responsibility for the auditor to report any non-compliance with respect to the back-up rules? In what situations auditor needs to qualify?

RESPONSE

Yes, the auditor is required to report any non-compliance with respect to the back-up rules. As per Section 143(3), the auditor has to opine on whether proper books of accounts as required by law have been kept by the company. In the author’s view, proper books of accounts should be interpreted to include not only situations where the books of accounts do not present a true and fair view but also situations where other requirements of the law relating to books of accounts are not complied with, such as daily back-ups or maintenance of an audit trail.

Audit qualification may be warranted in the following situations:

  • Books of accounts are not accessible in India or not always accessible in India
  • Back-up of books available, but no back-ups of underlying invoices, vouchers
  • Back-ups maintained physically but not on a server
  • Back-ups maintained electronically (e.g., a CD) but not on a server
  • Back-up server is not physically located in India
  • Back-ups done weekly, but not daily
  • Back-up done daily, except a few days when server was down
  • Back-up is being done daily, but that process was started only in March 2023 (instead of August 2022 and onwards), prior to that back-up were done monthly
  • Back-up on cloud and servers located outside of India

The obligation of a daily back-up is highly onerous and there are many situations which could lead to an audit qualification.

QUERY

An entity’s software configuration requires daily back-up however, the entity does not have an audit log to demonstrate to the auditor that the daily back-ups were indeed being taken. What is the auditor’s responsibility in such a situation?

RESPONSE

The auditor will have to state in his audit report that it was not possible to verify if daily back-ups were being taken in the absence of any evidence to that effect.

QUERY

Does taking a daily back-up mean that the entity will have 365 or 366 days of separate back-up information?

RESPONSE

The entity has to take daily back-up. However, the back-ups taken on each day will update the previous back-ups. In other words, on any given day, the entity will have one cumulative back-up of the books of accounts and papers. Consequently, at the end of the financial year, the entity will have one set of original books of account, and another set of back-up of those books of accounts.

QUERY

A company has a Document Management System (DMS), where for certain underlying documents the paper trail is not maintained, will back-up be required of the DMS?

RESPONSE

Many companies maintain “papers” in the DMS application – which is primarily a computer system/ software to store, manage and track electronic documents and electronic images of paper-based information. Requirements of this law will extend to such applications as well. Therefore, back-up would be required of the DMS.

QUERY

A company has a physical server in India, where the original set of books of accounts are maintained. In such a situation, can back-up be located in a physical server outside India?

RESPONSE

No. The requirements prescribed under Rule 3 of the Accounts Rules (including taking daily backups) are applicable to all companies having their servers in or outside India. Particularly, it may be noted that even companies having their main server in India are also required to maintain back-up server in India.

QUERY

Since back-ups are taken on a daily basis, would it by analogy mean that the books of accounts have to be closed on a daily basis?

RESPONSE

The amended Rule envisages that backups of books of account and other books and paper should be taken on a daily basis. The Rule does not require the management to carry out books closing process on a daily basis.

QUERY

If the server is down at times, back-ups may not happen, would that tantamount to a non-compliance with the Rules?

RESPONSE

Yes, that is a non-compliance with the Rules and will require an audit qualification.

Logistics Sector

INTRODUCTION

Logistics is one of the most essential sectors of an economy and comprises all supply chain activities, mainly transportation, inventory management, flow of information and customer service. Though primarily concerned with the movement of goods, the sector covers a host of activities apart from transportation of goods, such as clearance with customs authorities, storage of goods, etc., and requires involvement of various stakeholders, such as transporters (road/ rail/ air/ waterways), warehousing service provider, customs house agent/clearing and forwarding agents, etc., The various activities involved in this sector are listed below:

  • Transport of goods by road, rail, air and waterways, including multi-modal transport,
  • Freight forwarding services,
  • Warehousing services, including Free Trade Warehousing Zones,
  • Clearing and forwarding services, including services provided within port areas.

In this article, we have discussed the above activities covering the sector along with various GST issues revolving around them.

A. TRANSPORTATION OF GOODS

The core activity undertaken by this sector is the transportation of goods with all other activities being incidental to this. The mode of transportation of goods may be either by road, rail, air or waterways or a combination of more than one. The applicable GST rates for service of transportation of goods, when supplied via a single mode are notified under notification 11/2017-CT (Rate) dated 28th June, 2017 as under:

Description of
Service		 Notified Rate Conditions
Service of GTA in relation to
transportation of goods supplied by a GTA where the GTA does not exercise the
option to itself pay GST on the services supplied by it		 5 per cent Credit of input tax charged on goods and
services used in supplying the service has not been taken.
Service of GTA in relation to
transportation of goods supplied by a GTA where the GTA exercises the option to
itself pay GST on the services supplied by it		 5 per cent (without ITC) /12 per cent (with
ITC)		 Option should be exercised in Annexure V on
or before 15th March of the preceding financial year. Once option is
exercised, the same cannot be changed.
Transport of goods in container by rail by
any person other than Indian Railways		 12 per cent Nil
Transport of goods by rail, other than
above		 5 per cent Credit of input tax charged in respect of
goods in supplying the service is not utilized for paying central tax or
integrated tax on the supply of service.
Transport of goods in a vessel including
services provided or agreed to be provided by a person located in non-taxable
territory to a person located in non-taxable territory by way of
transportation of goods by a vessel from a place outside India up to the
customs station of clearance in India.		 5 per cent Credit of input tax charged on goods (other
than ships, vessels including bulk carriers and tankers) used in supplying
the service has not been taken. This condition shall not apply where the
supplier of service is located in non-taxable territory.
Transportation of goods, being natural gas,
petroleum crude, motor spirit (petrol), HSD or ATF through pipeline subject
to restriction in claim of input tax credit		 5 per cent Credit of input tax charged on goods and
services used in supplying the service has not been taken.
Transportation of goods, being natural gas,
petroleum crude, motor spirit (petrol), HSD or ATF through pipeline other
than above		 12 per cent Nil
Multimodal transportation of goods 12 per cent Nil
Transport of goods by ropeways 5 per cent Credit of input tax charged on goods used
in supplying the service has not been taken.
Goods transport services other than above 18 per cent Nil

TRANSPORTATION OF GOODS BY ROAD

The levy of indirect tax on services of transport of goods by road has always been litigative and seen its’ fair share of controversy, right from its’ introduction under service tax regime. The same was primarily due to resistance by the transport sector, which predominantly has been an unorganised sector not geared up to comply with the taxation laws. This is why the concept of reverse charge mechanism was introduced for this sector.

The concept of reverse charge continued even under GST when services are provided by GTA with restriction on claim of input tax credit by the suppliers. Entry 1 of notification 13/2017 – CT(Rate) dated 28th June, 2017 provides that the same shall apply in case of services supplied by a Goods Transport Agency (GTA) to

(a) Any factory registered under or governed by the Factories Act, 1948 (63 of 1948); or

(b) Any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) Any co-operative society established by or under any law; or

(d) Any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(e) Anybody corporate established, by or under any law; or

(f) Any partnership firm whether registered or not under any law including association of persons; or

(g) Any casual taxable person; located in the taxable territory.

In view of representations made by the sector, the rate entries were amended and option to pay tax @ 12 per cent under forward charge was introduced with corresponding credits available to transporter. The entry read as under:

The above indicates that a taxable person may opt to pay tax @ 5 per cent (without ITC) / 12 per cent (with ITC) under forward charge. However, following issues emerge from the above:

Description
of Service		 Rate
(per cent)		 Conditions
(iii) Services of goods transport agency
(GTA) in relation to transportation of goods (including used household goods
for personal use). Explanation.-“goods transport agency”
means any person who provides service in relation to transport of goods by
road and issues consignment note, by whatever name called.		 2.5 Provided that credit of input tax
charged on goods and services used in supplying the service has not been
taken [Please refer to Explanation no. (iv)]
Or
6 Provided that the goods transport agency
opting to pay central tax @ 6% under this entry shall, henceforth, be liable to pay central tax
@ 6% on all the services of GTA supplied by it.

a) Can a GTA having multiple GSTIN, exercise different options for different GSTINs?

b) This is because under GST, each registration obtained by a taxable person is treated as distinct person, i.e., separate legal entity for the purpose of GST and therefore, a view was possible that separate options could have been exercised for separate registrations.

c) Once the option was exercised, did the taxable person have an option to revert to the RCM scheme, i.e., whether the option was permanent or temporary or a taxable person could change the option at the start of the next financial year? The notification did not explicitly provide for a change in the option and therefore, a view prevailed that once exercised, the GTA could not have changed the option.

Considering the above ambiguity, the entry was again amended vide notification 3/2022 – CT (Rate) dated 13th July 2022. It is now provided that the option to pay tax at 5 per cent will be the general rule, unless the supplier exercises the option to pay tax at 12 per cent which should be exercised on or before 15th March of the preceding year. The timeline to exercise the option for FY 2023-24 has been extended up to 31st May, 2023. It is for this reason that many suppliers have started obtaining multiple registrations and entities wherein under one registration / entity, the option is not exercised, i.e., under one registration /entity, the tax is paid under reverse charge by the recipient while in another registration/entity, the option is exercised, i.e., GST is charged @ 12 per cent with corresponding input tax credit. This also invariably clears the first confusion, i.e., whether the option to be exercised is vis-à-vis the legal entity or the specific registration as the Declaration is to be given for the GSTIN and there is no specific condition in the notification to the effect that the option exercised shall be uniform across the legal entity.

GTA VS. NON-GTA – RELEVANCE OF CONSIGNMENT NOTE

An important aspect which needs to be noted in the above rate entries is that they apply to services supplied by a Goods Transport Agency or GTA. The term “GTA” has been defined under the rate notification to mean any person who provides service in relation to transport of goods by road and issues a consignment note by whatever name called. This necessarily means that person who provides the service of transportation of goods by road but does not issue a consignment note is not a GTA. In fact, services of transportation of goods when not supplied by a GTA have been exempted vide entry 18 of notification 12/2017 – CT (Rate) dated 28th June, 2017 which exempts services by way of transportation of goods by road except the services of a goods transport agency or a courier agency.

Therefore, it can be said that whether a person supplying the service of transportation of goods by road is a GTA or not is dependent upon whether such person issues a consignment note or not? In this context, one may refer to the decision of Tribunal in the case of Narendra Road Lines Pvt. Ltd. vs. Commissioner [2022 (64) GSTL 354 (Tri-All)] wherein it has been held as under:

14. … … In some of the cases the appellant transported the goods by road without issuance of the consignment note, the said activity prior to June, 2012 was not classifiable under category of services as no consignment note was issued and it is prime requirement to demand service tax under the category of goods transport agency service. … …

Similar view was followed in the case of Mahanadi Coalfields Ltd. vs. Commissioner [2022 (57) GSTL 242 (Tri-Kol)] wherein the demand under GTA was set-aside by holding that issuance of consignment note is non-derogable ingredient for a service transport to fall under GTA.

It therefore becomes important to understand what constitutes “consignment note”. While the notification is silent to that aspect, vide press release (39 dated 1st January, 2018), it has been clarified that guidance can be taken from the meaning ascribed under Rule 4B of Service Tax Rules, 1994. In terms of the said rule, consignment note means a document issued by a goods transport agency containing following details/attributes:

  • It should be serially numbered,
  • It should contain the name of the consignor and consignee,
  • It should disclose the registration number of the goods carriage in which the goods are transported,
  • It should disclose details of the goods transported, the place of origin and destination,
  • It should disclose person liable for paying service tax, i.e., whether consignor, consignee or the goods transport agency.

Therefore, a supplier issuing a document in the course of supplying service of transportation of goods which contain all the above details can be said to have issued a consignment note and therefore, he will be GTA for the purpose of GST. However, in one particular case (K M Trans Logistics Pvt Ltd [2020 (35) GSTL 346 (AAAR-GST-Raj)]) before the Authority for Advance Ruling, a query was raised regarding the applicability of GST in case where the consignment note was not issued by them. In this case, the supplier was providing the service of transport of manufactured vehicles from factory to authorised dealers. It was their contention that in the course of providing the said service, they do not issue consignment note and therefore, the services provided were exempt from the levy of GST. This was however rejected by the Authority on the grounds that the service supplier was generating EWB which contained all the particulars required to be mentioned in a consignment note and therefore, held that they were not eligible for the above exemption. In the view of the author, this conclusion may not survive judicial scrutiny as an EWB does not contain many of the features which are prescribed u/r 4B of Service Tax Rules, 1994, such as being serially numbered, details of person liable to pay tax, etc.

This takes us to the next question of what happens if a supplier is able to prove that he has not issued a consignment note. The answer to this would be exemption from GST vide entry 18 of notification 12/2017-CT (Rate) dated 28th June, 2017 which exempts service provided by way of transportation of goods other than by a GTA or a courier agency.

GTA – SUB-CONTRACTING

At times it may so happen that a GTA (say “A”) has entered into a contract for providing service relating to transport of goods. However, the GTA may not have the means to execute the said service himself and therefore, he may appoint another GTA (say “B”) to execute the said service under the sub-contracting model. Under this model, both A and B are providing the service of transporting of goods by GTA with service flowing from B to A to client.

There remains an issue of whether B, i.e., sub-transporter can be treated to be GTA. This is because in Liberty Translines [2020 (41) G.S.T.L. 657 (App. A.A.R. – GST – Mah.)], it has been held that there cannot be more than one consignment note in a transaction. Since the contract would be awarded to A, the consignment note would generally be issued by A. The question that therefore arises is how the service by B to A shall be classified? In the above ruling, the Authority has also held that upon sub-contracting, classification of supply changes from the service of transportation of goods by GTA to service of hiring of means of transport. Therefore, the sub-transporter would be eligible to claim exemption under entry 22 of notification 12/2017 – CT (Rate) dated 28th June, 2017. However, this would necessarily mean that the sub-transporter will not be eligible to claim proportionate credit to the extent he has exercised the option of paying tax under forward charge.

However, the conclusion of the above ruling is questionable. So far as the conclusion that there can only be one consignment note in a transaction is concerned, one may refer to the Carriage by Road Act, 2007 which does not provide any exception from issuing the goods receipt note when receiving the goods from another transporter. The format of goods receipt note (provided in Form 8 of Carriage by Road Rules, 2011) to be issued by the transporter on receipt of goods from another transporter contains all the particulars which are required to be contained in consignment note. Hence, a view can be taken that even a sub-transporter can issue consignment note to the transporter.

Similarly, the second conclusion that classification changes upon sub-contracting is not correct in all instances. This is because if A has received a contract for transporting goods of a lesser quantity, say five boxes from Maharashtra to Gujarat (half vehicle load) and transports the goods in his own vehicle, he will end up bearing a loss as full capacity is not utilised. In such case, he might contract with B, who has a half-loaded vehicle going on the same route to also load his goods on his vehicle and deliver them on his behalf. In this case, it cannot be said that B has provided the service of hiring of vehicle to A. Rather, it is clearly a service for transportation of goods and therefore, since B is not a GTA for this leg of transaction (as consignment note is not issued), the service provided by him would be exempt under entry 18 of notification 12/2017-CT (Rate) dated 28th June, 2017.

To summarise, if the element of hiring of vehicles is not brought into picture, there can be following variants in a sub-contracting transaction:

Transporter Sub-transporter Implications
A – 12 per cent (FCM) B – 12 per cent (FCM) A and B will claim full input tax credit.
A – 12 per cent (FCM) B – 5 per cent (FCM) A to claim ITC of tax charged by B. No ITC
available to B.
A – 12 per cent (FCM) B – 5 per cent (RCM) A to pay tax on service received from B
under RCM and claim input tax credit. No ITC available to B.
A – 5 per cent (FCM) B – 12 per cent (FCM) A will not be entitled to claim input tax
credit, thus resulting in tax inefficiencies.
A – 5 per cent (FCM) B – 5 per cent (FCM)
A – 5 per cent (FCM) B – 5 per cent (RCM) A to pay tax on service received from B
under RCM and claim input tax credit. No ITC available to B.
A – 5 per cent (RCM) B – 5 per cent (RCM) Liability on A to pay tax under RCM with no
corresponding input tax credit
A – 5 per cent (RCM) B – 5 per cent (FCM) A will not be entitled to claim input tax
credit, thus resulting in tax inefficiencies.
A – 5 per cent (RCM) B – 12 per cent (FCM)

However, if B takes a view and is able to demonstrate that the transaction with A is that of hiring of goods transport vehicle or he is not a GTA (as he is not the one issuing consignment note), he shall be eligible to claim exemption under entry 22 / 18 of notification 12/2017-CT (Rate) dated 28th June, 2017. This will however restrict B’s claim of input tax credit under rules 42 / 43 of the CGST Rules, 2017.

TRANSPORTATION VS. HIRING

There are also instances where instead of providing the transportation services, the service provider gives the entire vehicle at the disposal of the client who can use the vehicle as deemed fit/necessary. Similarly, at times, a transporter having capacity issues may take the vehicle of other transporter on hire.

Such services are distinct from the service of supply of transportation of goods though the end objective
achieved may have been the same. However, the issue remains is whether such supplies will attract classification under chapter 9966 which deals with rental services or 9971 which deals with transfer of right to use any goods. The relevant rate entries are reproduced below for reference:

Chapter 9966:

Description of
Service		 Rate
Renting of goods carriage where the cost of
fuel is included in the consideration charged from the service receiver		 12 per cent
Rental services of transport vehicle with operators
other than above		 18 per cent
Time charter of vessels for transport of
goods provided that credit of input tax charged on goods (other than on
ships, vessels including bulk carriers and tankers) has not been taken		 5 per cent

Chapter 9971

Description of
Service		 Rate
Transfer of right to use any goods for any
purpose (whether or not for a specified period) for cash, deferred payment or
valuable consideration		 Same tax rate as applicable on supply of
such goods

At this juncture, it may be relevant to refer to the decision of the Hon’ble Supreme Court in the case of Great Eastern Shipping Company Ltd. vs. State of Karnataka [2020 (32) GSTL 3 (SC)] wherein in the context of time charter agreements for vessels along with operating staff, the Hon’ble Supreme Court had held that during the period of agreement, the vessel was at the exclusive disposal of the other party and therefore the same constituted “deemed sales” and shall attract levy of sales tax/ VAT.

The time charter of vehicle specifically attracts 5 per cent GST. However, the same also gets covered under 9971 as per which, the applicable tax rate shall be the same tax rate as applicable on supply of goods. This may result in confusion as to which entry shall be applicable. In such a situation, one needs to refer to Rule 3 (a) of the Rules of Interpretation which provides that the heading with most specific description shall be preferred over a more general description. Therefore, one may take a view that entries under chapter 9966 shall have precedence over entries under chapter 9971, which are the residuary entries.

TRANSPORT OF GOODS BY VESSEL

The activity of transport of goods by vessel generally refers to the service of transport of goods by waterways. Traditionally, it referred to the services provided in relation to import / export of goods. However, with the development of infrastructure for transportation of goods within India using inland waterways, the provisions shall also apply to domestic services. However, to promote inland waterways, services by way of transportation of goods by inland waterways have been exempted under entry 18 of notification 12/2017 – CT(Rate) dated 28th June, 2017.

REGISTRATION ASPECT

The person supplying the service, i.e., shipping line may be located in or outside India. It may happen that an exporter of goods from India contracts for receiving the said service from a foreign shipping line. In such a case, the issue arises is whether the shipping line has supplied the service from India or not? This is because the shipping line receives the goods in India for loading on the vessel. Therefore, a view prevails that the shipping line is providing service from India and therefore, they are required to obtain registration and discharge GST on the charges collected from their clients.

Alternately, they also have an option to appoint the agent who will issue the invoice on their behalf and discharge the applicable GST. In such a scenario, the agents will obtain a separate registration for discharging the tax liability on charges collected on behalf of their principals (“principal registration”). The details under this registration will not form a part of the financials of agent as they are not themselves supplying the service, but merely facilitating the process of raising the invoice and collecting the consideration from the clients on behalf of the shipping lines.

However, other services which the agent provides on their own account will be taxed under their regular registration (“agent registration”), i.e., where they supply services on their own account. This would include local charges levied by ports, charges for transport of goods within the port area, etc., which are recovered from the importer/exporters. Similarly, the agents also recover charges from the shipping line for providing the above services on which GST is leviable as “intermediary”.

The consideration collected on behalf of the clients is remitted to the shipping lines abroad after making various deductions. One of the deductions include various expenses incurred by the shipping lines in India for which the invoices are issued by the local suppliers to the principal registration as the representative of the shipping line. There is a question of whether the input tax credit of tax charged on these supplies can be claimed while discharging the GST liability collected on behalf of the shipping lines. This question arises because the shipping lines sell the freight not only through their Indian agents, but at times, also directly through their foreign offices. Therefore, the location of supplier of service is outside India and no GST is leviable on the same. This would mean that the said inward supplies are used for both, taxable as well as non-taxable activities and claim of input tax credit may give rise to the question of levy of tax on such freight sold from outside India.

TYPES OF CHARGES

The supplies are generally structured under two models, i.e., “prepaid” or “to collect” which applies to both, import as well as export shipments. Under the prepaid model, the customer takes upon himself to pay the freight while in case of “to collect”, the liability to pay the freight and the incidental charges is on the consignee or some third party.

In addition to the above, in the course of providing the transport services, the shipping lines also collect various additional charges, such as:

  • Bunker adjustment factor
  • Bill of Lading Charges
  • Fuel Surcharge
  • Hazardous Material surcharge
  • Low sulphur surcharge
  • Emergency Risk Surcharge
  • Peak Season surcharge

The above charges are recovered in the course of providing the main supply, i.e., transportation of goods by vessel and therefore, attract same treatment as the freight charges.

EXEMPTION

It may also be noted that upto 30th September, 2022, the place of supply of services of transportation of goods by a vessel from customs station of clearance in India to a place outside India was exempted from the levy of service tax. This exemption was applicable especially when the services were supplied to Indian exporters. However, this exemption has been withdrawn w.e.f. 1st October, 2022 and the said services are now taxable and therefore, instead of outright exemption, the exporters will now have to opt for the refund mechanism to encash the tax charged by the service providers.

TRANSPORT OF GOODS BY AIR

The services of transportation of goods by aircraft are leviable to GST under the residuary rate, i.e., 18 per cent as there is no specific entry for the same in the rate notifications.

There are following exemptions w.r.t the said services:

  • Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India
  • Services by way of transportation of goods by an aircraft from customs station of clearance in India to a place outside India. This exemption (similar to export of goods by vessel) was applicable only upto 30th September, 2022 and has been withdrawn w.e.f 01st October, 2022.

MULTI-MODAL TRANSPORT

At times, it may happen that a supplier provides the service of transportation of goods by multiple modes, i.e., road, air, waterways or rail. This is termed as multi-modal transportation and the rate notification prescribes rate of 12 per cent for the same. However, this applies only to domestic multi-modal transport, i.e., transport of goods from a place in India to a place within India.

For example, an exporter who wants to ship goods to the US may procure the service of a transporter who picks up the goods from his location and ensures delivery till the US by transporting the goods to the customs port, arranging for vessel, etc., Though this supply involves multi-mode transport, for the purpose of GST, it is not classifiable under the said rate. Therefore, the supply should classify as transport of goods by water and attract GST @ 5 per cent.

The question that arises is would the answer differ if the contract identifies separate consideration for each activity, i.e., transport of goods by road, handling customs compliance, ocean freight, etc.? The answer to this question is in the definition of “composite supply” under section 2 (30) of the CGST Act, 2017 which is reproduced below for ready reference:

(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

(90) “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

As can be seen from the above, to determine whether a supply constitutes composite supply, we need to analyse what is the principal supply, i.e., predominant supply. In the above example, undoubtedly, the principal supply is that of transportation of goods by water and therefore, a view can be taken that the entire service supplied is that of transportation of goods by water and shall attract GST @ 5 per cent.

RESTRICTIONS ON CLAIM OF INPUT TAX CREDIT

A perusal of the rate entries applicable to the sector would indicate that a lower tax rate has been notified for certain services along with restrictions on claim of input tax credit and referring to Explanation (iv) of the notification which provides as under:

(iv) Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,—

(a) credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

(b) credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

Therefore, wherever the rate notifications prescribe restriction on claim of input tax credit, the services providers will not be eligible to claim input tax credit on goods or services exclusively used for supplying the service and for the common inputs/ input services, input tax credit will be allowed only on proportionate basis in the method prescribed as per Rule 42/43 of the CGST Rules, 2017.

However, in cases where there is a restriction on the claim of input tax credit only on inputs, whether input tax credit of input services used in supplying the said service can be claimed in entirety? A view can be taken that where the condition relating to non-claim of input tax credit applies only to inputs, input tax credit of input services can be claimed in entirety. This is because if the intention of the legislature was to deny input tax credit of both inputs and input services, the condition would have referred to both. Instead, in some entries, the rate notification refers to restriction of ITC claim on goods, which includes both inputs and capital goods, while in some entries, it refers to inputs and in some, only to input services.

PLACE OF SUPPLY

Place of Supply is an integral part of the GST mechanism as it determines which tax must be paid by the supplier. Under section 12(8) of the IGST Act, 2017 which applies to services where the location of recipient and supplier of services is in taxable territory, the place of supply is determined as under:

  • Where the services are supplied to a registered person, the location of such registered person
  • Where the services are supplied to a person other than a registered person, the location at which the goods are handed over for transportation shall be the place of supply.

Similarly, for cross-border transactions, i.e., where either the location of supplier of service or recipient of service is outside the taxable territory, the place of supply was determined under section 13(9) of the IGST Act, 2017 which provided that except for courier services, the place of supply of service of transportation of goods shall be the destination of the goods. However, the Finance Act, 2023 has omitted the same (effective date of amendment has not been notified) which necessitates the need to relook at the applicable rule for determination of place of supply.

It is in this context that one needs to look at section 13(3) (a) of the IGST Act, 2017 which provides that in case of services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services, the place of supply of the following services shall be the location where the services are actually performed. The question that arises is whether it can be said that the services supplied are in respect of goods? This aspect was clarified in the context of Service tax vide the Education Guide as under:

5.4.1 What are the services that are provided “in respect of goods that are made physically available, by the receiver to the service provider, in order to provide the service”? – sub-rule (1):

Services that are related to goods, and which require such goods to be made available to the service provider or a person acting on behalf of the service provider so that the service can be rendered, are covered here. The essential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical possession or control of the service provider, and without this happening, the service cannot be rendered. Thus, the service involves movable objects or things that can be touched, felt or possessed. Examples of such services are repair, reconditioning, or any other work on goods (not amounting to manufacture), storage and warehousing, courier service, cargo handling service (loading, unloading, packing or unpacking of cargo), technical testing/inspection/certification/analysis of goods, dry cleaning etc. ….

As can be seen from the above, the Education Guide also provides that courier services are also covered under the above clause. The courier service is an extension of transportation service, which is also apparent from perusal of section 13(9) which prior to amendment, excluded courier services from its’ scope. Therefore, the possibility of the Authorities proposing to classify transportation services provided to recipient outside India under this clause may not be ruled out.

The above view can be countered with an argument that section 13(3)(a) intends to cover only such activities which are performed on goods. Mere handling of goods per se cannot be treated as being covered under section 13 (3) (a). In this regard, one may refer to the recent decision of the Hon’ble Tribunal in the case of ATA Freightline (I) Pvt Ltd vs. Commissioner [2022 (64) G.S.T.L. 97 (Tri.-Bom)] wherein it has been held as under:

13. … … The objective of separate treatment in Rule 4 of Place of Provision of Services Rules, 2012 is not just about accepting responsibility for goods on behalf of ‘provider’ of service as is evident from the proviso

‘4. Place of provision of performance based services. – The place of provision of following services shall be the location where the services are actually performed, namely:-

‘(a) services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service :

Provided that when such services are provided from a remote location by way of electronic means the place of provision shall be the location where goods are situated at the time of provision of service:

Provided further that this clause shall not apply in the case of a service provided in respect of goods that are temporarily imported into India for repairs and are exported after the repairs without being put to any use in the taxable territory, other than that which is required for such repair.

xx xx xx’

therein, that goods concerned with the rendering of service is necessarily to be made available to the ‘provider’ or ‘person acting on behalf of provider’ by the ‘recipient of service’ for being put to use in the course of rendering service – an aspect that appears, and even conveniently, to have been passed over for scrutiny by the adjudicating authority. For so doing, the circular referred to by Learned Counsel would also have to be overcome.

It is therefore important that the CBIC issues a clarification on this issue before the notification making the amendment effective is issued.

DEEMED SUPPLY IMPLICATIONS

Entry 2 of Schedule I of the CGST Act, 2017 provides a deeming fiction to include supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business as supply even if made without a consideration.

This provision has created a challenge for all sectors and has been discussed in detail in the past as well. This provision poses a similar challenge for the logistic sector as well. Let us try to understand this with the help of following example:

  • ABC is a transporter having pan-India presence through its’ branches.
  • ABC has a client in Gujarat who requests for service of transport of goods from its’ factory in Gujarat to their client in Tamil Nadu. ABC’s Gujarat branch fulfils the said request of the client and provides the services using its’ truck registered with Gujarat RTO Authorities.
  • When the goods are delivered in Tamil Nadu, its’ Tamil Nadu branch has received client request for transfer of goods to Maharashtra.
  • Since they already have a truck in Tamil Nadu on its’ way to Gujarat via Maharashtra, the same is used for fulfilling the client request. The Tamil Nadu branch raises the invoice to the customer.
  • Similarly, the Maharashtra branch also loads goods of its’ customer in this truck while it is on its’ way back to Gujarat and raises the invoice to the customer.

The above simple and very routine transaction in the industry raises the question of whether the Gujarat branch has supplied any service to the Tamil Nadu branch or Maharashtra branch? There is already a ruling by the AAR to hold that this constitutes hiring of motor vehicle and not GTA service. In such a scenario, the service can be treated as exempted in view of entry 22 of notification 12/2017-CT (Rate) dated 28th June, 2017. However, this might trigger reversal u/r 42/43 of the CGST Rules, 2017.

B. FREIGHT FORWARDING

The activity of freight forwarding is very common in the logistics sector. In this model, the freight is sold by the person to consignors, i.e., persons intending to have goods transported, though they themselves don’t execute the said service. Instead, they in-turn buy freight from the various service providers, i.e., transporters, shipping lines, airlines, etc.

Under the erstwhile regime, there was substantial litigation with respect to activities carried out by freight forwarders, primarily because services of outbound transportation of goods did not attract service tax. Therefore, even the freight forwarders would not charge service tax on the amounts recovered from their clients. Therefore, the Department used to allege that the freight forwarders were acting as agents and the difference in the rate at which they sell and buy freight was taxable as intermediary services provided. The demands made on this allegation were set-aside by the Tribunal in the case of Greenwich Meridian Logistics (I) Pvt Ltd vs. CST, Mumbai [2016 (43) S.T.R. 215 (Tri. – Mumbai)] wherein the Tribunal has held that the surplus earned by the freight forwarders arises from the activity of purchase and sale of freight on a principal-to-principal basis and therefore no service tax is leviable on the same. Simply put, the Tribunal has recognised the concept of trading in services. The principle laid down by the Tribunal in the above decision should apply on all fours to GST as well.
However, with GST being applicable on various transactions, the issue of cross-charge cannot be ruled out as there can be a scenario where the freight is sold by one location whereas purchased by another location. The implications relating to deemed supply would therefore need analysis.

C. WAREHOUSING SERVICES

Warehousing service is an integral part of the logistics sector. At times, the goods are required to be stored before they can be dispatched to their destination. As discussed above, warehousing services are in respect of goods and therefore, the place of supply for services provided in cases the location of recipient of service is outside the taxable territory shall be the place where the services are performed. Therefore, if warehousing services are provided to recipients located outside India, the same will be leviable to GST.

The above interpretation will be of aid when looked at from the perspective of a supply where both supplier and recipient are located in taxable territory. In such cases, there is a view that the place of supply is determinable under section 12 (3) of the IGST Act, 2017 which provides as under:

(3) The place of supply of services,—

(a) directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work; or … …

However, once it is said that the services are in respect of goods for section 13, it cannot be said that for the purpose of section 12, the same are in relation to immovable property. Therefore, when a person in Gujarat receives service of storage of goods in Maharashtra, the place of supply will be determined u/s 12 (2), i.e., the same will be the location of recipient of service and therefore, the supplier will have to charge IGST and not CGST+SGST.

EXEMPTIONS

It may be noted that an exemption has been given to storage and warehousing services provided in relation to specific goods, such as rice, minor forest produce, cereals, pulses, fruits and vegetables, and lastly agricultural produce.

The exemption relating to agricultural produce is mired with controversies as there is confusion revolving around what constitutes agricultural produce. The term “agricultural produce” has been defined as under:

“agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;

A reading of the above entry would indicate the following:

  • The goods under consideration should be any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses.
  • No further processing should be done on the produce or such processing should have been done which is usually done by the cultivator / producer.
  • The processing should not have altered its’ essential characteristics.
  • The processing should make the produce marketable for primary market.

The above exemption entry has seen its’ fair share of controversy vis-à-vis each of the above conditions. This has been primarily due to the clarifications issued by the Board Circular 16/16/2017-GST dated 15th November, 2017

For instance, there has been confusion over what constitutes produce. In SAS Cargo [2022 (59) G.S.T.L. 424 (A.A.R. – GST – Kar.)], the Authority has held that fresh eggs in shell on which no further processing is done are fully covered in definition of term agricultural produce.

Similarly, while reading the condition of “processing which is usually done by the cultivator / producer”, the phrase “which is usually” has been ignored, i.e., the Authorities have been denying the benefit of exemption by merely stating that since the processing is not being done by the producer/ cultivator, the exemption is not available. What should have been analyzed is whether the producer / cultivator can carry out the said process themselves? Merely because someone else carries out the process will not disentitle benefit of exemption.

  • For instance, in Guru Cold Storage Pvt. Ltd. [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], the Authority has held that the process of de-husking or splitting or both of pulses is not usually carried out by the farmers at farm level but carried out by pulse millers. Therefore, the pulses will not qualify as “agricultural produce”. Similarly, processed dry fruits have also been held to be outside the scope of “agricultural produce”.
  • Contrarily, in Lawrence Agro Storage Pvt Ltd [2021 (48) G.S.T.L. 47 (A.A.R. – GST – Haryana)] the Authority has correctly interpreted the condition and held that it is immaterial who carries out processes as long as processes such that usually done by cultivator or producer, not essentially altering essential characteristics of agricultural produce but make it marketable for primary market.

This takes us to the third condition that “the essential characteristics of the produce should not be altered”. In other words, the produce should remain as is and should not change form. For example, if a process of drying is undertaken on the grape to increase its’ shelf life, the grape is still called a grape. However, if the same grape is converted into juice, the resultant product cannot be said to be grape and therefore, there is a change in the essential characteristics of the produce. However, the question that needs focus is whether the first produces’ essential characteristic should not change or if even part of the produce is the intended produce, will the answer change?

For instance, in Sardar Mal Cold Storage & Ice Factory [2019 (23) G.S.T.L. 321 (App. A.A.R. – GST)], the Authority has held that when a tamarind pod is cracked open, string (fibre) removed and kernel is taken out, resultant tamarind (ambali foal) do not fall under definition of agricultural produce as shelling and removal of seeds to obtain pulp usually done by specially designed machines. Similarly, in the context of dried mango, dried gooseberry, etc., it was held that such products are procured by the traders from the cultivators/ producers and then undergo processes such as washing, cutting, shelling, cleaning, drying, packing, etc. which lead to considerable value addition as compared to that of product sold in primary market reflecting change in essential characteristic. Therefore, such items cannot be characterized as Agricultural produce.

Similarly, in Chopra Trading Co [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], the Authority has held that the process of milling of paddy to extract rice alters the essential characteristics of the produce. In Narsimha Reddy & Sons [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], it was held that benefit of exemption notification will be available in case of storage services provided in relation to seeds when activities undertaken are restricted to only cleaning, drying, grading etc., without any chemical processing. However, since in the said case, chemical processing was done, exemption will not be available.

However, in the context of milk, the Gujarat HC has in Gujarat Co-op. Milk Marketing Federation Ltd. [2020 (36) G.S.T.L. 211 (Guj.)] held that the activity of chilling of milk to extend its’ shelf life does not result in altering of the essential characteristics of the milk and therefore, exemption will be available.

This takes to the last condition of what constitutes “primary market”. The term has not been defined either under GST or even under service tax regime. However, the Gauhati High Court has dealt with the issue in the case of Apeejay Tea Ltd. vs. UOI [2019 (23) G.S.T.L. 180 (Gau.)] wherein it has been held as under:

31. On a reading of the provisions of Section 65B(5) of the Finance Act of 1994, it is to be understood that the expression primary market mentioned therein apparently refers to the market where the agricultural produce as such are being sold and the process that the cultivator or the producer may undertake is to the extent to make it transportable and presentable in such a market. When the aforesaid situation is compared with that of the manufactured and finished tea, which apparently is being transported by the petitioners, the Court cannot take a different view but to conclude that such transported tea is not for the purpose of being marketed in a primary market where the agricultural produces are being marketed, but on the other hand the transported tea is being marketed as a finished product in the consumer market for its consumption. In view of the above, as to whether the expression agricultural produce appearing in Entry 21(a) of the Notification Nos. 3/2013-S.T., dated 1-3-2013 and 6/2015-S.T., dated 1-3-2015 includes tea or not would have to be understood from the perspective of the definition of the expression agricultural produce as appearing in Section 65B(5) of the Finance Act of 1994 and not from the perspective of the expression agricultural produce as defined and explained in D.S Bist (supra).

The above decision clearly indicates that primary market is the market where the agricultural produce is traded, be it the first sell by the producer/ cultivator or subsequent trade by the traders. Therefore, when the storage services are provided in the context of the agricultural produce which satisfies other conditions of the exemption notification, the benefit of exemption notification would be available.

However, the decisions of the AAR are to the contrary. In Lawrence Agro Storage, the Authority has held that primary market refers to markets where cultivator/ producer makes the first sale of produce.

To summarise, while the notification does provide exemption from GST to storage and warehousing services provided in relation to agricultural produce, what constitutes agricultural produce is itself debatable and therefore, the industry is stuck with the various conflicting ruling by the AAR denying the exemption benefit to the suppliers. It therefore remains to be seen how the Courts look at the exemption entry.

D. CLEARING AND FORWARDING SERVICES (INCLUDING SERVICES PROVIDED WITHIN PORT AREAS)

Clearing and forwarding agents and customs house agents are an important cog in the wheel of the logistics sector which facilitate the activity of import and export of goods. This service provider act as intermediary co-ordinating with various agencies, be it customs, port, etc., facilitating the entire process of receiving the goods in the port area till the time the goods are loaded in the vessel in case of export transaction and from the time the vessel arrives in the port till the goods are cleared from the customs authority in the case of import transaction.

While providing the above services, the service providers incur various expenses acting as agents of their client, i.e., importer / exporter (as the case may be). The expense so incurred by them are recovered from their clients on actual basis as reimbursement and the service providers also recover their service charges for carrying out the said activities. Under the service tax regime, the service providers used to charge service tax only on their service charges while the expense incurred were claimed as reimbursement on actuals. The importer / exporters were eligible to claim the CENVAT credit on the strength of invoices issued by the service providers / the supporting invoices included by them in their reimbursement claim.

Whether the amounts claimed as reimbursement was includible in the value of service provided by the agents was a subject matter of litigation and reached finality with the decision of the Hon’ble Supreme Court in the case of Intercontinental Consultants & Technocrats Pvt Ltd [2018 (10) G.S.T.L. 401 (S.C.)].

However, with the introduction of GST and the input tax credit mechanism, there has been a need to change the structure. This is because the agents engage various service providers in the course of providing their services. This includes port authorities, terminal, transporters, etc., who provide services leviable to GST. It may not be feasible to provide the GSTIN of importer/ exporter to all such service providers and therefore, many agents have stopped the reimbursement model and the invoices are issued by them with GST on the entire amount, i.e., service charge plus reimbursement of expenses. This has however increased their exposure as any mismatch in input tax credit has to be borne by them.

On the contrary, in case of agents continuing under the reimbursement model, the issues have increased for the importer / exporter as they have to follow-up with the vendor who is not in their system.

In the port area, there are many service providers. They levy various charges, which include terminal handling charges, inland handling charges, airway bill charges, etc., The charges are levied by them for services provided in relation to goods and therefore, the place of supply is determined under section 12 (2) or 13 (3) (a) as the case may be and applicable taxes have to be charged. This will apply even in cases where the service recipient is located outside India.

CONCLUSION

The logistic sector forms an integral part of the economy as it keeps the economy running smoothly. However, when studied from the perspective of GST, there are substantial issues involved and it is therefore imperative that all such issues are analysed before any decision / tax position is taken.

Watchdog – Whether Placed Under Statutory Watch!!

INTRODUCTION

 

In the course of their professional duties, chartered accountants, company secretaries and cost accountants are governed by the professional norms laid down in the relevant statutes overseeing their conduct. Thus, chartered accountants are governed by Chartered Accountants Act, 1949. Similarly, company secretaries are governed by Company Secretaries Act, 1980. The cost accountants are governed by Cost and Works Accountants Act, 1959.

 

Whenever these professionals are questioned as regards their professional conduct, the disciplinary forum adjudicates on their conduct in terms of the disciplinary mechanism laid down under the respective statutes mentioned above.

 

In several court matters, the professional against whom there was a charge of gross professional misconduct punishable under the statute governing him, there was always a convenient defence explored by the professional.

 

Often, the principles decided by English Judiciary came to the rescue of the professional and saved him from punishment. Thus, in respect of the charge of professional misconduct by a chartered accountant in respect of the gross negligence in his professional work relating to the audit of accounts of a business, defence was based on the age-old golden tenet “the auditor is not a bloodhound; he is merely a watchdog”.

 

Despite being equipped with such a golden defence tenet emerging from English Judiciary, chartered accountants have been punished in many cases for gross negligence in their professional duties. This is done by invoking the disciplinary mechanism provided under the Chartered Accountants Act and related regulations.

 

With the evolution of technology, increasing volume of commerce, and business and cross-border transactions, chartered accountants have come to assume greater responsibilities. As auditors, they are also expected to report on the business enterprise’s non-compliance with a host of other laws applicable to complex business transactions.

 

Two recent amendments made by the Central Government in the Prevention of Money Laundering Act (PMLA) appear to have stirred up a hornets’ nest and have caused anxiety to chartered accountants. A reading of the amendments notified under PMLA appears to give the impression that the watchdog – now, is placed under statutory watch!! Whether such an impression is correct is the subject matter examined in this article.

 

RECENT PMLA AMENDMENTS – PARAMETERS, NEED AND IMPLICATIONS

 

Amendments have been made in PMLA by two notifications, one dated 3rd May, 2023 and the second dated 9th May, 2023 issued by the Central Government in the exercise of its powers under section 2(1)(sa)(vi) of PMLA. Section 2(1)(sa) defines “person carrying on designated business or profession”. Under the residuary clause (vi) of section 2(1)(sa), the Central Government has the power to include further categories in the definition of a person carrying on designated activities.

 

In oral discussions, many chartered accountants have apprehended frightful consequences of these two amendments. Hence, it is necessary to analyse the parameters and implications of these amendments, as follows.

 

PARAMETERS OF THE AMENDMENTS

 

In terms of the notification dated 3 May 2023, the financial transactions carried out by a practicing chartered accountant, a practising company secretary or a practising cost accountant which are carried out on behalf of his client in the course of his profession in relation to the following activities are now regarded as an activity for the purpose of section 2(1)(sa).

 

  • buying and selling of immovable property;
  • managing money, securities or other assets of client;
  • management of bank, savings or securities accounts;
  • organisation of contributions for creation, operation or management of companies;
  • creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.

 

By another notification dated 9th May, 2023 issued by the Central Government, the following activities have been notified as an activity for the purpose of sub-clause (vi) when carried out by a person in the course of his business on behalf of or for another person.

 

  • acting as a formation agent of companies and limited liability partnerships;
  • acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;
  • providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;
  • acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust;
  • acting as (or arranging for another person to act as) a nominee shareholder for another person.

 

It has been clarified in the said notification that following four activities are not to be regarded as an activity for the purposes of sub-clause (vi).

 

(i)    any activity carried out as part of any agreement of lease, sub-lease, tenancy or any other agreement or arrangement for the use of land or building or any space and the consideration is subjected to deduction of income-tax under section 194-I of Income-tax Act, 1961; or
(ii)    any activity carried out by an employee on behalf of his employer in the course of or in relation to his employment; or
(iii)    any activity carried out by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in formation of a company to the extent of filing a declaration required under section 7(1)(b) of Companies Act, 2013 [to the effect that all requirements of Companies Act and the rules made thereunder in respect of registration and matters precedent and incidental thereto have been complied with]; or
(iv)    any activity of a person which falls within the meaning of an ‘intermediary’ as defined in section 2(1)(n) of PMLA. Section 2(1)(n) defines “intermediary” to mean –
(a)    a stock-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992; or
(b)    an association recognised or registered under the Forward Contracts (Regulation) Act, 1952 or any member of such association; or
(c)    intermediary registered by the Pension Fund Regulatory and Development Authority; or
(d)    a recognised stock exchange referred to in section 2(f) of the Securities Contracts (Regulation) Act, 1956.

 

NEED FOR THE AMENDMENTS

 

The immediate need for the two amendments was reportedly dictated by the pending assessment of the Financial Action Task Force (FATF) which is due in November 2023. India was last assessed by FATF in 2010. After 2010, the next FATF assessment was postponed due to the Covid pandemic. As a pre-cursor to such mandatory assessment, the government appears to have amended the money-laundering rules to widen the scope of reporting obligations of persons carrying on designated business or profession.

 

IMPLICATIONS OF THE AMENDMENTS

 

On a review of the aforementioned two notifications, the following implications are perceived.

 

A “Reporting Entity”

 

In terms of section 2(1)(wa) of PMLA, a person carrying on a designated business or profession is also regarded as a reporting entity.

 

Like any other reporting entity, a person carrying on a designated business or profession is also required to comply with the following obligations prescribed under the specified sections. Thus, if notification dated 3 May 2023 is held applicable to a chartered accountant in practice, he will also be required to comply with the following obligations.

 

Section Obligation
11A Verify identity of clients and
beneficial owners
12 Maintain a record of all transactions
and specified information
12A Furnish the information required by
Director of Enforcement
12AA Verify clients undertaking specified
transaction, examine ownership, financial position and sources of funds of
clients, record the purpose behind conducting specified transaction and the
intended nature of the relationship between the transaction parties.

 

B Applicability of both notifications to chartered accountants

 

From the preamble to the notification dated 3 May 2023, it is clear that a chartered accountant in practice is covered by that notification. Accordingly, he is regarded as a person carrying on designated business or profession in respect of the financial transactions carried out on behalf of his client in relation to the five activities specified in the said notification.

 

Preamble to the notification dated 9 May 2023 shows, however, that the said notification does not apply to a chartered accountant in practice. Accordingly, five activities specified in this second notification dated 9 May 2023 do not refer to any activity carried out by a chartered accountant in practice. This difference between the two notifications, one dated 3 May 2023 referring to the chartered accountant in practice and the second notification dated 9 May 2023 not referring to a chartered accountant in practice, is evident from the following.

 

(i)    The preamble to the notification dated 9 May 2023 refers to five activities “when carried out in the course of “business” on behalf of or for another person”.

 

In contrast, the preamble to the notification dated 3 May 2023 specifically refers to a chartered accountant in practice as one of the “relevant person”.

 

(ii)    Notification dated 3 May 2023 refers to certain financial transactions carried out by chartered accountant in practice “on behalf of his client in the course of his profession”.

 

So, unless the specified transaction is carried out by a chartered accountant in practice on behalf of his client, the notification would not be applicable to him.

 

In contrast, the second notification dated 9 May 2023 refers to certain specified activities “when carried out in the course of business”.

 

The dichotomy between the term “profession” in the notification dated 3 May 2023 and the term “business” in the second notification dated 9 May 2023 clearly indicates that while the first notification dated 3 May 2023 may be applied to a chartered accountant in practice in respect of specified transactions carried out by him on behalf of his client, the second notification dated 9 May 2023 cannot be applied to a chartered accountant in practice.

 

(iii)    Moreover, in the notification dated 9 May 2023 itself, a clear exception has been made for any activity carried out by a chartered accountant in practice who is engaged in the formation of a company to the extent of filing a declaration required by section 7(1)(b) of Companies Act, 2013.

 

A view may be expressed that the said exception is limited in nature and, therefore, the other activities falling outside such exception, carried out by a chartered accountant in practice are not covered by the exception.

 

This argument would not hold water because, as explained earlier, the second notification does not apply to a chartered accountant in practice. The exception made in favour of a chartered accountant in practice in the second notification dated 9 May 2023 only reaffirms the Government’s intention to exclude a chartered accountant in practice from the purview of the second notification dated 9 May 2023.

 

(iv)    As long as the chartered accountant in practice does not act on behalf of his client, he would be any way out of the purview of the notification since the words “on behalf of his client” are in the nature of a pre-condition for invoking the notification dated 3 May 2023.

 

(v)    It may be noted that assuming in a given case, amended law is held applicable, still the same would not attract penal provision under PMLA since in such case, there is no scheduled offence or the offence of money-laundering punishable under PMLA.

 

C Ambiguities

 

Certain terms and expressions used in the second notification dated 9 May 2023 are ambiguous and hence, likely to lead to controversy in their interpretation.

 

Thus, the meaning of the term “formation agent” is not clear. Accordingly, it is not clear whether consultants who assist the company in incorporation would be subject to the reporting obligations under PMLA. The expression “arranging for another person to act as” a director, partner, nominee, etc., is also not clear. It is not clear how to establish who arranges for whom.

 

While the nominee shareholding is very common, nominees could create significant obligations. Even advising clients for coordinating with directors or nominees could be covered by the amendment even though there is no formal written arrangement for such assistance. This could lead to controversies and litigation.

 

Having regard to the subjectivity and ambiguities involved in the wording, it would be worthwhile that appropriate guidance from the governing bodies is issued in consultation with the government. The same would help in monitoring illegitimate structures.

 

D Increase in the burden of professional work

 

The objective of the recent amendments in PMLA appears to be to ensure wider accountability by professionals concerned with transactions involving the proceeds of crimes.

 

The burden is now on professionals to ensure that their services are not used for suspect transactions. Indeed, the amendments would apply only to those professionals who undertake specified activities on behalf of their clients.

 

The purpose of enhanced scrutiny is to ensure that illegitimate transactions do not escape scrutiny.

 

However, when professionals have carried out the specified transactions on behalf of clients, they would be saddled with due diligence measures to verify the identities of their clients and beneficial owners as well as sources of funds. Records will also have to be maintained for a longer period. The increase in the cost of such compliances would be burdensome for small and medium-sized chartered accountants.

 

Persons acting as or arranging for another person to act as a director or secretary of a company or partner of LLP, providing a business or registered office address for a company or an LLP or a trust would also be liable under the PMLA as reporting entities. Here, too, as long as the same is not done on behalf of or for another person there should be no cause for anxiety.

 

The initial reading of the notification shows that the new regulations would trigger multiple new compliances for professionals as reporting entities, such as, monthly reports to FIU-IND, KYC of clients with the Central KYC Registry. It may be meaningful that guidance is issued by Government or the ICAI, ICSI to impart clarity on any exceptions or relaxations for professionals.

 

CONCLUSION

 

The amendments in PMLA were long called for to meet the challenges posed by various forms of money laundering and funding of terrorist activities. For this purpose, it was decided to extend the scope of reporting requirements under PMLA to the persons engaged in financial transactions and specified activities for and on behalf of others.

 

Indeed, the scope of applying the amendments to chartered accountants in practice appears to be limited and is confined only to transactions carried out on behalf of clients.

 

Accordingly, in other cases, the watchdog, though apparently placed under statutory watch, should have no reason to worry as the nature and extent of due diligence required to be exercised by him in such other cases would not undergo any change even after the two recent amendments in PMLA.

‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility For Exemption U/S 11- Sec 2(15)- Part III

INTRODUCTION
6.1    As mentioned in Part I of this write-up [BCAJ – April, 2023], history of provisions relating to exemption for charity under the Income-tax Act, right from 1922 Act to the current Act (1961 Act) and amendments made from time- to – time affecting such exemptions for Charitable Trust/institutions [Charity/Charities]; and in particular, the insertion of the proviso [the said Proviso] to section 2(15) by the Finance Act 2008 w.e.f. 1.4.2009 (2008 Amendment) placing restrictions on carrying out Commercial Activity [referred to in Para 1.6 of Part I of this write-up] has been considered by the Supreme Court in the AUDA’s case. Similarly, judicial precedents from time-to-time under the respective provisions of the Act relating to exemptions for Charity prior to 2008 Amendment have also been considered by the Supreme Court in this case as referred to in paras 4.1 and 4.2 of Part II of this write-up [BCAJ- May, 2023]

6.2    Brief facts of six categories of assessees [referred to para 2.1 of Part I of this write-up] before the Supreme Court in cases of Ahmedabad Urban Development Authority and connected matters [AUDA’s case] and the contentions raised by each one of them before the Court as well as the arguments of the Revenue are summarized in paras 3.1 to 3.3 of Part I of this write-up.

6.3    After considering the arguments of both the sides, the legislative history of the relevant provisions and amendments therein from time-to-time, the effect of Finance Minister’s speeches at the relevant time and relevant Circulars of the CBDT as well as the prior relevant judicial precedents dealing with respective provisions at the relevant time referred to in earlier Parts I & II of this write-up, the Court dealt with the effect of 2008 Amendment (including subsequent amendments in the said Proviso). The Court also explained the effect and implications of the provisions of section 11(4) & (4A) in the light of 2008 Amendment and concluded on the interpretation of Sec 2(15) which defines “Charitable Purpose” post 2008 Amendment in the context of GPU category object with which the Court was mainly concerned. These are summarized in paras 5.1 to 5.5.3 of Part II of this write-up.

ACIT(E) VS. AHMEDABAD URBAN DEVELOPMENT AUTHORITY (449 ITR 1 -SC)

7.1    As mentioned in Para 5.1 of Part II of this write-up, the Court had divided the appeals before it into six different categories of assessees namely- (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies/authorities, (iii) trade promotion bodies, councils, associations or organisations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. The Supreme Court then proceeded to decide cases falling in each of the six categories of assessees before it.

7.2    In respect of the first category of assessees being statutory corporations, authorities or bodies, etc such as AUDA, the Court firstly held that statutory entities eligible for exemption under the erstwhile section 10(20A) prior to its deletion w.e.f. 1st April, 2003 can make a claim under section 11 r.w.s 2(15) of the Act as a GPU category charity. In this context, the Court also referred to its earlier decisions in the cases of Gujarat Industrial Development Corporation-GIDC [(1997) 227 ITR 414 (SC)] rendered in the context of section 10(20A) and Shri Ramtanu Co-op Hsg Society [(1970) 3 SCC 323 (SC) – five judge bench] and noted that in these cases the Court had taken a view that such industrial development corporations are involved in “development” and are not essentially engaged in trading and that is binding.

7.2.1    Similarly, the Court also noted its judgment in Gujarat Maritime Board [(2007) 295 ITR 561(SC) ] where the Board was earlier getting exemption under section 10(20) as Local Authority and the fact that section 10(20) was subsequently amended retrospectively to define Local Authority whereby the Gujarat Maritime Board ceased to be eligible to claim exemption under section 10(20). However, in that case also, the Court held that sections 10(20) and 11 of the Act operate in totally different spheres. Even if the Board is not considered as a Local Authority [due to this amendment], it is not precluded from obtaining registration under section 12A of the Act and claiming exemption under section 11. This was in the light of definition of the words’ Charitable Purpose’ as defined in section 2(15) which includes GPU category.

7.2.2    The Court then observed that rates, tariffs, fees, etc. as specified in the enactments and charged by statutory corporations for undertaking essential activities will not be characterised as ‘commercial receipts’. The reasons for the same were given by the Court as under [page 112]:

“….. The rationale for such exclusion would be that if such rates, fees, tariffs, etc., determined by statutes and collected for essential services, are included in the overall income as receipts as part of trade, commerce or business, the quantitative limit of 20% imposed by second proviso to Section 2(15) would be attracted thereby negating the essential general public utility object and thus driving up the costs to be borne by the ultimate user or consumer which is the general public…By way of illustration, if a corporation supplies essential food grains at cost, or a marginal mark-up, another supplies essential medicines, and a third, water, the characterization of these, as activities in the nature of business, would be self-defeating, because the overall receipts in some given cases may exceed the quantitative limit resulting in taxation and the consequent higher consideration charged from the user or consumer.”

7.2.3    In view of the above, the Court took the view that Statutory Corporations, Board, Authorities, etc.[by whatever name called] in the Housing Development, Town Planning, Industrial Development sectors are involved in advancement of object of general public utility and considered as Charities in the GPU category. Such entities may be involved in promoting public object and also in the course of pursuing their object may get involved or engaged in commercial activities. As such, it needs to be determined whether such entities are to be treated as GPU category Charities for claiming exemption. The Court also laid down certain tests [pages 118 to 120] to determine if the statutory corporations or bodies are GPU category Charities. These tests are broadly summarised herein – (i) whether state or central law or memorandum of association, etc. advances any GPU object, (ii) whether the entity is set up for furthering development or charitable object or for carrying on trade, business or commerce or service in relation thereto [i.e. Commercial Activity/Activities], (iii) rendering services or providing goods at cost or nominal mark-up, will ipso facto not be activities in the nature of Commercial Activities. However, if the amounts are significantly higher, they will be treated as receipts from Commercial Activities (iv) collection of fees, rates, etc. fixed by the statute under which the body is set up will not per se be characterised as ‘fee, cess or other consideration’ for engaging in activities in the nature of trade, commerce, etc. (v) whether statute governing the entity permits surplus or profits that can be earned and whether state has control over the corporation (vi) as long as statutory body furthers a GPU object, carrying on other activities in the nature of Commercial Activities that generate profits and the receipts from which are within the permissible limits as stated in the said Proviso to section 2(15), it will continue to be GPU category Charity.

7.3    Coming to the second category of assessees being statutory regulatory bodies/ authorities for which the sample case was of the Institute of Chartered Accountants of India (ICAI), the Court noted the relevant provisions of the Chartered Accountants Act, 1949 and held that ICAI is a Charity advancing GPU objects. In this context, the Court held as under [page 122]:

“…… As things stand, the Institute is the only body which prescribes the contents of professional education and entirely regulates the profession of Chartered Accountancy. There is no other body authorised to perform any other duties which it performs. It, therefore, clearly falls in the description of a charity advancing general public utility. Having regard to the previous discussion on the nature of charities and what constitutes activities in the ‘nature of trade, business or commerce’, the functions of the Institute ipso facto does not fall within the description of such ‘prohibited activities’. The fees charged by the Institute and the manner of its utilisation are entirely controlled by law. Furthermore, the material on record shows that the amounts received by it are not towards providing any commercial service or business but are essential for the providing of service to the society and the general public.”

7.3.1    The Court also noted that there are several other regulatory bodies that discharge functions otherwise within the domain of the State (including the one regulating professions of Cost and Work Accountants, Company Secretary, etc.). In this context, the Court further held as under [page 123]:
“…Therefore, it is held that bodies which regulate professions and are created by or under statutes which are enjoined to prescribe compulsory courses to be undergone before the individuals concerned is entitled to claim entry into the profession or vocation, and also continuously monitor the conduct of its members do not ipso facto carry on activities in the nature of trade, commerce or business, or services in relation thereto.”

7.3.1.1    The Court, however, added that if the consideration charged by regulatory entities such as annual fees, exam fees, etc. is ‘vastly or significantly higher’ than the costs incurred by the regulatory entity, the case would attract the said Proviso to section 2(15) of the Act. In this context, following observations of the Court are worth noting [page 123]:

“At the same time, this court would sound a note of caution. It is important, at times, while considering the nature of activities (which may be part of a statutory mandate) that regulatory bodies may perform, whether the kind of consideration charged is vastly or significantly higher than the costs it incurs. For instance, there can be in given situations, regulatory fees which may have to be paid annually, or the body may require candidates, or professionals to purchase and fill forms, for entry into the profession, or towards examinations. If the level of such fees or collection towards forms, brochures, or exams are significantly higher than the cost, such income would attract the mischief of proviso to Section 2(15), and would have to be within the limits prescribed by sub-clause (ii) of the proviso to Section 2(15).”

7.3.2    While deciding the matter of the Andhra Pradesh State Seeds Certification Authority and the Rajasthan State Seeds and Organic Production certification Agency [set-up under Seeds Act, 1966] also falling within the second category of assessees, the Court held that these entities tasked with the work of certification of seeds are performing regulatory function and do not engage in activities by way of trade, commerce or business, for some form of consideration.

7.4    With respect to the third category – trade promotion bodies, councils, associations or organisations, the Court at the outset stated that the predominant object test laid down in Surat Art’s case [ for this also refer to para 5.3.3 of Part II of this write-up] was in the context of section 2(15) applicable prior to the 2008 Amendment. In view of the 2008 Amendment, the Court held that the position had undergone a change and opined as follows [page 124]:

“In the opinion of this court, the change in definition in Section 2(15) and the negative phraseology – excluding from consideration, trusts or institutions which provide services in relation to trade, commerce or business, for fee or other consideration – has made a difference. Organizing meetings, disseminating information through publications, holding awareness camps and events, would be broadly covered by trade promotion. However, when a trade promotion body provides individualized or specialized services – such as conducting paid workshops, training courses, skill development courses certified by it, and hires venues which are then let out to industrial, trading or business organizations, to promote and advertise their respective businesses, the claim for GPU status needs to be scrutinised more closely. Such activities are in the nature of services “in relation to” trade, commerce or business. These activities, and the facility of consultation, or skill development courses, are meant to improve business activities, and make them more efficient. The receipts from such activities clearly are ‘fee or other consideration’ for providing service “in relation to” trade, commerce or business.”

7.4.1 After laying down the aforesaid ratio, coming to the facts of the assessee under this category – Apparel Export Promotion Council [AEPC], the Court held that its activities such as booking bulk space and renting it to individual Indian exporters, charging fees for skill development and diploma courses, market surveys and market intelligence aimed at catering to specified exporters involved an element of Commercial Activities. The Court then concluded as under [page 125]:

“In the circumstances, it cannot be said that AEPC’s functioning does not involve any element of trade, commerce or business, or service in relation thereto. Though in some instances, the recipient may be an individual business house or exporter, there is no doubt that these activities, performed by a trade body continue to be trade promotion. Therefore, they are in the “actual course of carrying on” the GPU activity. In such a case, for each year, the question would be whether the quantum from these receipts, and other such receipts are within the limit prescribed by the sub-clause (ii) to proviso to Section 2(15). If they are within the limits, AEPC would be – for that year, entitled to claim benefit as a GPU charity.”

7.5    The Court then proceeded to consider the cases of fourth category of assessees being non-statutory bodies. In respect of one such assessee – ERNET, the Court noted that it was a not-for profit society set up under the aegis of the Union Government with the objects of advancing computer communication in India, develop, design, set up and operate nationwide state of the art computer communication infrastructure, etc. After noting the activities of the assessee and also the fact that it’s project, funded through Government, support educational network and development of internet infrastructure in numerous other segments of the society, the Court felt that functions of ERNET are vital to the development of online educational and research platforms and held that its activities cannot be said to be in the nature of Commercial Activities. For this, the Court also noted that ERNET received fees to reimburse its costs and that the material on record did not suggest that its receipts were of such nature so as to be treated as fees or consideration towards business, trade or commerce.

7.5.1    In case of another assessee in this category – NIXI which was set-up under the aegis of Ministry of Information and Technology for production and growth of internet services in India, to regulate the internet traffic, act as an internet exchange, and undertake “.in” domain name registration. The Court also noted that NIXI is a not-for profit, and is barred from undertaking commercial and business activity and it charges annual membership fees of Rs. 1,000 and registration of second and third domain at Rs 500 and Rs. 250. Having regard to the findings on record and material available, an importance of country’s needs to have domestic internet exchange and other relevant facts, the Court rejected the Revenue’s contention that NIXI was involved in Commercial Activities.

7.5.2    GS1 India was another assessee in this category. GS1 codes were developed and created by GS1 international, Belgium which was not for profit under the Belgium Tax Laws. The coding system has been used worldwide and is even mandatory for some services/goods or adopted for significant advantages on account of its worldwide recognisation and acceptance. GS1 India is affiliated and was conferred exclusive rights relating to GS1 coding in India. The GS1 code provides a unique identification to a product with wide range of benefits such as facilitating tracking, tracing of the product, product recalls, detection of illegal trade, etc. The Revenue believed that GS1 India is a monopolistic organisation with an exclusive license in relation to bar coding technology which is admittedly used for fees or other consideration and it provides services mostly to business, trade, etc. On the other hand GS1 also claims that it performs important public function which enables not merely manufacturers but others involved in supplies of various articles by packaging, etc to regulate and ensure their identity.

7.5.2.1    Considering overall facts of GS1 India, the Court held that though GS1 undertakes activities in the nature of GPU, the services provided by it are in relation to trade, commerce or business. In this context, the Court opined as under [page 130]:

“In the opinion of this Court, GS1’s functions no doubt is of general public utility. However, equally the services it performs are to aid businesses manufactures, tradesmen and commercial establishments. Bar coding packaged articles and goods assists their consigners to identify them; helps manufactures, and marketing organizations (especially in the context of contemporary times, online platforms which serve as market places). The objective of GS1 is therefore, to provide service in relation to business, trade or commerce – for a fee or other consideration. It is also true, that the coding system it possesses and the facilities it provides, is capable of and perhaps is being used, by other sectors, in the welfare or public interest fields. However, in the absence of any figures, showing the contribution of GS1’s revenues from those segments, and whether it charges lower amounts, from such organizations, no inference can be drawn in that regard. The materials on record show that the coding services are used for commercial or business purposes. Having regard to these circumstances, the Court is of the opinion that the impugned judgment and order calls for interference.”

7.5.2.2    The Court also concluded that though GS1 India is involved in advancement of GPU, its services are for the benefit of trade and business, from which it receives significantly high receipts. Therefore, its claim for exemption was rejected in view of the amended provisions of section 2(15). However, with respect to claims to be made by GS1 in future, the Court observed that the same would have to be independently assessed if GS1 is able to show that it charges its customers on cost-basis or at a nominal markup.

7.6    In respect of state cricket associations falling within the fifth category, the Court firstly held that the claim of the associations will not fall within the ‘education’ limb in section 2(15) but will have to be examined under the last limb – GPU category. In this regard reference was made to the decision in Loka Shikshana Trust’s case [referred to in para 1.3.1 of Part I of this write-up] where it was held that ‘education’ would entail formal scholastic education. The Court then noted that the state associations apart from receiving amounts towards sale of entry tickets, also receive advertisement money, sponsorship fees, etc. from BCCI. The Court also noted the fact [in case of Gujarat as well as Saurashtra Cricket Associations] that the records reveal the large amount of receipts from such activities as against which the amount of expenditure is much lower leaving good amount of excess in the hands of such associations in the relevant year. The Court also observed that the activities of the cricket associations are run on business lines. It further noted that the expenses borne by the cricket associations did not disclose any significant proportion being expended towards sustained or organized coaching camps or academics. The Court also noted that broadcasting and digital media rights have yielded huge revenues to BCCI and the state associations are entitled to a share in the revenue of BCCI. The Court also noted the method adopted [auctioning such rights] by BCCI to obtain better terms, and gain bargaining leverage. The Court felt that these rights are apparently commercial.

7.6.1    Based on the above factual position, the Court directed the AO to decide the matter afresh and held as under [page 143]:

“In the light of these, the court is of the opinion that the Income-tax Appellate Tribunal – as well as the High Court fell into error in accepting at face value the submission that the amounts made over by BCCI to the cricket associations were in the nature of infrastructure subsidy. In each case, and for every year, the tax authorities are under an obligation to carefully examine and see the pattern of receipts and expenditure. Whilst doing so, the nature of rights conveyed by the BCCI to the successful bidders, in other words, the content of broadcast rights as well as the arrangement with respect to state associations (either in the form of master documents, resolutions or individual agreements with state associations) have to be examined. It goes without saying that there need not be an exact correlation or a proportionate division between the receipt and the actual expenditure. This is in line with the principle that what is an adequate consideration for something which is agreed upon by parties is a matter best left to them. These observations are not however, to be treated as final; the parties’ contentions in this regard are to be considered on their merit.”

7.7    In case of Tribune Trust, one of the assessees falling within the sixth category of private trust, the Court referred to the past litigation history of the assessee under the 1922 Act leading to the decision of Privy Council referred to in para 1.2.1 of Part I of this write-up and finding that the trust was established as Charity- GPU category and also noted the fact that the exemption was continuously allowed in this category under 1961 Act also including under section 10(23C)(iv) from assessment year 1984-85 onwards.

7.7.1    The Court then considered the facts of the case under appeal for the A.Y. 2009-10 in which the exemption was denied by the Revenue based on 2008 Amendment to section 2(15). The Punjab and Haryana High Court upheld the action of the Revenue by concluding that the income is derived by the Trust from the activities [publishing and sale of newspaper, etc.] which were based on profit motive. In doing so it had also noted that 85 per cent of the revenue of the Trust was from advertisements and interest.

7.7.1.1    Finally, the Court stated that though publication of advertisements is intrinsically linked with newspaper activity and is an activity in the course of actual carrying on of the activity towards advancement of the trust’s object, publishing advertisements is an activity in the nature of trade, commerce or business for a fee or consideration. The Court held that though the objects of the assessee trust fell within the GPU category, it would not be entitled to exemption under section 2(15) of the Act as the advertisement income received by the trust constituted business or commercial receipts and the same exceeded the limits laid down in the said Proviso to section 2(15).

7.7.2    The Court then considered the case of Shri Balaji Samaj Vikas Samiti, another assessee falling in the category of private trust wherein the assessee society was formed with the object of establishing and running a health club, arogya kendra; its object also included organization of emergency relief center, etc. Other objects included promotion of moral values, eradication of child labour, dowry, etc. The assessee had entered into arrangement with State agency to supply mid-day meals to students of primary schools in different villages through contracts entered into with some entity. Material for preparation of the mid-day meal was supplied by the Government and it was claimed that it only obtained nominal charges for mid-day meals. Registration application was rejected by the Revenue on the basis that it was involved in Commercial Activity. The Tribunal agreed with the assessee that the supply of mid-day meal did not constitute Commercial Activity and that it promoted object of GPU and directed grant of registration under section 12AA of the Act and this was affirmed by the Allahabad High Court. The Revenue had contended that assessee’s only activity for the relevant year was supply of mid-day meals which is not within its objects. The Supreme Court felt that there is no clarity with respect to whether the activity of supplying mid-day meal falls within the objects of the assessee and in the absence of this it is not possible for the Court to assess the activity in which the assessee was engaged to determine whether it falls in GPU category.

7.7.2.1    On the above facts the Court stated as under [page 147]:

“The first consideration would be whether the activity concerned was or is in any manner covered by the objects clause. Secondly, the revenue authorities should also consider the express terms of the contract or contracts entered into by the assessee with the State or its agencies. If on the basis of such contracts, the accounts disclose that the amounts paid are nominal mark-up over and above the cost incurred towards supplying the services, the activity may fall within the description of one advancing the general public utility. If on the other hand, there is a significant mark-up over the actual cost of service, the next step would be ascertain whether the quantitative limit in the proviso to section 2(15) is adhered to. It is only in the event of the trust actually carrying on an activity in the course of achieving one of its objects, and earning income which should not exceed the quantitative limit prescribed at the relevant time, that it can be said to be driven by charitable purpose.”

7.7.2.2    Despite the above, the Court ultimately decided not to interfere with the judgment of the High Court and held as under [page 147]:

“This court, in the normal circumstances, having regard to the above discussion, would have remitted the matter for consideration. However, it is apparent from the records that the tax effect is less than Rs.10 lakhs. It is apparent that the receipt from the activities in the present case did not exceed the quantitative limit of Rs.10 lakhs prescribed at the relevant time. In the circumstances, the impugned order of the High Court does not call for interference.”

8    After dealing with general interpretation of section 2(15) and cases of all the categories of assessees, the Court proceeded to give Summation of Conclusions which is worth noting.

8.1    In the context of general test to be applied under section 2(15), the Court broadly stated that the assessee pursuing object of GPU category should not engage in Commercial Activity as envisaged in the said Proviso to section 2(15). If it does so, then (i) such Commercial Activity should be connected [“actual carrying out…..” inserted w.e.f. 1st April, 2016 to the achievement of its GPU object; and (ii) receipts from such Commercial Activities should not exceed the quantitative limit provided from time to time[ currently, 20 per cent of the total receipts of the entity for the relevant previous year- w.e.f. 1st April, 2015]. Generally, charging of any amount for GPU activity, which is on cost-basis or nominally above the cost cannot be considered to be Commercial Activities as envisaged in the said Proviso. If such charges are markedly or significantly above the cost incurred by the assessee then the same would fall within the mischief of “cess, fees or any other consideration” towards the Commercial Activity. This position is clarified through illustrations [referred to in Para 5.5.2 of Part II of this write-up] by the Court which would also be relevant in this context. The Court has also summarised its conclusion on section 11(4A) of the Act and for all the six categories of assessees as well as on application of interpretation. Summation of Conclusions given by the Court deserves careful reading. However, due to space constraint and to avoid making this write-up further lengthy (which otherwise has already become lengthy extending to division in three parts, mainly on account of lengthy judgment dealing with six categories of assessees) the same is not reproduced here. The detailed Summation of Conclusions are available at pages 147 to 151 of the reported judgment which, as earlier mentioned , are worth reading to consider various implications arising out of the above judgment. In this context, useful reference may also be made to ‘Summation of Interpretation of section 2(15)’ appearing at pages 101 and 102 of the reported judgment.

CONCLUSION

9.1    The above judgment of the Supreme Court in AUDA’s case primarily deals with the effect of the said Proviso to section 2(15) [i.e. position post 2008 Amendment]. The said Proviso applies to the trust or institution [Trust] pursuing the object of GPU category. As such, this judgment should not apply to Trust pursuing only Specific Objects category such as education, medical relief, yoga, etc. [referred to by the Court as ‘per se’ category objects] and therefore, in case of Trust pursuing only object of Specific category, 2008 Amendment should not have any direct impact. In this context, the useful reference may also be made to the recent decision of the Tribunal in M.C.T.M Chidambaram Chettiar Foundation’s case [Chennai Bench- ITA Nos: 976,977,978 & 979/CHNY/2019] dated 11th January, 2023 wherein the Tribunal has also taken similar view following the judgment in AUDA’s case. In this case, mainly based on actual facts and records, the Tribunal also took the view that letting out of auditorium [located in school complex and used for its educational activities] to outsiders during some parts of the year is incidental to ‘education’ and rejected the claim of the Revenue treating this activity as pursing GPU category object. In this context, one also needs to bear in mind the views expressed by the Court in New Noble Educational Society’s case [dealing with section 10(23C)(vi)] regarding letting of premises/infrastructure by the Trust to outsiders [referred to in para 5.8.2 of Part II of write-up on that case- BCAJ February, 2023] which has not been considered by the Tribunal in this case.

9.1.1    In the context of Specific Objects category even if the said Proviso is not applicable, if Trust earns business profits it would be necessary to comply with the requirements of section 11(4A) to claim exemption under section 11. As such, the business should be incidental to the attainment of objective of the Trust [such as education, medical relief, etc]. The advantage in this category in respect of business profit could be that the limit of 20 per cent specified in the said Proviso would not be applicable. However, at the same time, it is advisable that the activity of education itself should not be carried on purely on commercial lines consistently yielding significant profit. In this context, the observations in the recent judgment of Madras High Court in the case of Mac Public Charitable Trust [(2023) 450 ITR 368] are worth noting. In this case, while dealing with the case of violation of the provisions of the Tamil Nadu Educational Institution [Protection of Collection of Capitation Fees Act, 1992 and cancellation of Registration under Income–tax Act, the High Court has elaborately discussed the concept of education with reference to various judgments and stated [page 462] that education can never be a commercial activity or a trade or a business and those in the field of education will have to constantly and consistently abide by this guiding principle. For this, the recent judgment of the Supreme Court [April, 2023] in the case of Baba Bandasingh Bahadur Education Trust [Civil Appeal No 10155 of 2013- for A.Y. 2006-07] delivered in the context of section 10(23C) (vi) should also be looked at.

9.1.2    In Specific Object category of education, the meaning of the term ‘education’ is equally relevant. The Supreme Court in LokaShikshana Trust’s case [(1975) 101 ITR 234] has given a narrower meaning of the term ‘education’ appearing in section 2(15) to say that it is process of training and developing the knowledge, skill, mind and character of students by formal schooling. As such, it means imparting formal scholastic learning in a systematic manner and the Supreme Court in its recent judgment in New Noble Education Society Trust’s case [448 ITR 592- considered in this column of BCAJ- January & February, 2023] has also followed this narrower meaning[refer para 5.5.1 of Part II of write-up on that case- BCAJ February,2023]. This meaning is also considered by the Court in AUDA’s case [at page 139- para 225] and that should be borne in mind. This should be equally applicable to the term education appearing in the definition of charitable purpose under section 2(15). For this useful reference may also be made to recent decision of Ahmedabad bench of Tribunal in the case of Gujarat Council of Science Society [ITA No 2405/AHD/2017, ITA No 260/AHD/2018 and ITA No 306/AHD/2019] vide order dtd 20/3/2023 for A.Ys 2013-14 to 2015-16. In this case, the Tribunal also took a view that prospective applicability of the judgment in New Noble’s case is only confined to cases involving the interpretation of the term “solely” and did not find any inconsistency with the same for the meaning /definition /scope of the term “education” as used in section 2(15). It may also be noted that the Bombay High Court in Laura Entwistle and Ors’s case- The Trustees of American School Bombay Education Trust [ TS- 102-HC-2023(Bom)] and the Orissa High Court in Sikhya ‘O’ Anu Sandhan’s case [TS- 04-HC-2023(Ori)] have taken a view that the judgment of the Supreme Court in New Noble’s case should operate prospectively and cannot be applied to earlier period. Of course, the issue of distinction drawn by the Ahmedabad Tribunal was not before the High Courts in these cases.

9.1.3    It is also possible that the Trust pursuing only the object of specific category, say education, may also carry out some incidental activities perceiving the same to be part of education or incidental to the imparting education. In such cases, on facts, a possibility of Revenue treating such other activity as GPU category and invoking the said Proviso can’t be ruled out. If ultimately the Revenue succeeds on this, the risk of losing total exemption under section 11 for that year remains by virtue of the provisions of section 13(8). Therefore, such Trusts will have to be cautious in this respect. Furthermore, if GPU category object is not part of its objects, some further issues may also need consideration [also refer to para 7.7.2.1 above].

9.2    In view of the ratio laid down by the Court in AUDA’s case, the meaning of `charitable purpose’ as applicable post 2008 Amendment in section 2(15) is now settled. In this regard, as stated in para 5.3.3 Part II of this write-up, the predominant object test laid down by the Supreme Court in Surat Art’s case no longer holds good post the 2008 Amendment. Likewise, `ploughing back’ of business income to `feed’ the charity is also not relevant. In this context, the expressions cess, fees, etc. [consideration] should be given purposive interpretation and accordingly, the same should be understood differently for various categories of assessees such as statutory bodies, regulatory authorities, non-statutory bodies, etc. [referred to in para 5.3.2 of Part II of this write-up]. Therefore, the Trust having GPU object will not satisfy the definition of ‘charitable purpose’ in section 2(15) in cases where such Trust carries on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation thereto for consideration [i.e. Commercial Activity] even though its ‘predominant object’ is charitable in nature and even if business income from such activity is utilised to feed the charity. What is now relevant is the fact of undertaking Commercial Activity during the relevant year. However, in such an event, the Trust should ensure that it complies with the twin requirements[ w.e.f. 1st April, 2016 onwards] of relaxations provided [for earlier period also refer para 1.6 of Part I of this write-up] in the said Proviso so as to satisfy the definition of ‘charitable purpose’, namely, (i) the Commercial Activity should be undertaken in the course of actual carrying out of the GPU object [Qualitative Condition]; and (ii) the aggregate receipts from such activity do not exceed 20 per cent of the total receipts of the Trust of that previous year [Quantitative Condition]. In such cases, the Trust also needs to comply with the provisions of section 11(4A).

9.2.1    For the purpose of determining whether the Trust is carrying on any Commercial Activity, the Court has placed significant emphasis on the amount of consideration charged and has stated that generally if, the consideration charged is significantly more than the cost incurred by such Trust, that would fall in the category of consideration towards Commercial Activity and where the consideration charged is at cost or nominal mark-up on the cost incurred by the Trust it should not be regarded as towards Commercial Activity. This is the under lying broad principle for this purpose and this should be borne in mind in every case. At the same time, the fact of determination of mark-up charged is either nominal or significant is left open without any further guidance and this being highly subjective, may lead to litigation. Likewise, the Court has also not dealt with [perhaps rightly so] the meaning of ‘cost’ for this purpose and therefore, in our view, the same should be determined on the basis of generally accepted principles of commercial accounting.

9.2.2    For the above purpose, various explanatory illustrations given by the Court in the above case [referred to in para 5.5.2 of part II of this write-up] are relevant.

9.2.3    For all practical purposes, as a general rule, it is advisable to also maintain separate books of account in respect of each incidental activity carried on by the Trust pursuing any category of object [i.e. Specific, GPU or both] to meet with, wherever needed, the requirement of section 11(4A) so as to avoid possibility of any litigation on non-compliance of requirement of maintaining separate books of account contained in section 11(4A), whenever the same becomes applicable.

9.3    In view of the narrow interpretation of the term `incidental [used in provisions of section 11(4A)] made by the Court [referred to in para 5.4.3 Part II of this write-up] to claim exemption for profits of the incidental business, it would be necessary that the business activity should be conducted in the course of achieving GPU object to be regarded as incidental business activity and of course, the requirement of maintaining a separate books of account for the same also should be met to claim exemption under section 11. Interestingly, for this purpose, the Court has relied on 2008 Amendment with subsequent amendments and also stated that introduction of clause (i) in the said Proviso by amendment of 2016 is clarificatory. In this context, it is worth noting that the Supreme Court in Thanthi Trust’s case [referred to in para 1.4.2 of Part I of this write-up] while dealing with section 11(4A) has taken a view [post-1992 amendment] that business whose income is utilised by the Trust for achieving its charitable objects is surely a business which is incidental to the attainment of its objectives. The Court in AUDA’s case has distinguished this case on the ground [referred to in para 5.4.2 of Part II of this write-up] that in that case, the Court was dealing with a case of Specific Object category [education] and not GPU category object and the ratio of that case cannot be extended to cases where the Trust carries on business which is not held under trust and whose income is utilised to feed the charitable object. It is difficult to appreciate this distinction and both the judgments being of equal bench [three judges], some litigation questioning this view cannot be ruled out.

9.3.1    In the context of distinction between the provisions of section 11(4) and 11(4A), from the observations of the Court [referred to in para 5.4.1 of part II of this write-up], one may be inclined to take a view that if the business is held under trust, then the case of the assessee will fall only under section 11(4) and section 11(4A) would apply only to cases where business is not held under trust. The Court also noted that there is also difference between business held under trust and the business carried on by or on behalf of the trust. Normally, the business undertaking will be considered as held under the trust where it is settled by the donor or trust creator in the trustees. Referring to the test applied in J.K. Trust’s case [referred to in para 5.4.1 of part II of this write-up], the Court also noted that for a business to be considered as property held under trust, it should have been either acquired with the help of funds originally settled or the original fund settled upon the trust must have proximate connection with the later acquisition of the business. We may also mention that similar view is also expressed in the judgment [authored by justice R. V. Easwar] of Delhi High Court [by a bench headed by justice S. Ravindra Bhat- who has now authored the judgment in AUDA’s case] in the case of Mehta Charitable Prajnalay Trust [(2013) 357 ITR 560,572] in which Thanthi Trust’s case judgment has also been considered. It may be noted that observations of the Court [referred to in para 5.4.1] appear to be summarising the position noticed by the Court after referring to earlier judgments and may not necessarily seem to be expressing its view on such legal position. In this context, the judgment of the Supreme Court in Thanthi Trust’s case [referred to para 1.4.2 of Part I of this write-up] is worth noting wherein also business was held under trust and the Court has applied the provisions of section 11(4A).

9.4    Article 289(1) of the Constitution of India exempts property and income of a State from Union taxation. However, Article 289(2) of the Constitution permits the Union to levy taxes inter alia in respect of a trade or business of any kind carried on by, or on behalf of a State Government or any income accruing or arising in connection therewith. In view of this, judgment in AUDA’s case has held that every income of state entity is not per se exempt from tax. State controlled entities will have to evaluate whether the functions performed by them are actuated by profit motive or whether the same are in the nature of essential service provided in larger public interest. In this regard, the Court has laid down certain tests [referred to in para 7.2.3 above]. As clarified by the Court [refer para 5.3.3 of Part II of this write-up], statutory fees or amounts collected by state entities as provided in the enactments under which they have been set up will not be treated as business or commercial in nature. The same view emerges in respect of fees/cess etc. collected in terms of enacted law [by state or center] on amount collected in furtherance of activities such as education, regulation of profession etc. by regulatory authority/body.

9.5    The Revenue had filed a miscellaneous application before the Supreme Court seeking clarifications in the aforesaid decision of AUDA so as to enable it to redo the assessments in accordance with the Court’s judgment for the past and examine the eligibility on a yearly basis for the future. The Court in its order dated 3rd November, 2022 ([2022] 449 ITR 389 (SC)) disposed of the application and held that the appeals decided against the Revenue were to be treated as final. With respect to the applicability of the judgment to other years, the Court stated that the concerned authorities would apply the law declared in its judgment having regard to the facts of each such assessment year.

9.6     In view of the above judgment of the Court in AUDA’s case, the popular understanding that beneficial circular issued by the CBDT under section 119 are binding on the Revenue authorities in all cases has again come-up for questioning. In this case, the Court has opined [as stated in para 5.3 of Part II of this write-up] that such circulars are binding on the Revenue authorities if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding. Furthermore, the Court has also stated that such circulars are also not binding on the courts and the courts will have to decide the issue based on its interpretation of a relevant statute. As such, the debate will again start as to the binding effect of such circulars which are considered by the assessing officers as contrary to the plain words of the statue. It is unfortunate that on this issue, the debate keeps on resurfacing at some intervals and something needs to be positively done in this regard to finally settle the position on this issue to provide certainty.

9.7    Clause (46A) is inserted in section 10 by the Finance Act, 2023 to exempt any income arising to a body or authority or Board or Trust or Commission, not being a company, which has been established or constituted by or under a Central or State Act with one or more of purposes specified therein and is notified by the Central Government in the Official Gazette. The following purposes are specified in the said clause (i) dealing with and satisfying the need for housing accommodation; (ii) planning, development or improvement of cities, towns and villages; (iii) regulating, or regulating and developing, any activity for the benefit of the general public; or (iv) regulating any matter, for the benefit of the general public, arising out of the object for which the entity has been created. Therefore, statutory authorities /bodies, etc. can get themselves notified under this provision to avoid the potential litigation for claiming exemption under section 11 and in such cases, the above judgment in AUDA’s case will not be relevant.

9.8    Unlike the judgment of the Supreme Court in New Noble Education Society’s case [(2022) 448 ITR 598 – considered in this column in BCAJ January and February, 2023], the Court has not stated that the judgment in AUDA’s case will apply prospectively. Therefore, as per the settled position, this decision will act retrospectively and accordingly, will apply to all past cases also post 2008 Amendment. As such, post the above judgment in AUDA’s case, various benches of the Tribunal and Courts have started considering this judgment for deciding matters coming before them. Some of such cases are briefly noted herein.

9.8.1    The Supreme Court in Servants of People Society’s case [(2022) 145 taxmann.com 234 /(2023) 290 Taxman 127] vide order dated 21st October, 2022 summarily disposed of the SLP filed by the Revenue challenging the decision of the Delhi High Court [(2022) 145 taxmann.com 145] in terms of its decision in AUDA’s case by observing that the matter is fully covered by that judgment. In this case, it is worth noting that the assessee-society ran schools, medical centers and also a printing press and published a newspaper. The profits so generated were used for charitable purposes and, apparently, the activities of the assessee were not for profit motive. The Delhi High Court [seems to be for A.Ys 2010-11, 2012-13 to 2014-15] had held that the assessee was not involved in any trade, commerce or business and, therefore, the mischief of said Proviso to section 2(15) of the Act was not attracted. Interestingly, while dealing with the appeal of the Revenue in the case of the same assessee for a different assessment year [seems to be for A.Y. 2011-12 as mentioned in the High Court judgment reported in [(2022) 447 ITR 99], the Supreme Court in order dated 31st January, 2023 [(2023) 452 ITR 1-SC] noted that the Society was running schools, medical center, old age home etc. as well as printing press for publishing newspaper and further noted that the assessee society claimed exemption in respect of income from newspapers which included advertisement revenue of Rs. 9,52,57,869 and surplus of Rs.2,16,50,901. After noting these facts, the Court held that the law regarding interpretation of section 2(15) of the Act had undergone a change due to the decision in AUDA’s case for which the Court referred to its conclusion in AUDA’s case in relation to Tribune Trust’s case [referred to in para 7.7 above] and noted that in that case it was held that while advertisement is intrinsically linked with the newspaper activity which satisfies the requirement of carrying out such activity in the course of actually carrying on the activity towards advancement of object [referred to in clause (i) of the said Proviso– Qualitative Condition]but the condition of quantitative limit imposed in clause (ii) of the said Proviso has also be fulfilled. Accordingly, the Court remitted the matter to the AO for fresh consideration of the nature of receipts in the hands of the assessee and to re-examine as to whether the amounts received by the assessee qualify for exemption under section 11.

9.8.2    The Gujarat High Court in the case of GIDC [(2023) 442ITR 27] has followed the above judgment in AUDA’s case and confirm the view of the Tribunal granting the exemption to the assessee for A.Y. 2015-16. For this, the High Court has relied on the view taken by the Supreme Court in AUDA’s case[ being the first category of assessee therein] as well as on the general interpretation of the definition of ‘charitable purpose’ under section 2(15) post 2008 Amendment.

9.8.3    The Mumbai bench of Tribunal in case of The Gem & Jewellery Export Promotion Council [ITA Nos. 752/MUM/2017, 989/MUM/2019 and 2250/MUM/2019- Assessment Years 2012-13 to 2014-15] had an occasion to consider the assessee’s claim for exemption under section 11 which was denied by the AO by treating the activity of conducting exhibitions on a large scale [international as well as domestic] as Commercial Activities under the said Proviso and that was also upheld by the CIT(A).After elaborate discussion and considering the judgment of the Court in AUDA’s case[ including in relation to AEPC’s case referred to in paras 7.4 & 7.4.1 above], the Tribunal noted that the assessee had incurred a net loss from this activity of exhibitions conducted within and outside India in each year as revealed by the records. Factually, the assessee has charged consideration for conducting exhibitions/trade fairs slightly below the cost. As such, there being no mark-up on consideration charged from the exporters, in the broad principles laid down by the Court in AUDA’s case, this activity is beyond the preview of Commercial Activity as envisaged in the said Proviso and the assessee is entitled to claim exemption under GPU category objects.

9.8.3    In some cases, the Tribunal has decided the issue against the assessee following the law laid down in the above judgment in AUDA’s case such as : (i) Fernandez Foundation’s case[(2023) 199 ITD 37 – Hyd] wherein the assessee’s application for registration under section 12AA was rejected, inter alia, on the ground that the assessee was involved in activities which were in the nature of trade and provided medical facilities at market rates and, in fact, the amount charged by the assessee was far more than the amount charged by other diagnostics centers/hospitals for similar tests/ diagnostic/ treatment. The Tribunal upheld the order of CIT(E) and stated that assessee neither provided services at reasonable rate nor utilised its surplus for helping medical aid/facilities to the poor/needy persons at free of cost. Treatments were provided only to limited patients at a concessional rate which was a meagre portion of its total revenue earned. ITAT also referred to the decision of the Supreme Court in AUDA’s case and the observations made therein examining the issue of profit generated by charities engaged in GPU objects and observed that the CIT(E) was correct in holding that the assessee was charging on the basis of commercial rates from the patients and had failed to demonstrate that the charges/fee charged by it were on a reasonable markup on the cost; (ii) In Maharaja Shivchatrapati Pratishsthan’s case [(2023) 199 ITD 607], the Pune Bench of Tribunal rejected the claim of exemption under section 11 for A.Y. 2013-14 following AUDA’s case and stated that crux of the interpretation of the said Proviso to section 2(15) is to first examine the receipts of the assessee from pursuing GPU category object are on cost-to-cost basis or having a nominal profit on one hand or having a significant mark-up on cost on the other hand and the latter cases are a business activity but the former is non-business activity. Noting the fact on record that in this case the revenue from performing drama for various institutes/companies was Rs 1.96 crores and the cost for such performance was only Rs. 1.16 crores, the Tribunal took the view that profit elements in drama performance is more than 40 per cent of the gross receipts and that patently falls in the category ‘significant mark-up cases’ and hence business activity. Considering the significant margin on performing drama uniformly, the Tribunal took the view that this activity is in nature of business activity and ceases to fall within the domain of ‘chartable purpose’ as the business receipts exceeds 20 per cent of total receipts. The Tribunal also took the view that the contention of the assessee that the review petition has been filed in AUDA’s case is not relevant as that does not alter in any manner binding force of the judgment in terms of Article 141 of the Constitution of India.

9.9    As mentioned in para 7.1 above, the Court had divided the appeals before it into six categories of assessees and the Court has dealt and decided each category of assessee’s case [ as referred to in para 7.2 to 7.7.2.2 above] and also given summation of conclusions [as mentioned in para 8 above].In this concluding part of the write-up, we have only briefly dealt with the major general principles emerging from the judgment in AUDA’s case as mainly applicable to GPU categories of cases and not separately dealt with the Court’s conclusion of each category of assessees for the same reasons as stated in para 8.1 above. In all these cases, the decision of the Court is applicable for the assessment years in appeals and other year cases will have to be decided on yearly basis considering the facts in relevant year based on the law laid down by the Court in the above case.

9.10    If the exemption under section 11 is lost by the Trust in a given year on account of applicability of the said Proviso, then its taxable income now will have to be computed in accordance with the provision of section 13(10) read with section 13(11) introduced by the Finance Act, 2022 [w.e.f. 1st April, 2023] which, to an extent, brings certainly on this and give some comfort for determining tax liability. Furthermore, in our view, merely because the exemption is lost in a given year in such cases, the Registration granted to the Trust does not become liable to be cancelled.

9.11    At the time of 2008 Amendment, the possibility of an adverse view in many cases was perceived by many tax professionals as well as by some senior counsel and some trusts while claiming exemption under section 11, also started paying advance tax out of abundant caution. As such, the possibility of adverse judgment from the Supreme Court based on the clear language of the said Proviso was not ruled out. However, in this context, the judgment in the AUDA’s case seems to have gone far beyond the perception formed at that time. As such, the judgment, on an overall basis, is likely to create unending uncertainty and in large number of cases, possibly, give rise to long-drawn litigations. It was expected when this judgment was pronounced that the Government will make appropriate amendment in the said Proviso to make the law fair and reasonably workable but unfortunately, in the Finance Act, 2023 this has not been done except insertion of section 10(46A) [referred to in para 9.7 above] for the benefit of statutory authorities, etc. In the recent past, more so with the recent amendments in past few years, the feeling has started developing amongst those who are sparing time and resources for bonafide philanthropic purposes that the Charitable Trusts are, perhaps, treated in the most uncharitable manner in this respect and this is not a good sign for the nation. May be, in some cases, the Revenue may have noticed abuse of the exemption provisions. But the larger question is: is it fair to punish the entire community of charity by making such provision?

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not binding:

7 Kamal Varandmal Galani vs. PCIT -19
[WP (L) No. 38534 of 2022,
Dated: 20th April, 2023, (Bom) (HC)]

Section 127 – Transfer of case – Instructions of CBDT dated 17th September, 2008 – cogent material or reasons, for the transfer of the case should be disclosed – request for transfer of jurisdiction is not  binding:

The Petitioner has been filing his income returns in Mumbai for the last 22 years, the last of which was filed electronically from Mumbai on 31st December, 2021 for the A.Y. 2021-22. A notice dated 24th June, 2022 came to be issued by the PCIT – 19 informing the Petitioner regarding the proposed transfer of assessment jurisdiction from the DCIT -19(3) to the DCIT Central Circle-3, Jaipur, with a view to enable a proper and co-ordinated assessment along with the assessment in the case of Veto Group, Jaipur on whom search proceedings were conducted under section 132 of the Act. The show cause notice stated that the PCIT (Central), Rajasthan vide a communication dated 16th February, 2022 had proposed for centralisation of the case of the Petitioner with Vito Group at Jaipur and, therefore, the Petitioner was asked to file his submissions in that regard.

Section 127 of the Act authorises inter alia the Principal Chief Commissioner to transfer any case from one or more AO subordinate to him to any other AO also subordinate to him, after recording reasons and after giving to the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so. Section 127(2) further envisages that where the AOs from whom the case is to be transferred and the AOs to whom the case is to be transferred are not subordinate to the same officer, then there ought to be an agreement between the Principal Commissioner or other authorities mentioned in the said sub-section exercising jurisdiction over such assessing offcers, and an Order can then be passed after recording reasons and providing the assessee a reasonable opportunity of being heard in the matter.

Objections to the transfer of jurisdiction were filed by the Petitioner, wherein, it was stated that there was no basis for transfer of the assessment jurisdiction of the Petitioner from DCIT- 19(3), Mumbai to the DCIT Central Circle-3, Jaipur as there was no material found during the search operation, which would connect the Petitioner with the Vito Group of Jaipur. It was also stated that no such search was conducted in terms of Section 132 of the Act on the premises of the Petitioner, although, a survey under section 133A of the Act was conducted in the case of M/s Landmark Hospitality Pvt Ltd in Mumbai in which the Petitioner was a Director. It was also stated that during the course of survey proceeding, statement of the Petitioner had been duly recorded and further that there was no incriminating material found during the survey proceeding so conducted, which would connect either the Petitioner or even M/s Landmark Hospitality Pvt Ltd with the Vito Group of Jaipur in whose case the search action had been conducted. It was further urged that the Petitioner had also highlighted the fact that in the show cause notice, no mention had been made as regards there being any material collected by the revenue against the Petitioner, on the basis of which, the transfer of the jurisdiction could be contemplated.

Objections raised by the Petitioner came to be decided and rejected by virtue of the Order dated 21st November, 2022.

Reply affidavit has been filed by the Respondent-revenue, wherein it is stated that the assessment jurisdiction of the Petitioner was transferred to Rajasthan for an effective investigation and meaningful assessment after fulfilling the applicable procedural and legal requirements as stated under section 127 of the Act.

The Court noted that, in the reply, there was no specific averment made that there was anything incriminating found either during the survey proceeding conducted on M/s Landmark Hospitality Pvt Ltd, of which the Petitioner was a Director, or during the search proceedings conducted on the Vito Group, which would connect either M/s Landmark Hospitality Pvt Ltd or the Petitioner to the Vito Group of Jaipur. The survey report and records prepared in regard to the survey proceedings on M/s Landmark Hospitality Pvt Ltd does reflect that there was no inventory prepared during the survey proceeding, suggesting that there was nothing incriminating found.

From the reply filed by the Respondent revenue the authorities only seem to be speculating that the incriminating documents and data found and seized/impounded ‘may relate to the assessee as well as other assesses of this group.’ The PCIT, therefore, did not appear to be in possession of any material at all, based upon which he could draw his satisfaction that the assessment jurisdiction deserved to be transferred from DCIT-19(3), Mumbai to the DCIT Central Circle-3, Jaipur and rather appears to have speculated that only because there was a search/survey conducted and a request made by the concerned PCIT (Central), Rajasthan, the jurisdiction had to be transferred following the instructions of CBDT dated 17th September, 2008. Reference to the instructions dated 17 September 2008 relied upon by the Respondent-revenue is pertinent and in particular clause (d), which is reproduced herein under:

“(d) The ADIT (Inv.) should send proposal for centralization through the Addl. DIT (Inv.) to the DIT(Inv.) who in turn should send the proposal to the CIT (C) or the CIT as mentioned in (C) above as the case may be within 30 days of initiation of search. The proposal should contain names of the cases their PANs, the designation of the present assessing officers and the present CIT charge. The list should also contain the connected cases proposed to be centralized along with reasons thereof including their relationship with the main persons of the group. The assessees not having PAN should also be included along with their addressees and territorial jurisdiction. Against each of the cases, it should be mentioned whether it is covered u/s 132(1) of 132A or 133A(1) or it is a connected case copies of the proposal should also be endorsed to the CCIT concerned from whose jurisdiction the cases are to be transferred and the DGIT(Inv.)/CCIT(C) to whose jurisdiction the cases are being transferred.”

The Court observed that the instructions make it clear that while sending a proposal for centralization, reasons had to be reflected including the relationship of the petitioner with the main persons of the group. No such sustainable reasons are forthcoming from the records except speculation connecting the Petitioner and the subject material and a request from the PCIT, Jaipur for centralisation of the case. In fact, the Deputy Commissioner of Income tax-19(3), Mumbai ought to have refused to accede to the request for centralization inasmuch as it had not received any cogent material or reasons, which would have formed a basis for the transfer of the case to the DCIT Central Circle-3, Jaipur. The Court noted that transfer of assessment jurisdiction from Mumbai to Jaipur would certainly cause inconvenience and hardship to the petitioner both in terms of money, time and resources. Therefore, the order impugned in the absence of the requisite material/reasons as the basis would be nothing but an arbitrary exercise of power and therefore liable to be set aside.

The Court held that the Order impugned passed under section 127(2) of the Act, does not at all reflect as to why it was necessary to transfer the jurisdiction from DCIT- 19(3), Mumbai to DCIT Central Circle-3, Jaipur. None of the issues raised by the Petitioner have been dealt with either in the Order dated 21st November, 2022 disposing of the objections raised by the Petitioner, much less have the same been reflected in the Order impugned under section 127(2) of the Act. The AO appears to have acted very mechanically treating the request from DCIT Central Circle-3, Jaipur, as if it was binding upon him.

The Court observed that the said request was not at all binding inasmuch as if it was so, then the agreement envisaged under section 127(1)(a) would be rendered superfluous. The agreement envisaged in terms of aforesaid section is not in the context of showing deference to a request made by a colleague or higher officer, but an agreement based upon an independent assessment of the request in the light of the reasons recorded seeking transfer of the jurisdiction. In fact, section 127(1)(b) contemplates a situation where in the event of a disagreement, the matter is referred to an officer as the Board may, by notification in the Official Gazette, authorise in that behalf. Not only this, if a request for transfer of jurisdiction was to be treated as binding, then it would have rendered otiose Section 127 to the extent the same envisages an opportunity of being heard to be provided to the Petitioner. The obligation on the part of the AO to record reasons before ordering the transfer of the case and the right of the assessee to be heard in the matter are not hollow slogans but prescribed to achieve a particular purpose and the purpose is to remove any element of arbitrariness while exercising powers under section 127 of the Act. If the request for transfer of jurisdiction was so sacrosanct as could not be refused, then the opportunity of being heard would be nothing but illusory rendering the request a foregone conclusion regarding its acceptance. Therefore, the Court was not convinced at all that the request made by the concerned officer from Jaipur, had necessarily to be allowed as per the Instructions dated 17th September, 2008.

The Order impugned was unsustainable in law and was, accordingly, set aside.

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

6 Amtek Transportation Systems Ltd vs. ACIT, Circle-1(1), New Delhi & Ors,
[WP (C). 5197 OF 2023 & CM Nos. 20269 -70 of 2023; A.Y. 2021-22.
Dated: 25th April, 2023, (Del.) (HC)]

Exparte order – Stay of Demand – CBDT instructions dated 31st July, 2017 – Averment made that addition was unsustainable – PCIT to pass speaking order on the contentions raised in the application:

An ex parte assessment order was passed on 27th December, 2022 under section 144 read with section 144B of the Act. This was followed by a demand notice dated 27th December, 2022 of Rs.129,70,09,500 for A.Y. 2021-22.

The Petitioner’s bank account was attached by virtue of an order dated 5th March, 2023 issued by the concerned authority.

The Petitioner had filed an application dated 15th March, 2023, wherein certain averments were made to set up a prima facie case for staying the demand. The aspects concerning balance of convenience and irreparable injury were also, adverted to in the application.

The department vide impugned order dated 08th April, 2023, rejected the application for stay of the operation of demand notice without any cogent reasons.

The petitioner, in terms of the impugned order dated 8th April, 2023 was directed to deposit Rs. 25,94,01,900 if it wishes to have the benefit of stay on the demand notice.

The Petitioner stated that it was unable to meet the terms of the impugned order, the demand itself was, prima facie, substantially unsustainable. It was further contented, that the value of the total assets available with the petitioner was approximately Rs. 21.91 crores, and that it has a turnover of nearly Rs. 2.15 crores. It was also contented, that the petitioner, has a negative net worth. It was emphasised, that its current liabilities, nearly, amount to Rs. 99 crores.

The Honorable High Court noted that on perusal of the order dated 8th April, 2023 it shows that the concerned authority has simply taken recourse to the CBDT instructions dated 31st July, 2017, issuing the direction that the outstanding demand will remain stayed, provided 20 per cent of the outstanding demand is deposited. Though the petitioner had indicated in its reply, that a substantial part of the addition was unsustainable.

The Court observed that the petitioner has averred in the application, that the AO has added the entire amount, which was shown as current liabilities, i.e., Rs. 99,86,14,787 on account of the fact that there was no explanation. Furthermore, expenses amounting to Rs. 71,64,71,368 have also been disallowed by the AO, on the grounds that there was no explanation. However, the Petitioner claims that these very expenses were added back by the petitioner on its own, and therefore, no explanation was required. These aspects, were inter alia referred to in the application for stay, which the concerned authority have not dealt with, while dealing with the petitioner’s application for grant of stay. If the demand was likely to get scaled down for the reasons adverted to in the petitioner’s application, these aspects will have to be taken into account by the concerned authority, while dealing with the application for stay.

The Court observed that the AO has merely gone by the CBDT instructions dated 31st July, 2017 and granted stay, on deposit of 20 per cent of the outstanding demand.

The Court referred to the Supreme Court decision in case of PCIT vs. M/s LG Electronics India Pvt Ltd (2018) 18 SCC 447 wherein it was held that the requirement to deposit 20 per cent of the demand is not cast in stone. It can be scaled down in a given set of facts.

Thus, for the aforesaid reasons, the Court set aside the order dated 8th April, 2023 The Court further directed the PCIT to carry out the de novo exercise, and take a decision on the application for stay preferred by the petitioner after granting personal hearing to the authorised representative of the petitioner. Further, the PCIT was directed to also pass a speaking order and deal with the assertions made by the Petitioner in the stay application.

The Petitioner stated that the amount lying to the credit of the petitioner in the subject bank account could be remitted to the concerned authority, subject to the debit-freeze being lifted. The Court issued a direction, to the effect that the entire amount which is available in the subject bank account shall stand remitted to the PCIT and the debit-freeze ordered by the concerned authority shall stand lifted.

Reassessment – Law applicable – Effect of amendment to sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 – Credit Instruction No. 1 of 2022 has no binding force.

20 Rajeev Bansal vs. UOI
[2023] 453 ITR 153 (All):
A. Y.: 2013-14 to A.Y. 2017-18
Date of order: 22nd February, 2023:
Sections. 147 to 151 of ITA 1961 and Article 142 and 226 of Constitution of India

Reassessment – Law applicable – Effect of amendment to sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 – Credit Instruction No. 1 of 2022 has no binding force.

The assessment years under challenge are A.Y. 2013-14 to A.Y. 2017-18. The dispute pertains to the issue of notice under section 148 of the Income-tax Act, 1961 after 1st April, 2021 without following the new regime of tax for reopening of assessment applicable with effect from1st April, 2021. The assessees contended that re-opening of assessment for A. Y. 2013-14 and A.Y. 2014-15 could not be done since the maximum period prescribed in the pre-amended provisions had expired on 31st March, 2021 and therefore the notices issued between 1st April, 2021 to 30th June, 2021 for AYs. 2013-14 and 2014-15 were time barred. For the AYs. 2015-16 to 2017-18, the contention raised was regarding the monetary threshold and the other requirements prescribed under the new provisions of re-opening with effect from 1st April, 2021.

Various notices were challenged before the High Courts on the basis of the above and the High Courts took the view that the re-assessment notices issued after 01.04.2021 under the pre-existing provisions by applying extension of time with the help of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 were to be quashed and further held that the assessing authorities were at liberty to initiate re-assessment proceedings in accordance with the provisions of the Act.

The matters from various High Courts travelled to the Supreme Court and the Supreme Court held that the Department should not have issued notices under the unamended provisions and the notices issued after 01.04.2021 should have been issued under the substituted provisions of section 147 to 151 of the Act. However, in order to strike a balance, the Supreme Court directed that the notices issued under the unamended provisions of the Act shall be deemed to have been issued u/s. 148A as per the substituted provisions.

Pursuant to the Supreme Court decision, the CBDT issued directions regarding implementation of the judgment of the Supreme Court. Thereafter, the Department, in pursuance of the decision of the Supreme Court and the directions issued by the CBDT issued notices providing with the material or information on the basis of which re-opening was initiated and proceeded to pass orders u/s. 148A(d) of the Act holding that notice u/s. 148 should be issued.

These orders were challenged by filing writ petitions. The Allahabad High Court framed the following two questions for deciding the issues:

“(i)    Whether the reassessment proceedings initiated with the notice u/s. 148 (deemed to be notice u/s. 148A), issued between April 1, 2021 and June 30, 2021, can be conducted by giving benefit of relaxation/extension under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, (TOLA) 2020 up to March 30, 2021, and then the time limit prescribed in section 149(1)(b) (as substituted with effect from April 1, 2021) is to be counted by giving such relaxation, benefit of TOLA from March 30, 2020 onwards to the Revenue ?

(ii)    Whether in respect of the proceedings where the first proviso to section 149(1)(b) is attracted, benefit of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 will be available to the Revenue, or in other words the relaxation law under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 would govern the time frame prescribed under the first proviso to section 149 as inserted by the Finance Act, 2021, in such cases ?”

The High Court held as under:

“i)    Sweeping amendments have been made in sections 147 to 151 of the Income-tax Act, 1961 by the Finance Act, 2021. The radical and reformative changes governing the procedure for reassessment proceedings in the substituted provisions are remedial and benevolent in nature. A comparison of pre and post amendment section 149 indicates that the period of notice for reassessment proceedings in the pre-amended section 149 was four years and six years. Whereas in the post-amendment section 149(1), the time limit within which notice for reassessment u/s. 148 can be issued is three years in clause (a) and can be extended upto ten years after the lapse of three years as per clause (b), but there is substantial change in the threshold requirements which have to be met by the Revenue before issuance of reassessment notice after the lapse of three years u/s. 149(1)(b). Nor has the only monetary threshold been substituted but the requirement of evidence to arrive at the opinion that the income escaped assessment has also been changed substantially. A heavy burden is cast upon the Revenue to meet the requirements of section 149(1)(b). The first proviso to section 149(1) provides that notice u/s. 148, in a case for the relevant assessment year beginning on or before April 1, 2021, cannot be issued, if such notice could not have been issued at the relevant point of time, on account of being beyond the time limit specified under the unamended provisions section 149(1)(b). The time limit in the unamended section 149(1)(b) of six years, thus, cannot be extended up to ten years under the amended section 149(1)(b), to initiate reassessment proceedings in view of the first proviso to sub-section (1) of section 149. In other words, the case for the relevant assessment year where the six year period has elapsed as per unamended 149(1)(b) cannot be reopened, after commencement of the Finance Act, 2021, with effect from April 1, 2021.

ii)    The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 is an enactment to extend timelines only from April 1, 2021 onwards. Consequently, from April 1, 2021 onwards all references to issuance of notice contained in the 2020 Act must be read as reference to the substituted provisions only. In the case of Ashish Agarwal, the Supreme Court invoked its power under article 142 of the Constitution. From a careful reading of the judgment of the Supreme Court, there is no doubt that the view taken by the court in Ashok Agarwal on the legal principles and the reasoning for quashing the notices u/s. 148 of the unamended Income-tax Act, issued after April 1, 2021 had been affirmed in toto. The result is that all notices issued under the unamended Income-tax Act were deemed to have been issued u/s. 148A of the Income-tax Act as substituted by the Finance Act, 2021 and construed to be show-cause notices in terms of section 148A(b) of the Income-tax Act. The inquiry as required u/s. 148A(b) was to be completed by the officers and after passing orders in terms of section 148A(d) in respect of the assessee, notice u/s. 148 could be issued after following the procedure as required u/s. 148A. As a one time measure, the requirement of conducting an inquiry with the approval of specified authority at the stage of section 148A(a) was dispensed with.

iii)    In the absence of any express saving clause, in a case where reassessment proceedings had not been initiated prior to the legislative substitution by the Finance Act, 2021, the extended time limit of unamended provisions by virtue of the 2020 Act cannot apply. In other words, the obligations upon the Revenue under clause (b) of sub-section (1) of amended section 149 cannot be relaxed. The defences available to the assessee in view of the first proviso to section 149(1) cannot be taken away. The notifications issued by the Central Government in exercise of powers u/s. 3(1) of the 2020 Act cannot infuse life in the unamended provisions of section 149 by this way. As held by the Supreme Court, all defences which may be available to the assessee including those available u/s. 149 of the Income-tax Act and all rights and contentions which may be available to the assessee and revenue under the Finance Act, 2021 shall continue to be available to assessment proceedings initiated from April 1, 2021 onwards.

iv)    Clause 6.2 of the directions issued by the CBDT pursuant to the Supreme Court decision deals with the cases of the A. Ys. 2013-14 to 2017-18 and are based on the misreading of the judgment of the Supreme court. Terming reassessment notices issued on or after April 1, 2021 and ending with June 30, 2021 as “extended reassessment notices”, within the time extended by the 2020 Act and various notifications issued thereunder is an effort of the Revenue to overreach the judgment of the court in Ashok Kumar Agarwal as affirmed by the Supreme Court in Ashish Agarwal. In any case, the Central Board of Direct Taxes Instruction No. 1 of 2022 dated May 11, 2022 ([2022] 444 ITR (St.) 43), issued in exercise of its power u/s. 119 of the Income-tax Act, as per the Revenue’s own stand, is only a guiding instruction issued for effective implementation of the judgment of the Supreme Court in Ashish Agarwal. The instructions issued in the third bullet to clause 6.1 and clause 6.2 (i) and (i), being in teeth of the decision of the Supreme Court have no binding force.

v)    The reassessment proceedings initiated with the notice u/s. 148 (deemed to be notice u/s. 148A), issued between April 1, 2021 and June 30, 2021, could not be conducted by giving benefit of relaxation/extension under the Taxation and Other Laws (Relaxation And Amendment of Certain Provisions) Act, 2020 up to March 30, 2021, and the time limit prescribed in section 149(1)(b) (as substituted with effect from April 1,2021) could not be counted by giving such relaxation from March 30, 2020 onwards to the Revenue.

(vi)    In respect of the proceedings where the first proviso to section 149(1)(6) is attracted, the benefit of the 2020 Act would not be available to the Revenue, or in other words, the relaxation law under the 2020 Act would not govern the time frame prescribed under the first proviso to section 149 as inserted by the Finance Act, 2021, in such cases.

(vii)    That the reassessment notices issued to the assessee in this bunch of writ petitions, on or after April 1, 2021 for different assessment years (the A. Ys. 2013-14 to 2017-18), had to be dealt with, accordingly, by the Revenue.”

Reassessment – Notice – Limitation – Effect of Amendment to Sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and amendment of Certain provisions) Act, 2020 and notification issued under it – CBDT Instruction No. 1 of 2022 could not override provisions of law or decision of Supreme Court – Order passed under section 148A(d) and notice issued under section 148 on 26.07.2022 for A. Ys. 2013-14 and 2014-15 – Barred by limitation:

19 Keenara Industries Pvt. Ltd vs. ITO
[2023] 453 ITR 51 (Guj)
A. Ys.: 2013-14 and 2014-15
Date of order: 7th February 2023

Sections. 147 to 151 of ITA 1961 and Art. 226 of Constitution of IndiaReassessment – Notice – Limitation – Effect of Amendment to Sections 147 to 151 by Finance Act, 2021 and Taxation and Other Laws (Relaxation and amendment of Certain provisions) Act, 2020 and notification issued under it – CBDT Instruction No. 1 of 2022 could not override provisions of law or decision of Supreme Court – Order passed under section 148A(d) and notice issued under section 148 on 26.07.2022 for A. Ys. 2013-14 and 2014-15 – Barred by limitation:

During the period between 1st April, 2021 to 30th June, 2021, the Department had issued a notice under section 148 of the Income-tax Act, 1961 for A. Y. 2013-14 and A.Y. 2014-15 under the old provisions of the Act despite the fact that new regime of re-opening of provisions had come into force. This was challenged and the matter eventually travelled to the Apex Court, which vide its judgment dated 4th May, 2022 in case of Union of India & Ors. vs. Ashish Agarwal (2022) 444 ITR 1 (SC) adjudicated the issue as to the validity of such reopening notices issued across the nation and gave certain directions to the Department. Consequent to the aforesaid decision of the Supreme Court, the assessing officer issued show cause notice under section 148A(b) and supplied the relevant material on the basis of which the case was sought to be re-opened. Thereafter, on July 26, 2022, the AO passed order under section 148A(d) and issued the consequent notice under section. 148 dated 22nd July, 2022.

The assessee filed a writ petition and challenged the validity of the order under section 148A(d) and the notice under section 148 both dated 26th July, 2022. The Gujarat High Court allowed the writ petition and held as under:

“i)    Under the new scheme of reassessment as contained in the Finance Act, 2021 the time limit for issuance of notices u/s. 148 of the Act under the substituted provision of section 149 of the Act have been substantially modified. Clause (a) of sub-section (1) of section 149 of the Act makes the originally prevailing four year period to three years, whereas clause (b) has extended the previously prevailing limit of six years to ten years in cases where income chargeable to tax has escaped assessment amounting to Rs. 50 lakhs or more. While enacting the Finance Act, 2021, Parliament was aware of the existing statutory laws both under the Act as amended by the Finance Act, 2021 as also the Ordinance and the 2020 Act and notification issued thereunder. However, the new scheme for reassessment which was made effective from April, 1, 2021 does not have any saving clause. The notification dated March 31, 2021 came to be issued before the amended provision of re-opening came into force and thus, the notification was applicable to the unamended provision of reopening. The unamended provisions of re-opening ceased to exist from April 1, 2021, the extension by notification could have no applicability. Notification dated April 27, 2021 was in continuity of the earlier notification dated March 31, 2021 as the unamended provisions of reopening ceased to exist on April 1, 2021. No notification can extend the limitation of the repealed Act.

ii)    In Ashish Agarwal’s case, the Supreme Court, after detailed consideration of provisions of law and extensive submissions made by both the sides, held that the new provision substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with the specific aim and protect the right and interest of the assessee as well as being in public interest, respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to the past assessment year provided u/s. 148 of the Act notice has been issued on or after April 1, 2021. The Supreme Court was in complete agreement with the view taken by various High Courts in holding so. At the same time, being concerned about the revenue being remediless as this judgment would result into absence of reassessment proceedings, the Supreme Court permitted the respective notices u/s. 148 of the Act to be deemed to have been issued u/s. 148A of the Act as substituted by the Finance Act, 2021 and to be treated as the show cause notice in terms of section 148A(b) of the Act.

iii)    The test to determine the validity of notice issued after March 31, 2021 is that they should be permissible under the Finance Act, 2021. The Central Board of Direct Taxes Instructions No. 1 of 2022 dated May 11, 2022 ([2022] 444 ITR (St.) 43) surely cannot override the provisions of law or the decision of the Supreme Court.

iv)    The Assessing Officer had issued the reassessment notices on or after April 1, 2021 under the erstwhile sections 148 to 151 of the Act relying on Notification No. 20 of 2021 dated March 31, 2021 ([2021] 432 ITR (ST.) 141) and Notification No. 38 of 2021 dated April 2021 dated April 27, 2021 ([2021] 434 ITR (St.) 11), which extended the applicability of those provisions as they stood on March 31, 2021 before the commencement of the Finance Act, 2021 beyond the period of March 31, 2021. Since as per the scheme prescribed under the first proviso to the amended section 149 of the Act, six years had already elapsed from the end of the relevant assessment years the notices issued u/s. 148 of the Income-tax Act, as well as the order dated July 26, 2022, passed u/s. 148A(d) for the A. Ys. 2013-14 and 2014-15 were barred by limitation.”

Reassessment — Notice under section 148 — Sanction of prescribed authority — One of two reasons recorded already considered by Principal Commissioner in revision and proceedings dropped accepting assessee’s explanation — Sanction for notice under section 148 given without application of mind — Notice not valid: Sections 147, 148, 151 and 263 of ITA 1961: A. Y. 2012-13:

18 Godrej and Boyce Manufacturing Co Ltd vs. ACIT
[2023] 453 ITR 10 (Bom.)
A. Y.: 2012-13
Date of order 13th January, 2023
Sections. 147, 148, 151 and 263 of ITA 1961

Reassessment — Notice under section 148 — Sanction of prescribed authority — One of two reasons recorded already considered by Principal Commissioner in revision and proceedings dropped accepting assessee’s explanation — Sanction for notice under section 148 given without application of mind — Notice not valid: Sections 147, 148, 151 and 263 of ITA 1961: A. Y. 2012-13:

For the A. Y. 2012-13 the AO issued a notice under section 148 of the Income-tax Act, 1961. The assessee filed writ petition and challenged the notice. The Bombay High Court allowed the petition and held as under:

“i)    The sanctioning authority u/s. 151 of the Income-tax Act, 1961 is duty bound to apply his or her mind to grant or not to grant approval to the proposal put up before him to issue notice u/s. 148 to reopen an assessment u/s. 147 to the material relied upon by the Assessing Officer for reopening the assessment. Such power cannot be exercised casually in a routine and perfunctory manner.

ii)    One of the reasons recorded for reopening the assessment u/s. 147 of the Income-tax Act, 1961 being the claim for deduction of the diminution in the value of investment in a subsidiary, had already been considered by the Principal Commissioner, who in his revision order u/s. 263 had dropped the proceedings initiated accepting the reply of the assessee and rejecting the audit objection. The Principal Commissioner had accorded the approval u/s. 151 which showed non-application of mind by the Principal Commissioner while according approval for reassessment without considering all documents including his own earlier order passed dropping proceedings u/s. 263.

iii)    The notice u/s. 148 and the order passed on the objections of the assessee were quashed and set aside.”

Reassessment – Notice after four years – Sanction of prescribed authority – Limitation – Extension of time limit under provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 applicable only in situations arising out of amendment by Finance Act, 2021 – Sanction not obtained from appropriate authority – Notices quashed:

17 Ambika Iron and Steel Pvt. Ltd. vs. Principal CIT
[2023] 452 ITR 285 (Ori)
Date of order: 24th January, 2022
Sections. 147, 148 and 151 of ITA 1961

Reassessment – Notice after four years – Sanction of prescribed authority – Limitation – Extension of time limit under provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 applicable only in situations arising out of amendment by Finance Act, 2021 – Sanction not obtained from appropriate authority – Notices quashed:

Several notices under section 148 of the Income-tax Act, 1961 for re-opening of assessment issued prior to 1st April, 2021, that is prior to amendment by the Finance Act 2021, were issued beyond the period of four years and were time barred in terms of the first proviso to section 147 of the Act. Further, the sanction for issuing such notices was obtained from the Joint Commissioner whereas the appropriate authority to record satisfaction was the Chief Commissioner of Income-tax/Commissioner of Income-tax.

The assesses filed writ petitions challenging the validity of such notices.

The Department contended that in view of the notifications issued by the Central Government in terms of provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the said limits stood extended.

The Orissa High Court allowed the writ petitions and held as under:

“i)    The contention of the Department that in view of the notifications issued by the Central Government in terms of the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 time limits stood extended was untenable since the notifications were issued to deal with the situation arising from the amendment to 1961 Act by the 2021 Act with effect from April 1, 2021 whereas the notices issued u/s. 148 under challenge were issued prior to April 1, 2021.

ii)    It had been stated that the notices had been issued after obtaining the necessary satisfaction of the joint Commissioner whereas the officer authorized to accord necessary satisfaction was the Chief Commissioner or Commissioner.

iii)    The notices u/s. 148 are quashed.”

Offences and prosecution – Compounding of offences – No limitation laid down under section 279 – Power of CBDT to issue directions to Income-tax authorities for proper compounding of offences – CBDT has no power to lay down time limit – Guidelines of CBDT prescribing limitation – Not valid.

16 Footcandles Film Pvt Ltd vs. ITO
[2023] 453 ITR 402 (Bom)
A. Y.: 2010-11
Date of order 28th November, 2022

Section 279 of ITA 1961Offences and prosecution – Compounding of offences – No limitation laid down under section 279 – Power of CBDT to issue directions to Income-tax authorities for proper compounding of offences – CBDT has no power to lay down time limit – Guidelines of CBDT prescribing limitation – Not valid.

By order dated 14th January, 2020, the Magistrate Court convicted the assessee under section 248(2) of the Code of Criminal Procedure for the offence punishable under section 276B read with section 278B of the Income-tax Act, 1961 whereby the fine of Rs. 10,000 and rigorous imprisonment for one year were imposed. The assessee filed a criminal appeal before the Sessions Court which was pending adjudication. The assessee then filed application for compounding of offence under section 279(2) of the Act along with application for condonation of delay in filing of compounding application. The assessee’s request for compounding application was rejected.

The assessee filed a writ petition and challenged the order. The assessee, inter alia, contended before the High Court that provisions of section 279(2) do not impose any bar on the authorities to consider the compounding application even when the Magistrate Court had convicted the assessee and the appeal against the Magistrate Court’s order was pending before the Sessions Court. Section 279(2) allows compounding of offence either before or after the institution of proceedings and the word ‘proceedings’ encompasses all the stages of criminal proceedings.

The Department relied upon CBDT Circular No. 25 of 2019 and Circular No. 1 of 2020 to contend that the Circular provides that no application for compounding can be filed after the end of twelve months from the end of the month in which prosecution complaint has been filed and does not permit the authorities to grant such an application beyond the periods specified in the aforesaid circulars.

The Bombay High Court allowed the writ petition and held as under:

“i)    Offences can be compounded under the provisions of section 279(2) of the Act. The Explanation to section 279(6) provides power to the Board to issue orders, instructions or directions under the Act to other Income-tax authorities for proper composition of offences under the section. The Explanation does not empower the Board to limit the power vested in the authority u/s. 279(2) for the purpose of considering an application for compounding of offence specified in section 279(1). The orders, instructions or directions issued by the CBDT u/s. 119 of the Act or pursuant to the power given under the Explanation will not limit the power of the authorities specified u/s. 279(2) in considering such an application, much less place fetters on the powers of such authorities in the form of a period of limitation.

ii)    The guidelines contained in the CBDT guidelines dated June 14, 2019 could not curtail the powers of the authorities under the provisions of section 279(2). The guidelines in the circular of 2019 set out “Eligibility Conditions for Compounding”. The guidelines, inter alia, state that no application for compounding can be filed after the end of twelve months from the end of the month in which prosecution complaint has been filed in the Court. Guidelines further prescribe that the person seeking compounding of the offence is required to give an undertaking to withdraw any appeals that may have been filed by him relating to the offences sought to be compounded. Guidelines also contain powers to relax the time period prescribed as aforesaid and refers to situations where there is pendency of an appeal.

iii)    A conjoint reading of these provisions leaves one with no manner of doubt that the condition specified regarding the time limit of twelve months is not a rule of limitation, but is only a guideline to the authority while considering the application for compounding. It in no matter takes away the jurisdiction of the authority u/s. 279(2) of the Act to consider the application for compounding on its own merits and decide it. Guidelines also provide the basis on which the application can be rejected. It prescribes the offences which are generally not to be compounded. Clause (vii) refers to offences under any law other than the direct tax laws.

iv)    In the present case the assesses had categorically averred that they had not been convicted under any other law other than direct taxes laws, nor was it the case of the Revenue that the assessee had been convicted under such law other than direct taxes laws. The assessee had deposited the tax deducted at source due, though beyond time limit set down, but before any demand notice was raised or any show-cause notice was issued. The tax deducted at source was deposited along with penal interest thereon. Detailed reason for not depositing it within the time stipulated under the law had been filed in the reply to the show-cause notice issued earlier. Though the assesses had been convicted, a proceeding in the form of an appeal was pending before the sessions court, which was yet to be disposed of, and in which there was an order of suspension of sentence imposed on the second assessee.

v)    Under these circumstances, the findings arrived at in the order dated June 1, 2021, that the application for compounding of offence, u/s. 279 of the Act, was filed beyond twelve months, as prescribed under the CBDT guidelines dated June 14, 2019, were contrary to the provisions of section 279(2). The authorities had failed to exercise jurisdiction vested in it while deciding the application on the merits and consideration of the grounds set out when the application for compounding of offence was filed before it. On this count, the order dated June 1, 2021 is quashed and set aside.

vi)    Consequently, we remand the application, under the provisions of section 279(2) of the Income-tax Act, of the petitioners back to respondent No. 3 to consider afresh on its own merits.

vii)    Respondent No. 3 shall dispose of the application of the petitioners preferably within a period of thirty days from the date of receipt of this judgment.

viii)    Until disposal of the application of the petitioners for compounding of offence, under sub-section (2) of section 279 of the Income-tax Act, 1961, by respondent No. 3, the proceedings, being Criminal Appeal No. 127 of 2020, along with Criminal Miscellaneous Application No. 407 of 2020, pending before the City Sessions Court, Greater Mumbai, shall remain stayed.”

Assessment pursuant to revision order – Appeal to the Appellate Tribunal – Pending appeal before the Appellate Tribunal against the revision order, AO issued notice for assessment pursuant to revision order – Assessee directed to co-operate with AO – But demand, if any, to be kept in abeyance till the disposal of appeal by the Tribunal.

15 Taqa Neyveli Power Co. Pvt Ltd vs. ITAT
[2023] 452 ITR 302 (Mad)
A.Y.: 2016-17
Date of order: 14th March, 2022
Section 263 of ITA 1961

Assessment pursuant to revision order – Appeal to the Appellate Tribunal – Pending appeal before the Appellate Tribunal against the revision order, AO issued notice for assessment pursuant to revision order – Assessee directed to co-operate with AO – But demand, if any, to be kept in abeyance till the disposal of appeal by the Tribunal.

For A.Y. 2016-17, the assessment order was passed under section 143(3) of the Income-tax Act, 1961. Subsequently, the Commissioner passed a revision order under section 263 of the Act. The assessee preferred an appeal before the Tribunal against the revision order. Pending appeal before the Tribunal, the AO initiated the assessment pursuant to revision order and required the assessee to furnish the submissions along with the necessary evidence/documents in respect of the findings given in the revision order.

The assessee filed a writ petition and contended that the appeal is pending before the ITAT against the order passed in revision under section 263 of the Act, since there is no provision to seek for stay of further proceedings pursuant to the order under appeal, the assessing authority has issued this communication dated 6th February, 2022. By doing this, they want to complete the proceedings, and once they complete the proceedings, they may further go ahead with issuance of demand notice. Hence, the assessee’s appeal which is pending for consideration would become infructuous and therefore, till the disposal of the appeal, the assessing authority may be precluded from proceeding further pursuant to the notice dated 6th February, 2022.

The Madras High Court disposed the writ petition with directions as under:

“i)    Once an appeal has been filed against the revision order u/s. 263 wherein the date has been fixed for hearing before the Tribunal, the assessing authority could wait till such time.

ii)    The assessing authority could proceed with the assessment proceedings pursuant to the date fixed for hearing before the Tribunal on the basis of the order passed by the Commissioner and the assessee should co-operate by filing reply or the documents sought for.

iii)    Once the order has been passed by the assessing authority, and it is adverse to the assessee, no further proceedings, including the notice of demand should be made by the Assessing Officer till the disposal of appeal which was pending before the Tribunal and for which hearing has been fixed.

iv)    Depending upon the outcome of the Tribunal order it was open to the Assessing Officer to proceed against the assessee in accordance with law.”

Section 69A–Where the assessee had introduced capital from funds received from his relatives towards advance for purchase of property through banking channel and same was recorded in books of account and identity of person from whom amount was received was also not in doubt then provisions of section 69A could not be invoked. Section 69A r.w.s 131 – Where the assessee informed the address of a person from whom amount was received and also requested AO to summon person if there was any doubt, then addition under section 69A was not justified if summons was not issued by the AO

15 Smt. Jagmohan Kaur Bajwa vs. Income-tax Officer, Ward 3(1), Chandigarh [2022] 97 ITR(T) 149 (Chandigarh – Trib.)
ITA No.:962 (CHD.) OF 2019
A.Y.: 2014-15
Date: 23rd July, 2021

Section 69A–Where the assessee had introduced capital from funds received from his relatives towards advance for purchase of property through banking channel and same was recorded in books of account and identity of person from whom amount was received was also not in doubt then provisions of section 69A could not be invoked.

Section 69A r.w.s 131 – Where the assessee informed the address of a person from whom amount was received and also requested AO to summon person if there was any doubt, then addition under section 69A was not justified if summons was not issued by the AO

FACTS

The deceased assessee was engaged in the business of sale and purchases of houses. During the course of assessment proceedings the AO noticed that there was a substantial increase in the capital account of the assessee amounting to Rs. 1,19,44,047. The AO asked the assessee to furnish the source of increase in the capital account with supporting evidence.

The assessee submitted that he had introduced capital from the funds received from his relatives Hardev Singh (Rs. 19 lakh) and Maninder Singh Sahi S/o Hardev Singh (Rs. 99.84 lakh) through banking channels. The assessee submitted a copy of ledger, ‘advice of inward remittance from Canada’ and relevant extract from his bank statement. The AO contended that the documents submitted by the assessee did not prove the identity, creditworthiness and genuineness of the transactions. He asked the assessee to furnish the bank statement of the persons from whom the assessee received money from Canada in Indian rupees and prove the identity and creditworthiness of the persons.

The assessee submitted that Hardev Singh was a retired officer from a Government Organisation and at the time when he transferred the amount, he was residing in Canada. Singh transferred Rs.19 lakh interest free out of his personal savings and retirement fund. Maninder Singh Sahi S/o Hardev Singh, who transferred Rs.99.84 lakh during the year had well established set-up of his own. The assessee submitted before the AO that advance money was given to him with motive of making some property investment in India. But since no deal could get materialized, the advance amounting to Rs.1,18,84,046 was to be refunded. The assessee also furnished identity of both lenders and his self-declaration in the form of affidavit with details of amount received. The purpose of receipt of funds and then as to why the same could not be invested in the property because of market conditions was duly explained.

The AO accepted explanation of assessee with respect to receipt of Rs.19 lakh from Hardev Singh. However, AO made an addition under section 69A in respect of Rs.99.84 lakh received from Maninder Singh Sahi on the grounds that documentary evidence furnished for establishing identity and creditworthiness of lender were not sufficient.

On appeal, the Commissioner (Appeals) upheld the addition of R99.84 lakh made by the AO. Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the entries relating to the advances received from Hardev Singh and his son Maninder Singh Sahi from Canada were recorded in the books of account as an advance for making the investment in the property by the said persons, and the assessee was engaged in the property business. The AO, therefore was not justified in invoking the provisions of section 69A particularly when the entries were recorded in the books of account maintained by the assessee and the explanation relating to the purpose of receiving the advances was given, identity of the person from whom amount was received was not in doubt and the entries were through banking channel. It was not the case of the AO that the assessee went to Canada and then put his money in the account of the depositor i.e. Hardev Singh and Maninder Singh Sahi which was remitted back. Therefore, the addition made by the AO and sustained by the Commissioner (Appeals) was not justified particularly when the credit of Rs. 19,00,000 in the similar circumstances from Hardev Singh had been accepted but the advance amounting to Rs. 99,84,046 received from his son Maninder Singh Sahi was doubted and added to the income of the assessee. The AO was not justified in blowing hot and cold in the same wind pipe.

The assessee informed the address of the person from whom the amount was received and also requested the AO to summon the person if there was any doubt. But the AO had not taken any step for issuance of the summons under section 131 of the Act. Therefore, the addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was not justified.

The Assessing Officer did not doubt the contents of the affidavit furnished by the deceased assessee, declaration from the depositor as well as confirmation from bank. Therefore, the impugned addition made by the AO and sustained by the Commissioner (Appeals) was not justified.

The entries were made in the books of account maintained by the assessee and those were appearing in the bank account. The assessee also furnished an affidavit and the statement made therein was not doubted. Therefore, the addition made by the AO and sustained by the CIT (Appeals) was not justified. Therefore, addition of Rs. 99,84,046 made by the AO and sustained by the CIT (Appeals) was deleted.

Claim of Additional Depreciation – Additional Issue

ISSUE FOR CONSIDERATION
An assessee is entitled to the claim of ‘additional depreciation’, in computing the total income, under the Income Tax Act. This benefit was first conferred by the insertion of clause (iia) in Section 32(1) by the Finance (No. 2), 1980 w.e.f. 1st April, 1981 which benefit was withdrawn w.e.f. 1st April, 1988. The benefit was again introduced w.e.f. 1st April, 2003 and was substituted w.e.f. 1st April, 2006 by the Finance Act, 2005.The present provision contained in clause (iia) of Section 32(1), in sum and substance, provides for the grant of a ‘further sum’ (referred to as an ‘additional depreciation’) equal to 20 per cent of the actual cost of new machinery or plant acquired and installed, on or after 1st April, 2005, by an assessee engaged in the business of manufacturing or production of any article or thing or in the business of generation, transmission or distribution of power subject to various conditions prescribed in the two provisos to the said clause.

The interpretation of the clause (iia) and the grant of additional depreciation, at any point of time, has been the subject matter of numerous controversies. One such interesting controversy is about the claim and allowance of additional depreciation under the present clause (iia) in a year subsequent to the year in which such a claim was already allowed. In other words, the claim for additional depreciation is made in a year even after such a claim was once allowed in the past.

The Kolkata bench of the Tribunal allowed such a claim while the Chennai and Mumbai benches rejected such a claim. Interestingly, the Mumbai bench first disallowed the claim but in the later decisions entertained it following the decision of the Kolkata Bench.

GLOSTER JUTE MILLS LTD.’S CASE

The issue first arose in the case of Gloster Jute Mills Ltd., before the Kolkata Bench of ITAT reported in 88 taxmann.com 738. In this case, the assessee company purchased and installed new machinery during the financial year 2005-06, i.e. on or after 1st April, 2005 and claimed additional depreciation under section 32(1)(viia) of the Act, which was allowed to the assessee for A.Y. 2006-07. The assessee company again claimed the additional depreciation for A.Y. 2007-08, which was rejected by the AO on the grounds that such an allowance was limited to the ‘new’ machineries and in the second year the machinery was no more new. The AO referred to the provision of the substituted section 32(1)(iia) which allowed the additional depreciation only to a new machinery. Referring to the dictionary, the AO observed that ‘ new’ meant something which did not exist before; now made or brought into existence for the first time. The AO held that, the assets in question were already used and depreciated, and therefore were old, and no additional depreciation was allowable for such assets as the basic qualification for such a claim was not satisfied.

The assessee company invited the attention of the Tribunal to the history of the allowance of additional depreciation by highlighting that the benefit was first conferred by insertion of clause (iia) of Section 32(1) by the Finance No. 2, 1980 w.e.f. 1st April, 1981. It was explained by the assessee company that the benefit then was explicitly allowed for the previous year in which the machinery or plant were installed or were first put to use. It was further explained to the Tribunal that the said benefit was withdrawn w.e.f. 1st April, 1988; the newly introduced provision presently did not contain any such limitation that restricted the benefit only in the year of installation or the use.

The assessee company invited attention to the now substituted provision that was introduced w.e.f 01.04.2003 by the Finance (No.2) Act, 2002 which conferred the benefit for the previous year in which the assessee began manufacturing or production or in the year of achieving the substantial expansion. It was highlighted that the newly introduced provision presently did not contain any such limitation that restricted the benefit to the year of manufacturing or production or substantial expansion.

The revenue supported its case for disallowance by reiterating the AO’s findings that the claim was allowable only in the year of acquisition of the new machinery.

The assessee company further contended that since the specific condition for the claim of additional depreciation, in one year only, has been done away with, it should be construed as the intention of the legislature, post substitution, to allow additional depreciation in subsequent years, as well. Relying on the settled position in law it was contended that a fiscal statute should be interpreted on the basis of the language used and not de hors the same. It was contended even if there was a slip, the same could be rectified only by the legislature and by an amendment only. A reference was also made to the DTC Bill, 2013 which had then proposed that the claim of additional depreciation would be allowed in the previous year in which the asset was used for the first time.

The Kolkata bench, on careful consideration of the provisions of the law and its history, confirmed that the present law before them, did not limit the allowance to the year of installation or manufacture or substantial expansion; the present law did not carry any stipulation for limiting the benefit of additional depreciation to one year only. It further noted that the case of the revenue for limiting the deduction to the year of acquisition of new machinery was not supported by the language of the provision; the condition for allowance was limited to ensuring that the machinery was new in the year of installation failing which no allowance was possible at all; however once this condition was satisfied, the claim for additional depreciation was allowable even for the year next to the year in which such an allowance was granted. It was therefore held, that the requirement of the machine being new should be a condition that should be fulfilled in the year of installation and once that was satisfied, no further compliance was called for in the year or years next to the year of installation.

This decision has been followed in the case of Graphite India Ltd., ITA No. 472 / Kol / 2012 and the latter decision is followed in the case of ACC Ltd., ITA No. 6082 / MUM / 2014. In addition, the claim was allowed in the case of Ambuja Cements Ltd., ITA No. 6375 / MUM / 2013 following these decisions.

EVEREST INDUSTRIES LTD.’S CASE

The issue also arose subsequently in the case of Everest Industries Ltd., before the Mumbai Bench of the ITAT, reported in 90 taxmann.com 330. The assessee company in this case, had acquired and installed plant and machineries in financial year 2005-06, and onwards and had claimed additional depreciation under section 32(1)(iia) @ 20 per cent of the original cost of the plant and machinery and such claims were allowed by the AO. For assessment year 2009-10, the company again claimed the benefit of additional depreciation for the said plant and machineries. The AO disallowed the claim on the ground that the allowance under section 32(1)(iia) was a one-time allowance that was allowed on the cost of the new plant and machineries, acquired and installed during the year of acquisition and installation. The AO held that the machineries acquired and put to use in the earlier years were no longer new and therefore no benefit was again allowed where the benefit of additional depreciation was already granted once in an earlier assessment year. The order of the AO was confirmed by the CIT(A).The assessee, in the appeal before the Tribunal, contended that the provisions of s.32(1)(iia), applicable to A.Y.2006-07 and onwards, were different from its predecessor provisions in as much as the new provisions did not require the installation or the use or the manufacturing or the substantial expansion in the year of the claim. It further contended that there was no bar on claiming the additional depreciation, more than once. It also contended that the machinery in question need not have been acquired in A.Y. 2009-10 and for this proposition it heavily relied on the decision of the Kolkata Bench in the case of Gloster Jute Mills Ltd. (supra).

In reply, the revenue submitted that the legislative intent was to allow additional depreciation under section 32(1)(iia) of the Act only in the year in which the new plant and machinery was acquired and installed. The revenue invited the attention to the Second Proviso of s.32(1)(iia) to highlight that the claim for depreciation was to be restricted to one half of the allowable amount in cases where the new plant and machinery was installed and used for less than 180 days. In such a case, the remaining depreciation was allowed in the next year; as was claimed by the assessees, the balance depreciation was allowed in the next following year by the courts; the amendment by the Finance Act, 2015 had made that aspect amply clear. The revenue also contended that in the past it was necessary for the legislature to have used the words ‘during the previous year’ so as to qualify numerous conditions. However, with removal of many such conditions, the use of such words became redundant as long as the condition requiring the machinery to be ‘new’ was retained; therefore there was no change in the law and the legislative intent continued to be that the allowance was a one-time benefit not intended to be enjoyed year after year.

The Mumbai bench of the Tribunal took note of the decision of the Kolkata Bench, in the case of Gloster Jute Mills Ltd. (supra) and found that the views of the said bench were, on the plain reading of the new provision in comparison to the predecessor provisions, contrary to the views canvassed by the revenue. The Mumbai bench proceeded to analyse the provisions of section 32(1) for allowance of the regular depreciation, and the concepts of the ‘user of assets’ and the ‘block of assets’.

Relying on certain decisions, it observed that the concept of user in the scheme of depreciation was required to be examined and tested only in the first year of the claim of depreciation and not thereafter, once an asset entered into the block of assets. Applying this proposition to the issue of additional depreciation, the Mumbai bench held that the additional depreciation in respect of a machinery was allowed when its identity was known; on merger of the identity, the question of allowing additional depreciation did not arise; any allowance of additional depreciation as was claimed by the assessee would necessitate maintaining a separate record for each of the asset, contrary to the concept of block of asset and the legislative intent; no provision was found for maintenance of separate records. It also held that, the retention of the term “new” confirmed that the claim was allowable only once in the year of acquisition of the asset.

The Mumbai bench approved of the contention of the revenue that the provision for restriction of the claim to 50 per cent of the allowable amount and the allowance of the balance amount in the subsequent year confirmed that the allowance was a one-time affair, not to be repeated year after year, and, to support its decision, it relied upon the Memorandum explaining the provisions of the Finance Bill, 2015 while inserting the Third Proviso to s.32(1)(iia) w.e.f 1st April, 2016; the bench noted that the said amendment was not considered by the Kolkata bench and therefore the Mumbai bench found itself unable to agree with the Kolkata bench. Accordingly, the Mumbai bench held that the claim for additional depreciation under section 32(1)(iia) was not allowable for more than one year.

OBSERVATIONS

The interesting issue, with substantial revenue implications, moves in a narrow compass. The dividing lines are sharply drawn with conflicting decisions of three benches of the Tribunal and further extenuated by three conflicting decisions of the Mumbai bench. There is no doubt that the overall quantum of depreciation cannot exceed the cost of an asset and the claim of additional depreciation is an act of advancing the relief in taxation and not enhancing it. It is also clear that the asset, on entering the block of assets, loses its identity. It is also not disputed that there is a difference between the meaning of the words ‘new’ and ‘old’; a new cannot be old and old cannot be new, both the words are mutually exclusive. It is also essential to provide a lawful meaning to the word “new” used in s.32(1)(iia); it surely cannot be held to be redundant and excessive.The law of additional depreciation has a turbulent history and has undergone important changes and therefore the legislative intent of the law can neither be gathered by its past or the subsequent amendments introduced with prospective effect, unless an amendment is made with an express intent of amending the course. It is also fair to accept that the decisions of the Courts or the Tribunal delivered in respect of unrelated issues, though under section 32(1)(iia), should not colour the understanding of the issue relating to the subject on hand.

Having noted all of this, it seems that there is no disagreement as regards the meaning of the word ‘new’; an asset to be new, has to be something which did not exist before, which is now made, which is brought into existence for the first time; it is clear that an asset that does not satisfy the test of being new can never be eligible for the claim of additional depreciation, in the first place. There is no conflict on this or there can be no conflict on this aspect of newness of the asset; the conflict is about the year in which the test of newness is to be applied. Is the test to be applied every year or is to be applied once is a question that is to be resolved. No claim would be permissible to be made more than once where it is held that the test is to be applied every year. As against that, once the test is satisfied in the year in which the claim was first made, the claims would be allowed in the following year, where it is held that a one-time satisfaction of the test is sufficient. The language of the present section, in its comparison to the language of the predecessors, does not expressly prohibit the claim in more than one year, as noted by the Kolkata bench. The decision therefore has to be gathered by the words used in law and the word ‘new’ is the only word, the meaning supplied to which would make or mar the case.

It is usual and not abnormal to apply the test in the year in which the claim is made and the test of newness may not be possible to be satisfied for the subsequent years and in that view of the matter it may not be possible for an assessee to claim the allowance year after year. However, such a claim year after year, would be possible where a view is taken that the test of newness is to be satisfied once or that even in the subsequent year the test of newness where examined should be limited to verify whether the asset in the first year of acquisition or installation and claim was new or not. The later view is difficult, but not impossible to hold, as there is no explicit restriction in the provision.

The concept of block of assets and its application to the facts of the case of repetitive claims may also cause a concern. Accepting the claim of the assessee would mean regular and substantial erosion of the written down value of the asset, year after year, which in our respectful opinion cannot be a clinching factor.

The Mumbai bench of the Tribunal in the later decision dated 7th November, 2022 has chosen to follow the decision of the Kolkata bench, maybe due to the fact that it’s own decision in case of Everest Industries Ltd. was not cited before the bench.

The latest decision of the Mumbai Tribunal dated 28th February, 2023 however has taken note of 2018 decision of the bench in Everest Industries Ltd’s case but has chosen to follow the 2022 decision of the bench, on the ground of it being the later decision of the bench.

The Chennai bench of the Tribunal was the first to address the issue in its decision dated. 4th April, 2013 in the case of CRI Pumps (P.) Ltd., 34 taxmann.com 123. In that case, the assessee company had claimed additional depreciation on certain machineries that were not acquired during the year. The Tribunal held that the machinery in question were acquired before the commencement of the year and were not new and therefore the claim for the year was not maintainable in as much as it would not be a claim for a new machinery. In this case, a reference was made by the revenue to the decision of the co-ordinate bench dated 6th January, 2012 in ITA No. 1069/ Mds / 2010 in the case of Brakes India Ltd.

It appears that we should wait for the decision of the High Court to conclude the interesting issue.

S.69A read with S.148–Where the draft sale deed of property between the assessee-company and a developer was never signed by assessee and application filed by developer before Settlement Commission admitting to having invested certain amount of unaccounted income was not provided to assessee for confrontation then the additions made by the AO in the hands of the assessee-company were to be deleted

14 Rajvee Tractors (P) Ltd vs. ACIT
[2022] 98 ITR(T) 459 (Ahmedabad – Trib.)
ITA No.: 1818 (AHD.) OF 2019
A.Y.: 2015-16
Date: 29th July, 2022

S.69A read with S.148–Where the draft sale deed of property between the assessee-company and a developer was never signed by assessee and application filed by developer before Settlement Commission admitting to having invested certain amount of unaccounted income was not provided to assessee for confrontation then the additions made by the AO in the hands of the assessee-company were to be deleted.

FACTS

The assessee was a private limited company, and was engaged in the business of tractors and spare parts. There was a survey operation under the provisions of section 133A of the Act at the business premises of the assessee on 22nd January, 2015. As a result of survey, the assessee had made certain disclosure of an income of Rs. 3,13,00,000 representing the advance received against the sale of land which was duly offered to tax in the income tax return. The property was sold by the assessee to a party namely M/s Ohm Developers for a consideration of Rs. 3,51,00,000 as recorded in the books of accounts.

There was also a survey operation under section 133A of the Act, at the premises of the M/s Ohm Developers. As a result of survey operation, a draft sale deed was found between the assessee and M/s Ohm Developers wherein the sale consideration was shown at Rs. 5,47,37,500 leading to a difference in the sale consideration of Rs. 1,96,37,500 which was alleged to be less/short reported by the assessee. The AO also found that M/s. Ohm Developers had also admitted to have invested unaccounted income of Rs. 1,96,37,500 on the purchase of the property in the application made before the Settlement Commission.

Accordingly, the AO initiated proceedings under section 148 of the Act. The assessee requested to supply copy of the application made by the M/s Ohm Developers before the Settlement Commission as well as copy of the order of the Settlement Commission. However, the AO denied to provide the same on the reasoning that these are confidential information of the third party which cannot be provided to the assessee. The AO finally held that the income of the assessee to the tune of Rs. 1,96,37,500 had escaped assessment and therefore made the addition of the same to the total income of the assessee.

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

Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the draft sale deed in the absence of other corroborative materials cannot substitute the evidence. The Tribunal relied upon the decision of the Hon’ble Supreme Court in the case of Common Cause (A Registered Society) vs. Union of India [2017] 394 ITR 220 wherein it was held that noting on loose sheets/diary does not carry any evidentiary value under the provisions of section 34 of the Evidence Act.

The Tribunal also relied upon the decision of the Supreme Court in the case of CBI vs. V.C. Shukla [1998] 3 SCC 410 wherein it was held that entry can be made by any person against the name of any other person in any sheet, paper or computer, but the same cannot be the basis of making charges against the person whose name noted on sheet without corroborating the same.

Accordingly, the Tribunal held that the admission made by the buyer of the property before the Settlement Commission does not establish the fact that the assessee had received unaccounted consideration. The AO was directed to delete the addition made by him.

In result the appeal filed by the assessee was allowed.

Taxation of Life Insurance Policies

INTRODUCTION

Proceeds from life insurance policies (LIPs) have caught attention of the law makers in recent years. The Finance Act, 2016 amended section 194DA to increase the rate of TDS to 2% and the Finance Act, 2019 made it 5% of the “income comprised” in the life insurance policy proceeds. This started a discussion on how income from a life insurance policy could be computed and under which head of income.

Two years later the Finance Act, 2021 inserted sub-section (1B) in section 45 giving capital gains characterization for the income from Unit Linked Insurance Policies (ULIPs) and Rule 8AD was inserted.

Three years later the Finance Act, 2023 has inserted clause (xiii) in section 56(2) providing taxation of income from life insurance policies not qualifying for the benefit of section 10(10D). This article summarises some of the issues related to the taxation of proceeds from life insurance policies.

WHAT IS A LIFE INSURANCE POLICY?

Life insurance companies issue several types of policies such as pension policies, annuity plans, health policies, group policies etc. Considering the types and varieties of policies issued by the insurance companies, it would be important to first determine whether the policy qualifies as a “life insurance policy” and then apply the relevant provisions.

The provisions dealing with life insurance policy under the Act are section 10(10D), section 194DA, section 80C(3), section 80C(3A) and section 56(x)(xiii). None of these provisions give a precise definition of the term “life insurance policy”.

The term “life insurance business” is defined under the Insurance Act, 19381 as follows:

“(11) “life insurance business” means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include—

(a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance,

(b) the granting of annuities upon human life; and

(c) the granting of superannuation allowances and benefit payable out of any fund] applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons;

Explanation. — For the removal of doubts, it is hereby declared that “life insurance business” shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer referred to in clause (9) of this section. “

1. Section 2(11).

One possible approach could be to treat each policy issued in the course of running “life insurance business“ as getting covered by “life insurance policy”. This is on the basis that every policy issued in the course of carrying on a “life insurance business” should be treated as a “life insurance policy”.

The problem with the approach in the preceding para is that the Income-tax Act, 1961 (“Act”) also recognises other types of policies and gives tax treatment for such policies. For example, section 10(10A) specifically deals with “pension policies”, section 80C(2)(xii) and section 80CCC deal with “annuity policy”, section 80D deals with “health insurance policy” etc.

Although the above policies are issued as a part of the “life insurance business” carried on by a life insurance company, the Act does not treat these policies as “life insurance policies” and gives different treatment. A better view could be that for a policy to qualify as a life insurance policy, it must be a policy on the life of a person. In other words, the life of a person must be an insured event i.e. on the occurrence of the death of a policyholder, the insurance company is obliged to pay the assured amount.

In this regard, the orders of the Amritsar bench of the Tribunal in the case of F.C. Sondhi & Co. (India) (P.) Ltd. vs. DCIT2 and DCIT vs. J.V.Steel Traders3 need to be noted. In these cases, the assessee had claimed a deduction for premia paid on insurance policies on the basis that these policies were “Keyman Insurance Policy”, as defined in Explanation 1 to section 10(10D). The Tribunal found that the policies were essentially Unit Linked Insurance Policies (ULIP) and the predominant feature of the policy was an investment plan. A small fraction of the premium paid by the assessee was towards insurance risk and the balance was towards investment. The Tribunal held that such policies cannot be treated as “life insurance policies”, as contemplated in section 10(10D)4, and hence deduction for premium was not allowable. Reference was also made to CBDT Circular No. 7625 in this regard.

2. [2015] 64 taxmann.com 139.
3. 0ITA No. 377 (Asr)/2010.
4. Explanation 1- For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.
5. Dated 18-02-1998.

It would also be relevant to take note of the order of the Mumbai bench of the Tribunal in the case of Taragauri T. Doshi vs. ITO [2016] 73 taxmann.com 67 (Mumbai – Trib.) wherein the Tribunal allowed benefit of section 10(10D) for a life insurance policy issued by an American Insurance Company. The dispute in the case pertained to AY 2006-07. The definition of Unit Linked Insurance Policy inserted in the form of Explanation 3 to section 10(10D) by the Finance Act, 2021 makes a specific reference to IRDAI Regulations as well as the Insurance Act, 1938. However, it is possible to argue that this definition does not have an impact on insurance policies other than ULIPs and benefit of section 10(10D) can be availed for insurance policies issued by foreign insurance companies as well if all the conditions of section 10(10D) are satisfied.

RATIONAL FOR TAXING OR EXEMPTING LIPS

It is a settled principle that “capital receipts” are not subject to tax. The understanding or perception which prevailed for a long period of time was that the proceeds of LIPs are not subject to tax under the Act. However, disputes related to bonuses to policyholders necessitated the insertion of specific exemption in the form of section 10(10D) in the year 1991. The relevant observations in the CBDT Circular no. 6216 are reproduced hereunder:

“14. Payments received under an insurance policy are not treated as income and hence not taxable. However, in a recent judicial pronouncement, a distinction has been made between the sum assured under an insurance policy and further sums allocated by way of bonus under life policies with profits. The sum representing bonus has been held to be chargeable to income-tax in the year in which the bonus was declared by the Life Insurance Corporation.

14.1 Since such bonus has always been considered as payment under an insurance policy, section 10 of the Income-tax Act has been amended to exempt from income-tax the bonus declared or paid under a life insurance policy by the Life Insurance Corporation of India.

14.2 This amendment takes effect retrospectively from 1st April, 1962.”

6. Dated December 19, 1991.

Subsequently, the life insurance sector was opened for private-sector players. This not only increased the competition for Life Insurance Corporation of India, but also resulted in the availability of a variety of products to the customers. To some extent, the life insurance industry effectively also started competing with the mutual fund industry as the insurance products offered a variety of investment products. The provisions of section 10(10D) were amended from time to time to ensure that exemption was given to pure life insurance products. The following extracts from the Explanatory Memorandum to the Finance Bill, 2023 need to be noted:

“1. Clause (10D) of section 10 of the Act provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy. There is a condition that the premium payable for any of the years during the terms of the policy should not exceed ten per cent of the actual capital sum assured.

2. It may be pertinent to note that the legislative intent of providing exemption under clause (10D) of section 10 of the Act has been to further the welfare objective by benefit to small and genuine cases of life insurance coverage. However, over the years it has been observed that several high net worth individuals are misusing the exemption provided under clause (10D) of section 10 of the Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies.

3. In order to prevent the misuse of exemption under the said clause, Finance Act, 2021, amended clause (10D) of section 10 of the Act to, inter-alia, provide that the sum received under a ULIP (barring the sum received on death of a person), issued on or after the 01.02.2021 shall not be exempt if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 2,50,000. It was also provided that if premium is payable for more than one ULIPs, issued on or after the 01.02.2021, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of the policy. Circular No. 02 of 2022 dated 19.01.2022 was issued to explain how the exemption is to be calculated when there are more than one policies.

4. After the enactment of the above amendment, while ULIPs having premium payable exceeding Rs 2,50,000/- have been excluded from the purview of clause (10D) of section 10 of the Act, all other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable.

5. In order to curb such misuse, it is proposed to tax income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs 5,00,000 in a year. Income is proposed to be exempt if received on the death of the insured person. This income shall be taxable under the income from been claimed as deduction earlier.”

POLICIES ISSUED PRIOR TO APRIL 1, 2023

The provisions of section 56(2)(xiii) are inserted with effect from 1-4-2024 i.e. they will apply from FY 2023-24 onwards. The Explanatory Memorandum to the Finance Bill, 2023 clarifies that the proposed provision shall apply for policies issued on or after 1st April, 2023. There will not be any change in taxation for polices issued before this date.

The policies issued prior to April 1, 2023 (pre-Apr 2023 policies) will continue to be governed by the old provisions and not section 56(2)(xiii). The relevant issue then would be under which head of income the proceeds from such insurance policies be taxed if the benefit of section 10(10D) is not available. In the absence of any specific provision in section 56(2), the policyholder may decide to offer its income from LIP (not qualifying for Keyman policy) to tax either as capital gains or as income from other sources.

CAPITAL GAINS CHARACTERIZATION FOR PRE-APRIL 2023 POLICIES

For the computation of income under the head “capital gains”, the following must be satisfied:

  • there should be an identifiable “capital asset”
  • there should be a “transfer” of such capital asset
  • the computation machinery must work

The words “property of any kind” contained in the definition of the term “capital asset” in section 2(14) are given very wide interpretation to include various assets. A life insurance policy may be treated as a “property of any kind”. Such policies constitute a major asset for many individuals and support life of many families.

The definition of the term “transfer” has been a subject matter of several disputes and satisfaction of this definition would be most critical for capital gains characterization.

The following extract from Kanga & Palkhiwala’s Commentary7 needs to be noted:

“The supreme court held in Vania Silk Mills v CIT,8 that compensation received from an insurance company on the damage or destruction of an asset is not liable to Capital gains tax. The judgment of the court rested on three grounds:

i. When an asset is destroyed or damaged it is not possible to say that it is transferred: the words ‘the extinguishment of any rights therein’ postulate the continued existence of the corporeal property.9

ii. The word ‘transfer’ must be read in the context of s 45 which charges the gains arising from ‘the transfer… effected’; and so read, ‘transfer’ would include cases in which rights are extinguished either by the assessee himself or by some other agency, but not those in which the asset is merely destroyed by a natural calamity like fire or storm.10

iii. The insurance money represents compensation for the pecuniary loss suffered by the assessee and cannot be taken as ‘consideration received… as a result of the transfer’ which is the basis under s 48 for computing capital gains.”

Subsequently, sub-section (1A) and sub-section (1B) were inserted in section 45 to bring proceeds of insurance policy on account of damage or destruction of capital asset11 and proceeds of ULIP respectively to tax under the head “capital gains”.

7. 13th Edition updated by Arvind P Datar, page no. 1183 and 1184, Vol 1
8. 191 ITR 647, followed in CIT v Marybing 224 ITR 589 (SC); Agnes Corera v CIT 249 ITR 317; CIT v Kanoria 247 ITR 495; CIT v Herdelia 212 ITR 68 (under s 34); Travancore Electro v CIT 214 ITR 166; CIT v EID Parry 226 ITR 836; Air India v CIT 73 Taxman 66; Union Carbide v CIT 80 Taxman 197.
9. CIT v East India 206 ITR 152 (debenture stock extinguished).
10. Darjeeling Consolidated v CIT 183 ITR 493 (machinery lying in valley after storm).
11. On account of flood, typhoon, hurricane, cyclone, earthquake, riot, accidental fire or explosion, civil disturbance, enemy action etc.

Based on the insertion of sub-section (1A) and (1B) in section 45, one may argue that the legislative intent is to tax proceeds of insurance policies under the head “Capital gains”. This article does not analyse all the nuances of the definition of “transfer”. Given that sub-section (1A) and (1B) of section 45 gives a “capital gain regime” to tax certain insurance policies, the article proceeds on the basis that the definition of “transfer” is satisfied.

The taxability is to be examined in cases where the policy proceeds are received otherwise than on the occurrence of the death of a person. This could happen when the policy matures or when the policyholder surrenders the policy before that. In terms of section 2(47)(iva), the maturity or redemption of a zero coupon bond is treated as a “transfer” and based on this, one may argue that the definition of “transfer” gets satisfied in the case of life insurance policies as well. Further, reference can also be made to the decision of the Supreme Court in the case of CIT v. Grace Collis [2001] 115 Taxman 326 (SC) where in the apex court held that the expression “extinguishment of rights therein” in the definition of “transfer” extends to mean extinguishment of rights independent of or otherwise than on account of transfer.

Insertion of sub-clause (xiii) in section 56(2) however does create some confusion, although that provision is to be applied to only post-March-2023 policies.
Taxation under the head “capital gains” could be beneficial due to the lower tax rates applicable to capital gains as well as the benefit of indexation.

COMPUTATION OF CAPITAL GAINS

The application and implications of the computation provisions can be considered on the basis of examples. It is assumed that the policyholder in these cases did not claim the benefit of section 80C for the premiums paid.

Example 1

Mr. A acquired a single premium policy on December 1, 2012. Mr. A paid a premium of Rs. 150,000. The sum assured is Rs. 6,00,000 as the policy is having predominant features of an investment product.

Mr. A receives the policy proceeds on March 31, 2022 amounting to Rs. 9,50,000.

The capital gains from the policy would be computed as follows:

Particulars Rs. Rs.
Full value of consideration 950,000
Cost of acquisition 150,000
Indexed cost of acquisition 150,000*295/20012 221,250
Capital gains 728,750

The amount of Rs. 728,750 will be treated as a long-term capital gain and will be subject to tax at the reduced rate.

12. Cost Inflation Index for the financial year 2021-22 is assumed to be 295.

Example 2

Mr. A acquired a single premium policy on December 1, 2012. Mr. A paid a premium of Rs. 150,000. The sum assured is Rs. 6,00,000 as the policy is having predominant features of an investment product.

Mr. A was in dire need of Rs. 500,000 in December 2018 and he partially surrendered his policy on December 31, 2018.

After this partial surrender, the sum assured under the policy is reduced to Rs. 250,000. Mr. A receives the policy proceeds on March 31, 2022, amounting to Rs. 4,00,000.

ANALYSIS

In this case, Mr. A receives policy proceeds on two occasions and to make the computation machinery work, the following questions need to be answered:

  • Is there a “transfer” of “capital asset” on both occasions (i.e. on Dec 31, 2018, and on March 22, 2022)?
  • Is the “capital asset” identifiable for both events?
  • Is the cost of acquisition available?

In this case, the capital asset is the “life insurance policy” and the question which arises is, can the part of the policy surrendered be said to be transferred? In this case, the insurance company is able to give revised or balance sum assured after the partial surrender and hence it is possible to split the capital asset as well as the cost of acquisition in two parts.

If the capital asset was a house property and part of the property was transferred, there would be a separate capital gains computation for part of the property transferred.

Capital gains computation for FY 2018-19

Particulars Rs. Rs.
Full value of consideration 500,000
Cost of acquisition 87,500 (Note 1)
Indexed cost of acquisition 87,500*280/200 122,500
Capital gains for FY 2018-19 377,500

Note 1: The original cost of acquisition (i.e. premium paid) is split into two parts on the basis of the sum assured (i.e. 350,000: 250,000).

The amount of Rs. 377,500 will be treated as a long-term capital gain and will be subject to tax at the reduced rate.

Capital gains computation for FY 2022-23

Particulars Rs. Rs.
Full value of consideration 400,000
Cost of acquisition 62,500 (Note 1)
Indexed cost of acquisition 62,500*295/20013 92,188
Capital gains for FY 2021-22 307,812 
13. Cost Inflation Index for the financial year 2021-22 is assumed to be 295

Note 1: The original cost of acquisition (i.e. premium paid) is split into two parts on the basis of the sum assured (i.e. 350,000: 250,000).

The amount of Rs. 307,812 will be treated as a long-term capital gain and will be subject to tax at a reduced rate.

Example 3

Mr. A acquired a life insurance policy on December 1, 2012, on which he paid a premium of Rs. 75,000 each for 8 years. The insured event, i.e. death of Mr. A, did not happen and at the end of the 15th year he got a sum of Rs. 740,000.

ANALYSIS

In this case, the real issue to be addressed is, in which year did Mr. A acquire the capital asset. This question is relevant from the perspective of indexation of the cost of acquisition.

The following approaches can be considered:

A. Treat the first year as the year of acquisition of a capital asset. This is on the basis that had Mr. A died in the first year itself, the insurance company was liable to pay the sum assured.

Under this approach, the entire premium of eight years i.e. Rs. 600,000 (75,000 * 8) will get indexed with reference to the first year. This is on the basis that once the capital asset is acquired, the year in which the consideration is paid is not relevant from the perspective of indexation. Section 48, section 49 or section 55 do not categorically provide that the entire cost of acquisition must have been “actually paid” by the assessee to claim indexation. However, whether extending the benefit of second proviso to section 48 dealing with Cost Inflation Index in such cases is contrary to the rationale for the provision could be an issue.

B. Treat the first year as the year of acquisition of a capital asset. Further, each year, the capital asset gets improved. This is on the basis that although the policy is acquired in the first year unless Mr. A keeps on paying premiums year after year, he would not get the benefits of the policy.

Under this approach, the premium paid for the years 2 to 8 will be treated as a “cost of improvement” and will be indexed on the basis of the cost inflation index for the respective years.

C. One-eighth of the policy gets acquired every year.
Under this approach, the premium paid for the years 1 to 8 will be treated as “cost of acquisition” and will be indexed based on the cost inflation index for the respective years.

RULE 8AD

Sub-section (1B) of section 45 provides that the method of capital gains computation would be prescribed and Rule 8AD gives the method. This method does not give indexation benefit for capital gains arising from ULIP products. While section 48 does not specifically deny indexation benefit to ULIP products, such benefit may be denied on the basis that section 45(1B) read with Rule 8AD is a specific provision for the computation of capital gains from ULIP products, which will prevail over general provisions of section 48.

TAXATION under section 56 FOR PRE-APR 2023 POLICIES

If the proceeds of insurance policy are subject to tax in terms of section 45, the same cannot be subjected to tax under section 56. However, given that the application of section 45 could lead to lesser tax payment, the tax authorities may attempt to apply section 56. Further, section 56 may also be applied on the basis that for Post-2023 policies the Finance Act, 2023 has inserted a specific provision in section 56(2)(xiii).

Deduction for expenses

The income taxable under the head “income from other sources” is also required to be computed on net basis. Section 57 and section 58 deal with the deductibility of expenses. In this regard, the following restrictions need to be considered.

Section 57(iii) permits a deduction for any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. While premia paid would certainly qualify as “paid wholly and exclusively for the purpose of earning income”, the issue would be whether the premium can be said to be “capital expenditure”, especially in the case of a single premium policy.

Further, section 58(1)(a)(i) restricts the deduction for “personal expense” for the assessee. The argument could be that the primary purpose of the policy is to give financial support to the family members after the death of a person and hence the premium payment is in the nature of personal expense. Alternatively, this involves a dual purpose, requiring apportionment of cost.

However, it would be possible for the policyholder to rely on the observations in the Explanatory Memorandum to the Finance (no. 2) Bill, 2019, which suggests that the intention is to allow a deduction for premia paid. Further, reliance can also be placed on CBDT Circular no. 07/2003 dated 5-09-2003 which explained the provisions of the Finance Act, 2003 which replaced section 10(10D) and restricted the scope of the exemption. The Circular provides that the income accruing on non-qualifying policies (not including the premium paid by the assessee) shall become taxable. The Nagpur bench of the Tribunal has in the case of Swati Dyaneshwar Husukale vs. DCIT [2022] 143 taxmann.com 375 upheld deduction for premia.

The policyholder may be eligible and may have claimed a deduction for premia in terms of section 80C. While there does not appear to be a specific restriction, if so claimed, the deduction for premium u/s 57(iii) may result in a double deduction. Certain other issues related to deduction for premiums are described in the subsequent paragraphs.

It will be relevant to take note of the order of the Kolkata bench of the Tribunal in the case of Bishista Bagchi vs. DCIT [2022] 138 taxmann.com 419. In this case, the assessee was not entitled to claim the benefit of section 10(10D) and claimed capital gains characterisation for the income arising from a single premium policy. The tax authorities subjected the income to tax under section 56. The Tribunal allowed the capital gains characterisation claimed by the assessee. The deduction was allowed after indexation of the premium paid only to the extent it was not allowed as a deduction under section 88.

POLICIES ISSUED AFTER 31ST MARCH, 2023

The Finance Act, 2023 has inserted clause (xiii) in section 56(2) which specifically deals with the taxation of post-March 2023 policies which do not qualify for the benefit of section 10(10D). Section 56(2)(xiii) does not apply in the following situations:

  • When the policy qualifies as a ULIP
  • When the policy qualifies as a Keyman insurance policy and income from such policy is subject to tax under section 56(2)(iv)
  • When the benefit of exemption under section 10(10D) is available

POST-MARCH 2023 LIPs – INCOME FROM OTHER SOURCES

When section 56(2)(xiii) is applicable, the amount described in the provision shall be subject to tax under the head “Income From Other Sources”. The amount described is the sum received (including the amount allocated by way of bonus) at any time during the previous year under a life insurance policy as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction under any other provision of this Act, computed in such manner as may be prescribed.

It can be observed that the manner of computation would be prescribed separately and hence it can be said that the complete tax regime is not yet declared in this regard.

Double deduction for premium

It can be observed that the words “and not claimed as deduction under any other provision of this Act” in section 56(2)(xiii) ensures that the policyholder does not get a deduction for premia more than once. The policyholder may be eligible and may have claimed a deduction for premia under section 80C. It should be noted that the deduction for premium is capped under section 80C(3) and section 80C(3A) to 20%/10% of the actual capital sum assured. Thus, it is possible that the policyholder paid the premium of Rs. 10,000 but the deduction in terms of section 80C was restricted to Rs. 6,000.

In the following circumstances, the determination of whether or not the policyholder has claimed deduction could result in difficulties:

Where the total amount paid/invested on premium, PPF, tuition fees etc. qualifying for section 80C was Rs. 300,000 and deduction was restricted to Rs. 150,000.

Where the policyholder was required to file the return of income for one or more earlier previous years but did not file it.

Where the policyholder was not required and did not file the return of income for one or more earlier previous years.

Partial surrenders

At times, it is possible for the policy holder to partially surrender an insurance policy. Example 2 above deals with such a situation. Section 56(2)(xiii) as such does not seem to be contemplating the policyholder getting money prior to maturity and application of section 56(2)(xiii) to such situations where the policyholder gets money more than once from the insurance policy could be difficult. This may be prescribed as a part of the manner of computation.

Deduction under other sections

While section 56(2)(xiii) itself facilitates deduction for premiums which could be the biggest item of expenditure, there is no restriction for claiming a deduction for other expenses under section 57, provided the related conditions are satisfied.

Where the total of premia exceeds maturity proceeds

Ordinarily, this may not happen. However, it would be interesting to understand the application of section 56(2)(xiii) to such a situation. This provision describes what is chargeable under section 56. Further, the description contained in clause (xiii) contemplates excess of the amount received from the insurance policy over the aggregate of the premia paid. If the aggregate of premia paid does not exceed the policy proceeds, then prima facie clause (xiii) does not get triggered.

POST-MARCH 2023 LIPs – CAPITAL GAINS CHARACTERIZATION?

In terms of section 56(1), income not chargeable under other heads of income shall be chargeable under the head “Income from other sources”. However, sub-section (2) of section 56 gives a list of items of income which shall be chargeable to income-tax under the head “Income from other sources”. Thus, prima facie, if the policyholder offers income from post-March 2023 LIPs to tax under the head capital gains, such treatment may be denied.

In this regard, it would be relevant to take note of the order of the Mumbai bench of the Tribunal in the case of Tata Industries Ltd [TS-935-ITAT-2022(Mum)] involving a comparable situation. Mumbai ITAT, in this case, held that since Tata Industries’ held investments in various subsidiary companies for the purpose of exercising control over such companies, which constituted business activity, the resultant income in the form of dividends was of the character of business receipts, though it is taxed under the head ‘income from other sources’ pursuant to specific provision contained in section 56(2)(i). Accordingly, ITAT held that against the foreign dividends income, the Assessee shall be entitled to: (i) set off of current year loss, (ii) set off of brought forward business losses and unabsorbed depreciation of earlier years and (iii) deduction under Section 80G from the Gross Total Income, subject to the restrictions provided in that relevant section.

IMPLICATIONS OF AMENDMENT TO SECTION 2(24)

The Finance Act, 2024 also inserts sub-clause (xviid) in section 2(24) to specifically include in the definition of “income” the income from life insurance policies referred to in section 56(2)(xiii). This is consistent with several other sub-clauses inserted in section 2(24), which correspond to the items listed in specific clauses of section 28 or section 56.

As stated in the Explanatory Memorandum to the Finance Bill, 2023, the new regime contained in section 56(2)(xiii) is applicable only to policies issued after March 31, 2023. Thus, there is no specific sub-clause in section 2(24) dealing with income from life insurance policies which are issued prior to April 1, 2023, which are not Keyman insurance policies and which do not qualify for the benefit of section 10(10D). Although income from such policies is not specifically included in the definition of income in section 2(24), it cannot be said that the amounts received from such policies cannot be treated as income. The definition given in section 2(24) is an inclusive definition.

CONCLUSION

Taxation of proceeds from life insurance policies is uncharted territory. Provisions specifically inserted in the Act for life insurance policies are new and the application of old provisions to such proceeds could also be new. The law is likely to further evolve on these issues and guidance from specific rules as well as the judiciary can be expected. This article does not attempt to give a final view on the issues but attempts to give related technical arguments.

In view of section 270A (6)(a), no penalty under section 270A can be imposed in respect of an erroneous claim made by a salaried employee who is dependent on his consultant for filing the return of income which erroneous claim is withdrawn by filing a revised computation of income and also by revising return of income of subsequent year withdrawing the excess claim.

13 Sridhar Murthy S vs. ITO
ITA No. 1175/Bang/2022 (Bangalore-Trib.)
A.Y.: 2018-19
Date of order: 28th February, 2023
Section: 270A

In view of section 270A (6)(a), no penalty under section 270A can be imposed in respect of an erroneous claim made by a salaried employee who is dependent on his consultant for filing the return of income which erroneous claim is withdrawn by filing a revised computation of income and also by revising return of income of subsequent year withdrawing the excess claim.

FACTS

The assessee, a salaried employee, filed his return of income declaring therein income under the head `salaries’ and `house property’. The AO while assessing the total income of the assessee restricted the house property loss to Rs. 4,22,012 as against Rs. 18,87,322 claimed by the assessee. The AO initiated proceedings for levy of penalty under section 270A for misreporting of income.

The case of the assessee was that the return of income was filed by a local consultant who had made an erroneous claim by aggregating the interest on housing loan in respect of two properties (one self-occupied and one let out property) and claimed it against the let out property. The loss so computed was carried forward. Upon realising the mistake, the assessee filed a revised computation in the course of assessment proceedings and also revised return of income for A.Y. 2020-21 withdrawing the excess claim of loss.

The AO levied penalty under section 270A of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the case of the assessee is covered by section 270A (6)(a) and it was pointed out that the Mumbai Tribunal in the case of Venkateshwearan Krishnan vs. ACIT in ITA No. 5768/Mum/2012 order dated 24th January, 2014 has, on identical facts, deleted the penalty under Section 271(1)(c) of the Act.

HELD

Section 270A(6)(a) of the Act states that when an explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered, then it cannot be a case of under reporting of income for the purpose of Section 270A of the Act. In the instant case as mentioned earlier, the assessee being a salaried employee would have been dependent on the consultant for filing his return of income. When the erroneous claim of the excess interest income against rental income by aggregating both the housing loans was pointed out, the assessee immediately filed revised computation for A.Y. 2018-19 and also filed revised return for A.Y. 2020-21 withdrawing the excess claim. The Mumbai Tribunal, on identical facts in the case of Venkateshwearan Krishnan (supra) had held that assessee’s explanation in making the incorrect claim is bona fide and deleted the penalty under section 271(1)(c) of the Act by following the judgement of the Hon’ble Apex Court in the case of Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC).

CA – From a Watchdog to a Bloodhound?
(Onerous Responsibilities Under Various Statutes)

Anything in excess is bad. The food which nourishes the body, if taken in excess, turns into poison for it. Excessive wealth may cause family disputes and so on. One of the famous verses of the Chanakya Niti reads as follows:

It means that by excessive charity, Karna was ruined. Suyodhan was ruined by excessive greed, and Ravana by excessive desire. Therefore, anything in excess should be avoided everywhere.

The above prologue is in the context of excessive responsibilities fastened on Chartered Accountants through various Statutes and/or by several Regulators.

Recent amendments to the Code of Ethics1 by the ICAI that were made applicable w.e.f. 1st October, 2022 requires CA Employees and Auditors of the Listed Companies to respond to Non-Compliance with Laws And Regulations (NOCLAR) about which they become aware or suspicious during their engagement. A Professional Accountant2 (PA) is required to comply with the fundamental principles and apply the conceptual framework set out in section 120 of the Code of Ethics to “identify, evaluate and address threats”. While the applicability of NOCLAR in India with the noble objective of protecting the public interest, it fastens wholesome responsibility on a CA, as NOCLAR covers acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws and regulations committed by the organisation itself, Management or other individuals working for or under the direction of such organisation.

1. Section 260 for Professional Accountants in Service and Section 360 for Professional Accountants in Practice of the Code of Ethics Volume I.
2. A Professional Accountant is defined to mean “an individual who is a member of the Institute of Chartered Accountants of India”.

The illustrative list of laws and regulations covered by NOCLAR are:

  • Fraud, corruption and bribery.
  • Money Laundering, terrorist financing and proceeds of crime.
  • Securities Markets and Trading.
  • Banking and other financial products and services.
  • Data protection.
  • Tax and pension liabilities and payments.
  • Environment protection and
  • Public health and safety.

The above list being only illustrative in nature, the PA will have to exercise due care and vigil while discharging his duties and must have robust documentation to justify his work. What is more burdensome is the requirement to report not only actual but even suspicious non-compliance to an appropriate authority without the knowledge of the concerned party or client. The Management may pretend ignorance about the provisions of laws and regulations and would throw the burden of compliance on a PA. Even the Code of Ethics provides that a PA shall consider whether Management and those charged with governance understand their legal or regulatory responsibilities with respect to non-compliance or suspected non-compliance. Thus, the burden is cast on a PA. Even Regulators and Stake Holders may hold PA responsible for any such breach. Is the profession ready to take on this onerous responsibility? Are we equipped to discharge this obligation?

The only silver lining to this dark cloud is the provision in para 260.24 A1 and 360.10 A2 which states that the accountant is not expected to have a level of knowledge of laws and regulations greater than that which is required to undertake the engagement or for the accountant’s role within the employing organisation. However, when things go wrong, how far the investigating agencies or regulators would accept this stand of an auditor? The experience has not been so good in this respect. One shudders to think of the plight of the auditors and CAs in employment when these standards are applied to even unlisted entities. It necessitates that a PA must have professional indemnity insurance. However, the insurance will take care of only financial loss, but what about the loss of health and reputation?

Another significant development is the issuance of Notification No. SO 2036 (E) dated 3rd May, 2023 by the Ministry of Finance, whereby certain services rendered by Chartered Accountants, Company Secretaries, and Cost Accountants are brought under the Prevention of Money Laundering Act, 2002 (PMLA) reporting requirements.

Services rendered by a chartered accountant on behalf of his client in the course of his or her profession, which are notified under PMLA, inter alia, include buying and selling of any immovable property; managing money, securities or other assets of the client; management of bank, savings or securities accounts, organisation of contributions for creation, operation or management of companies; creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.

The inclusion of the above services under PMLA casts an onerous duty on Chartered Accountants in terms of verifying, recording and reporting complete details of specified transactions. These requirements inter alia include identifying the object and purpose of the transaction, sources of funds and beneficial owner. This change, coupled with the revision of the Code of Ethics to apply NOCLAR w.e.f. 1st October, 2022 will make the task of chartered accountants in practice or in service much more challenging. All these professionals will have to maintain adequate documentation to prove their innocence in case of any allegations.

From the above developments, it is clear that sound technical knowledge of all applicable laws, compliance with Auditing Standards, Ethical Standards, KYC of clients, detailed Engagement Letter clearly defining the scope and the responsibilities, active engagement with clients, and robust documentation etc. are going to be critical factors for CAs in practice or in service. Above all, professionals should uphold the highest integrity level and not get involved in any wrongdoings.

With the kind of onerous responsibilities cast on CAs, there is a growing feeling and need for a law to protect the interest of CAs. Such a law should protect CAs from being made scapegoats, frivolous lawsuits, harassment, unwarranted arrest and loss of reputation. There is no accountability on the part of people who administer laws, nor on people who drag professionals into unnecessary litigations, which may continue for years. If such a law is in place, CAs will be able to render their services independently without any fear and insecurity.



Let me end my Editorial on a positive note by taking note of the inauguration of the state-of-the-art and architectural marvel – New Parliament House. The New Parliament is part of Central Vista, which will house all Ministries in new buildings going forward. It is said that Central Vista, including the New Parliament, is Vastu Shastra3 compliant. Let’s hope that the laws made in the New Parliament House are fair and equitable and that their administration by various Ministries is balanced, upholding the citizens’ rights provided in the Constitution of India, and Citizens’ Charters laid down by the various Government departments!

3. Vastu Shastra are the textual part of Vastu Vidya – the broader knowledge about architecture and design theories from ancient India. [Source: Vastu shastra. (2023, April 1). In Wikipedia. https://en.wikipedia.org/wiki/Vastu_shastra}

Kaalaaya Tasmai Namah

This expression is used as a proverb in many Indian languages since it is derived from a Sanskrit Shloka.

This is from Bhartruhari’s Vairagya Shataka. Bhartruhari, a great Sanskrit poet, wrote 100 verses (shlokas) each on 3 topics – Neeti (Ethics), Shringar (Romance) and Vairagya (Detachment/renunciation). Each collection of 100 shlokas is known as shatak (century).

41st shloka in Vairagya shatak is the present one. It refers to the prosperous city of Ujjain (Ujjayini). Meaning of the shloka – Gone is that prosperous city (kingdom), that great king (Vikramaditya), those subordinate states, that community of scholars, those beautiful women (artists), those arrogant princes, those admirers of the King, those stories of valour. All these things have now remained in memories, due to the TIME (Kaal). I bow to this TIME (who pushes everything into oblivion or history).

That is life. We have a well-known kawwali: –

Kaal (Time) is so powerful. All your wealth, all your reputation, everything is temporary. All material things are liable to be destroyed or outdated. Therefore, one should avoid possessiveness, one should avoid attachment Material things include good as well as bad. However, if bad things are gone, we have no regrets. In Ramayana, Shree Ram once says – ‘Gone are those days of our childhood when we were looked after by our parents’. This is inevitable. Sometimes, it is a consolation that even bad periods are also bound to go in the past.

We see and experience this day in and day out. Wealthy people suddenly become paupers, healthy people suddenly become sick or thin, beautiful women lose their charm and youthfulness, and cheerful people become depressed. Politically powerful people suddenly lose power and become very ordinary. Even ideologies lose their influence. Sometimes, it works the reverse way as well. An ordinary person becomes a hero!

Today once prosperous economies of European countries are no longer sound. There is poverty, unemployment, indiscipline, and unrest…..! On the other hand, India is perceived with respect on the international scene.

In society, everywhere we observe the effects of kaliyuga. Mutual trust and respect amongst human beings have disappeared. Values are there, but everybody expects only others to honour them. There is no introspection. Humanity often becomes unaffordable. There is no fear of the law. Corruption was always present, but it has assumed a monstrous proportion. Technology has overtaken everything and it is killing human relations. Artificial Intelligence is making us lazy and self-centred. There is no healthy atmosphere in sports, art, and culture. Everything is politically vitiated. No love, no affection, no empathy; only showmanship!

Take our CA profession. Once upon a time, it was an enviable profession. There was dignity, there was charm, there was respect and there was prosperity even by lawful means. But today…! The less said the better. It is losing respect. People are losing enthusiasm in pursuing the profession. It doesn’t attract new talent in terms of number of students. New CAs are not keen on entering the practice. Senior members are shying away from audit or attest functions. Regulatory burdens are unbearable without commensurate rewards. Everything is becoming risky and vulnerable. Credibility has diminished. The government takes CAs for granted.

The change (downfall) was so rapid that it took place in one single generation! Therefore, old generation people say helplessly

Penalty is not maintainable where AO does not pass an order accepting or rejecting an application filed by the assessee under section 270AA(4)

12. Okasi Ceramics vs. ITO
ITA No.: 779/Chny/2022 (Chennai-Trib.)
A.Y.: 2017-18
Date of order: 8th February, 2023
Sections: 270A, 270AA

Penalty is not maintainable where AO does not pass an order accepting or rejecting an application filed by the assessee under section 270AA(4)

FACTS

For A.Y. 2017-18, the assessee firm did not file its return of income for the A.Y.2017-18 within the time provided in the notice issued under section 142(1) of the Act, nor within the time allowed under section 139(4) of the Act. Therefore, the AO issued a show cause notice under section 144 of the Act and proposed to pass a best judgment assessment order on the basis of material available on record. Subsequently, the assessee filed a copy of profit and loss account and admitted business income of Rs. 10,15,730. The assessment was completed under section 144 determining the total income to be Rs. 10,15,730. The AO initiated proceedings for imposition of penalty under section 270A of the Act.

The assessee paid the tax demanded within thirty days and applied for grant of immunity under section 270AA. The AO did not dispose-off the application and proceeded to levy penalty under section 270A on the ground that the assessee has under-reported its income in consequence of misreporting. Thus, the assessee is not entitled for immunity as provided under section 270AA of the Act and levied penalty of 200 per cent of the tax sought to be evaded which worked out to Rs. 6,09,438.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the grievance of the assessee is that, the assessee filed an application in Form no. 68 and sought an immunity from the levy of penalty because the assessee has satisfied conditions prescribed under section 270AA of the Act, but the AO without disposing off application filed by the assessee in Form no. 68 has completed penalty proceedings and levied penalty under section 270A of the Act.

The Tribunal observed that when the assessee has filed an application in Form no. 68, seeking immunity from levy of penalty in terms of section 270AA of the Act, as per sub section 4 of the 270AA of the Act, the AO shall pass an order accepting or rejecting said application after giving an opportunity of hearing to the assessee. The Tribunal held that in this case, the AO did not pass an order accepting or rejecting application filed by the assessee as required under section 270AA(4) of the Act. Therefore, on this ground itself, the Tribunal can conclude that the penalty order passed by the AO under section 270A of the Act is not maintainable.

However, considering the facts and circumstances of the case, and also taking into account the totality of facts of the present case, the Tribunal deemed it appropriate to set aside the order passed by the CIT(A). The Tribunal restored the issue of levy of penalty under section 270A of the Act to the file of the AO with a direction to the AO to deal with the application filed by the assessee in Form no. 68 of the Act by passing a speaking order before levying penalty u/s. 270A of the Act.

An addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. The penalty cannot be sustained where the only basis of the addition is the estimate made by the DVO.

11. Jaibalaji Business Corporation Pvt Ltd vs. ACIT
ITA. No.840/PUN/2022 (Pune-Trib.)
A.Y.: 2017-18
Date of order: 10th February, 2023
Section: 270A

An addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. The penalty cannot be sustained where the only basis of the addition is the estimate made by the DVO.

FACTS

The assessee, engaged in the business of solar power generation, filed its return of income declaring total income to be Rs. Nil. The AO assessed the total income to be Rs. 2,80,07,310 by making an addition of equal amount under section 43CA. During the year under consideration, the assessee sold certain lands at a price less than stamp duty value. The AO proposed to make an addition on the basis of stamp duty value. The assessee requested for a reference to DVO. The assessee completed the assessment by taking stamp duty value of certain other properties subject to rectification on receipt of report of DVO. Thereafter, the report was received, pursuant to which the rectification order was passed under section 154 of the Act reducing the addition to Rs.7,05,000. The addition was computed by taking note of the value declared by the assessee (sic taken by the AO) at Rs. 71,83,800 and the value determined by the DVO at Rs. 78,88,800. On this basis, the AO rectified the original assessment and also imposed penalty under section 270A of the Act at Rs. 6,99,669.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that –

i)    the only basis for imposition of penalty under section 270A is the making of addition under section 43CA on the strength of report of the DVO. The AO originally took certain comparable circumstances and computed the amount of addition at Rs.2.80 crores, which got reduced on the receipt of report of the DVO by Rs. 7,05,000;

ii)    it is apparent from the report of the DVO that the value determined by the DVO is again an estimate, in as much as he considered certain other properties at different rates and then averaged such rates to find out the value which the property ought to have realised on the transfer;

iii)    it is vivid that the difference between the value declared by the assessee and the value determined by the DVO is minimal and further the value of the DVO is on the basis of value of certain other nearby properties.

Considering the provisions of section 270A(6)(b), the Tribunal held that it is ostensible from the language of subsection (6) that an addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under section 270A of the Act. Since the only basis of the addition was the estimate made by the DVO, the Tribunal held that the penalty cannot be sustained.

Order imposing penalty under section 270A passed in the name of deceased is void.

10 Late Shri Atmaram Tukaram Karad through Legal Heir Shri Sagar Atmaram Karad v. ITO 

ITA Nos.: 942 and 943/PUN/2022 (Pune-Trib.)
A.Ys.: 2017-18 and 2018-19
Date of order: 7th February, 2023
Section: 270A

Order imposing penalty under section 270A passed in the name of deceased is void.

FACTS

The assessee, a salaried individual, filed his returns of income for A.Ys. 2017-18 and 2018-19. Subsequently, a notice under section 148 was issued for each of these two years alleging that the assessee has misreported his income. Reassessments were completed and proceedings for imposition of penalty under section 270A were initiated. The assessee was represented by way of a legal representative, who filed written submissions, which fact stood recorded at para 5 of the penalty order. Eventually, the AO imposed penalty under section 270A.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that a penalty was initiated for both the years with reference to the income declared by the assessee in the returns filed pursuant to notices under section 148. This is a case in which the assessee passed away before the initiation of penalty proceedings. The legal representative, in such capacity, filed written submissions as has been categorically recorded in the penalty order itself. Still the AO passed the penalty order for both the years in the name of the deceased.

Considering the above stated observations, the Tribunal held that the penalty orders, having been passed in the name of deceased, are void ab intio. The Tribunal noted that the Bombay High Court in Rupa Shyamsundar Dhumatkar vs. ACIT and others in writ Petition No.404 of 2009, vide its judgment dated 5th April, 2019 considered a similar situation in which the assessee had died and the notice was issued in the name of Late Shyam Sundar Dhumatkar with the Legal Heir as his widow. The Bombay High Court declared such reopening of the assessment as invalid in law. Also, the Supreme Court in PCIT vs. Maruti Suzuki India Ltd [(2019) 416 ITR 613 (SC)] has dealt with a similar situation in which notice was issued in the name of an amalgamating company. The Apex Court held that after amalgamation, the amalgamating company ceased to exist and thus the notice issued was rendered void ab-initio. Their Lordships further held that participation in the proceedings by the assessee cannot operate as estoppel against law.

The Tribunal held that it is manifest that the facts and circumstances of the instant appeals are mutatis mutandis similar to those as considered by the Hon’ble Supreme Court and the Hon’ble Bombay High court in the afore-noted cases and consequently held that the penalty order passed by the AO in the name of deceased is void. The consequential impugned order upholding the penalty was set aside by the Tribunal.

Applicability of Deferred Provisions in The Icai Code of Ethics- Fees, Tax Services, and Non-Compliance of Laws and Regulations

INTRODUCTION

The 12th edition of the ICAI Code of Ethics, effective from July 1, 2020, is divided into three volumes. However, certain provisions in Volume-I were deferred due to the prevailing situation caused by Covid-19. The Institute of Chartered Accountants of India (ICAI) decided to make these deferred provisions applicable from October 1, 2022, with certain amendments. This article discusses provisions of Fees-relative size, Tax Services to Audit Clients, and Responding to Non-Compliance of Laws and Regulations (NOCLAR) applicable to members in practice and service.

1.  Fees – Relative Size-

The provisions regarding fees and relative size in the Code of Ethics aim to address threats to independence that may arise when the total fees received by a firm from an audit client represent a significant proportion of the firm’s total fees. This situation can create self-interest or intimidation threats, which may compromise the professional accountant’s judgment and behaviour.

Self-interest threat refers to the risk that external factors, such as financial interests or incentives, could unduly influence the professional accountant’s objectivity and judgment. Intimidation threat, on the other hand, arises when there are perceived pressures or attempts to exert undue influence, leading the accountant to act in a biased manner.

These threats also emerge when the fees generated by an audit client represent a substantial portion of the revenue for a particular partner or office within the firm. To mitigate such threats, one example of a safeguard is to diversify the client base of the firm, reducing dependence on a single audit client.

The purpose of these provisions is to offer guidance on implementing safeguards to mitigate threats that arise in these circumstances and protect the independence of auditors. To ensure transparency and accountability, the Code requires disclosure to the Institute under specific circumstances.

If an audit client is not a public interest entity, and for two consecutive years, the total fees received by the firm and its related entities from that client represent more than 40% of the firm’s total fees, the firm must disclose this fact to the Institute. For audit clients classified as public interest entities, the disclosure threshold is set at more than 20% of the firm’s total fees.

However, there are exceptions to this provision. If the total fees of the firm, including fees received through other firms in which the member or firm is a partner or proprietor, do not exceed twenty lakhs of rupees, this requirement does not apply. This exception is applicable to all audit clients, including public interest entities.

Additionally, another exception exists for the audit of government companies, public undertakings, nationalized banks, public financial institutions, and cases where auditors are appointed by the government or regulators.

It is crucial to note that if the fees continue to exceed the specified thresholds for two consecutive years, the firm must disclose this information to the Institute annually.

Regarding the disclosure to the Institute, the Ethical Standards Board (ESB) will define the reporting framework, including the format and timeline. Members will be required to provide an undertaking or declaration regarding their independence, strengthening their commitment to independence.

ESB will also establish a mechanism to address the disclosure, potentially including mandatory peer reviews or other forms of quality review.

It is also imperative at this moment, to know the meaning of certain terms used herein-

a)    Public Interest Entity (PIE)

  •     The Volume-I of Code of Ethics refers to the term ‘Public Interest Entity’ wherever there is enhanced requirement of Independence.

 

  •     PIE is defined as:

(i)    A listed entity; or

(ii)    An entity:

  •     Defined by regulation or legislation as a public interest entity; or

 

  •     For which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit of listed entities. Such regulation might be promulgated by any relevant regulator, including an audit regulator.

 

  •     For the purpose of this definition, it may be noted that Banks and Insurance Companies are to be considered Public Interest Entities.

 

  •     Other entities might also be considered by the Firms to be public interest entities because they have a large number and wide range of stakeholders. Factors to be considered include:

 

  •     The nature of the business, such as the holding of assets in a fiduciary capacity for a large number of stakeholders. Examples might include financial institutions, such as banks and insurance companies, and pension funds.

 

  •     Size.

 

  •     Number of employees.

b)    Audit Client

An audit Client refers to an entity in respect of which a firm conducts an audit engagement. When the client is a listed entity, the audit client will always include its related entities. When the audit client is not a listed entity, the audit client includes those related entities over which the client has direct or indirect control.

Audit engagement refers to a reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements are prepared, in all material respects (or give a true and fair view or are presented fairly, in all material respects), in accordance with an applicable financial reporting framework, such as an engagement conducted in accordance with Standards on Auditing. This includes a Statutory Audit, which is an audit required by legislation or other regulation.

c)    Independence

Independence is linked to the principles of objectivity and integrity. It comprises:

(a)    Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

(b)    Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit team member’s, integrity, objectivity, or professional skepticism has been compromised.

Overall, the provisions on fee-relative size aim to maintain independence by addressing threats that can arise from significant dependence on a particular audit client, ensuring objectivity, integrity, and professional judgment in the auditing profession.

2.    Responding to Non-Compliance with Laws and Regulations (NOCLAR) –

The Non-Compliance with Laws and Regulations (NOCLAR) is a set of guidelines introduced for professional accountants to help them respond appropriately in situations where their clients or employers have committed acts of omission or commission contrary to prevailing laws or regulations. It is the ethical responsibility of the accountant to not turn a blind eye to such matters and serve the public interest in these circumstances. Examples of laws and regulations which this section addresses include those that deal with:

  •     Fraud, corruption and bribery.

 

  •     Money laundering, terrorist financing and proceeds of crime.

 

  •     Securities markets and trading.

 

  •     Banking and other financial products and services.

 

  •     Data protection.

 

  •     Tax and pension liabilities and payments.

 

  •     Environmental protection.

 

  •     Public health and safety.

It may however be noted that the above list is not exhaustive and is only illustrative. It is important to note that the accountant is not expected to have a level of knowledge of laws and regulations greater than that which is required to undertake the engagement.

For Professional Accountants in Service (Section 260):

NOCLAR is applicable to senior professional accountants in service who are employees of listed entities. These refer to Key Managerial Personnel and are directors, officers or senior employees who can exert significant influence over the acquisition, deployment, and control of the employing organization’s resources. Such individuals are expected to take actions in the public interest to respond to non-compliance or suspected non-compliance because of their roles, positions, and spheres of influence within the employing organization.

The professional accountant is expected to obtain an understanding of the matter if he becomes aware of non-compliance or suspected non-compliance. This includes understanding the nature of the non-compliance or suspected non-compliance, the circumstances in which it has occurred or might occur, the application of relevant laws and regulations, and the assessment of potential consequences to the employing organization, investors, creditors, employees, or the wider public.

Depending on the nature and significance of the matter, the accountant might cause, or take appropriate steps to cause, the matter to be investigated internally. The accountant might also consult on a confidential basis with others within the employing organization or Institute, or with legal counsel. If the accountant identifies or suspects that non-compliance has occurred or might occur, he shall discuss the matter with his immediate superior and take appropriate steps to have the matter communicated to those charged with governance, comply with applicable laws and regulations, rectify, remediate or mitigate the consequences of the non-compliance, reduce the risk of re-occurrence, and seek to deter the commission of the non-compliance if it has not yet occurred.

The accountant shall determine whether disclosure of the matter to the employing organization’s external auditor, if any, is needed. He shall assess the appropriateness of the response of his superiors, if any, and those charged with governance, and determine if further action is needed in the public interest. The accountant shall exercise professional judgment in determining the need for, and nature and extent of, further action, considering whether a reasonable and informed third party would conclude that the accountant has acted appropriately in the public interest.

NOCLAR does not address personal misconduct unrelated to the business activities of the employing organization or non-compliance by parties other than those specified in paragraph 260.5 A1. Nevertheless, the professional accountant might find the guidance in this section helpful in considering how to respond in these situations. In relation to non-compliance that falls within the scope of this section, the professional accountant is encouraged to document the matter, the results of discussions with superiors and those charged with governance and other parties, how the superiors and those charged with governance responded to the matter, the courses of action considered, the judgments made, and the decisions taken. The accountant must be satisfied that he has fulfilled his responsibility.

For Professional Accountants in Practice (Section 360):

NOCLAR is applicable to Professional Accountants in public practice if he/she might encounter or be made aware of non-compliance or suspected non-compliance during Audit engagements of entities the shares of which are listed on a recognised stock exchange(s) in India and have a net worth of 250 crores of rupees or more. For this purpose, “Audit” or “Audit engagement” shall mean a reasonable assurance engagement in which a professional accountant in public practice expresses an opinion whether financial statements give a true and fair view in accordance with an applicable financial reporting framework”.The applicability of Section 360 will subsequently be extended to all listed entities, at the date to be notified later.

Professional Accountant when encountering or becoming aware of NOCLAR is required to assess the laws and regulations that generally have a financial impact as well as laws and regulations that are related to the operations of the Audit client. Some laws and regulations in this category may be fundamental to the operations of all or virtually all entities even if they do not have a direct effect on the determination of material amounts and disclosures in the entities’ financial statements. Examples include laws against fraud, corruption, and bribery. PAs are expected to recognize and respond to NOCLAR or suspected NOCLAR in relation to those laws and regulations if they became aware of it.

Other laws and regulations in this category might be relevant to only certain types of entities because of the nature of their business. Examples include environmental protection regulations for an entity operating in the mining industry, regulatory capital requirements for a bank, laws and regulations against money laundering, and terrorist financing for a financial institution etc. PAs who provide professional services that require an understanding of those laws and regulations to an extent sufficient to competently perform the engagements are expected to be able to recognize NOCLAR or suspected NOCLAR in relation to those laws and regulations and respond to the matter accordingly.

A professional Accountant is only expected under the Code to have a level of knowledge of laws and regulations necessary for the professional service for which he was engaged. When he/she might encounter or be made aware of non-compliance or suspected non-compliance during the course of Audit Engagements, he/she shall obtain an understanding of the matter of legal or regulatory provisions governing such non-compliance or suspected non-compliance (nature of the act and the circumstance) and discuss with management, may seek views of the legal counsel. The professional accountant shall advise the management/ those charged with governance to take timely action (rectify, remediate, mitigate, deter, disclose)

If the professional accountant becomes aware of non-compliance or suspected non-compliance in relation to a component of a group, he/she shall communicate the matter to the group engagement partner unless prohibited from doing so by law or regulation. The accountant shall assess the appropriateness of the response of management and, where applicable, those charged with governance (timely response, appropriate steps taken by the entity, etc. consider withdrawing from engagement) and determine whether to disclose the matter to the appropriate authority if there is a legal requirement for the same.

The professional accountants shall document the matter, the result of the discussion with management or those charged with governance, and the action taken.

3. Tax Services to Audit Clients-

Sub Section 604 of Volume-I of the Code of Ethics outlines the guidelines and considerations for auditors regarding various tax services provided to audit clients. The section highlights potential threats that may arise during the provision of these services and emphasizes the importance of adopting appropriate safeguards to ensure independence and objectivity.The tax services generally include-

a) Tax Return Preparation-

Tax return preparation is generally considered a low-risk job, as it involves the analysis and presentation of historical information under existing tax laws. Additionally, tax returns undergo review and approval processes by relevant tax authorities. As such, the provision of tax return preparation services to audit clients is typically not a significant threat to auditors’ independence.

b) Tax Calculations for Accounting Entries-

The preparation of tax calculations for the purpose of accounting entries poses a self-review threat. To mitigate this threat, auditors may use professionals who are not part of the audit team and ensure the presence of an appropriate reviewer. It is important to note that auditors should not prepare tax calculations for current and deferred tax liabilities/assets that are material to the financial statements on which the firm will express an opinion. However, they may review the tax calculations prepared by the client.

c) Tax Planning and Other Tax Advisory Services-

Tax planning and other tax advisory services might create self-review or advocacy threats. To address these threats, auditors may engage professionals who are not members of the audit team and have an appropriate reviewer, independent of the service, review the audit work. Furthermore, auditors must refrain from providing tax planning and other tax advisory services when the effectiveness of such advice relies on a particular accounting treatment or presentation in the financial statements that will materially impact the audited financial statements.

d) Tax Services Involving Valuations-

Engaging in tax services involving valuations can introduce self-review or advocacy threats. Appropriate safeguards may be implemented, such as involving professionals who are not part of the audit team and having an independent reviewer who is not involved in providing the service. If a tax valuation is performed to assist an audit client with tax reporting obligations or for tax planning purposes, and the valuation’s outcome directly affects the financial statements, the requirements and application material stated in Subsection 603 of the Code of Ethics related to valuation services should be followed.

e) Assistance in the Resolution of Tax Disputes-

Assisting in the resolution of tax disputes may create self-review or advocacy threats. In such cases, auditors may adopt appropriate safeguards. However, auditors must refrain from acting as advocates for the audit client before a court or providing assistance, if the amounts involved are material to the financial statements on which the firm will express an opinion. It’s worth noting that, for the purposes of this subsection, “Court” excludes a Tribunal.

Thus, the three provisions of Volume-I of the Code of Ethics which were newly introduced and were deferred from 1.7.2020 till 1.10.2022 due to the situation prevailing due to covid-19 and also to make members aware of the provisions for better adoption and implementation are now applicable, with certain modifications, and these are obligatory upon members to comply with. The provisions of NOCLAR guide the accountant in assessing the implications of the non-compliance and the possible courses of action when responding to non-compliance or suspected non-compliance. The provisions outlined in Sub Section 604 of Volume-I of the Code of Ethics are crucial for auditors providing tax services to audit clients. By recognizing potential threats and implementing appropriate safeguards, auditors can maintain their independence, objectivity, and ethical integrity while providing tax-related services. These guidelines aim to uphold professional standards and ensure the reliability of audit opinions on financial statements.

Likewise, the provisions of Fees Relative size are significant in addressing self-interest and intimidation threats resulting from continued over-reliance on one Audit client for fees.

It may also be relevant to note that the Volume-I of the Code of Ethics has been issued as a guideline of the Council. The non-compliance with the guidelines will be deemed as professional misconduct in line with the provisions of the Chartered Accountants Act, 1949. The Code contains requirements and application material to enable professional accountants to meet their responsibility to act in the public interest. The requirements of the sections of the Code establish general and specific obligations on the professional accountants to comply with the specific provision in which “shall” has been used. The Requirements are designated with the letter “R” in the Code. Professional accountants require to comply with the requirements of the Code.