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Year: 2024

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO. Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

88 Rajeev Biswas vs. UOI

[2023] 459 ITR 36 (Cal)

A.Y.: 2012-13

Date of Order: 22nd September, 2022

Ss. 10(6)(viii), 154 and 254 of ITA 1961

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO.

Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

The assessee was employed outside the Indian territory. For the A.Y. 2012-13, the return filed by the assessee was processed u/s. 143(1) of the Income-tax Act, 1961 computing the tax liability at ₹4,40,070. The Chartered Accountant of the assessee filed a petition for rectification stating that the assessee was a non-resident Indian during the period as he had to stay outside the country due to his employment, that he was outside the country for a total of 210 days during the previous year relating to the A.Y. 2012-13 and the income had been assessed without considering the assessee’s non-resident status. The request was rejected by the Deputy Commissioner (International Taxation) on the ground that there was no mistake apparent from the record.

The assessee preferred an appeal before the Commissioner (Appeals) contending that the Assessing Officer had ignored the revised return filed by the assessee where the income earned by the assessee under the head “Salary” was exempted u/s. 10(6)(viii) of the Act. The Commissioner (Appeals) dismissed the appeal. The Tribunal rejected the assessee’s further appeal on the ground that the issue pertaining to the assessee’s claim for exemption on account of salary income stated to be earned outside India was a debatable issue and the Commissioner (Appeals) was right in rejecting the appeal. The assessee preferred an application for rectification before the Tribunal which it dismissed by order dated5th January, 2018.

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

“i) Circular No. 13 of 2017, dated 11th April, 2017 ([2017] 393 ITR (St.) 91) issued by the CBDT states that salary approved to a non-resident seafarer for service rendered outside India on a foreign ship shall not be included in the total income merely because the salary has been credited in the non-resident external account maintained with an Indian bank by the seafarer. In Circular No. 14 (XL-35), dated 11th April, 1995 the CBDT has directed the Officers of the Department not to take advantage of ignorance of an assessee as to his rights and stated that it is the duty of the Officers of the Department to assist the assessee in every reasonable way, particularly in the matter of claiming and securing reliefs under the Income-tax Act, 1961 and that in this regard the Officers should take the initiative in guiding an assessee where proceedings and other particulars before them indicate that some refund or relief is due to the assessee.

ii) The orders of the Tribunal and the Commissioner (Appeals) were perverse because:

(a) On the date when the Tribunal had passed the initial order dismissing the appeal of the assessee there was a binding decision of the court in Utanka Roy vs. DIT (International Taxation) [2017] 390 ITR 109 (Cal) which the Tribunal could not have ignored. The Tribunal having ignored it there was an error which was apparent on the face of the record. The Tribunal ought to have exercised its power when the rectification application was filed by the assessee but had erroneously rejected it. Therefore, the said order dated 5th January, 2018 also suffered from perversity.

(b) The Assessing Officer failed to note that the assessee was an individual and the return of income was filed by the chartered accountant and the chartered accountant on going through the facts found the mistake which had been committed and immediately filed the revised return which has been duly acknowledged by the Department. Thereafter, the rectification application was filedwhich was dealt with by the Deputy Commissioner of Income-tax, International Taxation which was also rejected. In our considered view the Departmentcould have taken a more reasonable stand, more particularly when the law on the subject is in favour of the assessee.

(c) The Assessing Officer and the Commissioner (Appeals) had ignored Circular No. 13 of 2017, dated 11th April, 2017 and Circular No. 14 (XL-35) dated 11th April, 1995 issued by the CBDT.

iii) The initial order and the order in the miscellaneous application passed by the Tribunal, the orders passed by the Commissioner (Appeals), the Deputy Commissioner (International Taxation), the order of rejection of the application under section 154 passed by the Centralised Processing Centre were quashed. The Assessing Officer was to review the assessment in accordance with law and Circular No. 13 of 2017, dated 11th April, 2017 issued by the Central Board of Direct Taxes and grant relief under section 10(6)(viii) by excluding the income received abroad by the assessee.”

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

87 Sudarshan Reddy Kottur vs. ITO

[2023] 458 ITR 750 (Telangana)

A.Y.: 2017-18

Date of Order: 30th January, 2023

S. 220(6) of ITA 1961

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

Assesee is an individual. For the A.Y. 2017-18, the assessee had filed return of income on 30th October, 2017 declaring total income of ₹15,02,400. By an order dated 30th March, 2022 passed u/s. 147 r.w.s. 144B of the Income-tax Act, 1961, the Assessing Officer determined the total income at ₹24,89,27,611 and raised the demand. The assessee filed an appeal before the CIT(A) and made an application u/s. 220(6) for stay of demand before the Assessing Officer. By the order dated 16th January, 2023, the Assessing Officer directed the assessee to pay 20 per cent of the demand on or before 25th January, 2023, but at the same time rejected the application for stay of demand.

The Telangana High Court allowed the writ petition filed by the assessee challenging the order and held as under:

“i) When the Income-tax authority exercises jurisdiction u/s. 220(6) of the Income-tax Act, 1961 he exercises quasi-judicial powers. While exercising quasi-judicial powers, the authority is not bound or confined by Departmental instructions.

ii) From a perusal of the order dated 16th January, 2023, it could be seen that the Income-tax Officer had followed instructions of the CBDT dated 21st March, 1996 to the effect that where an outstanding demand was disputed before the appellate authority, the assessee had to pay 20 per cent of the disputed demand. Accordingly, the assessee was directed to pay 20 per cent of the outstanding demand. There had been no application of mind by the Assessing Officer. The order therefore was not valid.

iii) That being the position, we set aside the order dated 16th January, 2023 and remand the matter back to the Assessing Officer for passing a fresh order in accordance with law after giving due opportunity of hearing to the assessee. This shall be done within a period of six (6) weeks from the date of receipt of a copy of this order. Till the aforesaid period of six (6) weeks, the respondents are directed not to take coercive steps for realising the outstanding demand for the A.Y. 2017-18.”

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

86 Vellore Institute of Technology vs. ACIT(Exemption)

[2023] 459 ITR 499 (Mad)

A.Y.: 2015-16

Date of Order: 30th June, 2023

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

For the A.Y. 2015-16, the Assessing Officer issued notice against the assessee under the unamended provisions of section 148 for reopening the assessment u/s. 147 of the Income-tax Act, 1961. Based on the liberty granted by the court on a writ petition against this notice, the Assessing Officer issued a second notice u/s. 148A(b) which included the details of the information on the basis of which the allegation of escapement of income was made. An order rejecting the objections of the assessee u/s. 148A(d) was passed and notice u/s. 148 was issued. On a writ petition challenging the second notice, the court granted an interim order which stated that while the second notice u/s. 148 could proceed with any decision taken by the Department would be subject to the result of the writ petition. Pursuant to that no notice u/s. 143(2) was issued. Thereafter, based on the decision of the Supreme Court dated 4th May, 2022 in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC), the Assessing Officer issued a third notice dated 2nd June, 2022 u/s. 148A(b) and rejected the objections filed by the assessee in his order u/s. 148A(d) stating that the second notice dated 18th April, 2022 was dropped and the first notice u/s. 148 dated 12th April, 2021 which was the subject-matter of the first writ petition filed by the assessee was revived.

The Madras High Court allowed the writ petition filed by the assessee and held as under:

“i) The distinction between the erstwhile and the new system for reassessment of income that has escaped assessment u/s. 147 of the Income-tax Act, 1961 is that, under the old procedure it was necessary for the Assessing Officer to record reasons on the basis of which a notice u/s. 148 would be issued. The reasons formed the substratum of the proceedings for reassessment. In the new procedure obviating the necessity to record reasons and furnish them to the assessee upon request, the reasons are to be part of the initial notice u/s. 148A(b) and a response thereto is solicited. After hearing the assessee, an order is to be passed u/s. 148A(d) for issuance of notice u/s. 148 after considering the objections raised.

ii) There was no justification for the Department either in law or on fact, to subject the assessee to a third round of reassessment proceedings u/s. 147 merely by invoking the liberty granted in UOI vs. Ashish Agarwal decided on 4th May, 2022. The Department was bound by its decision in full when it dropped the second round of proceedings pursuant to the order of the High Court in the writ petition against the second notice issued under the new procedure. After the passing of the order by the High Court in respect of the second notice, proceedings had been commenced afresh by issuance of a notice u/s. 148A(b) and those proceedings had culminated by issuance of notice u/s. 148 dated 18th April, 2022 pursuant to which no notice u/s. 143(2) had been issued and the proceedings lapsed. The explanation tendered for issuance of a notice under section 148A(b) for the third time on June 2, 2022 was fallacious and unacceptable as the liberty granted by the Supreme Court in its decision dated 4th May, 2022 would be available only in those situations where the matters stood at an initial or preliminary stage of notice for reassessment and not where the proceedings had been carried forward to the stage of passing of order under section 148A(d) and issuance of notice under section 148 .

iii) The Department’s submission that the proceedings initiated pursuant to the first notice stood revived was also factually incorrect as there were material differences between the reasons in the first notice and those in notice u/s. 148A(b) dated 2nd June, 2022. If the third round of proceedings was only a revival of the earlier proceedings, the reasons ought to have been identical but they were not. The notices and consequential proceedings were quashed.”

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

85 Urban Homes Realty vs. UOI

[2023] 459 ITR 96 (Bom)

A.Y.: 2016-17

Date of Order: 4th July, 2023

Ss. 142(1), 143(3), 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

The assessee was a property developer. For the A.Y. 2016-17, its case was selected for scrutiny for various reasons, one of which was large investment in property. The Assessing Officer stated in his order u/s. 143(3) of the Income-tax Act, 1961 that during the course of assessment proceedings the assessee submitted the details as called for and such details were examined. Thereafter, the Assessing Officer issued an initial notice u/s. 148A(b) on the basis of information from the Insight portal that the assessee had made an investment in a property on account of which income had escaped assessment. The Assessing Officer rejected the assessee’s explanation that all the details in respect of the purchase of the property in question were disclosed in the original scrutiny assessment and passed an order u/s. 148A(d) for issue of notice u/s. 148 and also issued a notice u/s. 148 pursuant thereto.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“i) The findings of the Assessing Officer that the issue covered in the scrutiny assessment u/s. 143(3) was not related to verification of source in respect of purchase of property, that the assessee did not furnish relevant bank statement evidencing the payments made for purchase of the property and did not explain the source during the course of issuance of notice u/s. 148A(b) were incorrect. In the notice u/s. 142(1) issued on 24th August, 2018, the assessee was expressly called upon to submit all the details of all the properties purchased with copies of the purchase deed and a copy of statement of the bank account from which the payment was made and the assessee had in its response furnished all the details called for. In his order u/s. 143(3) the Assessing Officer had specifically stated that during the course of assessment proceedings the assessee had submitted various details as called for and that those details were examined and that the data had been verified from the details submitted by the assessee. Therefore, the Assessing Officer was certainly satisfied with all the details provided by the assessee.

ii) In the reply to the notice issued u/s. 148A(b) also, the assessee had given details of the consideration paid for the property and the source of funds. Therefore, the Assessing Officer’s stating in his order u/s. 148A(d) that the assessee did not provide the details or explaining the source was incorrect. Accordingly, the initial notice u/s. 148A(b), the subsequent order u/s. 148A(d) and the consequential notice u/s. 148 were quashed and set aside.”

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

84 Hasmukh Estates Pvt. Ltd. vs. ACIT

[2023] 459 ITR 524 (Bom)

A.Y.: 2015-16

Date of Order: 8th November, 2023

Ss. 147, 148, 148A(b), 148A(d) and 151 of ITA 1961

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

The assessee sold a plot of land to one RNL by a registered agreement to sell dated 7th October, 2011 for a consideration of ₹18 crores, the stamp duty value of which was ₹16.5 crores. Due to non-fulfilment of certain obligations on the part of the assessee, the consideration was reduced to ₹12 crores. The case was selected for scrutiny and the assessment order was passed on 26th December, 2017, accepting the consideration of ₹12 crores. The submission of the assessee to the Assessing Officer in the original assessment proceedings in respect of the sale of land was that section 50C of the Act was not applicable as the sale consideration of ₹18 crores was higher than the stamp valuation of ₹16.50 crores.

Thereafter, an audit memo dated 29th March, 2019 was received by the Assessing Officer raising an objection that Petitioner has shown lower amount of sale consideration than value adopted by the Stamp Duty Authority thus, inviting the applicability of Section 50C of the Act to the transaction. Subsequently, the assessee’s case was reopened to tax the difference between the stamp duty value and the sale consideration u/s. 50C of the Act.

The assessee filed a writ petition challenging the reopening of the assessment. The Bombay High Court allowed the petition, quashed the reassessment proceedings and held as follows:

“i) The admitted facts clearly indicated that the information on the basis of which the Assessing Officer issued notice alleging that there was “information” that suggested escapement of income was an internal audit objection. Information is explained in section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of India” and no one else. Prima facie the information which formed the basis of reopening itself did not fall within the meaning of the term “information” under Explanation 1 to section 148 of the Income-tax Act, 1961, and hence, the reopening was not permissible as it clearly fell within the purview of a “change of opinion” which was impermissible in law.

ii) Consequently, dehors any audit objection by the Comptroller and Auditor General, a view deviating from that which was already taken during the course of issuing original assessment order was nothing but a “change of opinion” which was impermissible under the provisions of the Act.”

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

83 Knight Riders Sports Pvt. Ltd. vs. ACIT

[2023] 459 ITR 16 (Bom)

A.Y.: 2016-17

Date of Order: 26th September, 2023

Ss. 142(1), 143(3), 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

The assessee-company was engaged in the business of operating and running a cricket team in the Indian Premier League. During the assessment proceedings for the A.Y. 2016-17, the Assessing Officer issued various notices u/s. 142(1) of the Income-tax Act, 1961, raising queries, inter alia, regarding foreign payments made and the assessee provided the details. An assessment order u/s. 143(3) of the Act was passed. Thereafter the assessee received notice dated 17th March, 2023, u/s. 148A(b) of the Act alleging that the audit scrutiny of assessment records disclosed payments of consultancy and team management fees to a foreign company and that income was chargeable to tax for the A.Y. 2016-17, had escaped assessment. The Assessing Officer rejected the objections raised by the assessee and passed an order u/s. 148A(d) of the Act, followed by a reassessment notice u/s. 148 of the Act.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“i) Reopening of the assessment was not permissible based on change of opinions as the Assessing Officer does not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information which was considered by the Assessing Officer before passing the assessment order u/s. 143(3) of the Act. Once a query had been raised during the assessment and query had been answered and accepted by the Assessing Officer while passing the assessment order, it followed that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. This would apply even if the assessment order had not specifically dealt with that issue.

ii) The reopening of the assessment was merely on the basis of change of opinion. This change of opinion did not constitute justification to believe that income chargeable to tax had escaped assessment. The notice dated 17th March, 2023, the order dated 30th March, 2023 and the reassessment notice dated 30th March, 2023, were quashed and set aside.”

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

82 Health Bio Tech Ltd. vs. DCIT

[2023] 459 ITR 349 (P&H.)

A.Y.: 2011-12

Date of Order: 14th September, 2023

Ss. 276C(2) and 278B of ITA 1961

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

The assessee, a registered firm, filed its return of income for A.Y. 2011-12 wherein aggregate amount of tax was shown at ₹1,36,20,887. Subsequently, the return of income was revised and the aggregate amount of tax was shown at ₹1,50,81,728. The tax was not paid in time but was paid late. The Department filed a complaint for offence u/s. 276C(2) of the Income-tax Act, 1961 of wilful attempt to evade payment of tax. The trial court admitted the complaint and passed an order summoning the assessee as accused.

The Punjab and Haryana High Court allowed the revision petition filed by the assessee and held as follows:

“i) It was apparently clear from the facts on record, that there was no attempted evasion on the part of the assessee-company. There was undoubtedly delayed payment, but for that penalty had already been levied. While maintaining both these proceedings simultaneously, the one fact that must be present there, that there was or has been a criminal intent in the mind of the accused right from the beginning.

ii) The income tax was self-assessed and payment was also made by the assessee-company, though belatedly. Thus, the question of evasion of tax did not arise in the present facts and circumstances. The facts and circumstances of the case did not reveal that there was a deliberate and wilful default of evasion of tax on the part of the assessee. The complaint and all the consequential proceedings arising therefrom, including the summoning order were quashed.”

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

81 D. N. Homes Pvt. Ltd. vs. UOI

[2023] 459 ITR 211 (Orissa)

A.Y.: 2021-22

Date of Order: 13th October, 2023

Ss. 2(35), 276B, 278AA and 278B of the IT Act

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

The assessee is a private limited company. As per the TRACES, the assessee deducted tax of ₹2,58,29,945 for F.Y. 2020-21 relevant to A.Y. 2021-22 which was not deposited with the Central Government before the due date. However, the amount was deposited in a phased manner with delay of 31 days to 214 days. The Department filed a complaint against the assessee for an offence u/s. 276B of the Income-tax Act, 1961. The lower Court took cognizance of the offence.

The Orissa High Court allowed the revision petition filed by the assessee and held as under:

“i) The expression “reasonable cause” used in section 278AA of the Income-tax Act, 1961 may not be “sufficient cause” but would have a wider connotation than the expression “sufficient cause”. Therefore, “reasonable cause” for not visiting a person with the penal consequences would have to be considered liberally based on facts of each individual case. The issue of there being a reasonable cause or not is a question of fact and inference of law can be drawn.

ii) The legislative intent would be well discernible on consideration of the provisions of section 201 and section 221 which state that penalty is not leviable when the company proves that the default was for “good and sufficient reasons”, whereas, the expression used in section 278AA is “reasonable cause”. The Legislature has carefully and intentionally used these different expressions in the situations envisaged under those provisions. The intent and purport being to mitigate the hardship that may be caused to genuine and bona fide transactions where the assessee was prevented by cause that is reasonable. Therefore, the court must lean for an interpretation which is consistent with the “object, good sense and fairness” thereby eschew the others which render the provision oppressive and unjust, as otherwise, the very intent of the Legislature would be frustrated.

iii) The expression “reasonable cause” in section 278AA qualifies the penal provision laid under section 276B. Both provisions accordingly are to be read together to ascertain the attractability of the penal provision. In a criminal proceeding by merely showing reasonable cause, an accused can be exonerated and for showing that reasonable cause, the standard of proof of suchfact in support thereof is lighter than the proof in support of good and sufficient reason. A reasonable cause may not necessarily be a good and sufficient reason.

iv) The assessee and its principal officer had deposited the entire tax deducted at source with interest for the delayed deposit before the time of consideration of the matter as to launching of the prosecution u/s. 279(1)of the 1961 Act. The tax deducted at source with interest had been accepted and gone to the State exchequer when by then no loss to the Revenue stood to be viewed.

v) The point for consideration by the authority was not to cull out the justification for delay in depositing the tax deducted at source but was whether to launch the prosecution. Hence, the order u/s. 279(1) passed by the Commissioner (TDS) suffered from the vice of non-consideration of the admitted factual settings as to the existence of reasonable cause for the failure to deposit the tax deducted at source and the complaint was vitiated since the failure was on account of the reasonable cause of the prevalence of covid-19 pandemic.

vi) The order of sanction having been passed without due application of mind and in a mechanical manner and putting the blame upon the assessee and its principal officer for not filing any exemption or relaxation notifications or circulars stood vitiated. Hence, the trial court ought not to have taken cognizance of the offences u/ss. 276B, 2(35) and 278B when even the latter two had no penal provisions and its orders were bad in law and, therefore, set aside.”

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

80 CIT (International Taxation) vs. Bio-Rad Laboratories (Singapore) Pte. Ltd.

[2023] 459 ITR 5 (Del.)

A.Y.: 2019-20

Date of Order: 3rd October, 2023

S. 260A of ITA 1961

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

The Tribunal held that the services offered by the assessee to its Indian affiliates did not come within the purview of fees for technical services, as reflected in article 12(4)(b) of the DTAA between India and Singapore, as they did not fulfil the criteria of “make available” test.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) According to the Tribunal, the agreement between the assessee and its affiliate had been effective from 1st January, 2010, and it had run for a long period. In order to bring the services in question within the ambit of fees for technical services under the Double Taxation Avoidance Agreement, the services would have to satisfy the ”make available” test and such services should enable the person acquiring the services to apply the technology contained therein. The facts on record showed that the recipient of the services was not enabled to provide the same service without recourse to the service provider.

ii) The analysis and conclusion arrived at by the Tribunal were correct.”

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

14 Dimexon Diamonds Ltd vs. ACIT

[2024] 159 taxmann.com 118 (Mumbai – Trib.)

ITA No: 2429/Mum/2022

A.Ys.: 2018–19

Date of Order: 30th January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

FACTS

DIHPL, an Indian company, was a wholly owned subsidiary of DIHBV, a Netherlands company. Assessee, another Indian company, was a wholly owned subsidiary of DIHPL. DIHPL and the assessee undertook a reverse merger whereby DIHPL merged into the assessee. Assessee discharged following consideration to DIHBV, which held the entire equity capital of DIHPL.

In the transfer pricing report, the assessee disclosed the aforesaid transaction as an international transaction. However, it was stated that the transaction was not required to be benchmarked since pursuant to the implementation of the said scheme of amalgamation, the assessee had neither generated any income nor incurred any expenditure. Without prejudice, the assessee adopted ‘other method’ and placed a third party valuer report to justify consideration.

TPO rejected the valuation report. In particular, TPO: (a) treated cash payment as loan and imputed interest thereon; (b) Disregarded issuance of CCD; and (c) treated ALP of interest as Nil. DRP upheld the order of AO.

Being aggrieved, the assessee appeal to ITAT.

HELD

• Amalgamation results in business restructuring and falls within the definition of international transaction. Each mode of consideration i.e. equity, cash and CCD needs to be examined separately. No adjustment was made by TPO in respect of issuance of equity shares.

• During NCLT proceedings, the assessee submittedthat it would comply with applicable Income Tax law. Thus, even if the scheme is approved by NCLT, the tax department had not waived its right to examine the issue arising out of the scheme of amalgamation. Further, approval of the scheme and computation of ALP are different aspects.

• The valuation report stated that management had decided to give cash consideration to DIHBV as excess cash was available with the assessee. Thus, the valuation report was not prepared scientifically as consideration was determined by management of companies.

• DIHBV was holding the assessee and the other two subsidiaries through DIHPL, After the merger, DIHBV directly held 100 per cent shares of the assessee and the other two subsidiaries through the assessee. Thus, a merger transaction is a mere restatement of the accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV.

• ITAT upheld the findings of lower authorities that in substance the transaction is really a relocation of shares and insofar as the parent holding company is concerned nothing has changed in substance.

• Considering the finding in the valuation report that management had excess cash, TPO was correct in holding that the issuance of CCDs and payment of cash of ₹100 crore represents excessive payment.

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

13 Intas Pharmaceuticals Ltd vs. ACIT

[2024] 159 taxmann.com 429

(Ahmedabad —Trib.)

ITA No: 1334/AHD/2017 & Others

A.Ys.: 2009–10 to 2011–12

Date of Order: 31st January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

FACTS

Assessee is engaged in the business of manufacturing and trading of pharmaceuticals. It advanced the amount to its AEs for registration of the assessee’s product in overseas territories. Assessee had the option to convert advances into equity. Hence, the assessee considered that the advances were in the nature of quasi capital. Therefore, the assessee did not charge Interest on the same. In the subsequent year, the assessee converted loans given to three of its AEs into equity.

In the course of the assessment, AO made an upward adjustment on account of interest on loans and advances.

In appeal, CIT(A) gave partial relief in respect of advances given to three of the AEs whose loans were converted into equity in the subsequent year. In respect of other foreign AEs, CIT(A) confirmed the upward adjustment on the grounds that loans and advances given to them were not converted into equity.

Being aggrieved, both parties appeal to ITAT.

HELD

Tribunal confirmed the decision of AO and affirmed upward addition for all the loans.

  • In the case of quasi capital, there is an option to convert the loan to equity, however, in the case of a loan, the consideration is received in terms of interest and return of principal amount after a pre-decided deferred period1.

 

  • The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.
  • In the instant facts, there was nothing to suggest that at the time of advancing the loans to the AEs, such loans were in the nature of quasi-capital. The fact that in the subsequent year, such loans were converted into equity (at the option of the assessee) would not alter the nature of such advance to quasi-capital.

 

  • Following considerations were irrelevant for deciding the issue of charging interest on loan:
  • Advances made were out of commercial expediency.
  • Advanced by the assessee to its AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover.
  • Advances were given from interest free funds available with the assessee.

____________________________________________

1 Bialkhia Holdings Pvt. Ltd. vs. Additional Commissioner of Income Tax 115 taxmann.com 230 (Surat Tribunal)

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

63 Khadi Grammodhyog Prathisthan vs. CPC

[2024] 108 ITR(T) 94 (Jodhpur – Trib.)

ITA NO.: 87 (JODH.) OF 2023

A.Y.: 2019-20

Date of Order: 31st July, 2023

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

FACTS

The assessee filed its original return of income for the assessment year 2019–20 on 30th October, 2019. Thereafter, the assessee revised the return on 15th January, 2020, which was considered by the CPC as the original return and accordingly, it denied the current year loss of ₹3,51,811. Aggrieved by the intimation, the assessee filed an appeal before the CIT(A).

The CIT(A) considered the revised return filed on15th January, 2020 as the original return and that it was filed after the due date u/s 139(1) of the Act which was 31st October, 2019. The CIT(A) sustained the intimation u/s 143(1) and denied the carry forward of current-year losses. The assessee then filed an appeal before the ITAT.

HELD

The ITAT observed that the apple of discord in this appeal was that the assessee had filed its original return of income on 30th October, 2019 which was within the extended due date of filing the return of income u/s 139(1). Thereafter, the assessee revised the return of income on 15th January, 2020 which the CPC considered as an original return filed beyond the due date u/s 139(1) and thereby denied the current year loss of ₹3,51,811.

The ITAT held that the return filed on 15th January, 2020 was not the original return but was a revised one and therefore, the denial of loss was not correct based on the set of facts and evidence available on records. The appeal of the assessee was allowed.

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

62 Santosh Jain vs. ITO

[2023] 108 ITR(T) 636 (Raipur – Trib.)

ITA NO.: 143, 145 & 147 (RPR) OF 2023

A.Y.: 1993–94 to 1995–96

Date of Order: 24th July 2023

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

FACTS

The AO imposed the penalties upon the assessee u/s 271A for failure to maintain his books of account and other documents as required u/s 44AA and u/s 271B for failure to get his books of account audited as per provisions of section 44AB.

The assessee filed an appeal before the CIT(A) against the penalty order u/s 271B dated 27th July, 2015 on the averment that as the assessee had been penalized for failure on his part to maintain books of account u/s 271A, the AO was divested from further saddling him with a penalty for getting such non-existing books of accounts audited as per the mandate of law. The CIT(A) upheld the view taken by the AO. Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the judgment of the Hon’ble High Court of Allahabad in the case of S.K Gupta & Co. [2010] 322 ITR 86 wherein it was observed that the requirement of getting the books of account audited could arise only where the books of account are maintained. It was further observed that if for some reason the assessee had not maintained books of account, then the appropriate provision under which penalty proceedings could be initiated was section 271A of the Act. Accordingly, the ITAT allowed the assessee’s appeal and deleted the penalty levied u/s 271B.

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

61 ACIT vs. Evermore Stock Brokers (P.) Ltd

[2023] 108 ITR(T) 13 (Delhi – Trib.)

ITA NO.: 5152 (DELHI) OF 2018

A.Y.: 2015–16

Date of Order: 19th September, 2023

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

FACTS

The assessee was engaged in investments and financial activities and had filed its return of income on 29th September, 2015 declaring total income of ₹96,19,580 for AY 2015–16. The case was selected for limited scrutiny to verify the genuineness of the amount received of ₹47,72,95,676 from M/s. Pioneer Fincon Services Pvt. Ltd. [PFSPL].

The assessee had asserted that the funds were advanced to PFSPL with a view to earn interest on idle funds, rather than obtaining loans and the credit entries appearing in the ledger account of the assessee denote a mere return of pre-existing loans advanced. In the process of such advance of its funds, the assessee also earned the interest of ₹2,39,640 from transactions carried with PFSPL.

To discharge its onus to prove the genuineness of the financial transactions, the assessee submitted the following documents:

i. Assessee’s books of accounts

ii. ledger account of PFSPL as appearing in its books

iii. financial statement of PFSPL

iv. extract of bank statements of both parties to the transaction

The AO, however, alleged that the financial statement of PFSPL does not inspire much confidence in its creditworthiness. The AO issued the summons u/s 131 in the name of the Principal Officer of PFSPL. Shri Sagar Ramdas Bomble attended and submitted that the entity namely PFSPL has been stricken off from the records of the Registrar of Companies and recorded a statement on oath. The AO ultimately concluded that PFSPL is a mere paper company which was used only to route money to the assessee. The AO accordingly considered an amount of R47,72,95,676 as unexplained credit and added the same to the total income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) observed that the assessee was never required to explain the sources of funds in the bank account of PFSPL. The CIT(A) observed from the recorded statement of Shri Sagar Ramdas Bomble that PFSPL took a loan from the assessee and repaid the same to the assessee within the financial year along with Interest. Receiving interest by the assessee from PFSPL was an indication that the loans were given by the assessee and not vice versa. The CIT(A) was satisfied that the identity of PFSPL was established as it was regularly filing ROI, genuineness of the transactions stands proved by the fact that all transactions were done through banking channels, the account was squared up during the same year and PFSPL paid interest on such transactions to the assessee while deducting tax at source and creditworthiness cannot be judged only from the site of its balance sheet at the year-end. The CIT(A) allowed the appeal and deleted the addition.

Aggrieved by the order, the revenue filed an appeal before the ITAT.

HELD

The ITAT observed that the AO failed to understandthat firstly, the credits represented the repayment of the loan advanced by the assessee and secondly, the outstanding at any point in time was only ₹2.06 crore. The AO had made high-pitched additions onmisplaced assumptions of facts. The transactions were carried out through a banking channel and both the assessee as well as the borrower PFSPL, were regularly assessed to tax. The so-called loans were ultimately repaid by PFSPL and there was no outstanding at the end of the year.

The ITAT observed that the order of the CIT(A) clearly brings out the fact that PFSPL was not a stranger entity to the assessee. PFSPL had availed loans from the assessee on commercial considerations, and the interest paid had been subjected to deduction of tax at source. The presence of the Accountant and CFO of the erstwhile PFSPL reflected cooperation of the borrower with the Revenue Authorities. The ITAT also observed that the repayment and squaring up of loans was an overriding point of significance. The factum of repayment thus also validated the stance of bona fide.

The ITAT held that the facts in the present case thus spoke for itself and there appeared no need to amplify the findings of CIT(A) and the reasoning advanced on behalf of revenue lacked merits. Thus, the appeal of the revenue was dismissed.

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

60 Tata Sons Ltd. vs. CIT

ITA No.: 3468/Mum/2016

A.Y.: 2009-10

Date of Order: 23rd January, 2024

Section: 2(47), section 48 and section 263

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

 FACTS

The assessee-company owned 288,13,17,286 equity shares in TTSL acquired at various points of time, which were held as capital assets.

Since TTSL had incurred substantial loss in the course of its business for providing telecom services, a large part of the paid-up share capital of TTSL was utilized so as to finance / bear the said loss.

In view of such losses, a scheme of arrangement and restructuring between TTSL and its shareholders was entered under sections 100 to 103 of the Companies Act, 1956, which was approved by the High Court.

As per the scheme—

— the equity shares of TTSL of ₹10 each from 634,71,52,316 shares was reduced to 317,35,76,158 shares.

— no consideration was payable to the shareholders in respect of the shares which were to be cancelled.

Consequently, the shareholding of the assessee was also reduced to half.

The assessee claimed such a reduction of capital as long-term capital loss, which was set off against other long-term capital gain.

During the course of assessment proceedings under section 143(3), AO specifically raised the issue relating to the assessee’s claim for allowability of long term capital loss. However, after examining the submissions of the assessee, he allowed such loss.

PCIT initiated revision proceedings under section 263 and held that since no consideration was received by or accrued to the assessee by way of reduction of capital, the computation mechanism provided under section 48 fails and consequently, long term capital loss cannot be worked out.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a)  There can be no dispute that there was a loss on the capital account by way of a reduction of capital invested and therefore any loss on the capital account, is a capital loss and not a notional loss.

(b)  If the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares, it amounts to the transfer of shares within the meaning of section 2(47) and therefore, computation of capital gains has to be made.

(c)  Following the observations of Gujarat High Court in CIT vs. JaykrishnaHarivallabhdas,(1997) 231 ITR 108 (Guj), it held that even when the assessee has not received any consideration on reduction of capital its investment has reduced resulting into capital loss, while computing the capital gain, such capital loss has to be allowed or set-off against any other capital gain.

Accordingly, the Tribunal held that AO had rightly allowed the computation of long-term capital loss to be set off against the capital gain and consequently, it set aside the order of PCIT under section 263.

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes. Section 54F does not allow pro-rata exemption.

59 ACIT vs. Shri Iqbal Ali Khan

ITA No.: 505 / Hyd / 2020

A.Y.: 2013-14

Date of Order: 12th January, 2024

Section: 54F

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes.

Section 54F does not allow pro-rata exemption.

FACTS

The assessee sold two properties for a total consideration of ₹8.81 crores, resulting in capital gain of ₹7.21 crores.

He claimed exemption under section 54F to the extent of ₹5.47 crores, by constructing a building consisting of ground floor plus three floors in Hyderabad.

The assessee had not taken any municipal permission before starting the construction.

However, subsequently, in the application forregularization dated 31st December, 2015 filed with the municipal authorities, it was stated that the property consisted of a mosque, orphanage school and staff quarters.

The Assessing Officer disallowed the exemption under section 54F.

On appeal, by relying on the remand report and verification / enquiry report of the inspector, CIT(A) held partly in favour of the assessee by allowing pro-rata exemption under section 54F in respect of first, second and third floors.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal held that –

(a) the property was predominantly being used for religious purposes, namely, mosque, orphanage school and staff quarters and therefore, it did not fit within the definition of “residential house” as contemplated under section 54F.

(b) Further, there was no evidence to show that the assessee had invested in construction of a residential house and therefore, he was not entitled to any relief under section 54F.

(c) The literal reading of section 54F makes it abundantly clear that there was no scope of grant of pro-rata deduction, more particularly when no provision of residence can be made in a mosque.

Accordingly, the grounds of appeal of the revenue were allowed and the order of the Assessing Officer was upheld by the Tribunal.

 

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

58 K.P. Muhammed Ali vs. ITO

ITA No.: 1008 / Coch / 2022

A.Y.: 2012-13

Date of Order: 12th January, 2024

Section: 2(47)(v) / (vi)

 

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

 

FACTS

On 27th June, 2011, the assessee and a developer entered into a Joint Development Agreement (JDA) and a General Power of Attorney (GPA) in respect of a piece of land in Kasaba village for the construction of a residential complex. Both JDA and GPA were not registered.

Under the said agreements, the assessee transferred his rights into 62 per cent of the land in lieu of 38 per cent of the developed area to be constructed over a period of time.

The construction was completed only in 2017. Thereafter, as and when the assessee executed assignment deeds in favour of the various parties who purchased the assessee’s share of apartments, he had declared capital gains in his returns of income for such year(s).

The question before the Tribunal was whether the arrangement can be regarded as transfer under section 2(47) exigible for capital gain in the year of execution of JDA / GPA.

 

HELD

The Tribunal observed that-

(a) Though the assessee fulfilled the other conditions of section 53A of Transfer of Property Act, 1882 as propounded in Chaturbhuj Dwarkadas Kapadia vs. CIT, (2003) 260 ITR 491 (Bom), with effect from 24th September, 2001, section 53A does not recognize unregistered contracts. Hence, section 2(47)(v) would not apply to the facts of the assessee wherein both the JDA and GPA were unregistered.

(b) However, the constraining factor of registration of a contract would not be relevant in the case of section 2(47)(vi) which applies to any agreement or arrangement or a transaction in any other manner which has effect of transferring or enabling the enjoyment of immovable property, as explained in P. George Jacob vs. ITO (in ITA No. 558/Coch/2022, dated 2.3.2023).

(c) It is well-settled that income is to be taxed in the hands of the right person and for the right year, and it is being offered to tax in the hands of another person or year would be of no relevance in law.

The Tribunal held that the transaction between the assessee and developer under JDA / GPA constituted a transfer under section 2(47)(vi) and was liable to capital gain in the year of entering into the agreements.

With regard to the quantification of capital gain, the matter was set aside to the file of the Assessing Officer with an observation that since land in question was acquired prior to 1st April, 2001, fair market value on that date would be considered cost of acquisition (and further indexed under section 48); and sale consideration would be compared to stamp value on transfer date under section 50C.

Recycling Of Wastes – An Accounting Conundrum?

Old mobile phones. Plastic wrapper of a chocolate bar. Used tyres. Most people would think of this kind of detritus as a future landfill, as the bulk of these wastes goes unprocessed. The ever-growing pile of waste is causing irreversible damage to the environment.

But not anymore. Indian lawmakers are waking up and passing / amending Rules under the Environment (Protection) Act, 1986, to enforce Extended Producer Responsibility for certain entities. These Rules cast an obligation on producers / brand owners / importers for environmentally sound management of their products that have reached their end of life and are now considered a waste. Extended Producer Responsibility includes collection / recycling of waste as prescribed in the Rules.

Based on the ‘Polluter-Pays Principle’ the purpose of these Rules is neither to transfer public expenditure to these entities nor to penalise them, but to set appropriate signals in place in the economic system so that environmental costs are incorporated in the decision-making process and hence arrive at sustainable development that is environment-friendly. These Rules have continuously been expanded to cover major categories of wastes and include manufacturers and importers irrespective of the selling technique used, such as dealers, retailers, e-retailers,etc (i.e. producers) and online platforms / market places and supermarkets/retail chains (i.e., brand owners). Following is a high-level summary of some of the key Rules:

These Rules raise certain fundamental questions regarding accounting for the cost of fulfilling the legal obligation to recycle / collect waste. Some of them are discussed below:

WHEN IS THE OBLIGATING EVENT?

A provision under Ind AS 37 is recognised when an entity has a present obligation (legal / constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.

The definition of a legal obligation refers to an obligation that derives from a contract (through its explicit or implicit terms), legislation or other operation of law. It is worth mentioning that the concept of an obligating event is open to interpretation and requires the exercise of significant judgement, as the obligating event is not always easy to identify. The following views are possible in the extant case:

View I – Sale of goods is the obligating event

The proponents of this view believe that the sale of goods is the event which triggers compliance under the Rules. The timing of recognition of the cost of fulfilment should be contemporaneous with the timing of revenue recognition. Provision should be made for all unfulfilled obligations emanating from historical sales as well as sales made during the current year (for which obligation to recycle would occur in subsequent years). The proponents argue as follows:

  • The minimum recycling targets, as summarised above, are generally based on the products ‘placed in the market’ or products ‘purchased / manufactured / imported’ previously. A product is placed on the market when it is made available for the first time on the market, i.e. when it is first supplied for distribution, consumption or use on the market in the course of a commercial activity, whether in return for payment or free of charge. Thus, the placing of a product in the market occurs on its sale to customers. A similar connotation is relevant where products are purchased, imported, etc.

 

  • The Rules aim to recycle end-of-life (i.e., waste) products and reduce the consequential damage to the environment. The expiration of the life of the product and the damage to the environment potentially begins when the customer starts using the products. Accordingly, the sale of products is the foundational tenet of these Rules.
  • Going concern basis envisages that the financial statements would continue for the foreseeable future. Thus, these entities would be economically compelled to incur the cost of recycling of all products sold to date, including sales made in the current year.
  • Analogy can be drawn from a similar situation where a lessor is obligated to return the leased premise in the same state that existed at the inception of the lease. For example, if an entity has erected partitioning in a leasehold building and the partitioning must be removed at the end of the lease term, then provision is made for this cost at the time of putting up the partition wall.

View II – Existence of the producer on the measurement date is the obligating event

This view is based on the premise that the cost associated with the fulfilment of Extended Producer Responsibility is akin to a levy as described in Appendix C to Ind AS 37. Proponents of this view argue that the obligation can be avoided if the entity ceases to exist on the measurement date. Under this approach, any unfulfilled obligation in relation to historical sales should be provided for. No provision is required for sales made in the current year (for which the obligation to recycle would occur in subsequent years). The following are the relevant arguments:

  • A levy is an outflow of resources embodyingeconomic benefits imposed by Governments (including Government agencies) other than those covered under other Ind AS e.g. income taxes under Ind AS 12 and fines or other penalties imposed for legislationbreaches. As long as the payments are required by law, they are generally considered to be imposed by the government.

Under the Rules, the obligation should be met through authorised recycling agencies, which will inter alia provide the certificates of recycled quantity to the entities. Instead of paying a charge directly to the Government for recycling the waste products, the charge would be paid to the Government’s agents. Thus, the payment made for the purchase of certificates from Government authorised recycling agencies is in the nature of a levy. Appendix C is specific guidance for the accounting of levies that builds on the principles of Ind AS 37. Thus, the assessment of the obligating event of wastes should be based on Appendix C to Ind AS 37.

  • Under Appendix C, the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. For example, if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

Under the above Rules, the payment to recyclers will arise only if the producer exists during the measurement period. For example, a producer would be obligated to meet the obligation in FY 2023-2024 only if the producer is in operation in such year. Since the activity that triggers the payment of the levy is the existence of the producer in the current period and the calculation of that levy is based on the products sold in a previous period, the obligating event for that levy is the existence of the entity in the current period. The sale of products in the previous period is not the activity that triggers the payment of the levy but only affects the measurement of the liability.

  • Merely preparing financial statements under the going concern assumption does not imply that the entities have a present obligation to pay a levy triggered by operating in a future period.

Closing entries:

  • It would be appropriate to follow View II. The accounting policy of a listed company provides as follows:

Provision for E-Waste/Plastic-Waste management costs is recognized when the liability in respect of products sold to customers is established in accordance with E-waste Management Rules, 2016, as notified by the Government of India. Initial recognition is based on liability computed based on Extended Producer Responsibility as promulgated in said Rules, including the cost to comply with the said regulation and as reduced by the expected realisation of collectable waste. The Company has assessed the liability to arise on a year-to-year basis.

  • View II would also be in line with global practices such as the European Union’s Directive on Waste Electrical and Electronic Equipment. The Directive prescribes that the cost of waste management for equipment should be borne by producers of that type of equipment that is in the market during the period specified in the applicable legislation. The manufacturers have to contribute to costs in proportion to their respective share of the market by type of equipment.
  • The International Financial Reporting Interpretations Committee (IFRIC), as set up by the International Accounting Standards Board, has issued certain guidance on the manner of recognition of liability under the above Directive. 1IFRIC 6 concludes that the event that triggers liability recognition is participation in the market during the measurement period. The measurement period is a period in which market shares are determined for the purposes of allocating waste management costs. IFRIC 6 states that this date, rather than the date of production of the equipmentor incurrence of costs, is the triggering event for liability
1   IFRIC on Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

Measurement of obligation

The above Rules mandate entities to purchasecertificates from authorised recyclers to meet their Extended Producer Responsibility. The cost of obligation is derived basis the target quantity multiplied by the rate per unit as agreed with the authorised recycler. For example, if an entity is required to recycle 100MT of plastics and the authorised recycler charges ₹10 per MT; then an expense of INR 1,000 should be recognised at the end of the current year. The amount of unfulfilled obligation, if any, should be classified as a provision in the Balance Sheet.

Closing entries:

  • Making a reliable estimate is one of pre-conditions for recognition of a provision under Ind AS 37. The Standard takes the view that a sufficiently reliable estimate can almost always be made for a provision except for extremely rare cases. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised.
  • In certain cases, entities face significant challenges in measuring the obligation. These challenges can stem from the non-availability of certificates with the authorised recyclers or the lack of necessary information to estimate the amount of cash outflow required to recycle a particular category of waste. Relevant extracts from the financial statements of a listed company are as follows:

On 21st July, 2022, the Ministry of Environment, Forest and Climate Change issued notification containing Regulations on Extended Producer Responsibility (EPR) for Waste Tyre applicable to Tyre manufacturers and Recyclers. As per the notification, the Company has a present legal obligation as at31st March, 2023, to purchase EPR certificates online from Recyclers of waste tyre registered with the Central Pollution Control Board to fulfil its obligations,which is determined based on a certain percentage of the quantity of tyres manufactured in the year ended 31st March, 2021.

Currently, the modalities of the above regulations are dynamic. They would be fine-tuned in line with the changing requirements, including measurement of obligation and timeline for achieving compliance by tyre manufacturing companies in consultation with the Industry forum of Tyre companies. Accordingly, the Company has not recognised any provision towards EPR obligation for the year ended 31st March, 2023.

Overview of NFRA Inspection Reports of 2023 on Audit Firms– II

This is the second and final article to cover an overview of the first five NFRA inspection reports. The inspection process, timelines and the structure of the inspection reports were covered in the February 2024 issue of The BCAJ on page 21, including the summary of NFRA observations related to governance and leadership structures or lack / non-disclosure thereof, international and domestic network / affiliations. The article also covered issues pointed out by NFRA related to non-audit services provided to audit clients and SQC 1.

This second part is on the remaining observations of NFRA on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From these two articles, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

At the cost of repetition, the purpose of this compilation is to enable auditors and audit firms to understand the focal points and key issues arising from these inspections. By understanding key features, firms can take the necessary steps to be compliant with applicable regulations.

The five reports covered are as below and referred to with the last two digits to identify the reports:

PART B OF REPORTS

The subheadings in all five reports are different in both sequence and content. Excluding leadership, structure, and Independence matters, which are covered in The BCAJ, vide article of February 2024 on page 21, let us consider Documentation, Engagement Quality Control and some observations arising from the review of the audit files.

FIRM WIDE AUDIT QUALITY CONTROL SYSTEM

1) EQCR Partner: The firm’s procedures fall short of SA 220 and SA 230 and the Firm’s Policy. Two samples selected contained incomplete work papers without sufficient evidence of EQC review done. (Para 30, Report No 01)

2) The practice of deleting all review comments should be reviewed as they may constitute a discussion between the Engagement Team and EQCR, which is mandatory under SQC 1 and SA 220. (Para 31, Report No 01)

3) Evidence of performance of EQCR, i.e., the EQCR docket (summary of EQCR work performed) was not made part of the Engagement Management System (EMS). However, EQCR clearance was obtained prior to the issuance of the audit report. This is despite the firm’s Policy of generating the EQCR docket via the EQCR portal to be incorporated in the EMS. (Para 26 & 27, Report No 02)

4) There was an instance of lack of reassessment of audit risk upon finding some suspicious transactions, etc., which was not in accordance with Para 31 of SA 315 and Firm’s Policy Manual. This matter led to reporting under Section 143(12) to the central government, adverse opinion and eventual resignation from audit later that year whereas suspicious transactions were noticed in the second quarter itself. (Para 18–22, Report No 02)

5) Consultation was taken, a decision taken on that basis, but the rationale was not recorded which is not in accordance with Para 56 of SQC1, which is not in accordance with the firm’s own Policy Manual. (Para 30–32 Report No 02)

6) Engagement Management System (EMS) required annual and engagement level independence confirmations. However, EMS permitted access to audit without obtaining the engagement level independence confirmations (which is an additional control), which is in violation of the Audit Firm’s Policy Manual and Para 18 of SQC 1. (Para 17 Report No 02)

7) An Independence compliance audit done by a network firm partner identified that “35% of the Partners, the sole Executive Director, 55% of the Directors and 38% of the Sr. Manager/Managers had not reported the financial relationships, required to be reported in accordance with the Firm’s independence policies”. Such high rates of non-compliance with the firm’s own independence policies were of serious concern to the NFRA. Despite such significant violations, the sample size was reduced compared to the prior year. The firm failed to provide the complete Independence Compliance Audit Report for FY 2020–21. A sample test of five audit engagements revealed that independence confirmations were absent in the case of some members of the engagement team and in some cases, independence declarations were obtained after the issue of the audit report. The Independence Compliance Tool is not aligned with Indian laws. (Para 22–26 Report No 03)

8) EQCR needs to be a partner who is a member of the ICAI as per SA 220 and SQC 1. However, the Firm’s EQCR Policy did not specify that EQCR shall be a member of the ICAI. (Para 23 Report No 04)

9) There is no document explaining the rationale or criteria for the selection of engagement files for internal quality inspection and specific areas for review by the inspection team. (Para 30 Report No 04)

10) Firm persons interviewed by the NFRA inspection team did not have much clarity on how to choose the value of assurance factor for the desired level of testing so far as sampling was concerned. (Para 28 Report No 04)

11) The Firm had a policy of doing background checks of the auditee company from the database of the network entity. In some cases, background check reports were not positive and yet the firm did not carry out alternative tests to assess client integrity for accepting / continuing. The firm’s reliance solely on a single source (network entity database) was found insufficient and not in accordance with Para 28 of SQC 1. (Para 25 Report No 05)

12) No audit documentation was found in relation to the evaluation of the competence and capabilities of the audit firm to undertake the engagement. (Para 27 Report No 05)

13) Audit documentation by EQCR is not fully compliant with Para 25, SA 220. (Para 28 Report No 05). Working papers had no documentation of the work done by EQCR. (Para 30 Report No 05)

AUDIT DOCUMENTATION

1) The firm’s policies and procedures to ensure integrity of its electronic audit documentation were not fully in accordance with the requirements of SQC 1 (Para 77, 79, 80). (Para 13 Report No 01)

2) The audit evidence, which is reviewed and signed as final, can be edited, altered or modified subsequently without affecting the previously provided signoff. While a report gives information about edits, it doesn’t identify the exact changes made in the document. (Para 13 Report No 01). Such weakness can lead to signing a blank folder and then allowing the engagement team to add documents before archival.

3) The electronic documentation system does not meet the requirement of Para 9 of SA 230. Neither the preparer nor reviewer date marks the completion of an audit procedure.

4) The archival process of the firm’s electronic work papers lacks integrity as the copy of the achieved file is editable while it is used for other post-archival purposes and, therefore, does not serve the purpose of audit documentation under Para 3 of SA 230. (Para 15, Report No 1)

5) Audit Work papers can be modified after sign-off. The application supports multiple sign-offs by the same and / or different people. It does not mandate modifier sign-off after the modification. A blank paper after sign-off can be filled out later without affecting sign-off. In the instances sighted by NFRA, there was no evidence of why and when documents were modified and who made and reviewed the changes. This was in non-compliance with Para 79 of SQC 1 and Para 8, 9 and 13 of SA 230. NFRA noted that “sufficient appropriate audit evidences are not obtained before issue of audit report as evidenced from large scale modification of AWPs post issue of audit report and without signing off AWPs after such modification.”(Para 29–30, Report No 3)

6) Signing partner is not the same as Engagement Partner in violation of Para 46 and 56 of SA 700 and 6.b of SQC 1. In FY 2020–21, there were 40 cases where Engagement Partners did not sign the audit reports. (Para 32, Report No 3)

7) The firm needs to put in place policies to deal with complaints and allegations about non-compliance with professional standards, regulatory compliance or legal requirements or the firm’s system of QC to ensure compliance with Para 101 of SQC 1. (Para 34, Report No 3)

8) NFRA desired that there should not be paper files and electronic files and all papers should be scanned and kept in electronic files. (Para 26, Report No 4)

9) Physical files are neither scanned nor incorporated by electronic files via cross-referencing of paper files with electronic files. Files lacked integrity prior to archival. (Para 12, Report No 5)

10) Sources of audit documents — whether from clients, etc., — were not available. This is a potential risk under SA 500, SA 540 and SA 550. (Para 13, Report No 5)

PART C OF REPORTS — NFRA OBSERVATIONS ON REVIEW OF INDIVIDUAL AUDIT FILES

NFRA selected a few Engagement Files for review (Refer to page 21, The BCAJ, February 2024) and selected three significant audit areas in respect of those selected engagements: Revenue, Trade Receivables and Investments.

1) The Audit Engagement team did not document its judgment for not recognising applicable types of revenue, revenue transactions and assertions as a fraud risk as necessitated by SA 240 to determine the risk of material misstatement due to fraud in the audit of revenue. (Para 32, Report No 1)

2) Audit Evidence in respect of year-end balance was not found in work papers and was obtained from the custodian during the course of the NFRA review. (Para 34, Report No 2)

3) Existence Assertion in respect of Investments at year-end, being 1 per cent, was necessary to be obtained at year-end and not obtaining such evidence was not in conformity with the firm’s policy manual and SA 230. (Para 35-36, Report No 2)

4) NFRA appreciated Non-Audit Services (NAS) guidelines voluntarily issued by the firm with effect from 1st April, 2020. At the same time, the firm delivered tax services related to DRP to an audit client in respect of years when such an entity was not an audit client. The firm had in place certain safeguards where the tax and these fell under transitional provisions of its internal NAS Guidelines. (Para 37–42, Report No 2)

5) In the case of two company audits, the financial statements did not disclose full particulars of the loans given, the investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security was proposed to be utilised by the recipient of the loan or guarantee or security, thus not complying with Section 186(4) of the Companies Act 2013. The auditor did not report on it in CARO para (iv) despite its reporting responsibility. (Para 36, Report No 3)

6) Final financial statements (FS) and independent auditors’ report (IAR) were not available on the audit file and the draft FS and IAR that were on the file were different from those on the website of BSE in violation of Para 30 of SA 330. The firm accepted this as an inadvertent error. (Para 37, Report No 3)

7) In respect to 3 out of 5 selected companies, the firm was found deficient in performing appropriate audit evidence in respect to impairment of investments. (Para 38–42, Report No 3)

a. In respect of one auditee company, uponacquisition of a group of companies under Ind AS 103 Business Combinations, the firm relied on a two-year-old valuation report in respect of the subsidiary and did not perform any audit procedures for identification of impairment indicators. There was also no working in respect of how the amount in respect of investment was arrived at.

b. In respect of the same auditee, the firm wrongly concluded that no impairment loss was required to be recognised:

i. On the grounds that the subsidiary was in the process of issuing shares to an unrelated MNC which will increase the share price in the near future.

ii. On the grounds that the subsidiary was a dividend paying company and 100 per cent subsidiary, therefore, it did not perform impairment testing.

iii. Since it involved the work of a valuation specialist engaged by another audit team which audited that subsidiary was not evaluated.

c. In respect of another auditee, the audit firm wrongly presumed a subsidiary as 100 per cent owned whereas it was 84.18 per cent owned. NFRA stated that had the correct percentage of investment been considered, the impairment value would have been material to be recognised. The detailed enterprise value relied upon by the firm was also not available on the audit file.

d. In the case of another auditee, the Firm concluded that no impairment was required to be recognised for the investment in an associate, on the basis that the associate company had issued shares to unrelated market participants at a value higher than the carrying value. However, the Firm did not perform any audit procedure to check that the referred market participants were not related to the auditee company.

8) The Audit Firm’s Information System Audit Team identified certain deficiencies in the IT Control Environment, i.e., Access to Programs and Data, Entity level controls and Period-end Financial Reporting. The audit firm did not issue a modified audit opinion in respect of the IFC report despite these critical inadequacies and deficiencies. The audit file did not contain any work paper concluding that a modified opinion was not required. (Para 40–41, Report No 4)

9) The Engagement Team’s selection of a sample size of only 25 was not commensurate with the risk level. (Para 40–41, Report No 4)

10) ET had planned to obtain a ‘Low’ level of substantive evidence despite the significantly weak IT General Control environment identified by the Information Systems Audit Team. The total monetary value of transaction testing was ₹19.5 crores, which was 2.09 per cent of Total Revenue of ₹930.14 crores. As a result, the ET did not have sufficient appropriate audit evidence to support its unmodified opinion on the financial statements. The Audit Firm’s response was not accepted as it was not in accordance with the SA 530. (Para 44–47, Report No 4)

11) ET did not perform any substantive audit procedure to check the accuracy and correctness of the ‘price details’ applied to the actual invoices generated. (Para 48–49, Report No 4)

12) The entity’s significant accounting policy in respect to the recognition and measurement of revenue at the fair value of the consideration received or receivable was not in accordance with the Ind AS 115. (Para 50–51, Report No 4)

13) The Engagement Team’s audit in respect of verifying and ensuring the entity’s recognition and measurement for impairment loss allowance in accordance with the ECL approach of Ind AS 109 was inadequate and inappropriate (Para 8(a), A13, Para 8(c), A24, A25 and Para19 of SA 5409).

a. The account policy followed was not in accordance with the accounting policy disclosed.

b. The ET did not check how the management had adjusted the historically observed default rates to forward-looking estimates.

a. The entity had not made the disclosures required as per Para 35M and 35N of Ind AS 107 in respect to the credit risk exposure of Trade Receivables.

(Para 52, Report No 4)

14) Invoice-wise matching of customer collections which had an impact on the aging report was not done. This had a direct consequence on the calculation of impairment loss allowance for Trade Receivables. (Para 54, Report No 4)

15) Although the actual PBT benchmark for calculating materiality was significantly lower than planned materiality levels based on the past 3–5 years PBT, the overall materiality and performance materiality were not changed. This was a non-compliance with SA 450. (Para 56–59, Report No 4)

16) While evaluating the impact of misstatements identified during the audit, the ET had, while computing the uncorrected misstatements as a percentage of PBT, considered the number of uncorrected misstatements net of tax instead of gross of tax, leading to erroneous computation of the impact of uncorrected misstatements and the extent of audit procedures. (Para 60, Report
No 4)

17) The audit file did not have the auditee company’s policy on related party transactions. There was no evidence of obtaining a complete list of related parties at the start of the audit and the audit team having verified management assertion that RPT had taken place at arm’s length. The engagement team was, therefore, in violation of SA 550 (Para 24). In one case, the firm also stated that since the RPT were with subsidiaries, they did not pose an elevated risk. NFRA specifically stated that such presumption was not appropriate. (Para 61–63, Report No 4)

18) For evaluating impairment of investments, the audit firm did not independently evaluate significant assumptions of the auditee. Such assumptions of the auditee were found to be not appropriate and in excess. (Para 32, Report No 5)

19) The assessment of the auditor regarding the forward contract to acquire remaining shares from NCI is not separately traceable from the audit file. The disclosures in the financial statements for FY 2020–21 (year reviewed by NFRA) and 2019–20 in respect of the forward contract to acquire additional shares at a future date and the related contingent consideration arrangements are not in compliance with the requirements of Para B64(g) of Ind AS 103. A disclosure of the arrangement and basis of determining contingent consideration was necessary in the CFS of both years. (Para 33–35, Report No 5)

20) There was non-compliance with Section 186 of the Companies Act, 2013 and Companies (Number of layers) Rules as there was no evidence that the auditee met the criteria of CIC-ND-SI NBFC when it had 92 subsidiaries and 52 associates. The audit firm should have reported this in CARO, which was not done. (Para 36–37, Report No 5)

21) The EP failed to consider the possible effects of misstatements on financial statements, which were material and pervasive and, thus, required consideration of Adverse or Disclaimer Opinion as per SA 705. The possible effect was not only confined to investments but also to other balances such as loans and advances, provisions etc., which indicate their pervasiveness. (Para 38–40, Report No 5)

22) An auditee company having 286 subsidiaries out of which 255 were loss-making. Although there were indicators of impairment, the firm had relied on a management representation letter stating that there was no impairment loss and there was no assessment on AWP. (Para 41–42, Report No 5)

23) AWP did not have sufficient appropriate audit evidence of KAM in respect of the going concern assumption. (Para 43–44, Report No 5)

Part D contained a chronology of events. The appendix at the end of each report carried the actual responses given by each firm.

All five inspection reports make a good read considering they are part of the first set. We can expect several more inspection reports in the coming months and years on the next set of audit firms. I am sure the NFRA reports with time will also become uniform and nuanced and an annual summary of all points brought out during a year will make a good collection for users of such inspection reports. We can expect NFRA to receive a ‘follow up action taken’ from audit firms inspected as a desirable outcome.

Decoding Residential Status Under FEMA

INTRODUCTION

This article is the third part of a series on Income Tax and the Foreign Exchange Management Act (FEMA) issues related to NRIs. The first article focused on the provisions of the Income Tax Act, whereas the second one was on the applicability of the treaty on the definition of Residential Status. This article will focus on the definition of Residential status under FEMA regulation.

BACKGROUND

Many professionals get flooded with questions on cross-border transactions day in and day out from their resident and non-resident clients regarding the remittance and capital account transactions to be done by individuals and companies.

FEMA governs the financial aspects of a cross-border transaction. As far as the individuals are concerned, the fundamental issue is determining their residential status under FEMA.

In India, the residential status of an individual is determined under the Income-tax Act as well as under FEMA. People at large get confused in deciding the status under both statutes as the criteria for determination and their impact are pretty different.

We shall try to decode the definition of a RESIDENT under FEMA.

An Individual can be a resident under the Income-tax Act, and a non-resident under FEMA and vice versa. An individual can simultaneously be a non-resident or a resident under both Acts.

Also, under FEMA, a split residency is permitted, meaning a person can be a resident for part of the year and a non-resident for another part and vice versa. However, under the Income-tax Act, a person is either a resident or a non-resident for the entire financial year.

Thus, many permutations and combinations are possible. This leads to further complications in practical application.

The definition of “Resident” for an individual under FEMA is similar to that of erstwhile FERA, as both emphasise on a person’s intention. However, FEMA has included the number of days stay in India (more than 182 days) in the preceding financial year as one of the criteria for determining the residential status.

DEFINITION

A person resident in India is defined u/s 2(v) of FEMA, as follow:

“person resident in India” means —

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—

(A) a person who has gone out of India or who stays outside India, in either case—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

Whereas,
(w) “person resident outside India” means a person who is not resident in India;

From the above definition, it is clear that section 2(v) defines an individual to be resident in India if he resides in India for more than one hundred and eighty-two days during the course of the preceding financial year, except where he has gone out of India or who stays outside India, (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period. Thus, a person falling under the above exceptions will not be considered a person resident in India even though his stay in India exceeded 182 days in the preceding financial year. This can give rise to a split residency. Consider an individual who leaves India for employment on 1st November, 2023. He can be considered a non-resident under FEMA from that date and would be a resident from 1st April, 2023 till 31st October, 2023. The exceptions will be operative as he is leaving for employment. Hence, although his stay in India during FY 2022-2023 exceeded 183 days, he would be regarded as non-resident w.e.f. 1st November, 2023.

Similarly, in case of a person resident outside India who is coming back to India to take up employment or for carrying on business or vocation in India or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period, such person would be regarded as a person resident in India from the day he comes to India even if his stay in the preceding financial year in India was less than 183 days.

There is another school of thought, and according to which a person can become non-resident from the date he leaves India for employment, business / vocation or an uncertain period; however, to determine the residential status of an individual returning to India, one has to look at the physical stay of that person in the preceding financial year along with the intentions, such as employment, business / vocation or stay for an uncertain period. This view is applicable in the case of the purchase of immovable property in India as per the Press Release by the Government of India dated 1st February, 2009. As per the said Press Release, to be considered as a person resident in India, a person has not only to satisfy the condition of the period of stay in India (being more than 182 days during the preceding financial year) but also his purpose of stay as well as the type of Indian visa granted to him should indicate the intention to stay in India for an uncertain period.

In this regard, to be eligible, the intention to stay has to be unambiguously established with supporting documentation, including a visa.

Section 7(1) of the Limited Liability Partnership Act, 2008 (LLP Act) stipulates that every LLP should have two designated partners who are individuals, and at least one of them shall be a resident in India. The Explanation further provides that the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding year. Thus, an individual must satisfy the 182-day stay criteria to become a designated partner in an LLP.

Determination of the Residential Status of an individual based on his stay in India in the preceding FY may pose serious challenges, as one has to wait for the entire year to become a resident of India that is too subject to stay in the preceding FY of 183 days or more. Therefore, except for buying properties or becoming a designated partner in an LLP, the earlier view seems more practical and workable, i.e., an individual becomes a resident of India from the date he arrives for employment, business/vocation, or stay for an uncertain period.

This view is strengthened by the provisions of Para 7 of Schedule 1 of FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, which provides that NRE accounts should be re-designated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts immediately upon the return of the account holder to India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period.

From the above, it is clear that significant focus is being put on the intention of the person going abroad or returning to India.

Thus, we find that determining the residential status of a returning Indian is challenging. One needs to interpret the same in the context in which it is to be determined.

It is interesting to note that section 2(w) of the FEMA defines “person resident outside India” as a person who is not resident in India. Thus, it does not define the term “non-resident”, but for all practical purposes, the term “person resident outside India” is equated to “non-resident of India.” Similarly, the term “Non-Resident of India” (NRI) is not defined in FEMA, but various notifications / Master Directions define the term. For example, Para 2(vi) of the FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, as well as defines ‘Non-Resident Indian (NRI)’ as a person resident outside India who is a citizen of India. Rule 2(aj) of the FEMA Non-Debt Instruments Rules, 20191 defines ‘Non-Resident Indian (NRI)’ as an individual resident outside India who is a citizen of India.

1      Also refer Para 2.18 of the Master Direction – Foreign Investment in India RBI/FED/2017-18/60 FED Master Direction No.11/2017-18 dated 4th January, 2018, updated up to 17th March, 2022

ILLUSTRATION

Let’s understand the concept of the Residential Status of an Individual under FEMA with the help of some examples:

1. Mr Raj leaves India for employment on 26th May, 2021. His stay during the preceding Financial Year, i.e., 2020–2021, was 365 days.

Will he be a non-resident as per FEMA?

Answer: Residence for an individual under FEMA has been defined u/s 2(v)(i).

An individual is considered an Indian resident if he has been in India in the preceding financial year for more than 182 days.

To determine the residential status of Mr. Raj as of26th May, 2021, we need to check if in the preceding year, i.e. 2020–21, his stay in India was more than 182 days.

As in preceding year Mr. Raj was in India for more than 182 days; he is a resident of India as on 26th May, 2021 as per FEMA.

However, on 26th May, 2021, Mr Raj went outside India for employment and therefore fell under one of the exclusions in the definition of “person resident in India” hence, he is a Non-resident of India from 26th May, 2021.

2. If Mr Raj returns to India on 31st July, 2023 for employment, what would be his residential status under FEMA for FY 2023–24? (You may assume his stay in India during the FY 2022–2023 period to be less than 182 days).

Answer: To determine the residential status as per FEMA law for the financial year 2023–24, we need to check if his stay in India in the preceding year i.e. 2022–23 was more than 182 days. As in the preceding year, Mr. Raj was in India for less than 183 days. He is a Non-resident as per FEMA till July 2023, after which he shall become a Resident if he intends to stay in India for employment.

However, if Mr Raj intends to buy a property in India, he must complete a stay in India of 183 days or more in the preceding FY. Assuming Mr. Raj’s stay in India during the FY 2023–2024 exceeds 182 days, he can buy a property in the FY 2024–2025.

From the above, it is clear that one needs to apply the test of stay in India as well as the intention of a person depending upon the context for which one determines the residential status.

RESIDENTIAL STATUS OF A STUDENT GOING ABROAD FOR STUDIES

RBI vide its Press Release 2003-2004/710. Circular No. 45 dated 8th December, 20032 has clarified that “taking into account the definition of resident under FEMA and the intention of the student to stay abroad for an uncertain period though not for permanent settlement, it has been decided to treat them henceforth as non-residents from the FEMA angle.” The Circular further clarifies that “as non-residents, students will, in any case, be eligible for receiving remittances from India, as follows: (i) up to USD 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies also, (ii) up to USD 1 million out of sale proceeds / balances in their account maintained with an AD in India, (iii) all other facilities available for NRIs under FEMA, (iv) educational and other loans which were availed (as residents in India) by students would be allowed to continue.”

2      https://www.rbi.org.in/commonman/Upload/English/PressRelease/PDFs/40570.pdf and https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2763

While taking up studies or further advanced courses, students may have to take up jobs or seek scholarships to supplement income to meet their financial requirements abroad. As they have to earn and learn, their stay for educational purposes gets prolonged than what is intended while leaving India. Thus, the above clarification and NRI status will help students take up jobs and undertake various financial transactions as non-residents without violating FEMA provisions.

A few more examples of residential status are as follows:

 

Sr. No. Purpose Status Reasons
1 A person Leaves India to take up employment for the first time. A person Resident Outside India Since he has left India for employment, he has become non-resident from the day he leaves India.
2 The student leaves for Australia to undertake a Master’s degree course for three years. A person Resident Outside India As per RBI Circular No. 45 dated
8th December, 2003,
3 A person visits India as a tourist. A person Resident Outside India Since he is on a visit for a fixed or specific period.
4 A person goes to Brisbane to participate and represent India. His stay was extended for eight months. A person Resident in India Since he has gone for a fixed period and his coming back is confirmed.
5 A person has gone to the UK. She will return to India after the maternity case of her daughter. A person Resident in India Since the period of stay is definite and not uncertain.
6 A person has taken up American citizenship even though his wife and children are in India. He travels to India to meet his family and is in India for more than 250 days. However, he is employed in the USA and intends to be outside India. A person Resident Outside India Since he has no intention to stay in India for the uncertain period and is employed outside India.
7 A person is serving on board a ship flying the Indian National Flag and has not set up any residence, business, or profession outside India. Person Resident in India A ship with the Indian National Flag is considered a territory of India. He cannot be considered a person who proceeded outside India to take up employment and set up a business or profession.
8 A person employed with an Indian company undertakes export promotion tours to Singapore. He was in Singapore for approximately 201 days. A person Resident in India Since he is employed in India and has not gone to Singapore to take up employment or carry on business for an uncertain period, a visit abroad while exercising employment in India or a business visit cannot make a person non-resident. Also, export promotion tours typically are for a fixed duration; therefore, on all counts, that person will be regarded as a Resident of India.
9 A person leaves India for the US as he received a Green Card but has no employment or business, but he intends to settle or stay there for an uncertain period. A person Resident Outside India The receipt of a Green Card signifies the intention to stay outside India. The said intention is fortified with the person moving to such a country. Therefore, he
will be regarded as
a non-resident from the day he leaves India.
10 A person who is a foreign citizen of non-Indian origin sets up a proprietary concern in India on 1st June, 2019, to carry on business with the intention of settling in India. A person Resident in India Since a person is coming to India to set up Business or Vocation, he will be considered a resident in India.

OVERSEAS CITIZEN OF INDIA (OCI)

Another essential aspect to understand is OCI.

The Constitution of India does not allow holding dual citizenship.

However, to overcome the difficulty for various Indians settled abroad who have taken foreign citizenship (foreign passports), on 2nd December, 2005, the government launched the “Overseas Citizens of India” scheme. Registration as an OCI provides the registrant with a few benefits. An illustrative list is stated below:

 

  • A multiple entry / multi-purpose life-long visa for visiting India.

 

  • OCI may be granted Indian citizenship after five years from the date of registration, provided they stay in India for one year before making the application and are subject to renouncing the citizenship of another country. Employment is allowed to an OCI in all areas except mountaineering, missionary and research work and other work requiring PAP / RAP (PAP – Protected Area Permit, RAP – Restricted Area Permit).

 

A foreign national is eligible for registration as an OCI holder if one falls under any of the below criteria:

  • Who was eligible to become a citizen of India on26th January, 1950** or

 

  • Was a citizen of India on or at any time after26th January, 1950 or

 

  • Belonged to a territory that became part of India after 15th August, 1947

 

  • Person of Indian Origin card holders are deemed to be OCI.

Children and grandchildren, including minor children of the above-referred persons, are also eligible for registration as an OCI, provided their country of citizenship allows the same in some form or other under local laws and are eligible for registration as an OCI.

However, if the applicant had ever been a citizen of Pakistan or Bangladesh, he would not be eligible for registration as an OCI.

  • A spouse of foreign origin of a citizen of India or spouse of foreign origin of an OCI card holder registered and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the application’s presentation would be eligible to obtain registration as an OCI.

For eligibility for registration as OCI, such spouse shall be subjected to prior security clearance from a competent authority in India.

**Any person who, or whose parents or grandparents were born in India as defined in the Government of India Act, 1935 (as originally enacted), and who was ordinarily residing in any country outside India was eligible to become a citizen of India on 26th January, 1950. AnOCI card holder is eligible to visit India without obtaining a VISA.

PERSON OF INDIAN ORIGIN (PIO)

A PIO means a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, and Nepal):

  • who at any time held an Indian passport; Or
  • who or either of their parents / grandparents/great grandparents were born and permanently resident in India as defined in the Government of India Act, 1935 and other territories that became part of India thereafter, provided neither was at any time a citizen of any of the countries above (as referred above); Or
  • who is a spouse of a citizen of India or a PIO.

A TRANSITION FROM PIO CARD TO OCI CARD

Earlier, the “PIO Card Scheme” was in place. The PIO card scheme has been withdrawn vide Gazette Notification No. 25024/9/2014 F. I dated 9th January, 2015. Further, vide Gazette Notification No 26011/01/2014IC. I dated 9th January, 2015; all existing PIO card holders are deemed OCI card holders. Therefore, no separate authentication of the existing PIO card as an OCI card is necessary. Henceforth, applicants may only apply for an OCI Card, as the PIO Card scheme no longer exists. Current PIO cardholders may apply for OCI cards instead of their PIO cards.

CONCLUSION

The residential status under FEMA is often misconstrued due to the insertion of a number of days’ conditions, similar to the definition under the Income-tax Act. However, it is essential to note that the impact of residential status under FEMA is from the regulatory perspective, not the revenue perspective. Some situations lead to different residential statuses as explained in the article above; however, from the perspective of FEMA, the person’s intention is of utmost importance. It is also noteworthy that intentions need to be justifiable / verifiable from the documentary evidence such as type of visa, employment letter, hiring of an apartment, etc., and it should not be merely a thought by a person that he intends to stay in or out of the country. If the intention, coupled with the number of days of stay, is examined correctly, the residential status can be obtained for a particular person for a given period. As stated earlier, applying the criteria of stay vs. intentions will be relevant in the context in which one seeks to apply the provisions.

BCAS President CA Chirag Doshi’s Message for the Month of March 2024

Future Ready – Finance Professionals

“If you don’t want to be like everybody, then you have to do what nobody has done. Walk a different path, and you’ll create a new destination for yourself.” — Mahatria Ra

 

Dear BCAS Family,

The future awaits with loads of opportunities for persons / entities who want to be different. If we accept that “knowing what we are and what we are not” is critical, then the time for change is now. The pace at which transformation is taking place in our profession and industries across the world, will not wait for anyone, a person or a firm. Firms that fail to define their identity will have the risk of being overtaken by more disciplined firms or watching their own relevance to clients decline. Whereas the firms that embrace the discipline and have the courage to define what they are and what they do will enjoy growth and success.

Traditionally, strategies have always been a fundamental trade-off between scale and relations. Now, technology allows firms to have both, no matter their size. Along with a new wave of cloud-based services, which are available for rent-based or subscription-based models, it is possible for even small firms to access the benefits of scale without investing heavily in assets themselves. Firms of the future will also need innovative and flexible methods of working that support their teams to solve specific problems and move on quickly. Traditional firms were defined by the assets they owned and controlled. Future firms will be defined by the ecosystems they create, the partnerships and the global reach they possess. The Firms of the Future will see the emergence of new ownership models, too.

The new era demands very different skill set and leadership approaches than what has prevailed for the past 40 years. The leaders of the firms of the Future will not only have to run their current engine—as efficiently as possible, but also create new avenues—tomorrow’s engine—that aligns with dynamic client needs, new competitors and new global economics.

Working for a firm of the future will be very different. Many times, it will feel like an investment banking firm more focused on mission-critical roles. At other times, it will feel like a professional services firm, with its ability to rapidly mobilise its resources. If anything is true of the last ten years in India, it’s that the mountains of change we’ve experienced which have left a big mark on the way corporates do business. Accounting firms have seen notable shifts in how they operate and deliver services.

Various elements are impacting the future age firms:

1: Global resourcing

Global resourcing allows accounting firms to access specialised expertise and talent without local or even national talent constraints and provide better service to their clients. By leveraging global talent, firms can increase efficiency and provide more innovative services to their clients.

2: New service offerings and delivery models

Clients now have new needs and firms have to continuously upgrade their skills and talents to stay competitive and adapt to new models of delivering better and more efficient services. Changes will be seen in the near future as to how firms provide their various advisory services, technology consultancy, data analytics, and other value-added services. Firms may also witness changes in their pricing models.

3: Specialization

Steve Jobs was known for saying, “Do not try to do everything. Do one thing well.” Professional firms will also need to adopt this approach whereby they specialise by industry, region, service, and other niches to secure a competitive advantage over their competitors.

4: Client experience

A stronger client-centric approach that focuses onmeeting every client’s unique needs is the path forward for the firms now. Firms might have to increase their team sizes and skills in the area of client relationships and experience.

5: Work-life balance

With parts of the world experimenting with 4-day work weeks, Firms need to understand their human resources capacity, have transparent agreements with staff, and be able to distribute work in a more balanced manner.

6: Partnership and collaboration

Markets are changing with clients expecting inputs for strategic vision, forward-thinking opinions, thought-provoking solutions and more. It will be difficult for firms to meet these needs. Your clients’ needs will continue evolving, and you must stay relevant. You will have to remember that you cannot do everything by yourself and will have to find partners who can help you solve problems for your clients that you can’t.

The firms in denial about the need for change should examine the following six characteristics:1. Partner / manager comfort zones; 2. Artificial harmony; 3. Overconfidence; 4. Herding instinct; 5. Banking on good intentions; 6. Vested anchoring.

To be on the growth path and lead the professional career with confidence and success, I am providing various questions which Practitioners should plan to address:

– Have you defined who you are, in terms of clients or industries served, services offered and specialities? Also, define who you are not.

– Have you reviewed your list of clients to verify that only “ideal client” are being on boarded?

– Of the services listed on your profiles/website, which ones represent areas in which you have critical clients? In which are you truly differentiator, so much so that you distinguish yourself in the marketplace?

– Any work you transitioned out of your firm because it does not fit your long-term strategy or skills requirements?

– Are you aware of the services of your firm that will continue to have reduced profitability because they offer no real competitive advantage?

– Does your services produce data and information but create no real value?

– Are your team members specifically aligned with your areas of focus so that they quickly grow?

– Do you hold partners accountable for your core strategies? Are they working towards a common goal that is in the firm’s best long-term interest or working to meet individual goals?

In the professional services industry, technology has accelerated the pace of change and enabled faster, more flexible service delivery. Firms of the future will have to embrace the change in every aspect from enhanced client experiences and leveraging technology for efficiency to building a more balanced workplace and innovating around service offerings, which will be critical for firms to adapt if they want to stay competitive and grow. Otherwise, experts predict that by 2025, firms that remain loyal to old ways of working will likely have fallen by the wayside

Leadership Retreat

Our Society organised the Leadership Camp at the Deolali Military Camp area at The Leslie Sawhney Training Centre on “Empowering Relationship”. The major takeaway for me was the 4A principle to resolve various professional and personal conflicts. Avoidance, Acceptance, Analysis and Activation. I would recommend members to look forward to more such events by the Human Resource Development Committee.

57th Residential Refresher Course (RRC)

Our Society just witnessed a remarkable 57th RRC on the theme of “Back to Roots”, which had a traditional flavour with new energies. The nostalgic 18+ RRC’s held earlier at the same location were remembered by our various Past Presidents sharing their views on the concept of RRC. Intense Group and Panel discussions, and the Presentation Papers set the academics rolling. This RRC also set the flavour of the future, with around 50% of participants being youth, bringing new energies and enthusiasm through various ice-breaking activities and team building games, treasure hunts in the midst of mountains of Mahabaleshwar, discussion of global opportunities and much more. I have shared my thoughts on how to be future-ready for professionals with just one desire: we have to be in control of our journey as a professional. I would like to conclude with a relevant quote from Manu Smriti, which is apt for attaining happiness:

सर्वंपरवशंदुःखंसर्वमात्मवशंसुखम्।

एतद्विद्यात्समासेनलक्षणंसुखदुःखयोः॥

Everything that is in another’s control is painful. All that is in self-control is happiness.

 

Best Regards,

Chirag Doshi

President

Section 43B (h) – Kahin Khushi Kahin Gham

Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian economy. The share of MSME Gross Value Added (GVA) in the all-India Gross Domestic Product (GDP) during the years 2019–20, 2020–21 and 2021–22 was 30.5 per cent, 27.2 per cent and 29.2 per cent, respectively. The share of MSME manufacturing output in all India Manufacturing output during the years 2019–20, 2020–21 and 2021–22 was 36.6 per cent, 36.9 per cent and 36.2 per cent, respectively. The share of export of MSME-specified products in all India exports during the years 2020–21, 2021–22 and 2022–23 was 49.4 per cent, 45.0 per cent and 43.6 per cent respectively.1 As of 2nd August, 2023, the total number of persons employed by MSMEs was over 123.6 million people.

1      https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1946375

This shows the importance of the MSME sector in the development of the Indian economy. The government is aware of these facts and hence, has offered a slew of incentives and launched several schemes to help, protect and promote the interests of MSMEs. The schemes / programmes inter alia include the Prime Minister’s Employment Generation Programme (PMEGP), the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE), the Micro and Small Enterprises-Cluster Development Programme (MSE-CDP), the Entrepreneurship Skill Development Programme (ESDP), the Procurement and Marketing Support Scheme (PMS) and the National SC/ST Hub (NSSH).

 

However, despite these schemes, the challenges faced by this sector are humungous. Some of the major challenges faced by MSMEs are a constraint of resources in terms of finance, human resources, technology and so on. If only these challenges are addressed, the share of MSMEs in the GDP of the Indian economy can be increased up to 50 per cent from the present 30 per cent or so. One of the advantages of the MSME sector is that it is labour-intensive and generates employment, which can be seen from the above mentioned figures. A cash-rich company is King in any industry, more so for the MSME sector. With the objective of helping Micro and Small Enterprises (Medium Enterprises are excluded) expedite their collections and improve their cash flows, a new clause (h) was introduced in section 43B of the Income-tax Act, 1961, w.e.f. 1st April, 2024. Accordingly, any payment outstanding at the year-end (e.g., 31st March, 2024) and paid beyond the due date prescribed under section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED) is to be allowed as a deduction only in the year of payment. Section 15 of the MSMED Act provides the due date of payment as per the terms of the agreement or 45 days from the date of acceptance or deemed acceptance, whichever is earlier and within 15 days from the date of acceptance or deemed acceptance where there is no agreement2. These timelines are applicable across the board without any exceptions. Thus, payments made by one MSME to another Micro or Small Enterprise would also be subject to provisions of section 43B(h). Industries and businesses have not received these provisions requiring adherence to stringent timelines well for various reasons. The normal payment cycle is six months in some industries, e.g., textiles. Even FEMA provides nine months to realise export proceeds. Ninety days is the normally accepted period for the settlement of dues in various industries. Thus, 45 days is perceived to be too short a period for the settlement of dues of MSMEs.

2      Please refer to the separate Article in this issue of the Journal for the criteria for determining MSME, important provisions under the MSMED Act, 2006 and various issues arising from the amendment of section 43B of the Income-tax Act, 1961.

 

The Memorandum explaining the Finance Bill 2023 justifies the insertion of clause (h) in section 43B as a part of the Socio-Economic Welfare Measures. It states, “To promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.” The proviso to section 43B of the Income-tax Act, 1961, allows deduction on an accrual basis for various items if the amount is paid by the due date of furnishing of the return of income — this exclusion does not apply to micro and small enterprise dues. The reason for this provision seems to be to not grant time beyond what is prescribed under the MSMED Act. Whereas MSMEs should be happy with this provision, some also fear the loss of contracts from big companies, unless they deregister as MSMEs. The protection is available only to an MSME that qualifies as a “supplier” under section 15 of the MSMED Act. A “supplier”, as per section 2(n) of the MSMED Act, is that Micro and Small Enterprise which has filed a memorandum with authority referred to in section 8(1) (i.e., Udyam Registration). Thus, Udhyam Registration is a must to get protection under section 43B(h) of the Income-tax Act, 1961.

Another taxing issue for the tax auditor is to report such disallowances in Form 3CD. It will be extremely difficult to obtain information about the status of all suppliers in a large corporation. This is an additional burden on otherwise stretched tax auditors. Auditors will have to rely on the declarations filed by the MSMEs or representations made by the client. Detailed guidance from the ICAI will be useful to auditors. ICAI should consider how much responsibility be cast on tax auditors, and some portions of the tax audit report should be in the form of declarations / representations by the clients instead of certification of each and every figure by a tax auditor in Form 3CD. Micro and small enterprises should mention their Udyog Registration Number on their invoices, and the buyer or recipient of services should obtain a copy of such certificate on record.

In conclusion, the insertion of clause (h) in section 43B is with good intentions; however, considering varied practices across the industries, the proviso to section 43B, as applicable to other payments, should also be extended to Micro and Small Enterprises, allowing deduction of payments made before the due date of filing of the return. As demanded by various trade associations, the provisions may be deferred by one year so that sufficient time period is available for businesses to align with these provisions.

An amendment of this nature that significantly impacts businesses should be carried out only after consultation with stakeholders.

Election is around the corner, so we do not have a full-fledged budget this year. We await the full budget to be presented by the newly elected Government.

 

Warm Regards,

Mayur Nayak,
Editor

कर्मण्येवाधिकारस्ते मा फलेषु कदाचन | समत्वं योग उच्यते ………..| योग: कर्मसु कौशलम् …|

All the three lines are often quoted like proverbs. All the three lines are from the second chapter of Shreemad– Bhagawad Geeta. The text is as follows:

कर्मण्येवाधिकारस्तेमाफलेषुकदाचन l
माकर्मफलहेतुर्भूर्मातेसङ्गोऽस्त्वकर्मणि l l२.४७ ।।

योगस्थःकुरुकर्माणिसङ्गंत्यक्त्वाधनञ्जय।
सिद्ध्यसिद्ध्योःसमोभूत्वासमत्वंयोगउच्यते ।।२.४८।।

बुद्धियुक्तोजहातीहउभेसुकृतदुष्कृते।
तस्माद्योगाययुज्यस्वयोगःकर्मसुकौशलम्।।२.५० ।।

The word ‘yoga’ is derived from the Sanskrit root yuj (युज्). It means to join or to get connected. Yoga, in simple terms, means to get ourselves connected with God. Get ‘Atman’ (self) connected with ‘Super Atman’ (परमात्मा). This is in all religions / prayers are meant for achieving this goal. The word ‘yoga’ appears very frequently in Geeta. All chapters in the Shreemad-Bhagawad Geeta are also named as some ‘yoga’, e.g., Karma yoga and Bhakti yoga.

The literal meaning of each shloka is as follows:

2.47 – Only performing your duty (work, karma) is in your hands, not its fruit. Therefore, do not do any work to get a particular fruit since it is in God’s hands. At the same time, do not abstain yourself from doing your karma. Never think of stopping your work.

2.48 – Oh. Dhananjay (Arjun), keep doing your duty without attaching to the result or fruit. Be a real yogi (detached). Don’t get excited by success nor get nervous or depressed by failure. This equality of attitude towards success or failure is called ‘yoga’.

2.50 – Such a yogi gets detached from the sin or good work (पुण्य) – bliss – during his life itself. Keep on making efforts to achieve this detachment (yoga). Working without getting attached to the result is the ‘skill’ in the work.

Explanation
People often ask, “If we don’t’ work for success, why work at all?” The true implication is that one should certainly work for success, but success is not in one’s hands. You have no control over it. At the same time, the chances of God giving you success are better only if you do the work sincerely and honestly.

Take our familiar example of appearing for the CA examination! No need to elaborate on it. A doctor should perform surgery for success only; but keeping in mind that the result is not within his hands. This principle applies everywhere — war, sports, research, elections, singing, cooking, scientific activity and so on. Our India’s first Chandrayaan mission failed, but our scientists made it successful the next time. Had they become nervous, no success would have been possible. You can experience this in every walk of life. We CAs argue our case or appeal; but we have no control over the result. Still, we need to keep on fighting. Shrikrishna says, being the God Himself, He has everything within. Still, He needs to keep on doing some work or the other continuously. One cannot remain a single minute without work. If He stops working, everybody will give up work. Since He is the ‘leader’. If all stop working, it is a dangerous situation.

The next two shlokas are more or less an extension of this principle. Bhagwan recommends that everybody should strive to be a yogi – i.e., continuously working without getting attached. A mother rears the child by doing literally anything and everything. If the child is sick,she should attempt to cure him, but she should not expect anything beyond that, e.g. she should not keep on thinking that when the child grows up, he or she will reciprocate by taking care of the mother. A mother’s behaviour is a classic example of karma yoga.

समत्वंयोगउच्यते – Samatva does not mean ‘equality’ in the society as we presently understand. Here, it refers to equality of attitude towards success and failure. Similarly, inयोगःकर्मसुकौशलम्।Kaushalam does not mean merely the skill or dexterity; but the skill in the attitude of ‘not getting attached’.

Therefore, friends, let us try to be yogis int his sense.

Society News

LEARNING EVENTS AT BCAS

1. A three-day Mega Conference “R७ima५ine” was held from 4th January to 6th January, 2024 at Jio World Convention Centre, Mumbai.

We take pride in informing you that “R७ima५ine”, organised by the BCAS to celebrate its 75th year, received a thumping response; 1,000+ delegates from 75 Cities attended the event. R७ima५ine was, without a doubt, the biggest and most ambitious event hosted by BCAS in its illustrious history — an exuberant recognition of resilience, growth and the indomitable spirit of the accounting community, guided by over 40 thought leaders from different fields. The event was highly appreciated and acclaimed in the profession and garnered deserving coverage in the press.

For accessing the press coverage,

click here – https://bit.ly/496wOyV

On this occasion, BCAS also received a note of appreciation from the Hon’ble Prime Minister of India recognising the Society’s seven-and-a-half-decade committed service to the nation. The said commendation can be accessed at https://bit.ly/3SBhZhM

A detailed report on “R७ima५ine” is also given in this issue on page no: 11.

2. International Economics Study Group organised a meeting “Israel Palestine Conflict-Issues & Implications” on 19th December, 2023 in an Online Mode.

Group Leaders CA Deepak Karanth and CA K. K. Pahuja shared their practical insights regarding the Israel-Palestine conflict. The discussion on the war, spanning over 75 years with six wars and two uprisings, followed the intricacies of the conflict and noted that it is linked to the Middle East’s complex geopolitics, and that similar to the Russia-Ukraine conflict, involving powerful nations, its escalation could destabilise the global economy, impacting India and the world.

CA Deepak Karanth presented Israel’s perspective, while CA K. K. Pahuja highlighted Palestine’s suffering, revealing dire conditions in Gaza with a 50 per cent unemployment rate, widespread poverty, and a food security crisis. As tensions rise, targeting the US to draw it back into the Middle East may lead to further escalation, leaving the world on edge, uncertain if the US can prevent conflict escalation.

They further elaborated that the fate of the Israel-Palestine conflict is intertwined with global stability and the potential for repercussions that could resonate far beyond the borders of the Middle East, particularly for the economies of India and the world at large. The escalating tensions raise concerns about the fragility of the current state of affairs, akin to a powder keg waiting to explode.

3. Direct Tax Laws Study Circle organised a meeting “Financial Instrument Taxation” on 7th December, 2023 in an Online Mode.

The Group Leader CA Anup Shah shared a detailed analysis of financial instrument taxation, referring to specific sections and case laws to support his insights, showcasing a solid understanding of the topic. He further elaborated on the following:

1. Various trading segments.

2. Rates of taxation for listed and unlisted equity investments.

3. The requirement of audit of accounts as prescribed under section 44AB of the Income-tax Act, 1961 (Act).

4. The prescribed method of calculation of turnover in the case of speculative, derivatives and delivery based transactions.

5. The impact of section 44AD(4) read with section 44AD(1) along with a reference to the recently added proviso.

6. The tax treatment as per the Act of:

a. Shares and securities held as assets vs. stock-in-trade with reference to the CBDT Circular 6/2016, dated 29th February, 2016.

b. On the conversion of shares held as capital assets into stock-in-trade with reference to certain case laws.

c. In the case of the issue of shares in a company in which the public is not substantially interested as per section 56(2)(viib) of the Act.

d. In the case of the receipt of ESOPs.

e. Debt instruments, buyback of shares, and crypto assets.

The meeting was interactive and various issues were deliberated upon by the participants.

Miscellanea

1. BUSINESS

RBI not thinking of moving towards de-dollarisation: Governor

Reserve Bank of India (RBI) Governor Shaktikanta Das said that it is incorrect to say that there was a move towards de-dollarisation as the efforts of the central bank towards internationalisation of the rupee are not aimed at replacing the dollar.

“There is no such thinking to move towards de-dollarisation. The dollar will continue to be the dominant currency and whatever we are doing for the internationalization of the rupee, it is not to replace the dollar,” Das said at the World Economic Forum (WEF) Annual Meeting 2024 in Davos late on Tuesday.

India’s economy is expanding, with an increasing role in international trade. Gradually and steadily, India has entered new markets, countries, and products, particularly in services.

The objective is to offer the rupee as an alternative currency for settling transactions in international trade. It is incorrect to describe the internationalisation of the rupee as an effort towards de-dollarisation.

“Dependence on one currency can be risky as the entire global trade will be subject to the volatility of that particular currency,” he added.

Das said that the RBI has managed to achieve currency stability, making it ideal for overseas companies to invest in India and domestic companies to tap capital markets abroad.

Inflation in India is moderating and steadily approaching the central bank’s 4 per cent target while growth prospects remain robust, the RBI Governor noted.

Das also said that cryptocurrencies pose a huge risk, particularly for emerging market economies because they can impact your financial stability, currency stability, and monetary system.

“Cryptocurrency as a product is highly speculative, and my opinion and Reserve Bank’s opinion is that considering the big risk around it, I think countries like India should be very careful,” he added.

(Source: International Business Times — By IBT desk — 17th January, 2024)

 

2. TECHNOLOGY

PLI scheme to help India create a complete mobile supply chain in the next 3 years: Samsung

India will establish a complete supply chain for mobile production in the next three years driven by the production-linked incentive (PLI) scheme, just like China built its global supply chain years ago, and then, the growth will truly be led by the industry, Samsung India President and CEO J.B. Park said on 18th January, 2024.

In 2021, the Indian government had announced an outlay of R1.97 lakh crore for the PLI schemes for 13 key sectors, including mobile manufacturing.

The minimum production in India as a result of PLI schemes is expected to be over $500 billion in 5 years. Of the $101 billion electronics production in FY23, smart phones constituted $44 billion.

According to the government, the PLI scheme for smart phone manufacturing has resulted in local value addition of 20 per cent within a span of two-three years.

According to Park, the country still has about three years to further boost mobile exports from the country
and enable several brands to be eligible for the PLI scheme.

“This kind of policy that the government has given to the brands to come and build not only for domestic usage but also for exports, these kinds of incentives are very important to pivot the target that needs to be achieved,” Park told reporters here.

He said that in the next three years, “a complete mobile supply chain will be established in India”, just like China built its global supply chain years ago.

“After three years when all of the sub-supplier supply chains are established, I think the growth engine will be industry-led instead of government policy-led. It is the actual development that occurs with such initiatives,” Park noted.

The PLI scheme has attracted over ₹1.03 lakh crore of investment (till November 2023), according to the Ministry of Commerce and Industry.

The biggest impact of the PLI scheme is seen in mobile phone manufacturing as PLI beneficiaries, which account for about 20 per cent of the market share, contributed to about 82 per cent of mobile phone exports during FY 2022–23.

“Production of mobile phones increased by more than 125 per cent and export of mobile phones increased around 4 times since FY 2020–21,” according to the ministry. Manufacturing of various electronic components like batteries, chargers, printed circuit boards, camera modules, passive components and certain mechanics have been localised in the country.

Green shoots in the component ecosystem have emerged with large companies such as Tatas entering component manufacturing. The PLI scheme has made Indian manufacturers globally competitive, attracted investment in the areas of core competency and cutting-edge technology; ensured efficiencies; created economies of scale; enhanced exports, and made India an integral part of the global value chain.

According to Park, India has around 250 million feature phone users and they will eventually migrate to smart phones and, in five to 10 years of AI time-frame, they will again upgrade to the next level of device.

“More than 650 million smart phone base will start to increase as we will see more shifts of feature phone users happening to smart phones in India,” he said.

With the new Galaxy S24 series, Samsung has heralded the ‘AI phone’ era and AI-driven features will need to go local in order to address the needs of the masses.

“With brilliant engineers in India, we are already making the experiences local for our consumers. We will develop more local use cases adaptive to the users with AI,” said Park.

(Source: International Business Times — By IBT Technology desk — 18th January, 2024)

 

3. SCIENCE

Intermittent fasting may help slow brain ageing, boost longevity

If you want to help slow down your brain from ageing and increase your lifespan then follow diet patterns like intermittent fasting or restrict your calorie intake, suggests a study, led by researchers, one being of Indian origin.

A team of scientists at the Buck Institute for ‘Research on Ageing’ in California have found a role for a gene called OXR1 that is necessary for the lifespan extension seen with dietary restriction and is essential for healthy brain ageing.

OXR1 gene is an important brain resilience factor protecting against ageing and neurological diseases, said the researchers in the study, published in the journal Nature Communications.

“When people restrict the amount of food that they eat, they typically think it might affect their digestive tract or fat buildup, but not necessarily about how it affects the brain,” said Kenneth Wilson, a postdoctoral student at the Institute.

“As it turns out, this is a gene that is important in the brain.”

The team additionally demonstrated a detailed cellular mechanism of how dietary restriction can delay ageing and slow the progression of neurodegenerative diseases.

The study, done in fruit flies and human cells, also identifies potential therapeutic targets to slow ageing and age-related neurodegenerative diseases.

“We found a neuron-specific response that mediates the neuroprotection of dietary restriction,” said Professor Pankaj Kapahi from Buck Institute.

“Strategies such as intermittent fasting or caloric restriction, which limit nutrients, may enhance levels of this gene to mediate its protective effects,” he added.

The team began by scanning about 200 strains of flies with different genetic backgrounds. The flies were raised with two different diets, either with a normal diet or with dietary restriction, which was only 10 per cent of normal nutrition.

They found the loss of OXR1 in humans results in severe neurological defects and premature death. In mice, extra OXR1 improves survival in a model of amyotrophic lateral sclerosis (ALS).

Further, a series of in-depth tests found that OXR1 affects a complex called the retromer, which is a set of proteins necessary for recycling cellular proteins and lipids.

Retromer dysfunction has been associated with age-related neurodegenerative diseases that are protected by dietary restriction, specifically Alzheimer’s and Parkinson’s diseases.

The team found that OXR1 preserves retromer function and is necessary for neuronal function, healthy brain ageing, and lifespan extension seen with dietary restriction.

“Diet is influencing this gene. By eating less, you are actually enhancing this mechanism of proteins being sorted properly in your cells, because your cells are enhancing the expression of OXR1,” said Wilson.

(Source: International Business Times — By IBT desk — 16th January, 2024)

Statistically Speaking

Regulatory Referencer

I. SEBI

1. Extension of the deadline for implementation of new SCORES norms to April 2024: Earlier, SEBI had notified norms for the redressal of investor grievances through the SEBI Complaint Redressal (SCORES) Platform and linking it to the Online Dispute Resolution platform. As per the said circular, the new norms were to be implemented from 4th December, 2023. However, SEBI has now extended the date of implementation to 1st April, 2024. [Notification No. SEBI/HO/OIAE/IGRD/CIR/P/2023/18, dated 1st December, 2023]

2. Revised framework for computation of Net Distributable Cash Flow by REITs and INVITs: In order to promote ease of doing business, SEBI has decided to standardise the framework for the calculation of available Net Distributable Cash Flows (NDCF). Accordingly, the revised framework for computation of NDCF by REITs, INVITs, and its Holding companies / SPVs shall be as per the computation formula provided in the circulars. Further, any restricted cash should not be considered for NDCF computation by the SPV, REITs or InvITs. The revised framework shall be applicable from 1st April, 2024. [Circular No. SEBI/HO/DDHS/DDHS-POD/P/CIR/2023/184 & 185, dated 6th December, 2023]

3. Procedures for dematerialisation / crediting of units by AIFs when investors have not provided dematerialisation account details: SEBI had earlier mandated AIFs to dematerialise units within a specified timeframe. SEBI has now provided guidelines for dematerialising / crediting units in cases where investors haven’t provided demat account details. As per the said circular, the AIF managers shall continue to reach out to existing investors to obtain demat account information. Additionally, provisions for a separate demat account named “Aggregate Escrow Demat Account” have also been introduced. [Circular No. SEBI/HO/AFD/POD1/CIR/2023/186, dated 11th December, 2023]

4. Revision of framework requiring Stock Brokers / Clearing Members to upstream clients’ funds to Clearing Corporations: Earlier, SEBI issued a framework requiring Stock Brokers (SBs) / Clearing Members (CMs) to upstream (i.e., placed with) clients’ funds to Clearing Corporations (CCs). Later, representations have been received citing difficulties in implementation. Now, SEBI has issued a revised framework for the same. The bank instruments provided by clients as collateral cannot be upstreamed to CCs, and they shall be ineligible to be accepted as collateral in any segment of the securities market. [Circular No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/187, dated 12th December, 2023]

5. Accreditation Agencies, which are also KRAs, can now access KYC docs of applicants available with them: Earlier, SEBI vide circular dated 26th August, 2021, issued a framework for accreditation of investors by Accreditation Agencies. Now, SEBI has decided to simplify the requirements for grant of accreditation to investors. Accreditation Agencies, which are also KYC Registration Agencies (KRAs), may access Know Your Customer (KYC) documents of applicants available with them in the capacity of KRA and may also access the same from the database of other KRAs, for the purpose of accreditation. [Circular No. SEBI/HO/AFD/POD1/CIR/2023/ 189, dated 18th December, 2023]

6. Amendment of guidelines for online resolution of disputes in the Indian securities market: Earlier, the SEBI vide circular dated 11th August, 2023, had consolidated the norms relating to the guidelines for online resolution of disputes in the Indian securities market. Pursuant to feedback received for providing clarity on certain aspects, SEBI has notified various additions and amendments. It has been now decided that the seat and venue of mediation, conciliation and / or arbitration shall be in India and can be conducted online. Further, various other changes were notified too. [Circular No. SEBI/HO/OIAE/OIAE_IAD-3/P/CIR/2023/191, dated 20th December, 2023]

7. Trading Members (TMs) allowed to settle client accounts on Fridays and / or Saturdays, offering flexibility and easing operations: SEBI has decided to accept the recommendation of the Broker’s Industry Standards Forum (ISF) to settle the running account of clients on Friday and / or Saturday, which streamlines the process of settlement and ensures ease of doing business for various stakeholders viz., stock brokers and banks, while at the same time safeguarding the interests of the investors by ensuring error-free settlement. Accordingly, SEBI has made key changes in the Master Circular Dated 17th May, 2023. [Circular No. SEBI/HO/MIRSD/MIRSD-POD1/P/CIR/2023/197, dated 28th December, 2023]

8. Extension of timeline for nomination in demat accounts and mutual funds to 30th June, 2024: Earlier, SEBI had extended the deadline for submitting the ‘choice of nomination’ for demat accounts and mutual fund folios to 31st December, 2023. However, in response to representations from market participants and in an effort to enhance compliance ease and investor convenience, the deadline for submitting the ‘choice of nomination’ for demat accounts and mutual fund folios has been further extended to 30th June, 2024. [Circular No. SEBI/HO/MIRSD/POD-1/P/CIR/2023/193, dated 27th December, 2023]

 

II. DIRECT TAX: SPOTLIGHT

1. Guidelines under 194O(4) of the Income-tax Act,1961 —

Circular No. 20 of 2023 dated

28th December, 2023:

In continuation to circular no. 17 of 2020 dated 29th September, 2020, and circular no. 20 of 2021 dated 25th November, 2021, CBDT has issued further guidelines to remove the difficulties in implementation of section 194O.

2. Form ITR-1 SAHAJ and Form ITR-4 SUGAM notified for A.Y. 2024–25 — Income-tax (Thirtieth Amendment) Rules, 2023 — NotificatIoN No. 105/ 2023 dated 22nd December, 2023.

III. FEMA AND IFSCA REGULATIONS

1. FEMA Notification on “Manner of Receipt and Payment” revised:

FEMA Notification No. 14(R)/2016-RB dated 2nd May, 2016, on “Manner of Receipt and Payment” has been replaced and superseded by FEMA Notification 14(R)/2023-RB dated 21st December, 2023. It seems to be an attempt to bring simplification and clarity in line with the internationalisation of the Rupee. It has been clarified that trade transactions can now be in Indian Rupees or any foreign currency. Provisions regarding special cases have been removed considering INR payments and receipts are now allowed. It should be noted that the new notification uses the term “foreign currency” in place of “freely convertible foreign currency”. [Notification No. FEMA 14(R)/2023-RB dated 21st December, 2023]

2. Overhaul of Master Direction on Risk Management and Inter-Bank Dealings:

The present framework for hedging of foreign exchange risks was after a comprehensive review and public consultation undertaken in 2020. RBI has further reviewed them now based on feedback received from market participants and experience gained since the revised framework came into force. A new Master Direction on “Risk Management and Inter-Bank Dealings” has been issued and will come into effect on 5th April, 2024. The regulatory framework governing the hedging of foreign exchange risks has been made more comprehensive by consolidating the directions in respect of all types of transactions — over-the-counter (OTC) and exchange traded. Further, the Directions contained in the Currency Futures (Reserve Bank) Directions, 2008, and Exchange Traded Currency Options (Reserve Bank) Directions, 2010, are also now incorporated in the same Master Direction. [A.P. (DIR Series) Circular No. 13 dated 5th January, 2024]

3. Taxation, Accounting, Book-Keeping and Financial Crime Compliance Services Notified as ‘Financial Services’ under the IFSCA:

The Finance Ministry has expanded the kind of services that Units in an International Finance Services Centre can be provided by notifying book-keeping services, accounting services, taxation services and financial crime compliance services as ‘financial services’ under the IFSC Authority Act, 2019. Such financial services shall be offered by units in an IFSC only to non-residents (as per FEMA) whose businesses are not set up either by splitting up or reconstructing or reorganising businesses already in existence in India. Such Units shall also not offer services by either transferring or receiving existing contracts or work arrangements from their Indian group entities. Financial crime compliance services shall include services rendered in relation to compliances of Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) measures and Financial Action Task Force (FATF) recommendations, and other related activities. [Notification No. S.O. 291(E) dated 18th January, 2024]

Allied Laws

45 IFFCO Tokio General Insurance Co. Ltd vs. Geeta Devi and others

AIR 2023 Supreme Court 5545

Date of Order: 30th October, 2023

Compensation — Right of recovery — Death due to negligent driving of employee — Fake driver’s license — Failure on the part of the insurance company to plea — Failure on the part of the insurance company to prove wilful breach of insurance policy by the insured — Insurance policy did not mandate to confirm every license with RTO authorities — Liable to compensate for damages. [S. 149, 168, Motor Vehicle Act, 1988].

FACTS

In 2010, Mr. Dharambir died in a road accident, when his motorcycle was hit by a truck driver who was driving negligently. Dependents (Respondents) of the deceased sought compensation from the insurance company of the truck (Petitioner). The Tribunal held that the insurance company was liable but later discovered that the driving license of the truck driver was fake. Thus, the Tribunal directed the Petitioner to deposit the awarded amount with the liberty to recover the same from the present owners of the truck. Aggrieved, the Petitioner approached the Hon’ble Delhi High Court. The Hon’ble High Court ruled that the insurance company couldn’t recover compensation from the current truck owner as the Petitioner neither pleaded nor proved that the insured (vehicle owner) did not take adequate steps to verify the genuineness of the driving licence and in the absence of such a plea on its part, it cannot be said that there was a breach of contract.

The Petitioner filed a Special Leave Petition before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that employers relying on a driver’s license from a seemingly competent authority cannot be expected to independently verify every license with the RTO authority. Further, the court observed that such a condition was not mandated in an insurance policy. The Hon’ble Supreme Court also observed that Petitioner failed to prove that there was a wilful breach of insurance policy on the part of the insured. The Court concluded that the insurance company lacked the right to recover compensation, given the absence of pleading and proof for a willful breach.

Thus, the decision of the Hon’ble Delhi High Court was upheld.

 

46 Prataap Snacks Ltd vs. Royal Marketing

AIR 2023 Madhya Pradesh 173

Date of Order: 28th July, 2023

Arbitration and Conciliation — Super-Stockiest agreement with provision for arbitration — Application for appointment of arbitrator -Instrument neither registered nor stamped — Cannot be considered as a contract — Application dismissed. [S. 7, 11(6), Arbitration and Conciliation Act, 1996; S. 35, Indian Stamps Act, 1899].

FACTS

The Petitioner, a registered company entered into a super-stockist agreement with the Respondent, a Telangana-based proprietor firm, appointing the proprietor firm as a non-exclusive distributor. The Petitioner alleged that despite purchasing materials from the Petitioner, the Respondent failed to pay the outstanding amount. The agreement included a provision for dispute resolution through discussion and subsequently through formal arbitration proceedings. The Petitioner proposed a retired High Court Judge as the sole arbitrator. With no response from the Respondent, the Petitioner filed an application before the court to seek a resolution.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Petitioner had not submitted the original or certified copy of the agreement. Furthermore, the photocopy of the agreement which was provided was unregistered and unstamped. Relying on the decision of the Hon’ble Supreme Court in the case of N.N. Global Mercantile Private Limited vs. Indo Unique Flame Ltd [(2023) SCC Online SC 495], the Hon’ble Madhya Pradesh High Court held that the instrument which attracts the stamp duty may contain an arbitration clause and if it is not stamped or insufficiently stamped, the same cannot be said to be a contract which could be enforced. It is further held that the arbitration agreement which attracts the stamp duty, if not stamped or insufficiently stamped cannot be acted upon given Section 35 of the Indian Stamps Act.

Thus, the Arbitration application was dismissed.

 

47 Sri Basavegowda vs. The State of Karnataka

Writ Petition No. 10872 of 2023 (Karnataka High Court at Bengaluru)

Date of Order: 20th December, 2023

Gratuity — Appointed as daily wage employee — Services regularised subsequently — Retirement after 42 years — Denied gratuity for the time spent as a non-regularised employee — Daily wage employee same as Regular employee – Entitled to full gratuity for services of 42 years. [S. 2(e), 14, Payment of Gratuity Act, 1972].

FACTS

The Petitioner, a septuagenarian, joined the services of a Government High School on 18th November, 1971, as a Group-D employee. The Petitioner had joined as a daily wage employee until his services were regularised on 1st January, 1990. He retired on 31st May, 2013, after serving for 42 years in the Government school. However, the gratuity entitlement during the period when the petitioner served as a daily wage worker was denied, with gratuity being granted only from the date of service regularization. Thus, he filed a writ petition before the Hon’ble Karnataka High Court.

HELD

The Hon’ble Karnataka High Court after interpreting section 2(e) and 14 of the Payment of Gratuity Act, 1972 held that a daily wage employee is within the definition of an employee. Thus, there is no distinction between a regular employee and a daily wage employee. The Hon’ble Karnataka High Court relied on the decisions of the Hon’ble Supreme Court in the case of Nagar Ayukt Nagar Nigam, Kanpur vs. Mujib Ullah Khan [(2019) 6 SCC 103] and Netram Sahu vs. State of Chhattisgarh [(2018) 5 SCC 430) and directed the Respondent to pay gratuity to the Petitioner for his entire period of service i.e. for 42 years along with interest.

The Petition was allowed.

 

48 Nitin Shambhukumar Kasliwal vs. Debt Recovery Tribunal

Writ Petition No. 26333 of 2023 (Karnataka High Court at Bengaluru)

Date of Order: 6th December, 2023

Impounding of Passport — Power is available only to Passport Authority or Constitutional Courts – Impounding by Debt Recovery Tribunal — No authority — Passport impounded to be immediately released. [S. 10, The Passport Act, 1967].

FACTS

On 16th April, 2015, the Hon’ble Debt Recovery Tribunal ordered impounding of the passport of the Petitioner following the initiation of a case against him by lender banks. The petitioner was granted temporary access to his passport whenever he travelled abroad for business purposes, subject to the submission of a duly filed application and appropriate travel itineraries. On 2nd December, 2016, the Petitioner sought the release of his passport as he had to renew it before its validity expired. However, his application was rejected. The Petitioner, thus, filed an application under Articles 226 and 227 of the Constitution before the Hon’ble Karnataka High Court (Bengaluru Bench) seeking an order instructing the Hon’ble Debt Recovery Tribunal (Respondent) to release the petitioner’s passport for passport renewal.

HELD

The Hon’ble Karnataka High Court after referring to the decision of the Hon’ble Supreme Court in the case of Suresh Nanda vs. CBI [(2008) 3 SCC 674] held that as per section 10 of the Passport Act, 1967, only the Passport Authority of India has the powers to impound or seize a passport of a citizen. The Debt Recovery Tribunal had no power to order the impounding of the passport. The Hon’ble Karnataka High Court also observed that neither the police nor the courts (other than constitutional courts) have the power to seize or impound the passports of citizens. Thus, the Hon’ble Court ordered the release of the passport by the Respondent.

The Petition was allowed.

 

49 Amol Vaman Tilve vs. Goa State Information Commission and others

AIR 2023 Bombay 382

Date of Order: 21st September, 2023

Right to Information — Failure to provide information within statutory timeline — First Appeal – Directed to provide information — Failure to provide information — Second Appeal — Directed to provide information and awarded cost — Petition before High Court — Consistently failed to provide information — Penalty justified. [S. 4, 20, Right to Information Act, 2005].

FACTS

Respondent had filed an application seeking information under provisions of the Right to Information Act, 2005. However, the Petitioner failed to provide the relevant information within the prescribed timeline. The Respondent instituted the first appeal after her application was deemed to have been rejected. In the first appeal, the Petitioner was directed to give the information as per the said application. However, despite directions, the Petitioner did not bother to provide the information. The Respondent, thus, filed a second appeal to the Global State Information Commission (GSIC). The Ld. GSIC allowed the appeal in favour of Respondent and imposed a penalty on the Petitioner. The Petitioner challenged this order before the Hon’ble Bombay High Court (Goa Bench) by invoking provisions of articles 226 and 227 of the Constitution.

HELD

The Hon’ble Bombay High Court held that the Petitioner had consistently failed to perform its statutory duties. The Hon’ble court further held that various allegations put forth by the Petitioner such as Respondent acting under mala-fide intentions were vague and baseless. Furthermore, the Court observed that the Petitioner was seeking excuses of the corona virus and nationwide lockdown in March 2020, which were not acceptable. Thus, the Hon’ble Bombay High Court upheld the order of the GSIC and directed the Petitioner to pay the penalty ordered by the Ld. GSIC.

The Petition was dismissed.

Shares ~ Nominee Vs. Will: And The Winner Is……?

INTRODUCTION

Problems of inheritance and succession are inevitable especially in a country like India where many businesses are still family owned or controlled. Many times bitter succession battles have destroyed otherwise well established businesses.

A Will is the last wish of a deceased individual and it determines how his estate and assets are to be distributed. However, in several cases, the deceased has not only made a Will, but he has also made a nomination in respect of several of his assets.

Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository / demat accounts, mutual funds, Government bonds / securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death. SEBI has made it mandatory for all investors to compulsorily opt for nomination in demat accounts or expressly opt out of the same. The deadline for the same was 31st December, 2023, and those for holders who did not nominate or opt out of nomination by 31st December, 2023, their demat account were frozen.

A question which often arises is which is superior — the Will or the nomination made by the deceased owner. While the position was quite clear that a nominee was not superior to the legal heirs / a Will, a judgment rendered in the context of shares in a company had taken a contrary view. The Supreme Court in Shakti Yezdani vs. Jayanand Jayant Salgaonkar, Civil Appeal No. 7107 of 2017, Order Dated 14th December, 2023, has settled the matter once and for all!

EFFECT OF NOMINATION

The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face with whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc. and the nominee.

The nomination seeks to avoid any confusion in cases where the Will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.

WHICH IS SUPERIOR?

A nomination continues only up to and until such time as the Will is executed. No sooner the Will is executed, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is for all purposes a trustee of the property. He cannot claim precedence over the legatees mentioned in the Will and take the bequests which the legatees are entitled to under the Will.

The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), had an occasion to examine this issue in the context of a nomination under a life insurance policy. The Court held, in the context of the Insurance Act, 1938, that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.

The Supreme Court, once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), examined the effect of a nomination in respect of a National Savings Certificates. The Court examined the National Savings Certificate Act and various other provisions and held that the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest.

Again, in Shipra Sengupta vs. Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.

The Supreme Court again reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299.

In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee.

The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646 of 2006(SC). The Court held that the possession of the flat must be handed over by the society immediately to the nominee till such time as the succession issue (under a Will or intestate) is legally settled.

Thus, the legal position in this respect is very clear. Nomination is only a legal relationship and not a permanent transfer of interest in favour of the nominee. If the nominee claims ownership of an asset, the beneficiary under the Will can bring a suit against him and reclaim his rightful ownership.

FOR SHARES AND DEMAT ACCOUNTS — IS NOMINEE SUPERIOR?

S.109A of the Companies Act, 1956, was added by the Amendment Act of 1999. S.109A provided that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder / debenture holder, prevail over any law or any testamentary disposition, i.e., a Will. Thus, in case of shares or debentures in a company, the nominee on the death of the shareholder / debenture holder, becomes entitled to all the rights to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. In case the nominee is a minor, then the shareholder/debenture holder can appoint some other person who would be entitled to receive the shares/debentures, if the nominee dies during his minority. This position continues under the Companies Act, 2013 in the form of s.72 of this Act read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014. A similar position is contained in Bye Law 9.11 made under the Depositories Act, 1996 which deals with nomination for securities held in a dematerialised format.

A Single Judge of the Bombay High Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. Interpreting Section 109A of the Companies Act, 1956 and the Depositories Act, the Court ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s Will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the Will. The High Court ruled that securities automatically get transferred in the name of the nominee upon the death of the holder of shares. The nominee is required to follow the prescribed procedure in the Business Rules. Upon the death of the holder of shares the nominee would be entitled to elect to be registered as a beneficiary owner by notifying the depository participant along with a certified copy of the death certificate. The bank would be required to scrutinize the election and nomination of the nominee registered with it. Such nomination carries effect notwithstanding anything contained in a Testamentary Disposition (i.e. Wills) or nominations made under any other law dealing with Securities. The last of the many nominations would be valid.

The Court referred to the use of the word “vest” in the provisions of Section 109A of the Companies Act, 1956, which the court interpreted as giving ownership rights and not just custody rights as is the case for an insurance policy or shares of a housing society. The Bombay High Court distinguished the Supreme Court’s judgment in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC) citing a difference in the language of the applicable law. Section 109A of the Companies Act, 1956 provided that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent under s.109A of the Companies Act, 1956 and Bye Law 9.11 made under the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone. A similar view was also endorsed by a Single Judge of the Delhi High Court in the case of Dayagen P Ltd vs. Rajendra Dorian Punj, 151 Comp. Cases 92 (Del).

A TWIST IN THE TALE?

Another Single Judge of the Bombay High Court, had an occasion to consider the above provisions of the Companies Act and the earlier decision of the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014 decided on 31st March, 2015. The Bombay High Court after an exhaustive study of all the Supreme Court and Bombay High Court decisions on the subject of superiority of Will / legal heirs over nomination, concluded as follows:

a) The earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay High Court decisions.

b) It wrongly distinguished the Supreme Court’s decision in the case of Sarbati Devi vs. Usha Devi whereas the reality was that the ratio of that decision was applicable even under the Companies Act, 1956.

c) Neither the Companies Act, 1956 nor the Depositories Act provide for the law of succession or transfer of property. They must be viewed as being sub-silentio (i.e., as being silent on) of the testamentary and other dispositive laws.

d) If a nomination is held as supreme then it cannot be displaced even by a Will made subsequent to the nomination. This obviously cannot be the case.

e) The nomination would even oust personal law, such as Mohammedan Law and become all-pervasive.

f) The nomination under the Companies Act is not subject to the rigour of the Indian Succession Act in as much as it does not require witnesses as mandated under this Act. It cannot be assailed on grounds of importunity, fraud, coercion or undue influence. There cannot be a codicil to a nomination. In short, a nomination, if held supreme, wholly defenestrates the Indian Succession Act. According to the judgment in Harsha Nitin Kokate, a nomination becomes a “Super-Will”, one that has none of the defining traits of a proper Will.

g) Thus, a nomination, even under the Companies Act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.

BOMBAY HIGH COURT DIVISION BENCH VERDICT

The Single Judge’s decision in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar was appealed before the Division Bench of the Bombay High Court in Appeal No. 313/2015. The Division Bench observed that the object and provisions of the Companies Act were neither to provide a mode of succession nor to deal with succession at all. The Division Bench felt that the consistent view in the various judgments of the Supreme Court and the Bombay High Court must be followed and those did not warrant any departure. Accordingly, it declared that the nominee of a holder of a share or securities was not entitled to the beneficial ownership of the shares or securities which were the subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estates of the holders as per the law of succession. It concluded that a bequest made in a Will executed in accordance with the Indian Succession Act, 1925 in respect of shares or securities of the deceased, superseded the nomination made under the provision of S. 109A of Companies Act and Bye-law 9.11 framed under the Depositories Act, 1996.

SUPREME COURT’S VERDICT

The Apex Court in its recent decision in the case of Shakti Yezdani (supra) has upheld the verdict of the Division Bench of the Bombay High Court. It held that reading the provision of nomination within the Companies Act with the broadest possible contours, it was not possible to say that the same dealt with the matter of succession in any manner. It referred to various decisions (cited above) which had dealt with the precedence of a Will over nomination in the context of various assets such as, bank account, insurance policy, provident fund, etc. It concluded that in all cases, the usual mode of succession was not to be impacted by such a nomination. The legal heirs therefore had not been excluded by virtue of nomination.

Importantly, the Court concluded that the presence of the three elements i.e., the term ‘vest’, the provision excluding others as well as a non-obstante clause under S.109A of the Companies Act, 1956 did not persuade the Court to hold any different view. The concept of nomination, if interpreted differently than was understood, would cause major ramifications and create a significant impact on disposition of properties left behind by deceased nominators. It referred to the use of the term ‘vest’ and held (after referring to various decisions) that it had a variable meaning and the mere use of the word ‘vest’ in a statute did not confer absolute title over the subject matter. Byelaw 9.11.1 under the Depositories Act, 1996 provided for ‘vesting’ of the securities held in the demat account unto the nominee on the death of the beneficial owner. The Court concluded that the vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 was only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities.

It next dealt with the use of the non-obstante clause in s.109 of the Companies Act, 1956 (similar wordings are found in s.72 of the Companies Act, 2013) and held that use of the non-obstante clause, served a singular purpose of allowing the company to vest the shares upon the nominee to the exclusion of any other person, for the purpose of discharging of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement was until the legal heirs had settled the affairs of the testator and were ready to register the transmission of shares, by due process of succession law.

It also held that the Companies Act does not lay down a line of succession. The ‘statutory testament’ by way of nomination was not subject to the same rigours as was applicable to the formation and validity of a Will under the succession laws. The Companies Act did not deal with succession nor did it override the laws of succession. It was beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In case of a Will, it was upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession. The Court observed that the object of introduction of nomination facilities for shares was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

The Court’s final verdict read as follows:

“Consistent interpretation is given by courts on the question of nomination, i.e., upon the holder’s death, the nominee would not get an absolute title to the subject matter of nomination, and those would apply to the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 as well.”

In following earlier decisions on nomination, the Court invoked the doctrine of stare decisis et non quieta movere, which means “to stand by decisions and not to disturb what is settled”. Thus, the line of judicial thinking on nomination in the case of shares / demat account was the same as earlier Court judgements on other asset classes.

EPILOGUE

The Court has thankfully prevented a major upheaval in estate planning, as is understood. The Court made a very important and telling observation that an individual dealing with estate planning or succession laws understood nomination to take effect in a particular manner and expected the implication to be no different for devolution of securities per se. Therefore, an interpretation otherwise would inevitably lead to confusion and possibly complexities, in the succession process, something that ought to be eschewed.

Recent Developments in GST

A. AMENDMENT TO CGST ACT

Act No. 48 of 2023 dated 28th December, 2023

By this Act, CGST Act is amended. The amendment is relating to appointment and age limits of the Members of GST Appellate Tribunal. Amongst others, the Advocate is also eligible to appointment as member subject to fulfillment of other conditions.

B. NOTIFICATIONS

i) Notification No. 55/2023-Central Tax dated 20th December, 2023

By above notification, due date for filing of return in FORM GSTR-3B for the month of November 2023 for the persons registered in certain districts of Tamil Nadu is extended till 27th December, 2023.

ii) Notification No. 56/2023-Central Tax dated 28th December, 2023

By above notification, dates for specified compliances are extended in exercise of powers under section 168A of CGST Act. The time limit specified for issuing orders under section 73(10) for the year 2018–19 is extended till 30th April, 2024, and for the year 2019–20 till 31st August, 2024.

iii) Notification No. S.O.1(E), dated 29th December, 2023

By this notification, the principal Bench of Goods and Services Tax Appellate Tribunal (GSTAT) is constituted at New Delhi.

C. NOTIFICATIONS RELATING TO RATE OF TAX

Notification No. 1/2024-Central Tax (Rate) dated 3rd January, 2024 & Notification No. 1/2024-Integrated Tax dated 3rd January, 2024

The above notifications seek to amend NotificationNo. 01/2017- Central Tax (Rate) dated 28th June, 2017 and Notification No. 1/2024-Integrated Tax dated3rd January, 2024. Particularly, the changes are made in Schedule 1, and in Sr. No.165 & 165(A), the tariff items are substituted. The said serial numbers are relating to LPG and other gases.

D. ADVISORY / INSTRUCTIONS

a) Instruction no. 5/2023-GST dated 13th December, 2023 – In this instruction, CBIC referring to judgment of Hon. Supreme Court in the case of Northern Operating Systems Private Limited (NOS), has instructed that the application of section 74(1) of the CGST Act for issuing show cause notices should only occur when investigations reveal concrete evidence of fraud, deliberate misrepresentation, or withholding of facts to avoid tax.

b) The GSTN has issued Advisory dated 29th December, 2023, informing about extension for reporting opening balance of ITC reversal.

c) The GSTN has issued an Advisory dated 1st January, 2024, whereby availability of functionalities on the portal for the GTA taxpayers is informed.

E. ADVANCE RULINGS

49 Liability to GST vis-à-vis Money deposited in Escrow Account

Dedicated Freight Corridor Corporation of India Ltd.

(Order No. A. R. GUJ/GAAR/R/2023/31

dated 3rd November, 2023 (Guj)

The facts are that M/s. Dedicated Freight Corridor Corporation of India Limited (hereinafter, referred as Applicant), a PSU under the ownership and control of Ministry of Railways and incorporated under the Companies Act, 1956, is registered with the GST department.

Applicant is engaged in the business of construction, maintenance and operation of dedicated freight corridors. To undertake this work, they enter into contract with third-party contractors. The agreements so entered into contain dispute resolution clauseto tackle any eventuality of dispute that may arise between the contractor and the applicant.

The dispute resolution clause is based on the General Conditions for Contract as defined in FIDC’s first Edition 1999. [FIDIC means (Federation InternationaleDesIngenieurs – Conseils) which is an International Standards Organization for Consulting Engineering & Construction Technology].

The dispute resolution clause has various features and time mechanisms.

The relevant clause is about deposit of money into Escrow Account, pending litigation. The condition related to deposit in Escrow Account states that if PSUs are challenging any award / order passed against them by the Arbitral Tribunal, they are required to deposit 75 per cent of the amount directed to be paid in such award / order, in an Escrow Account against bank guarantee (BG) submitted by the contractor, without prejudice to the final order of the Court in the matter under challenge. Further that this deposit of 75 per cent amount into Escrow account by the PSU is subject to the fact that the contractor may ask for payment of 75 per cent of the amount awarded in terms of Cabinet Committee of Economic Affairs (CCEA) decision, after justifying the utility of such payment supported with authentic documents.

It was submission of applicant that the amount so deposited by the applicant in an Escrow account cannot be withdrawn by the contractor on his own volition. It was explained that as per the Arbitral Award Escrow Account Agreement, the Banker shall act as the trustee of the Escrow account and in terms of Clause 5 of the said agreement, the concerned banker shall withdraw and appropriate the amounts from the said Escrow account strictly in accordance with the instructions issued by the applicant to the contractor.

The further process of deposit in Escrow Account is that in case the applicant succeeds in the challenge / appeal, the amount so deposited and utilised by the Contractor is required to be paid back along with applicable Interest, and if the contractor fails to do so, the Applicant can en-cash the BG submitted by the contractor.

It is also evident that in case the challenged order / award is passed in favour of the contractor, the Applicant will be liable to pay the remaining 25 per cent of the amount along with any remaining balance in the Escrow account.

The applicant interpreted that even though he has parted away with 75 per cent of the disputed amount required to be paid in terms of the DAB decision / arbitral award, it is not an amount finally ‘paid’ to the contractor but only ‘deposited’ in an Escrow account.

It is submission of applicant that in terms of section 7 of the CGST Act, 2017, with respect to the transaction in question, it cannot be said that there is any supply of goods / services since there is no sale, transfer, barter, exchange or disposal made or agreed to be made for consideration by a person in the course or furtherance of business. It was also submitted that the amount deposited is under its control and appropriation is subject to its consent and subject to furnishing of BG of equivalent amount by contractor.

The treatment of ‘deposit’ as per the definition of term ‘Consideration’ was cited. As per the applicant, the deposit in Escrow Account is deposit as referred to in said definition.

Applicant also pointed out consequences if such deposit in Escrow account is treated as supply.

It was clarified that the present application is in respect of litigated area where no invoice about such litigated area is raised by contractor, like escalation clause, prior period differential amount, etc.

With the above background, the applicant posed the following question for advance ruling:

“1. Whether the amount deposited by the applicant (75%) in escrow account against bank guarantee pending outcome of the further challenge against Arbitral Award or dissatisfaction against DAB decision, is liable to GST under the provisions of CGST Act, 2017?

2. If the answer to first question is in affirmative, then, what shall be the ‘time of supply’ when tax on such DAB/arbitral award is payable to Government exchequer, i.e., whether tax is payable (a) when part amount (75%) is deposited into escrow account pending litigation, or (b) when complete award amount (100%) is paid to the contractor pursuant to finality of the decision.

3. If answer to Question No. 1 is affirmative, whether the applicant is eligible to claim Input Tax Credit (ITC) thereupon?”

The ld. AAR considered argument of department also where they stated that it is supply and liable to GST.

The ld. AAR referred to definition of “consideration” as per section 2(31) and meaning of “supply” in section 7 of CGST Act.

The ld. AAR noted that the primary question raised before them is whether the amount deposited in an Escrow account, which is pending outcome of the further challenge before DAB / Arbitral Tribunal and which can be withdrawn only against BG, is liable to GST under the provisions of CGST Act, 2017 or otherwise. The ld. AAR noted that the main crux of the argument of the applicant is that there is no supply involved in terms of section 7 of the CGST Act, 2017, and that it would not fall within the ambit of the definition of “consideration”.

Based on analysis of facts and definitions as above, the ld. AAR observed as under:

“25. We find that though the amount ie 75% paid into an escrow account is towards the dispute pertaining to the supply, what brings this particular transaction out of the scope of the consideration is the fact is that it is not paid to the contractor [supplier] but is deposited in an escrow account; that it cannot be withdrawn from the account without the explicit approval of the applicant; that the amount can be withdrawn only subject to the condition that the supplier [contractor] provides a BG for the said amount. In-fact, the applicant, though he has deposited the amount in an escrow account, also does not term this as a consideration for the supply since he is agitating his case, feeling aggrieved by the decision rendered against him. In view of the foregoing, we hold it to be outside the scope of ‘consideration’ as defined under section 2(31) of the CGST Act, 2017.”

In view of the above, the ld. AAR held that there isno supply as there is no consideration, confirming no tax is at present payable on said deposit in Escrow account.
However, the ld. AAR put a rider that the moment the supplier [contractor] finally succeeds in the dispute / the applicant accepts the adverse decision, this ruling would be rendered infructuous. In other words, the ld. AAR clarified that this AR is in operation only for a limited period when the supplier [contractor] has not succeeded in the litigation or the applicant has not accepted an adverse decision. The ld. AAR observed that the department reserves every right to recover any interest due on such amount for the delay in payment of GST, if any, on account of the non-acceptance of adverse decision of the DAB / Tribunal.

Accordingly, the ld. AAR disposed of AR application holding that there is no liability on amount deposited in the Escrow account.

50 Job Work

Shree Avani Pharma (Order No. A. R. GUJ/GAAR/R/2023/32

dated 3rd November, 2023 (Guj)

The facts are that the applicant is a partnership firm and is engaged in the job work of converting raw material [inputs owned by others] viz [i] Nitroantraquinone (HSN 2909); (ii) Monon methyl Amine (HSN 2921) & (iii) Bromine (HSN 2801) into Antraquinone derivatives (HSN 2914). The conversion is done by the applicant for their client M/s. Profile Bio-Chemical Pvt Ltd. (referred to as ‘client’), who is registered under GST. It is clarified that during the job work, ownership of the goods does not change, i.e., remains with its client.

Applicant has given the process flow chart, which depicts the following steps:

The applicant has further explained the process in detail, not repeated here for sake of brevity.

Applicant was of opinion that their service of job work falls under SAC 9988, and that he has to pay GST @ 12 per cent.

With this background, the applicant has sought advance ruling on the below mentioned question viz:

“1.Whether the service in question falls within the entry Sr. No. 26 of notification No. 11/2017-CE (Rate) dated 28.6.2017, as amended vide notification No. 20/2017-CT (Rate) dated 30.9.2019 & SAC 9988 (id) & attract GST @ 12% [CGST 6% + SGST 6%] or otherwise.”

The ld. AAR referred to definition of “job work” as given in section 2(68), which reads as under:

“(68) ‘job work’ means any treatment or process undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly.”

The ld. AAR also reproduced Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017, which gives reduced rate for job work which is amended from time to time.

The last amendment in the above notification is reproduced in AR as under:

“[Notification No. 20/2019-C.T. (Rate), dated 30-9-2019] (n) against serial number 26, in column (3), after item (ia) and the entries relating thereto in columns (3), (4) and (5) the following shall be inserted, namely:

Sl. No. Chapter Section. Heading, Group or Service Code (Tariff) Description of Services Rate (per cent) Condition
(1) (2) (3) (4) (5)
26 Heading 9988 (Manufacturing services on physical inputs (goods) owned by others) ‘(ib) Services by way of job work in relation to diamonds falling under Chapter 71 in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) 0.75 –
(ic) Services by way of job work in relation to bus body building; 9 –
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above.’ 6 –

2. This notification shall come into force with effect from the 1st day of October, 2019.”

The ld. AAR also made reference to Circular no. 126/45/2019-GST, dated 22nd November, 2019, in which the scope of the above notification is explained.

The relevant portion of circular is as under:

“4. In view of the above, it may be seen that there is a clear demarcation between scope of the entries at item (id) and item (iv) under heading 9988 of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017. Entry at item (id) covers only job work services as definedin section 2(68) of CGST Act, 2017, that is, servicesby way of treatment or processing undertaken by a person on goods belonging to another registeredperson. On the other hand, the entry at item (iv)specifically excludes the services covered by entry at item (id), and therefore, covers only such services which are carried out on physical inputs(goods) which are owned by persons other than those registered under theCGST Act.”

The ld. AAR considered that the description of the heading 9988 is manufacturing services on physical inputs (goods) owned by others and that the job work as defined under section 2(68) of the CGST Act, 2017, means any treatment or process undertaken by a person on goods belonging to another registered person. The activity of the applicant is converting the inputs supplied by the client into Antraquinone derivatives (HSN 2914).

After discussing the scope of Notification No. 11/2017-CT(Rate) dated 28th June, 2017, the ld. AAR summarised that Sr. No. 26(id) [residual entry] covers job work where inputs are sent by a registered person, while Sr. No. 26(iv) covers manufacturing services (processing) wherein inputs (goods) are sent by an unregistered person.

Since in this case, the applicant is carrying out the processing for their client M/s. Profile Bio-Chemical Pvt Ltd., who is registered under GST and that during the course of job work, ownership of the goods does not change and remains with its client, the ld. AAR concurred with applicant that it is liable to GST @ 12 per cent as per entry at Sr. No. 26(id) of notification No. 11/2017-CE (Rate) dated 28th June, 2017, as amended vide notification No. 20/2017-CT (Rate) dated 30th September, 2019, and the activity is classifiable under SAC 9988, which attracts GST @ 12 per cent.

51 GST charged on Canteen Service provider — Whether ITC available?

Tata Motors Ltd. (A. R. (Appeal) No. GUJ/GAAR/APPEAL/2022/23 (in App.No.AR/SGST&CGST/2021/AR/18)

dated 22nd December, 2022 (Guj))

The appellant has filed an appeal against the Advance Ruling no. GUJ/GAAR/ R/39/2021 dated 30th July, 2021 (2021-VIL-316-AAR).

The appellant had sought Advance Ruling on the following questions, from ld. AAR:

“1. Whether input tax credit (ITC) available to applicant on GST charged by service provider on canteen facility provided to employees working in factory?

2. Whether GST is applicable on nominal amount recovered by Applicant from employees for usage of canteen facility?

3. If ITC is available as per question no.(1) above, whether it will be restricted to the extent of cost borne by the Applicant (employer)?”

In AR, the appellant had submitted that they aremaintaining canteen facility for their employees at their factory premises to comply with the mandatoryrequirement of maintaining the canteen as per the Factories Act, 1948, and as per proviso to section 17(5)(b) of CGST Act, 2017, ITC of GST paid on goods or services or both shall be available where it is obligatory for an employer to provide the same to its employees under any lawfor the time being in force. It was also submitted thatthe appellant is recovering nominal amount from employees and expenditure incurred towards canteen facility borne by appellant is part and parcel cost to company.

The appellant had further submitted that they are not in the business of providing canteen service and, hence, recovery of nominal amount will not fall in definition of supply and relied upon ruling of Maharashtra AAR in the case of Jotun India P Ltd [2019 TIOL 312 AAR GST – 2019-VIL-296-AAR].

The ld. AAR vide the AR order dated 30th July, 2021 referred to the above, gave the following ruling:

“1. Whether input tax credit (ITC) available to applicant on GST charged by service provider on canteen facility provided to employees working in factory? Ans: ITC on GST paid on canteen facility is blocked credit under Section 17(5)(b)(i) of CGST Act and inadmissible to applicant.

2. Whether GST is applicable on nominal amount recovered by Applicants from employees forusage of canteen facility? Ans: GST, at the hands on the applicant, is not leviable on the amount representingthe employees portion of canteen charges, which is collected by the applicant and paid to the Canteen service provider.”

Aggrieved by the aforesaid advance ruling in respect to question no. 1 and indirectly to question no. 3, the appellant has filed the present appeal.

Appellant pointed out that the advance ruling was given by ld. AAR on footing that the proviso to section 17(5)(b)(iii) is not connected to the sub-clause 17(5)(b)(i). However, the appellant submitted that such interpretation cannot be read into it, and if such interpretation of ld. AAR is accepted, then it will make the proviso to section 17(5)(b)(iii) redundant for aspects which have been incorporated under section 17(5)(b)(i).

Various unexpected results of such interpretation were shown to ld. AAAR.

The appellant also relied upon various judgments for interpretation of legislation.

Lastly, the appellant also submitted that the CBIC vide its Circular no. 172/04/2022-GST dated 6th July, 2022, has clarified this issue also at Sr. No. 3 which is as under:

“Sl. No. Issue Clarification
Whether the proviso at the end of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the entire clause (b) or the said proviso is applicable only to sub-clause (iii) of clause (b)? 1. Vide the Central Goods and Service Tax (Amendment Act) 2018, clause (b) of sub-section (5) of section 17 of the CGST Act was substituted with effect from
1st February, 2019. After the said substitution, the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act provides as under:“Provided that the input tax credit in respect of such goods or services or both shall be available,where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”2. The said amendment in sub-section (5) of section 17 of the CGST Act was made based on the recommendations of the GST Council in its 28th meeting. The intent of the said amendment in sub-section (5) of section 17, as recommended by the GST Council in its 28th meeting, was made known to the trade and industry through the Press Note on Recommendations made during the 28th meeting of the GST Council, dated 21st July, 2018. It had been clarified that “scope of input tax credit is being widened, and it would now be made available in respect of Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.”3. Accordingly, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act.”

 

Appellant further submitted that in view of the above clarification, the appellant is eligible to take ITC on the GST charged by the service provider on the canteen facility provided to its employees working in their factory. They further clarified that input tax credit to the extent applicable on the amount of canteen charges recovered from their employees will not be taken.

The ld. AAAR referred to provision of section 17(5)(b) and reproduced the same as under:

“Section 17(5): Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

Though ld. AAR has given reasons for adopting its views, the ld. AAAR, considering the above Circular No.172/04/2022-GST dated 6th July, 2022, wherein at Sl. No. 3, it is clarified that the proviso at the end of clause (b) of section 17(5) of CGST Act is applicable to the entire clause (b), the ld. AAAR held that the issue is to be decided in favour of the appellant.

Thus, it is held that Input Tax Credit will be available to appellant in respect of canteen facility provided to its direct employees but not in respect of other types of employees including contract employees / workers, visitors etc. It is also clarified that the ITC will be eligible to the extent of cost suffered by the appellant, i.e., after reducing recovery from employees out of total cost incurred.

In view of the above finding, the ld. AAAR modified the Advance Ruling No. GUJ/GAAR/R/39/2021 dated 30th July, 2021.

52 Recipient vis-à-vis Agent

West Bengal Agro Industries Corporation Ltd. (Order No. 15/WBAAR/ 2022–23

dated 22nd December, 2022) (WB)

The facts are that the applicant is a Government Undertaking under the administrative control of Water Resources Investigation & Development Department, Government of West Bengal. The commercial operations carried out by the applicant are mainly related with three operating divisions namely, (i) Project Division, (ii) Agronomy Division and (iii) Agri Engineering Division.

It was submitted by the applicant that the Agri Engineering Division undertakes civil works as “Executive Agency or Project Implementing Agency” entrusted by various Administrative Departments of Government of West Bengal in the development of rural infrastructure like road, bridge, building, etc., under various schemes like, RIDF, etc., and the applicant accordingly gets the work done from different suppliers / contractors.

The applicant filed this application for ruling on the following issue:

“(a) Whether the applicant is required to issue tax invoice to State Government Department / Directorate on the contract value as determined by the department where the applicant is working as a ‘Project Implementing Agency’?”

The applicant reiterated that upon selection by various departments of Government of West Bengal as an ‘executing agency’, it undertakes various works following the Standard Operating Procedure. The variousclauses in SOP show that the applicant is doing work as an agent.

The applicant submitted that the work being undertakenby him as an ‘executing agency’ is in line with the notification number 5400-F(Y) dated 25th June, 2012,issued by the Audit Branch of Finance Department, Government of West Bengal. The applicant further referred to Memo No. 8183-F(Y) dated 26th September, 2012, which is issued on the subject matter of “Clarification regarding engagement of ‘Agency’ under Rule 47D of Finance Department’s Notification No. 5400-F(Y) dt.25.06.2012” wherein issues regarding the appointment of Government Agency for execution of work in terms of rule 47D has been clarified.

The applicant submitted that the aforesaid clarification along with the SOP to be followed, clearly indicates that his work is to facilitate execution of the entrusted works of the Government Department by calling tender, awarding the work to L1 bidder, monitoring the execution and finally releasing the payment to agency, on behalf of the concerned Administrative Department. It was further submitted that the applicant has no choice to execute the work on its own and has to get the work done by a contractor, being selected through a transparent tendering process.

In light of the above, the applicant contended that his role is similar to an ‘agent’ where the concerned Administrative Department acts as a ‘principal’.

The applicant submitted that for the purpose of implementing any work assigned to him as an ‘executing agency’, he enters into two separate contracts, one with the Department concerned and other with the contractor respectively.

It was also contended that the property in goods used in the execution of works is directly transferred from contractor to concerned Department through principle of accretion, accession or blending, and the applicant neither holds, nor is in a position to transfer the property in goods used thereon, and hence, the contract between the concerned Department and the applicant should not be treated as ‘works contract’ as defined in clause (119) of section 2 of the GST Act.

The applicant also conveyed that the concerned Government department does not ask for invoice from the applicant. In view of the above, the applicant expressed its view that he is not required to submit tax invoice to concerned department for the works done by him as a project implementing agency, and he is required to issue tax invoice only for Agency Fees along with the summary bill of the works done with the required certificate.

The ld. AAR examined the argument of the applicant. The ld. AAR made reference to definition of “recipient” insection 2(93) of CGST Act, which reads as under:

“(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.”

The ld. AAR observed that the applicant enters into an agreement with the contractor and so he is liable to pay the consideration to the contractor. The ld. AAR also noted the submission of the applicant that he merely acts as an ‘agent’ of the said administrative department to execute the work. The ld. AAR observed that an agent shall also be treated as recipient of supply of goods or services or both since the aforesaid definition has made it abundantly clear that “any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied”. Reading as above the ld. AAR observed that the applicant undisputedly is the recipient of supply provided by the contractor meaning thereby the contractor doesn’t make any supply to the department concerned.

In view of the above findings, the ld. AAR held that there are two separate supplies: the first one by the contractor to the applicant and the second one by the applicant to the department concerned though there is no value addition in respect of the second supply.

The ld. AAR gave ruling as under:

“The applicant while working as a ‘Project Implementing Agency’ is making supplies to State Government Department/ Directorate and therefore is required to issue tax invoice on the contract value as determined by the department.”

Corporate Law Corner – Part A | Company Law

18 In the matter of Vridhi Finserve Home Finance Limited Registrar of Companies, Karnataka, Adjudication order

Date of order: 30th November, 2023

Order of Adjudication of Penalty for violation of provisions of the Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

FACTS

M/s VFHFL had filed a suo-moto application on 9th August, 2023 for adjudication before Registrar of Companies, Karnataka (‘ROC’) with regards to non-compliance of Rule 9A (1) (a) & 9A (3)(a) of the Companies (Prospectus and allotment of Securities) Rules, 2014, as M/s VFHFL had issued 10,000 equity shares in physical mode on 25th January, 2022 instead of dematerialised mode and the Board of M/s VFHFL had also approved the transfer of 4990 equity shares in physical mode on 20th June, 2022.

As per Rule 9A (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every unlisted public company was at material time required to issue securities only in dematerialised form and further facilitate dematerialisation of all its existing securities.

Therefore, on the basis of the above suo-moto application, notice of hearing was sent and hearing was held before the office of ROC which was attended by Ms. K, Company Secretary and Mr SM, Director & CFO of M/s VFHFL who made their submissions.

ROC further asked for clarification on the matter. It was clarified that M/s VFHFL had made good the default by issuing the shares to initial subscribers and the transferees in dematerialised mode as per NSDL letters submitted to ROC with regards to activation of ISIN and for crediting equity shares in dematerialised accounts.

Provisions of the of 9A (1) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Issue of securities in dematerialised form by unlisted public companies. –

(1) Every unlisted public company shall –

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its existing securities

in accordance with provisions of the Depositories Act, 1996 and regulations made there under.

Provisions of the of 9A (3) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Every holder of securities of an unlisted public company,

(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialised form before such subscription.

Provisions of the section 450 of the Companies Act, 2013 states that;

Punishment Where No Specific Penalty or Punishment is Provided:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

HELD

Adjudication Officer (AO), after considering the facts and circumstances of the case and submissions made by M/s VFHFL and its representatives, held that in view of violations of the provisions of Rule 9A(1)(a) & 9A(3)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 penalty be imposed under Section 450 of the Companies Act, 2013 as mentioned in below table:

Sr. no. Penalty imposed on Penalty imposed for violation of Rule 9A(1)(a)
(R)		 Penalty imposed for violation of Rule 9A(3)(a)
(R)		 Total Penalty Imposed (R)
1. M/s VFHFL 10,000/- 10,000/- 20,000/-
2. Mr. SR, Director 10,000/- 10,000/- 20,000/-
3. Mr SS, Director 10,000/- 10,000/- 20,000/-
4. Mr DS, Director 10,000/- 10,000/- 20,000/-

M/s VFHFL and its directors were directed to pay the penalty amount as above within 90 days from the date of receipt of the Order and to file INC-28 attaching a copy of the order and payment challans. In the case of directors of M/s VFHFL, such a penalty amount was required to be paid out of their own funds.

Financial Reporting Dossier

This article provides: (a) key recent updates in the financial reporting space globally; (b) Global Regulators’ Actions – FRC and PCAOB; (c) SEC reports on audit, accounting and fraud matters.

A. KEY GLOBAL UPDATES:

1. IASB — ACCOUNTING FOR COMPOUND FINANCIAL INSTRUMENTS

On 29th November, 2023, the International Accounting Standards Board (IASB), based on feedback received from the Investors, proposed amendments to address the challenges in companies’ financial reporting on instruments that have both debt and equity features. The proposed amendment would amend the IAS 32, IFRS 7 Financial Instruments: Disclosures, and IAS 1 Presentation of Financial Statements.

IAS 32 Financial Instruments: Presentation sets out how a company that issues financial instruments should distinguish debt instruments from equity instruments. The distinction is important because the classification of the instruments affects the description of a company’s financial position and performance. The proposed amendment mainly to (i) clarify the underlying classification principles of IAS 32 to help companies distinguish between debt and equity; (ii) to require companies to disclose information to further explain the complexities of instruments that have both debt and equity features; and (iii) to issue new presentation requirements for amounts—including profit and total comprehensive income. The comments are to be received by 29th March, 2024.

2. IASB — REPORTING OF CLIMATE RELATED AND OTHER UNCERTAINTIES IN FINANCIAL STATEMENTS

On 20th September, 2023, the International Accounting Standards Board (IASB) decided to explore targeted actions to improve the reporting of climate-related and other uncertainties in the financial statements. Currently, IFRS Accounting Standards do not refer explicitly to climate-related matters. In July 2023, the IASB republished Education Material on Effects of climate-related matters on financial statements which provides examples illustrating when IFRS Accounting Standards may require companies to consider the effects of climate-related matters in applying the principles in several Standards.

For e.g. IAS-2- Inventories- Climate-related matters may cause a company’s inventories to become obsolete, their selling prices to decline or their costs of completion to increase. If, as a result, the cost of inventories is not recoverable, IAS 2 requires the company to write down those inventories to their net realisable value.

The possible actions include development of educational materials, illustrative examples and targeted amendments to IFRS Accounting Standards to improve application of existing requirements.

3. IASB — ACCOUNTING REQUIREMENTS IN CASE CURRENCY NOT EXCHANGEABLE

On 15th August, 2023, the International Accounting Standards Board (IASB) issued an amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates that will require companies to provide more useful information in their financial statements when currency cannot be exchanged into another currency.

These amendments will require companies to apply a consistent approach in assessing whether a currency can be exchanged for another currency and, when it cannot, in determining the exchange rate to be used and the disclosures to be provided.

The amendments will become effective for annual reporting periods beginning on or after 1st January, 2025. Early application is permitted.

4. FASB — ACCOUNTING FOR AND DISCLOSURE OF CERTAIN CRYPTO ASSETS

On 13th December, 2023, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) intended to improve the accounting for, and disclosure of certain Crypto Assets. The amendments in the ASU improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosures about significant holdings, contractual sale restrictions, and changes during the reporting period.

It will provide investors and other capital allocators with more relevant information that better reflects the underlying economics of certain crypto assets and an entity’s financial position while reducing cost and complexity associated with applying current accounting.

The amendments in the ASU apply to all assets that meet all the criteria:- (a) Meet the definition of intangible asset as defined in the FASB ASC (b) Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets (c) are created or reside on a distributed ledger based on block chain or similar technology (d) are secured through cryptography (e) are fungible and (f) are not created or issued by the reporting entity or its related parties.

The amendments in the ASU are effective for all entities for fiscal years beginning after 15th December, 2024, including interim periods within those fiscal years. Early adoption is permitted.

5. FASB — NEW SEGMENT REPORTING GUIDANCE

On 27th November, 2023, the Financial Accounting Standards Board (FASB) issued a final Accounting Standards Update (ASU) on Segment Reporting. It is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses. The key amendments are:

  • Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
  • Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.
  • Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB Accounting Standards Codification® Topic 280, Segment Reporting, in interim periods.
  • Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.
  • Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
  • Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280.

The ASU applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after 15th December, 2023.

6. FASB — INDUCED CONVERSIONS OF CONVERTIBLE DEBT INSTRUMENTS

On 14th September, 2023, the Emerging Issues Task Force (EITF) reached a consensus-for-exposure to amend the induced conversions guidance to improve its relevance. The Task force reached a consensus-for-exposure to (a) Pursue the preexisting contract approach for induced conversion assessment. Under this approach, only conversions that include the issuance of all the consideration (in form and amount) pursuant to conversion privileges included in the terms of the debt at issuance would be accounted for as induced conversions. (b) Include clarifications that, under the preexisting contract approach, when evaluating whether the amount of cash (or combination of cash and shares) issuable under the original conversion privileges is preserved by the inducement offer, (1) an entity should determine the amount of cash and number of shares that would be issued based on the fair value of the entity’s shares as of the offer acceptance date (2) if within a year leading up to the offer acceptance date the debt has been exchanged or modified without being deemed to be substantially different, then the debt terms that existed a year ago should be used in place of the terms of the debt at issuance. (c) Apply induced conversion accounting to all convertible debt instruments, including instruments that are not currently convertible, so long as those instruments contained a substantive conversion feature as of the time of issuance and are within the scope of the guidance in Subtopic 470-20, Debt—Debt with Conversion and Other Options.

7. FASB — ACCOUNTING FOR AND DISCLOSURE OF SOFTWARE COSTS

On 6th June, 2023, the Financial Accounting Standards Board (FASB) provided input about potential financial reporting improvements for software costs, including the development of a single model to account for costs to internally develop, modify, or acquire software. The project objectives are to (a) modernize the accounting for software costs and (b) enhance transparency about an entity’s software costs, noting the prevalence and continuous evolution of software. The FASB supported additional disclosures to provide transparency about software costs, given the judgement involved in the accounting and the nature of software costs incurred. Some investors and other allocators of capital expressed the importance of having information that enables them to understand a company’s technology spend and the expected return on that investment.

There were mixed views on the Recognition & Measurement of Software costs requiring capitalization at the time when it is probable that a software project will be completed, whereas some suggested refinements to the indicators to help apply the threshold, some questioned whether probability is a workable threshold and the rest advised that the current GAAP is sufficient.

Also, it was advised to have distinction between maintenance & enhancement costs since costs incurred for Maintenance activities should be expensed as incurred.

For Presentation & Disclosures, information about total software costs would be useful, information that differentiates between types of software such as revenue-generating & non-revenue generating, etc., information for potential additional disclosures would be feasible. Some practitioner council members stated that some of the potential disclosures could be challenging to audit due to the high level of management judgement involved in preparing them.

8. FASB — JOINT VENTURE FORMATIONS

On 23rd August, 2023, the Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to (1) provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements and (2) reduce diversity in practice in this area of financial reporting. Currently, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements, specifically the joint venture’s recognition and initial measurement of net assets, including businesses contributed to it. The proposed update provides decision-useful information to a joint venture’s investors and reduces diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurements that are consistent with the business combinations guidance). The said amendments in this ASU are effective prospectively for all joint ventures with a formation date on or after 1st January, 2025, and early adoption is permitted.

9. IAASB — NEW STANDARD FOR AUDIT OF LESS COMPLEX ENTITIES

On 6th December, 2023, the International Auditing & Assurance Standards Board (IAASB) published the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities, known as the ISA for LCE. The ISA for LCE is a standalone global auditing standard designed specifically for smaller and less complex businesses and organizations. Built on the foundation of the International Standards on Auditing (ISAs), audits performed using this standard provide the same level of assurance for eligible audits: reasonable assurance. The standard is effective for audits beginning on or after 15th December, 2025 for jurisdictions that adopt or permit its use. The ISA for LCE underscores the IAASB’s commitment to ensuring the credibility and reliability of financial reporting for entities of all sizes.

10. IAASB — AUDITOR’S REPORT TRANSPARENCY ON INDEPENDENCE

On 12th October, 2023, the International Auditing and Assurance Standards Board (IAASB) has released amendments aimed at bolstering transparency and providing auditors with a clear mechanism to action changes to the International Ethics Standards Board for Accountants’ (IESBA) Code of Ethics for Professional Accountants (including International Independence Standards). The IAASB amended International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements and ISA 260 (Revised), Communication with Those Charged with Governance. The IESBA Code now requires firms to publicly disclose when a firm has applied the independence requirements for public interest entities in an audit of the financial statements of an entity. The IAASB’s amendments provide a clear and practical framework for implementing this new requirement through appropriate communication in the auditor’s report and with those charged with governance.

11. FRC — REVISED ISA (UK) 505 EXTERNAL CONFIRMATIONS

On 3rd October, 2023, the FRC published revised ISA (UK) 505 External Confirmations. The revisions to the standard reflect recent enforcement findings as well as ensuring that modern approaches to obtaining external confirmations are considered, with additional material in respect of digital means of confirmation, enhanced requirements in relation to investigating exceptions and a prohibition on the use of negative confirmations.

There are following revisions:

Definitions

  • External Confirmation: Audit evidence obtained as a direct written response to the auditor, or by the auditor directly, from a third party (the confirming party), in paper form, or by electronic or other medium. Electronic or other mediums could include auditors directly accessing information held by third parties through web portals, software interfaces or other digital means.
  • Negative Confirmation Request: A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. The use of negative confirmations is prohibited in an audit conducted in accordance with ISAs (UK). Accordingly, the requirements and related application material in this ISA (UK) relating to negative confirmations are not applicable.

Requirements

  • External Confirmation Procedure: Designing the confirmation requests, including determining that requests are appropriately designed to provide evidence relevant to the assertions identified in accordance with ISA (UK) 330, are properly addressed and contain return information for responses to be sent directly to the auditor.

12. FRC — THEMATIC REVIEW OF AUDIT SAMPLING

On 24th November, 2023, the FRC published its thematic review of Audit Sampling. Audit sampling is a fundamental tool for auditors, allowing the auditor to draw conclusions about a population based on the sample selected. The FRC reviewed the sampling methodologies of the largest audit firms to identify areas of good practice and to highlight any concerns.

The review found all audit firms should:

  • Ensure that they provide engagement teams with sufficient guidance and training to support their use of professional judgement in audit sampling; and
  • Update their methodologies and guidance to drive better documentation of key professional judgements in this area.
  • Audit Committees should understand how auditors obtain audit evidence to support their choice of auditor when tendering and to aid understanding of how their auditor takes the audit.

13. PCAOB — NEW STANDARD: MODERNIZING REQUIREMENTS FOR AUDITOR’S USE OF CONFIRMATION

On 28th September, 2023, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard to strengthen and modernize the requirements for the auditor’s use of confirmation- the process that involves verifying information about one or more financial statement assertions with a third party.

Among its key provisions, the new standard:

  • Includes a new requirement regarding confirming cash and cash equivalents held by third parties or otherwise obtaining relevant and reliable audit evidence by directly accessing information maintained by a knowledgeable external source;
  • Carries forward the existing requirement regarding confirming accounts receivable, while addressing situations where it is not feasible for the auditor to perform confirmation procedures or otherwise obtain relevant and reliable audit evidence for accounts receivable by directly accessing information maintained by a knowledgeable external source;
  • States that the use of negative confirmation requests alone does not provide sufficient appropriate audit evidence;
  • Emphasizes the auditor’s responsibility to maintain control over the confirmation process and provides that the auditor is responsible for selecting the items to be confirmed, sending confirmation requests, and receiving confirmation responses; and
  • Identifies situations in which alternative procedures should be performed by the auditor.

Subject to approval by the Securities and Exchange Commission, the new standard will take effect for audits of financial statements for fiscal years ending on or after 15th June, 2025.

B. GLOBAL REGULATORS’ ENFORCEMENT ACTIONS AND INSPECTION REPORTS

I. THE FINANCIAL REPORTING COUNCIL, UK

a) Sanctions against audit firm, audit plc and two former partners

On 12th October, 2023, the FRC has issued two Final Settlement Decision Notices under the Audit Enforcement Procedure and imposed sanctions against KPMG LLP, KPMG Audit Plc, and two former audit partners following the conclusion of her investigations into the audits of Carillion plc (“Carillion”).

Decision 1:

Prior to going into liquidation in January 2018, Carillion was a leading UK based multinational construction and facilities management services company. KPMG audited the financial statements of Carillion and its group companies for the financial years 2014, 2015, and 2016. In each of these years, KPMG provided an unqualified audit opinion that the financial statements gave a true and fair view of Carillion’s affairs. The audit opinion for the financial year 2016 was dated 1st March, 2017. In July and September 2017, Carillion announced expected provisions totalling £1.045 billion, primarily arising from expected losses on a number of its contracts, and a goodwill impairment charge of £134 million.

The outcome of the investigation was that this very large public company, which had multiple large contracts with public authorities, was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise. In particular, in 2016, KPMG and Mr Meehan’s work in respect of going concern and Carillion’s financial position generally was seriously deficient. KPMG and Mr Meehan failed to respond to numerous indicators that Carillion’s core operations were lossmaking and that it was reliant on short term and unsustainable measures to support its cash flows.

KPMG failed to gather sufficient appropriate audit evidence to enable it to conclude that the financial statements were true and fair and also failed to conduct its audit work with an adequate degree of professional skepticism. Instead of consistently challenging and scrutinising such audit evidence as it gathered, KPMG failed to subject Carillion’s management’s judgements and estimates to effective scrutiny, even where those judgements and estimates appeared unreasonable and/or appeared to be inconsistent with accounting standards and might suggest potential management bias.

Additionally, audit procedures in a range of areas were not completed until more than six weeks after the date of the audit report was signed and records of the preparation and review of working papers were unreliable and, in some cases, misleading.

Decision 2:

The investigation related to transactions entered into by Carillion in 2013, that involved changing its provider of outsourced IT and business process services. At the same time as entering into a contract for those services with the new provider, Carillion concluded other agreements, with the same counterparty, involving the assignment of certain IP rights for a significant sum, as well as receiving a further sum as a contribution to ‘exit fees’ payable to the former outsourcing provider. Each of these transactions was treated in Carillion’s financial statements as being independent of each other and this treatment resulted in a significant increase in Carillion’s reported profit for 2013.

b) FRC – Inspection findings for tier 2 & 3 audit firms

On 13th December, 2023, the FRC published its annual inspection findings for Tier 2 and Tier 3 audit firms, alongside the actions these firms must prioritise to deliver high quality audits and contribute to a more resilient audit market.

As part of the FRC’s 2022-2023, the inspection programme of Tier 2 and Tier 3 firms, which audit Public Interest Entities (PIEs), the FRC inspected 13 audits at 11 of these firms. Only 38 per cent of audits reviewed required no more than limited improvements, 24 per cent required more than limited improvements and a further 38 per cent required significant improvements. Tier 2 and Tier 3 firms must prioritise audit quality improvements and respond swiftly.

Some of the key observations in the report are as follows:

  • audit teams not demonstrating sufficient professional skepticism in the areas involving significant levels of management judgement and the potential for bias;
  • weaknesses in the audit procedures to evaluate the underlying going concern assessments and supporting evidence provided by management.
  • weaknesses in the planned audit approach and the linkage of this to the audit team’s fraud risk assessment.
  • shortcomings in processes for the archiving of audit files in line with the requirements of the auditing standards.
  • lack of a policy and formal process, driven by a risk-based assessment, for accepting new clients and re-accepting existing clients.

II. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)

a) Light on rising audit deficiencies related to engagement quality reviews

On 12th October, 2023, PCAOB published a report which revealed that 42 per cent of firms the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews (EQRs), up from 37 per cent in 2020. The report focuses on the PCAOB-mandated EQR process, in which a reviewer who is not part of the engagement team evaluates significant judgements made by the audit engagement team. The EQR reviewer should (1) hold discussions with the engagement partner and other members of the engagement team and (2) review the engagement team’s audit documentation.

Common deficiencies related to EQR’s are:

  • Failing to identify certain Engagement Level Performance Deficiencies in the Audit.
  • Failing to provide competent, knowledgeable EQR reviewer.
  • Failing to properly document EQR.
  • Failing to provide Concurring Approval.
  • Failing to provide an EQR.

b) Sanctions on audit firms for violating PCAOB rules and standards related to audit committee communications

On 16th November, 2023, PCAOB announced settled disciplinary orders sanctioning six audit firms for violating PCAOB rules and standards related to communications with audit committees. The firms were sanctioned as part of a sweep, which enabled the PCAOB to collect information on potential violations from a number of firms at the same time.

Specifically, all six firms failed to make certain required communications with audit committees related to the planned participation of other firms and individuals in the audit, as required by AS 1301.10, Communications with Audit Committees.

In addition, UHY LLP failed to obtain audit committee pre-approval in connection with providing non-audit services to an issuer audit client, in violation of PCAOB Rule 3520, Auditor Independence, and PCAOB Rule 3524, Audit Committee Pre-Approval of Certain Tax Services.

RH CPA also failed to file an accurate Form AP in violation of PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants.

c) Historic sanctions on China-based audit firms

On 30th November, 2023, PCAOB announced the first major enforcement settlements with mainland Chinese and Hong Kong firms since securing historic access to inspect and investigate firms headquartered in China and Hong Kong in 2022 in accordance with the Holding Foreign Companies Accountable Act (HFCAA).

The settled disciplinary orders sanction three China-based firms and four individuals a total of $7.9 million and include the highest civil money penalties the PCAOB has imposed against a China-based firm and some of the highest penalties it has imposed against any firm around the globe.

The firms are:

  • PwC China
  • PwC Hong Kong
  • Shandong Haoxin & four of its auditors

PwC China and PwC Hong Kong violated the integrity and personnel management elements of the PCAOB quality control standards by failing to detect or prevent extensive, improper answer sharing on tests for mandatory internal training courses.

Shandong Haoxin and four of its auditors falsified an audit report, failed to maintain independence from their issuer client, and improperly adopted the work of another accounting firm as their own.

d) Deficiencies identified in inspection reports

1. ASA & Associates LLP (16th November, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) when at the time of issuing audit report(s) the firm had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/ or ICFR, (b) Instances of non-compliance with PCAOB standards or rules, (c) Instances of potential non-compliance with SEC rules or with PCAOB rules related to maintaining independence.

2. Baker Newman & Noyes, P.A. Limited Liability Company (16th November, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) the firm used confirmations to test the existence of loans. The sample size did not provide sufficient appropriate audit evidence because it was based on a level of reliance on other substantive procedures that was not supported given the nature and scope of those other substantive procedures (b) the firm used negative confirmations to substantively test the existence of certain types of loans. The firm’s use of negative confirmations did not reduce audit risk to an acceptable level because the population of such loans did not comprise a large number of small balances.

3. T R CHADHA & CO LLP (28th September, 2023)

Deficiency: In an inspection carried out by PCAOB, (a) the firm did not perform any substantive procedures to evaluate the reasonableness of certain significant assumptions developed by the company’s specialist (b) did not perform any substantive procedures to test the fair value of certain other accounts (c) The firm did not perform any procedures to identify and select journal entries and other adjustments for testing.

III. THE SECURITIES EXCHANGE COMMISSION (SEC)

a) Violations of the anti-bribery, books and records, and internal accounting controls (10th January, 2024)

SEC announced charges against global software company SAP SE for violations of the Foreign Corrupt Practices Act (FCPA) arising out of bribery schemes in South Africa, Malawi, Kenya, Tanzania, Ghana, Indonesia, and Azerbaijan. SAP employed third-party intermediaries and consultants from at least December 2014 through January 2022 to pay bribes to government officials to obtain business with public sector customers in the seven countries mentioned above. SAP inaccurately recorded the bribes as legitimate business expenses in its books and records, despite the fact that certain third-party intermediaries could not show that they provided the services for which they have been contracted. SAP failed to implement sufficient internal accounting controls over the third parties and lacked sufficient entity-level controls over its wholly owned subsidiaries.

b) Medical Device Startup Fraud (19th December, 2023)

The SEC charged Laura Tyler Perryman, the former CEO and co-founder of Florida-based medical device startup Stimwave Technologies Inc., with defrauding investors out of approximately $41 million by making false and misleading statements about one of the company’s key medical device products. The medical device comprised several components, one of which was a fake, non-functional component that was implanted into patients’ bodies.

During capital fundraising events from 2018 through 2019, Perryman made material misrepresentations about Stimwave’s peripheral nerve stimulation device, or PNS Device, which purported to treat chronic nerve pain by delivering electrical signals to targeted nerves. The device consisted of three key components: (1) a transmitter; (2) a receiver; and (3) an electrode array. The transmitter was worn by patients in a pouch outside the body and sent a wireless signal into the body. A receiver and electrode array were implanted inside patients’ bodies and were together supposed to receive the signal and convert it into electrical currents that stimulated target nerves. As alleged, Stimwave included two receivers of different sizes with the PNS Device, the smaller of which was designed to be used when the larger receiver was too big to implant.

The SEC’s complaint alleges that Perryman knew, or was reckless in not knowing, that the smaller receiver was, in reality, fake and nothing more than a piece of plastic. According to the complaint, Perryman misrepresented to investors that the PNS Device was approved by the U.S. Food and Drug Administration and was the only effective device of its kind on the market. The complaint also alleges that Perryman made false and misleading statements to investors about Stimwave’s historical revenues, revenue projections, and business model.

After Perryman’s fraud unraveled in the fall of 2019, Stimwave voluntarily recalled the PNS Devices and eventually filed for bankruptcy.

c) Fraud: Inflation of Financial Performance (19th December, 2023)

The SEC found that Mmobuosi Odogwu Banye a/k/a Dozy Mmobuosi spearheaded a scheme to fabricate financial statements and other documents of the three entities of which he is the CEO- Tingo Group Inc., Agri-Fintech Holdings Inc., and Tingo International Holdings Inc. and their Nigerian operating subsidiaries, Tingo Mobile Limited and Tingo Foods PLC to defraud investors worldwide. The SEC has obtained emergency relief including a temporary restraining order: (1) freezing Mmobuosi’s assets; (2) prohibiting TIH, OTC-traded Agri-Fintech and Nasdaq-listed Tingo Group from transferring money or property or issuing shares to Mmobuosi; (3) enjoining Defendants from selling or otherwise disposing of their respective holding in Agri-Fintech and/or Tingo Group stock; (4) prohibiting Defendants and their agents from destroying, altering, or concealing records and documents; and (5) ordering Defendants to show cause why a preliminary injunction continuing the relief set forth in any temporary restraining order as well as ordering repatriation of proceeds and a sworn accounting should not be entered.

d) Fraud: Misappropriation with Invoice (22nd December, 2023)

The SEC announced fraud charges against Brooge Energy Limited, a publicly-traded energy company located in the United Arab Emirates, the company’s former CEO, Nicolaas Lammert Paardenkooper, and its former Chief Strategy Officer and Interim CEO, Lina Saheb.

Before and after going public through a special purpose acquisition transaction, Brooge, whose securities trade on NASDAQ, misstated between 30 and 80 percent of its revenues from 2018 through early 2021 in SEC filings related to the offer and sale of up to $500 million of securities. The order finds that Brooge created false invoices to support inflating revenues from its oil facilities in Fujairah, UAE by over $70 million over three years, and that Paardenkooper and Saheb knew, or were reckless in not knowing, of the fraud. The SEC order also finds that Brooge provided these false invoices to its auditors to conceal the inflated revenue.

Brooge agreed to settle the SEC’s charges that found the company violated the antifraud, proxy statement, reporting, and books and records provisions of the federal securities laws and to pay a $5 million penalty. Paardenkooper and Saheb also agreed to settle the charges, to each pay $100,000 civil penalties, and to permanent officer and director bars.

According to the order, Brooge agreed during the SEC’s investigation not to issue the $500 million in securities. In April 2023, the company announced a restatement of its audited financial statements from 2018 through 2020.

e) Violation of Internal Accounting Controls (2nd November, 2023)

The SEC’s order finds that, from 2008 through 2020, Royal Bank of Canada’s accounting controls failed to ensure that the firm accurately accounted for its internally developed software project costs. The order finds that, for a portion of its internally developed software projects, Royal Bank of Canada applied a single rate to determine how much of those projects’ costs to capitalize, but it lacked a reliable method for determining the appropriate rate to apply, in part because it could not adequately differentiate between capitalizable and non capitalizable costs. This resulted in, among other things, the bank using the same capitalization rate each year without a sufficient basis and capitalizing certain costs that were ineligible under the appropriate accounting methodology.

Royal Bank of Canada has agreed to cease and desist from committing or causing any violations or any future violations of these provisions. Royal Bank of Canada also agreed to pay a $6 million civil penalty, offset by amounts paid to Canadian regulatory authorities as a result of the same conduct. The SEC considered Royal Bank of Canada’s remedial acts in determining to accept the settlement.

f) Representation of Material Misstatements (28th November, 2023)

SEC issued a suspension order against Daniel Rothbaum, CPA who as a controller for a subsidiary of UniTek Global Services Inc., was among others responsible for UniTek materially overstating its earnings in public filings with the Commission. The misstatements arose from the premature recognition of revenue using the percentage of completion accounting model based on goods and services purportedly purchased from subcontractors. Rothbaum did not fully understand the relevant accounting principles with respect to this issue and, along with UniTek’s Chief Accounting Officer and Corporate Controller, provided incorrect accounting advice to others and improperly relied on receipt of subcontractor invoices rather than receipt of the related goods and services to conclude when recognition of revenue was appropriate.

g) Misleading Investors about Sales Performance (29th September, 2023)

The SEC charged Newell Brands Inc., a Georgia-based consumer products company and its former CEO, Michael Polk, with misleading investors about Newell’s core sales growth, a non-GAAP (Generally Accepted Accounting Principles) financial measure the company used to explain its underlying sales trends. From Q3 2016 through Q2 2017 (the “Relevant Period”), Newell announced core sales growth rates that were misleading because Newell did not also disclose that its publicly disclosed core sales growth rate was higher as the result of actions taken by Newell that were unrelated to its actual underlying sales trends. Internal communications during this period recognized that Newell’s sales were disappointing and had fallen short of management’s goals. In response, Newell’s then-CEO, Polk, approved plans to pull forward sales from future quarters, asked employees to examine accruals established for customer promotions in order to determine if they could be reduced, and agreed with decisions to reclassify consideration payable to customers that resulted in the value of that consideration not being deducted as required by generally accepted accounting principles (GAAP).

Part A – Goods and Services Tax

I. HIGH COURT

82. Parsvnath Traders vs. Principal Commissioner, CGST

2023 (77) G.S.T.L. 413 (P&H.)

Date of Order: 27th July, 2023

Amount deposited during search operation cannot be treated as voluntary deposit and retained by the department where no proceedings were initiated under section 74(1) of CGST Act.

FACTS

Petitioner was engaged in trading of chemicals. Respondent searched the business premises and informed the petitioner that it was in possession of bogus invoices from the supplier without actual receipt of goods and had illegally availed ITC. Further, petitioner was forced to deposit tax amount on the same day and respondent did not provide the copy of statements recorded. On conclusion of search operations, neither any SCN nor any Order determining tax liability as per GST Law was provided to the petitioner. Accordingly, the petitioner requested the respondent to refund the amount deposited during the search. Thereafter, an order rejecting such refund was issued by respondent contending that deposits made voluntarily vide GST DRC-03 amounted to self-ascertainment as per section 74(5) of CGST Act.

Being aggrieved, petitioner preferred a writ petition before Hon’ble High Court seeking refund of amount forcefully deposited during search.

HELD

Hon’ble High Court, relying on its own decision in cases of William E-Connor Associates & Sourcing (P.) Ltd vs. Union of India & Others [76 GSTL 494 (P&H)], Diwakar Enterprises (P.) Ltd vs. Commissioner of CGST & Others [2023 (74) GSTL 202 (P&H)] and Modern Insecticides Ltd vs. Commissioner, CGST and Others [2023 (78) GSTL 423 (P&H)] held that amount deposited during search cannot be retained by department if no proceedings were initiated under Section 74(1) of CGST Act. Further, it was held that the amount deposited during search under stress does not amount to “self-assessment” or “self-ascertainment” as per section 74(5) of CGST Act. Accordingly, Hon’ble High Court instructed respondent to refund the amount deposited back to petitioner within a period of 6 weeks along with interest @ 6 per cent.

Thus, the petition was allowed in favour of the petitioner.

83. TVL. Raja Stores vs. Assistant Commissioner (ST)

2023 (77) GSTL 367 (Mad.)

Date of Order: 11th August, 2023

Audit as per section 65 of CGST Act cannot be conducted by department subsequent to closure of business operations and order for cancellation of registration was passed.

FACTS

Petitioner was a partnership firm registered under GST Act, 2017. It made an application before the department for closure of business. An order was issued allowing the petitioner to close its business with effect from 31st March, 2023. Subsequently, a notice dated 19th May, 2023 was issued for conducting audit under section 65 of CGST Act. Petitioner being aggrieved, filed a writ petition challenging the notice issued for conducting audit before Hon’ble High Court

HELD

It was held that section 65 of CGST Act specifically states that audit can be conducted for “any registered person” “for such period”, “for such frequency” and in “such manner”. Hence, unregistered persons are exempt from purview of the said section. Respondent failed to conduct audit for all these years from 2017–18 till 2021–22. When the section provides for periodical audit, respondent cannot suddenly wake up as per its own sweet will and conduct an audit. However, assessment proceedings could be initiated under sections 73 and 74 of CGST Act against petitioner.

Hence, the impugned order was quashed.

84 Kesoram Industries Ltd vs. Commissioner of Central Tax

2023 (78) GSTL 291 (Tel.)

Date of Order: 20th September, 2023

Garnishee proceedings initiated under section 79(1)(c) of CGST Act without issuing any prior notice are arbitrary and violate the principles of natural justice.

FACTS

Petitioner was engaged in manufacture and supply of cement. A letter was issued to the petitioner on  19th June, 2023 demanding interest of ₹1,28,97,335 on account of delay in payment of tax for the period from July 2017 to January 2023. Also, petitioner was further instructed to discharge the interest liability within 7 days failing which recovery proceedings would be initiated as per section 79 of CGST Act. In its response, petitioner submitted two letters dated 28th June, 2023 and 25th July, 2023, stating that they had already paid interest of ₹13,07,942 on delayed payment of tax dues. However, disregarding the submissions made by petitioner, garnishee proceedings were initiated under section 79(1)(c) of CGST Act vide notice dated 25th July, 2023 and 28th July, 2023 without issuing any SCN or providing opportunity of being heard.

Aggrieved by the same, a writ petition was filed before Hon’ble High Court.

HELD

It was held that respondent had erred while initiating the impugned garnishee proceedings since neither any SCN under section 73 or 74 of CGST Act was issued nor any opportunity of personal hearing was provided resulting in breach of principles of natural justice. Thus, the impugned proceedings are liable to be set aside with a discretion to respondent for initiating fresh proceedings in accordance with law.

85. Ganesh Steel (India) vs. State of Punjab

2023 (79) GSTL 168 (P&H)

Date of Order: 31st October, 2023

Refund of tax fine and penalty deposited for release of goods confiscated under section 130 of CGST Act pursuant to a favourable ordercannot be denied under the pretext that the department intends to file an appeal especially where no appeal was filed for a period of more than 1 year 4 months.

FACTS

An order dated 5th September, 2019 was passed by respondent demanding tax penalty and fine under section 130 of CGST Act amounting to ₹8,80,992. Petitioner for the sake of getting back the goods paid the amount. Subsequently, an appeal was preferred which was decided in favour of the petitioner. Accordingly, the petitioner applied for a refund of the entire amount of ₹8,80,992. Thereafter, application for refund was rejected and refund was declined via order dated 28th April, 2023 by State Tax Officer on the ground that department was under process of filing an appeal against order passed by Appellate Authority which was not filed even after more than 1 year and 4 months had lapsed. Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

It was held that the department was merely delaying the refund accrued to petitioner since no appeal was filed against the order passed by Appellate Authority for a period of more than 1 year 4 months. Thus, order dated 28th April, 2023 rejecting refund of petitioner was quashed, and respondent was directed to refund the amount within a period of 2 weeks.

86 Praveen Bhaskaran vs. Union of India

2023 (79) GSTL 210 (Ker.)

Date of Order: 20th September, 2023

ITC cannot be denied merely due to non-reflection of transaction in GSTR 2A without examining evidence submitted and giving the opportunity of being heard.

FACTS

ITC claimed by petitioner was denied by an order on the ground that ITC was not reflected in GSTR 2A since the supplier of petitioner had not mentioned supplies while filing GSTR 1. Also, no proof of payment of GST to the department was provided by the petitioner.

Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

It was held that ITC cannot be denied merely because it was not appearing in GSTR 2A of petitioner. High Court relied on the decisions of Diya Agencies vs. State Tax Officer [2023 (10) Centax 266 (Ker.), Suncraft Energy Pvt Ltd vs. Assistant Commissioner, State Tax, Ballygunge Charge [2023 (77) GSTL 55 (Cal.)] and State of Karnataka vs. M/s. Ecom Gill Coffee Trading (P.) Ltd [2023 (72) GSTL 134 (S.C.)]wherein it was held that reasonable opportunity should be provided to the taxpayer for submitting evidences and ITC should be allowed if the claims were bonafide and genuine. Impugned order for denial of ITC was thus set aside and matter was remanded back to respondent for examining evidences.

From Published Accounts

COMPILERS’ NOTE

Illustration of disclosure and reporting for disputed income tax purposes regarding deductions claimed. Also, for the first time, NFRA after examining the process followed by 2 Chartered Accountants (other than the auditor) who certified the said deductions and passed an adverse order commenting on the verification process followed by the said Chartered Accountants. On an appeal to the Delhi High Court by the said Chartered Accountants, the Show Cause Notice of NFRA levying penalty on the said Chartered Accountants has been stayed till date of next hearing.

Quess Corp Ltd (31st March, 2023)

From Notes to Financial Statements

INCOME TAX MATTERS

During the year that ended 31st March, 2023, the Company received assessment order (‘Order’) under section 143(3) read with section 144C(13) of the Income Tax Act after completion of Dispute Resolution Panel (‘DRP’) proceedings for fiscal 2017-2018 resulting in disallowances primarily relating to deduction under section 80JJAA of the Income Tax Act and depreciation on goodwill. The Company has filed an appeal with the Income Tax Appellate Tribunal relating to these disallowances. Further, during the year ended 31st March, 2023, the Company also received a draft assessment order for fiscal 2018-2019 under section 144C(1) of the Income Tax Act in which a primary deduction under section 80JJAA of the Income Tax Act and depreciation on goodwill has been disallowed. The Company has filed objections before the DRP against the draft assessment order.

The Company intends to vigorously contest its position and interpretative stance of these sections on merits, including judicial precedents, and believes it can strongly defend its position through the legal process as defined under the Income Tax Act. Based on its internal evaluation, the Company has disclosed a contingent liability of R740 million for fiscal 2017-2018 and fiscal 2018-2019, excluding interest and penalties, if any. The contingent liability will be updated as developments unfold in future.

The Company continues to maintain its stand on the manner of claiming the 80JJAA deduction, and accordingly, 80JJAA deduction of R1,824.01 million is claimed for the year ended 31st March, 2023, respectively. The Company believes that such deduction, including its quantum, has been validly and consistently claimed, in conformity with its interpretation of the statute.

From Auditors’ Report

EMPHASIS OF MATTERS

We draw attention to Note 37.4 of the standalone financial statements relating to disallowance by the Income Tax authorities primarily relating to depreciation on goodwill and deduction under section 80JJAA of the Income Tax Act, 1961 for financial year ended 31st March, 2018 and 2019, and Company’s evaluation relating to these disallowances. Our opinion is not modified in respect of these matters.

EXTRACT FROM EXECUTIVE SUMMARY OF ORDER PASSED BY NFRA (ORDER DATED 3RD JANUARY, 2024)

In August 2022 the Director General of Income Tax (Investigation), Bengaluru (IT department) shared information about claim of deduction under section 80 JJAA of Income Tax Act totalling R1135.41 crores by Quess based on form 10 DA issued by two chartered accountants for Financial Years 2016-17, 2017-18, 2018-19, 2019-20 & 2020-21. NFRA Suo motu initiated action under Section 132(4) of the Companies Act 2013 (‘Act’ hereafter) to look into the professional conduct of the chartered accountants and their firms involved in the said certification.

NFRA’s investigations inter alia revealed that the CA failed to exercise due diligence and obtain sufficient information before issuing reports under the Income Tax Act. The CA failed to apply the necessary checks, e.g.,

(a) verify reorganisation of business with various parties;

(b) exclude employees whose EPS contribution was paid by the Government;

(c) correctly report the number of additional employees during FY 2020-21;

(d) verify that payment of additional employee cost was made by account payee cheque/draft/electronic means; and

(e) verify salary limit of ₹25,000 per month for new employees, etc.

Based on investigation and proceedings under section 132 (4) of the Companies Act 2013 and after giving the CA an opportunity to present their case, NFRA found the CA, who issued reports under Income Tax Act to Quess Corp Ltd, guilty of professional misconduct and imposes through this Order a monetary penalty of ₹ fifty (50) lakhs which take effect from a period of 30 days from issuance of this Order.

Can Negative Revenue Be Reclassified to Expense?

In recent months, global regulators have become active on the topic of reclassification of negative revenue to expenses under IFRS 15 Revenue from Contracts with Customers (Ind AS 115 Revenue from Contracts with Customers). The purpose of this article is to help address this question and to clarify the authors’ view under Ind AS. This issue will require significant judgement and therefore formal consultation is desirable.

Payments to customers can take many different forms, including payments made by an entity to current customers (such as compensation for delays paid by an airline to its passengers), and payments or discounts provided by an entity to its customers’ customers. This issue is, therefore, closely linked to:

  • Principal versus agent considerations;
  • Determining who is(are) the current customer(s) (and the customer’s customer); and
  • Whether payments or discounts granted to a customer’s customer are the result of contractual or implied promises to one’s direct customer (and, therefore, in the scope of Ind AS 115).

All of these have the potential to be judgemental assessments and will depend on the facts. Therefore, the application of the same requirements might look different between entities.

AUTHOR’S VIEW

Ind AS 115.70 requires payments to customers that are not in exchange for a distinct good or service to be treated as a reduction of the transaction price. Therefore, in light of the words in the standard, we believe it is acceptable for an entity to present payments to a customer in excess of the transaction price that are not in exchange for a distinct good or service within revenue (i.e., not reclassify to expense). This would be the most preferred treatment.

However, the author believes it might also be acceptable, in certain circumstances, to reclassify negative revenue to expense in an entity’s income statement. For example, if an entity demonstrates that characterisation of consideration payable to a customer as a reduction of revenue results in negative revenue for a specific customer on a cumulative basis (i.e., since the inception of the financial year between the entity and the customer or inception of the relationship with the customer and considering anticipated future contracts), then the amount of the cumulative negative revenue for a financial year could be reclassified to expense.

Ideally, whether cumulative negative revenue exists for a specific customer, revenues from all contracts with that customer recognised by all entities within the consolidated group that includes the entity paying the consideration to the customer needs to be considered (i.e., revenues recognised from sales to the customer from all of the consolidated entities needs to be considered). However, that could be very restrictive and not practical, and therefore a more practical approach in this regard may be acceptable. There could be situations, where some contracts with a customer result in positive revenue whereas other contracts with that customer result in negative revenue. Even in such circumstances, the author believes that the positive revenue and negative revenue need not be set off against each other for presentation purposes, and the negative revenue could be presented as an expense and the positive revenue presented as revenue. To justify this position, the entity shall have to demonstrate that each of these contracts with the customer were negotiated based on independently fair terms, and the contracts that resulted in negative revenue were entered into due to the exigencies involved and keeping in mind the market situation and nature of the product sold or service delivered at that time.

HOW DOES AN ENTITY MAKE THE ASSESSMENT?

An entity needs to use its judgement to make the assessment relating to the presentation of negative revenue. The answers to the questions below may provide an insight into the analysis for negative revenue and the degree of complexity involved.

  • Is the entity the principal or the agent in relation to specified goods or services in the contract and, therefore, who are its current customers? Note: the focus of this discussion is current customers (not former or potential customers)
  • Does the entity make payments to its identified customer(s) and / or other entities in the distribution chain for that contract (i.e., a customer’s customer)? Such payments are in the scope of the requirements for consideration payable to a customer in Ind AS 115.
  • Are any payments or discounts made to end-consumers (i.e., a customer’s customer) outside the distribution chain that are a contractual or implied promise to the entity’s direct customer? Such payments are also in the scope of the requirements for consideration payable to a customer in Ind AS 115.
  • If there is more than one customer (e.g., the merchants and end-consumers are both customers), to which customers do the payment or discount relate? i.e., understand to which customer relationship the consideration payable to a customer relates. This is important because, as noted above, it might not automatically relate to the party to whom it is paid (e.g., if it is paid by the entity on behalf of a customer to another party, who also happens to be a customer of the entity).

ILLUSTRATIVE EXAMPLE

This illustrative example is provided to assist in understanding this guidance. However, it is not intended to limit the types of fact patterns to which this guidance relates (e.g., the above guidance equally applies to direct payments to customers, arrangements involving more than one customer (e.g., where an end-consumer is also a customer), entities arranging other goods or services through websites, apps etc. (e.g., food delivery, taxi rides) for only a single merchant or several merchants).

Entity A operates a platform that facilitates the booking of air travel from various airlines through its website. Entity A has determined that it is the agent and that its performance obligation is to facilitate the sale of air travel on behalf of the airlines. For the sake of simplicity, assume that the airlines are Entity A’s only customers.

Even though the airlines set the prices for the tickets, Entity A has discretion in determining what price it charges the end-consumers. Therefore, Entity A is able to discount the amounts end-consumers pay, while still having to pay the full price to the airlines. It offers discounts to end-consumers to increase their use of the platform. However, it has determined that these payments are an implied promise to its customers (the airlines). That is, its customers have a valid expectation that the payment will be made to the end-consumer based on reasonably available information about the entity’s incentive program, including written or oral communications and any customary business practices of the entity.

As Entity A is an agent and its customers are the airlines, the assessment of cumulative negative revenue on a customer relationship basis would be with the individual airlines (and its group companies), not with each individual end-consumer.

Assume Entity A has two Airlines as customers (B and C). In each case, Entity A determines that these discounts:

  • Are not outside the scope of Ind AS 115 – while they might be paid to anyone, they are an implied promise to their customer (each Airline) and, therefore, the consideration payable to a customer,
  • Are not within the scope of other requirements in Ind AS 115 – e.g., they are not in settlement of a refund (or other) liability,
  • Are not in exchange for a distinct good or service – while they are intended to drive traffic to the website, that is not sufficient to conclude they are providing a distinct marketing service (or similar) to the entity.

Therefore, Entity A calculates total cumulative revenue (including consideration paid or payable to the customer) from all transactions with each Airline (and their group companies) across past, current, and anticipated future customer contracts or for a particular financial year.

Scenario 1: Net amount is not negative on a cumulative basis [Customer Airline B]

Entity A has earned, and expects to earn from current and anticipated contracts, revenue from Airline B that is sufficient to exceed any current discounts provided to Airline B’s customers (the end-consumers). Therefore, it treats the current discounts as a reduction of revenue and does not reclassify any amounts in the current period (even if it causes revenue in the current period to be negative for this customer).

However, as discussed above the entity may have good reasons to classify with regards to Airline B, all the negative revenue as the expense and all positive revenue as revenue, depending upon facts and circumstances, which are discussed earlier.

Scenario 2: Net amount is negative on a cumulative basis [Customer Airline C]

Entity A has earned, and expects to earn from current and anticipated contracts, revenue from Airline C that is not sufficient to exceed any current discounts provided to Airline C’s customers (the end-consumers). That is, the entity performed a thorough review of all past, current and anticipated contracts with Airline C, and all revenues from and payments to that customer recognised by all entities within the consolidated group that includes the entity paying the consideration to the customer and determining that there is a cumulative negative revenue for Airline C.

Therefore, the entity can reclassify the cumulative negative revenue (not the current period shortfall) to expense. However, the entity is not mandatorily required to do so; i.e., negative amounts could remain in revenue in accordance with Ind AS 115.70.

CONCLUSION

There are multiple ways of addressing the presentation of negative revenue, in the absence of specific guidance under Ind AS 115 on this topic. The presentation of negative revenue can be extremely complex under Ind AS and formal consultation on the matter is always desirable.

Credit Notes in a GST Scenario

INTRODUCTION

In any commercial transaction, an invoice represents a document staking a claim towards supplies made by an entity to another. Subsequent adjustments to the value of such supplies already accounted for through the issuance of an invoice are typically made by either debit notes or credit notes. In many cases, a debit note by one entity is also mirrored by a credit note by another entity and vice versa. It is also a common business practice to issue a debit note instead of a tax invoice in certain specific types of transactions like reimbursements, etc.

Since GST imposes a tax on supplies of goods or services or both, extensive provisions have been made to prescribe for the issuance of a tax invoice, contents of the said invoice and timelines for the issuance thereof. Thus, the issuance of a tax invoice for a taxable supply triggers a liability to pay GST. In fact, by mandating the requirement to issue a tax invoice in all cases of taxable supplies, the GST Law has reduced the extent and flexibility available to commercial enterprises to issue debit notes, and therefore, tax invoice and debit notes cannot be issued interchangeably.

The GST Law also considers situations wherein the supplier is required to issue a debit note or credit note. As mandated by Section 34(3) of the CGST Act, any upward adjustment to the value or tax specified in the original tax invoice would be through a debit note, and the said debit note is required to be reported as specified under Section 34(4). There is no timeline for the issuance of the debit note. Similarly, Section 34(1) permits the issuance of a credit note for downward adjustment to the value or tax and also in circumstances like return of goods or deficiency in supply and Section 34(2) prescribes for reporting of the said credit note. However, Section 34(2) prescribes a timeline for the said reporting. In this article, we shall deal with the various issues revolving around credit notes from a GST perspective.

LEGAL POSITION & ANALYSIS THEREOF

Section 34 of the CGST Act, 2017, deals with the provisions relating to issuance of a credit note. The same provides as under:

(1) [Where one or more tax invoices have] been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient [one or more credit notes for supplies made in a financial year] containing such particulars as may be prescribed.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than [the thirtieth day of November] following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed.

A plain reading of the above provisions indicates that Section 34(1) permits a taxable person who has made a supply of goods or services to issue a credit note only in following cases:

– The taxable value as per invoice or the tax charged thereon is in excess of what should have been disclosed.

– The goods supplied are returned by the recipient.

– The goods or services or both are found to be deficient.

A quick reading of the above provisions would suggest that the credit note issued shall be declared and adjusted against the tax liability within the above timeline, failing which a taxable person may not be entitled to claim reduction in his outward taxable liability. However, a closer reading of the said provisions may suggest otherwise.

At the outset, Section 34(1) is an enabling provision which permits the issuance of a credit note upon satisfaction of the prescribed conditions. It does not impose any time limit for issuance of the credit note. Therefore, so long as the incidents warranting the issuance of a credit note are attracted, there is no provision in the law which prohibits a supplier from issuing a credit note after the time limit prescribed. Section 34(2) merely prescribes a timeline for reporting of the said credit notes. At this juncture, it may be relevant to interpret the timeline mentioned in Section 34(2). As reproduced above, Section 34(2) requires a credit note to be reported in the return for the month during which such credit note has been issued
but not later than the thirtieth day of November following the end of the financial year in which such supply was made.

This provision can be understood with a simple example. If the supply was made in the Financial Year 2022–2023, and the credit note is issued in June 2023, the above provision requires the reporting of the credit note in the return to be filed for the month of June 2023. It also requires that the said return should be filed before30th November, 2023. In case the supplier omits to report the credit note in the return of June 2023, in view of the specific provisions of Section 37 (discussed later), he can declare the said credit note in any subsequent return so long as the said return is filed before 30th November, 2023.

However, real-life situations can be slightly complex. What if in the above case, if the underlying supply itself is cancelled or the goods are entirely returned in December 2023? Commercially and legally, the credit note cannot be issued before December 2023. Assuming it is issued in December 2023, how would one interpret the above provisions prescribing an outer timeline of 30th November, 2023?

It may be important to understand the provisions relating to the reporting of credit notes. The process of transaction-level reporting of documents in a statement in GSTR-1 to be filed under Section 37, which would automatically result in a compilation of aggregate-level tax liability to be paid through a return in GSTR-3B to be filed under Section 39, is now a settled proposition. It is also clear that GSTR-3B and not GSTR-1 constitutes a return for the purposes of GST Law.

In general, once a credit note is issued u/s 34(1), a taxable person would be required to report it in his GSTR-1 (i.e., statement prescribed u/s 37) which provides as under:

(1) Every registered person, other than an Input Service Distributor, a non-resident taxable person and a person paying tax under the provisions of section 10 or section 51 or section 52, shall furnish, electronically, [subject to such conditions and restrictions and] in such form and manner as may be prescribed, the details of outward supplies of goods or services or both effected during a tax period on or before the tenth day of the month succeeding the said tax period and such details [shall, subject to such conditions and restrictions, within such time and in such manner as may be prescribed, be communicated to the recipient of the said supplies].

As can be seen from the above, Section 37(1) requires furnishing of details relating to outward supplies. What “details” have to be furnished has been prescribed vide Rules. Rule 59(4) provides that the taxable person shall furnish details relating to invoices and debit and credit notes issued during the month for such invoices which were issued previously. Tables 4, 5 and 6 require the reporting of tax invoices whereas Table 9B requires the reporting of debit notes and credit notes. It is, therefore, evident that the law considers invoice and credit note as distinct details.

Independent of the above provisions pertaining to debit / credit notes issued after the issuance of a tax invoice, the law also envisages errors or omissions in furnishing of details pertaining to the above referred invoices, debit notes and credit notes. Section 37(3) of the Act reads as under:

(3) Any registered person, who has furnished the details under sub-section (1) for any tax period [***], shall, upon discovery of any error or omission therein, rectify such error or omission in such manner as may be prescribed, and shall pay the tax and interest, if any, in case there is a short payment of tax on account of such error or omission, in the return to be furnished for such tax period.

Provided that no rectification of error or omission in respect of the details furnished under sub-section (1) shall be allowed after [the thirtieth day of November] following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier.

Tables 9A and 9C deal with the reporting of the said amendments, and as can be seen from the above provisions, a timeline is prescribed for the said amendments.

Coming back to the original example of a credit note issued in December 2023 for a supply made in FY 2022–2023. Such a credit note would require reporting under Section 37(1) in Table 9B and may not be governed by the timelines prescribed under Section 37(3). What constitutes “discovery of error or omission” would necessarily mean that a document issued was either not reported or reported with some discrepancy in GSTR-1 which required the amendment of GSTR-1 by the taxable person. For example, against an invoice issued in April 2022, the taxable person issues a credit note in June 2022 but fails to disclose the credit note in his GSTR-1, and this omission is detected only in December 2023. Such failure to disclose would be covered u/s 34(3) as this clearly is an omission. However, if the credit note itself is issued in December, it cannot be said that such credit note is governed by Section 34(3), i.e., amendment of an error or omission.

The details furnished in Section 37(1), subject to Section 37(3) are supposed to flow as “self-assessed” liability to GSTR-3B, the return prescribed u/s 39. It is known that GSTR-3B is a summary return requiring disclosure of details of outward supplies and inward supplies at an aggregate level, i.e., no breakup is required to be given as to liability on account of outward supplies, reduction in liability on account of credit notes issued, etc. Therefore, if once a credit note is correctly disclosed u/s 37 (1), the details of which flow to GSTR-3B, there cannot be a question for restriction on adjustment against tax liability as there is no specific restriction prescribed vis-à-vis Section 34(2) for adjustment.

The question that, therefore, arises is what is the role of Section 34(2)? One may say that Section 34(2) firstly casts an obligation by defining a timeline for reporting the credit note and creates a right for the taxable person by permitting an adjustment in the prescribed manner. Prescribed manner would mean reporting a credit note u/s 37 and adjusting the same while filing the return u/s 39, both of which do not restrict adjustment of tax liability on account of such credit notes, as discussed above. Section 34(2) casts an obligation for reporting but does not restrict reporting thereafter. For example, if GSTR-1 is not filed on 11th, it does not mean it can’t be filed on 12th. There are consequences like a late fee, but it could still be filed. However, there is nothing which explicitly mentions that if you do not follow the obligation of reporting, the right of adjustment will be taken away. If the intention was indeed to restrict the adjustment in case of delayed reporting, Section 34(2) should have been worded as under:

The tax liability on account of the credit note referredto in sub-section (1) shall be adjusted in such manner as may be prescribed, only if the registered person who issues the credit note has declared the details ofsuch credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.

DISTINGUISHING BETWEEN CREDIT NOTE GOVERNED AND NOT GOVERNED BY SECTION 34(1)

As discussed above, Section 34(1) envisages issuance of the credit note, disclosure and adjustment against other tax liability in following scenarios:

– The taxable value as per invoice or the tax charged thereon is in excess of what should have been disclosed.

– The goods supplied are returned by the recipient.

– The goods or services or both are found to be deficient.

In addition to the above, there can be other scenarios necessitating a taxable person to issue a credit note but which may not satisfy conditions prescribed u/s 34 (1), such as:

– An invoice for supply of goods has been issued to customer A, Maharashtra. However, before the goods could be delivered, the customer asked the supplier to issue an invoice to his Gujarat registration.

– An invoice for supply of goods has been issued to customer A though the goods have been delivered to customer B. The invoice issued to customer A is, therefore, required to be cancelled by issuing a credit note, and a new invoice is to be issued to customer B.

– An invoice for supply has been raised for ₹100 plus GST of ₹18. Later on, it comes to the supplier’s attention that the agreed amount was ₹80 / ₹120, and the recipient asks for a new invoice.

– An airline issues a ticket (which is treated as a tax invoice) for a future air travel. However, before the travel, the passenger cancels the ticket resulting in no supply taking place.

In all the above scenarios, the question that arises is whether the supplier has an option to issue a credit note for the invoice issued with incorrect details and generate a fresh invoice or invoice issued for a future supply which ultimately did not take place.

This is relevant because Section 34 permits the credit notes only in specific scenarios. However, the question remains as to whether a credit note can be issued in cases where an invoice issued for supply agreed to be made is subsequently cancelled or invoice is wrongly issued? Can such cases be classified as goods return or deficient supply? This is because to claim goods return, the goods should be supplied in the first place.

Similarly, to claim deficiency in supply, the supply should have been made and only then can there be a deficiency thereof. In this regard, one may refer to similar provisions u/r 6(3) of Service Tax Rules, 1994, which specifically permitted issuance of credit note in specific cases. The said rules provided as under:

(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason [orwhere the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract], the assessee may take the credit of such excess service tax paid by him, if the assessee,—

[(a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or]

[(b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.]

Similar provision permitting issuance of a credit note in case of non-supply per se is missing under GST. Therefore, there is a possibility of the Department claiming that the option of issuing a credit note to rectify the mistakes in an invoice other than in case of scenarios covered u/s 34 is not available.

This leads us to the next question of how to deal with such instances. In such cases, a taxable person always has an option to claim non-liability to pay tax on the grounds that there is no supply being made. GST is levied on supply of goods or services or both. When no underlying supply takes place, there is nothing in the law which authorises the collection and payment of a tax on a supply which is not affected. Therefore, the tax cannot be retained by the Government and should be refunded to the person who bears the same.

In fact, in the context of real estate transactions where cancellation of contracts take place, the Board has issued Circular 188/20/2022-GST permitting the recipient to claim refund of tax paid on cases involving deficient supplies or cancellation of supplies. Interestingly, the Circular at para 4.4 clarifies that in case the time limit prescribed u/s 34 has not lapsed, the supplier can issue a credit note to the recipient and adjust the tax amount against his other liability. In that sense, the clarification can be used to counter any challenge to the issuance of a credit note u/s 34 on account of cancellation of supply. However, so far as wrong invoicing is concerned, whether a credit note u/s 34 can be issued or not remains a subject matter of debate. For such cases also, a taxable person can take shelter under this Circular to claim refund u/s 54(1) of a tax paid, which was otherwise not payable subject to unjust enrichment. Interestingly, section 54(8)(c) provides for a refund of tax paid on a supply which is not provided, either wholly or partly and for which, invoice has not been issued. However, shelter can be taken u/s 54(8)(e) which provides for refund of tax and interest or any other amount paid by the applicant the incidence of such tax and interest has not been passed on to any other person.

CREDIT NOTES IN CASE OF WRITE-OFFS

GST is generally payable at the time of issuance of invoice. However, it is possible that the realisation of invoice might take place over time, and in many cases, there might not be realisation of invoice proceeds, i.e., the amount recoverable from the recipient is written off, either as bad-debts or renegotiation on account of non-payment of consideration by the recipient.

A perusal of Section 34 shows that such write-offs do not qualify as one of the reasons for which credit note u/s 34 can be issued. Therefore, the taxable person cannot claim a reduction from his outward liability, though he can issue a financial credit note, also known as non-GST Credit Note for the purpose of settling the accounts with the recipient.

However, in case of cross-border transactions, i.e., exports, one of the conditions for a supply to be classified as export of service is that export proceeds should be realised in convertible foreign exchange. In fact, when a supplier executes a LUT with the Department for effecting zero-rated supplies without payment of integrated tax, they give an undertaking to make the payment if the export proceeds are not realised within the prescribed period. In such cases, the question that arises is whether reduction in consideration receivable by way of issuance of a credit note (whether or not governed by Section 34) will reduce the obligation on the part of the supplier to demonstrate receipt of consideration to that extent or it will be treated as non-compliance of condition u/s 2(6) of IGST Act, 2017, resulting in a denial of claim of export of services to that extent. The larger issue will be in the context of credit notes not governed by Section 34. In such cases, the only recourse available with the supplier would be to challenge the vires of Rule 96A which requires payment of integrated tax to the extent payment is not realised on the grounds that there is no power to demand tax on export transactions under the Constitution. Additionally, one may argue that write-offs are governed by the FEMA regulations.

In fact, RBI has issued RBI FED Master Direction No. 16/2015-16 dated 1st January, 2016, on “Export of Goods and Services”, consolidating directions in respect of export of goods and services. Para C.23, thereof, provides that, subject to certain conditions, any exporter who has not been able to realise the outstanding export dues despite best efforts may either self-write off or approach the authorised Dealer for write-off of such export bills. The maximum amount of unrealised export proceeds that can be written-off is 10 per cent of total export proceeds realised during the previous calendar year, which itself provides for write-off up to 10 per cent. Therefore, when the law meant to regulate foreign exchange dealings itself allowed for extension of time for realising export proceeds and also provided for writing-off of certain export proceeds and Section 2(6) of the IGST Act alsonot prescribing any time limit to realise export proceeds, Rule 96A and Notification 37/2017-CT dated 4th October, 2017, prescribing the said time limit are ultra-vires the statute.

IMPACT OF CREDIT NOTES ON ITC

One of the conditions u/s 16 to claim input tax credit is that the recipient of supply should have made payment of the consideration to the supplier except in cases where the tax is payable on reverse charge basis. The relevant provision is reproduced below:

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.

As discussed above, a supplier can issue two types of credit note, one which is governed u/s 34(1) and results in reduction of his outward tax liability and another being a financial / commercial credit note which does not have any impact on his outward tax liability. In either case, the credit note results in the supplier agreeing to a reduction in the consideration receivable for the supply. The question that remains is whether in the case of the issuance of a credit note by the supplier casts an obligation on the recipient to reverse the ITC claimed.

It must be kept in mind that issuance of a credit note results in reduction in the consideration payable by the recipient to the supplier, i.e., to the extent of the credit note issued, the supplier foregoes his right to receive the consideration, and therefore, to that extent, it cannot be said that there is a failure to pay by the recipient to the supplier. What constitutes failure to pay has been dealt with by the Bombay High Court in the case of Malaysian Airlines vs. UOI [2010 (262) E.L.T. 192 (Bom.)] wherein it has been held that failure to pay means non-payment when amount is due. In the case of a credit note, when the supplier himself has agreed to receive a lower amount, the question of the amount being due to that extent does not arise, and therefore, it cannot be said that there is a failure to pay to the extent of the credit note issued. This view has also been followed in Board Circulars 877/15/2008-CX dated 17th November, 2008 and 122/3/2010-ST dated 30th April, 2010. In fact, in the context of post supply discounts, even in the context of GST, the CBIC had clarified that no reversal of ITC is required vide Circular 105/24/2019-GST dated 28th June, 2019 (though subsequently withdrawn by circular 112/31/2019 – GST dated 3rd October, 2019) as under:

5. There may be cases where post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the said supplier not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act. It has already been clarified vide Circular No. 92/11/2019-GST dated 7th March, 2019 that the supplier of goods can issue financial/commercial credit notes in such cases but he will not be eligible to reduce his original tax liability. Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial/commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial/commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial/commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

Therefore, in general, one may take a position that no obligation is cast on the recipient to reverse the ITC on account of a credit note issued by a supplier. However, when a credit note is issued u/s 34(1), it inter alia means a reduction in the value of taxable supply and the corresponding tax payable on the said supply. In fact, Section 15(3), which deals with exclusion of discount from the value of supply, specifically provides that exclusion of eligible discount from the value of supply shall be permitted only if the recipient also reverses the corresponding ITC. However, the same applies only in the context of eligible discounts which are excludable from the value of taxable supply. However, there is no such condition prescribed u/s 34 which requires the supplier issuing credit note to ensure that the recipient reverses the corresponding ITC except when issued in relation to a discount eligible for exclusion from value of supply. However, in case the supplier has issued a credit note u/s 34, a logical conclusion would be that the same results in a reduction in the value of supply for both the parties, and therefore, even the recipient will have to reverse the claim of ITC. The same has also been clarified under the pre-GST Regime by Board Circular 877/15/2008-CX dated 17th November, 2008 as under:

3. In view of above, it is clarified that in such cases, the entire amount of duty paid by the manufacturer, as shown in the invoice would be available as credit irrespective of the fact that subsequent to clearance of the goods, the price is reduced by way of discout or otherwise. However, if the duty paid is also reduced, along with the reduction in price, the reduced excise duty would only be available as credit. It may however be confirmed that the supplier, who has paid duty, has not filed/claimed the refund on account of reduction in price.

To summarise, in case of credit notes issued which are governed by Section 34, there is a requirement on the part of the recipient for the supplier to claim reduction in his outward tax liability. This takes us to the next question of when shall the reversal of ITC trigger. Just like there can be a timing difference in the issuance of invoice by the supplier and corresponding claim of ITC by the recipient, there can always be a timing difference in case of issuance of a credit note by the supplier and its accounting by the recipient. In fact, on many occasions, it is observed that the issuance of a credit note comes to the notice of the recipient on the basis of transaction reflecting in GSTR-2A which might also involve a scenario wherein the supplier declares the credit note backdated; for example, credit note dated April 2022 is disclosed in GSTR-1 of September 2022 and the recipient accounts for the same only in December 2022.

The question in such case would be whether the recipient is required to reverse ITC in April 2022 (credit note period), September 2022 (GSTR-2A period) or December 2022 (accounting period) and can the Department demand interest for delay in reversal of ITC in case the ITC is reversed in period subsequent to April 2022, i.e., May 2022 and onwards.

To deal with such a scenario, one would need to determine when the liability to reverse ITC triggers. While there is no specific provision for this, there is a provision as to when the ITC can be claimed, which is governed u/s 16. Section 16(2)(a) specifically provides that for claiming ITC, the recipient should be in possession of the document. More importantly, the recipient was not even aware of the issuance of the credit note in April 2022. Expecting him to reverse the ITC on the basis of a document which he is unaware of is clearly incorrect. Similarly, expecting reversal of ITC in September 2022 would also be incorrect. It must be noted that a recipient cannot claim ITC merely on the basis of transaction reflecting in their GSTR-2A. Similarly, a recipient cannot be expected to reverse the ITC merely on the basis of a credit note reflecting in GSTR-2A. Logically, if there is an expectation to reverse the ITC, the same can also be done only when the recipient is in possession of the corresponding document, i.e., credit note. Therefore, one can take a view that the tax period in which the credit note is received by the recipient is the appropriate trigger for reversing the ITC.

Another aspect which needs to be looked into is whether a recipient can defer the reversal of ITC on the ground that the same is not reflecting in his GSTR-2B, and therefore, just like claim of credit is dependent on ITC reflecting in GSTR-2B, even the reversal of ITC should depend on the same. Meaning there can be a situation where the recipient receives the credit note in September 2022 but the same is reflected in GSTR-2B of December 2022. A strict reading of the provision would indicate that just like eligibility to claim ITC is dependent upon the transaction reflecting in GSTR-2B, even the reversal, thereof, should depend upon the transaction getting reflected in GSTR-2B. This is because unless and until the transaction is not reflected in GSTR-2B, the recipient may not be in a position to determine whether the credit note received by him is governed by Section 34(1) or not and whether the recipient has adjusted his outward liability to that extent or not. If the recipient reverses the ITC and the supplier has issued a commercial / financial credit note not governed by Section 34(1), the transaction might end up getting taxed twice, as the recipient would have reversed the ITC and the supplier would not have claimed reduction in outward tax liability.

Another angle to be analysed is from the perspective of ITC claimed on import of goods. At times, after the goods are imported and cleared on payment of IGST, there are credit notes issued by the supplier. Whether a reversal of ITC would be triggered on such credit notes, as there is no exclusion prescribed under the 2nd proviso of Section 16(2) for ITC claimed on import of goods. A view can be taken that since the original document, based on which the ITC was claimed, i.e., bill of entry filed on the strength of commercial invoice issued by the supplier was not a tax invoice, even the consequential credit note cannot be issued u/s 34. Since such a credit note cannot have any GST implications, the question of any consequential impact on ITC should not arise. More importantly, there is also the support to claim that the issuance of a credit note does not result in failure to pay, and therefore, the 2nd proviso of Section 16(2) will also not get triggered in such cases.

CONCLUSION

Issuance of credit notes in commercial parlance is common. However, when such a credit note is issued in relation to a taxable outward supply, it gives rise to tax implications for both, the supplier issuing the invoice from the perspective of claiming reduction in outward tax liability as well as the corresponding recipient from the perspective of liability to reverse the input tax credit, if any. It is, therefore, important that while dealing with input tax credit, both at the time of issuing as well as receiving them, one exercise due care and understand the GST implications thereon.

Glimpses of Supreme Court Rulings

55 Commissioner of Income Tax vs. Jindal Steel & Power Limited (and connected appeals)

(2024) 460 ITR 162 (SC)

Industrial Undertaking — Captive Power Plant — Deduction under section 80-IA — The market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity for computing the profits of the eligible business — The rate of power sold to or supplied to the State Electricity Board cannot be the market rate of power sold to a consumer in the open market.

Depreciation — There is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return — All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 Under Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5.

RECOMPUTATION OF DEDUCTION UNDER SECTION 80IA OF THE INCOME TAX ACT, 1961.

The Assessee, M/s Jindal Steel and Power Ltd., Hisar, a public limited company was engaged in the business of generation of electricity, manufacture of sponge iron, M.S. Ingots etc.

Since electricity supplied by the State Electricity Board was inadequate to meet the requirements of its industrial units, the Assessee set up captive power generating units to supply electricity to its industrial units. Surplus power was supplied by the Assessee to the State Electricity Board.

The Assessee filed its return of income for the assessment year 2001-02 on 29th October, 2001 declaring nil income. The total income computed by the Assessee at nil was arrived at after claiming various deductions, including under Section 80IA of the Act. Since there was substantial book profit of the Assessee, net book profit being ₹1,11,43,36,230.00, income tax was levied under Section 115JB of the Act at the rate of 7.5 per cent along with surcharge and interest.

The return of income filed by the Assessee was processed by the Assessing Officer under Section 143(1) of the Act. After such processing, a refund was made to the Assessee.

Thereafter, the case was selected for scrutiny following which statutory notices under Section 143(2) and 142(1) of the Act were issued calling upon the Assessee to furnish details for clarification, which were complied with by the Assessee. During the assessment proceedings, the issue relating to deduction under Section 80IA of the Act came up for consideration. Assessee had claimed deduction under the said provision of a sum amounting to ₹80,10,38,505. The deduction claimed under Section 80IA related to profits of the power generating units of the Assessee.

The Assessing Officer noticed that the Assessee had shown a substantial amount of profit in its power generating units. The power generated was used for its own consumption and also supplied to the State Electricity Board in the State of Chhattisgarh and prior to the creation of the State of Chhattisgarh, to the State Electricity Board of the State of Madhya Pradesh. The electricity generated by the Assessee in its captive power plants at Raigarh (Chhattisgarh) was primarily used by it for its own consumption in its manufacturing units; while the additional/ surplus electricity was supplied to the State Electricity Board. Assessee had entered into an agreement on 15th July, 1999 with the State Electricity Board as per which Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board.

It was further noticed by the Assessing Officer that the Assessee had supplied power (electricity) to its industrial units for captive consumption at the rate of ₹3.72 per unit.

Assessing Officer took the view that the Assessee had declared inflated profits by showing supply of power at the rate of ₹3.72 per unit to its sister units i.e., for captive consumption. According to the Assessing Officer, there was no justification to claim electricity charge at the rate of ₹3.72 per unit for supply to its own industrial units when the Assessee was supplying power to the State Electricity Board at the rate of ₹2.32 per unit. Assessing Officer observed that the profit calculated by the Assessee (power generating units) at the rate of ₹3.72 per unit was not the real profit; the price per unit was inflated so that profit attributable to the power generating units could qualify for deduction from the taxable income under the Act. Thus, it was held to be a colourable device to reduce taxable income. On such an assumption, the Assessee was asked to explain its claim of deduction under Section 80IA of the Act which the Assessee complied with.

Response of the Assessee was considered by the Assessing Officer. By the assessment order dated 26th March, 2004 passed under Section 143(3) of the Act, the Assessing Officer held that ₹3.72 claimed by the Assessee as the rate at which power was supplied by it to its own industrial units was not the true market value. According to the Assessing Officer, the rate of ₹2.32 per unit agreed upon between the Assessee and the State Electricity Board and at which rate surplus electricity was supplied by the Assessee to the State Electricity Board was the market value of electricity. Therefore, for the purpose of computing the profit of the power generating units, the selling rate of power per unit was taken at ₹2.32. On that basis, Assessing Officer held that there was an excessive claim of deduction of ₹1.40 per unit on captive consumption (₹3.72 – ₹2.32), following which the Assessing Officer worked out the excess deduction claimed by the Assessee under Section 80IA at ₹31,98,66,505. Therefore, the Assessing Officer restricted the claim of deduction of the Assessee under Section 80IA at ₹48,11,72,000/- (₹80,10,38,505 – ₹31,98,66,505).

Aggrieved by the aforesaid reduction in the claim of deduction under Section 80IA of the Act, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals), Rohtak (‘CIT (A)’). By the appellate order dated 16th May, 2005, CIT (A) confirmed the reduction of deduction under Section 80IA.

Assailing the order of CIT (A), Assessee preferred further appeal before the Income Tax Appellate Tribunal, Delhi (‘the Tribunal’). The Revenue also filed a cross appeal arising out of the same order before the Tribunal but on a different issue. The grievance of the Assessee before the Tribunal in its appeal was against the action of CIT (A) in affirming the reduction of deduction under Section 80IA of the Act made by the Assessing Officer.

In its order dated 7th June, 2007, the Tribunal noted that the dispute between the parties related to the manner of computing profits of the undertaking of the Assessee engaged in the business of generation of power for the purpose of relief under Section 80IA of the Act. The difference between the Assessee and the revenue was with regard to the determination of the market value of electricity per unit so as to compute the income accrued to the Assessee on supply made by it to its own manufacturing units. After referring to the provisions of Section 80IA of the Act, more particularly to Sub-section (8) of Section 80IA and also upon an analysis of the meaning of the expression “market value”, Tribunal came to the conclusion that the price at which electricity was supplied by the Assessee to the State Electricity Board could not be equated with the market value as understood for the purpose of Section 80IA(8) of the Act. In this regard, the Tribunal also analysed various provisions of the Electricity (Supply) Act, 1948 and the agreement dated 15th July, 1999 entered into between the Assessee and the State Electricity Board. Consequently, Tribunal was of the view that the stand of the revenue could not be approved thereafter it was held that the price recorded by the Assessee at ₹3.72 per unit, being the price at which the Electricity Board supplied electricity, was the market value for the purpose of Section 80IA(8) of the Act. Thus, the Tribunal upheld the stand of the Assessee and set aside the order of CIT (A) by directing the Assessing Officer to allow relief to the Assessee under Section 80IA as claimed.

Aggrieved by the aforesaid finding rendered by the Tribunal, revenue preferred appeal before the High Court of Punjab and Haryana under Section 260A of the Act. The High Court in its order dated 2nd September, 2008, disposed of the appeal by following its order dated 2nd September, 2008 passed in the connected ITA No. 544 of 2006 (Commissioner of Income Tax, Hisar vs. M/s. Jindal Steel and Power Ltd.). That was an appeal by the revenue on the same issue against the order dated 31st March, 2006, passed by the Tribunal in the case of the Assessee itself for the assessment year 2000-2001. Insofar as allowance of deduction under Section 80IA of the Act was concerned, the High Court answered the question against the revenue as it was submitted at the bar that the issue already stood covered by the previous decision against the revenue.

Aggrieved, Revenue filed appeal before the Supreme Court. The Supreme Court noted the provisions of section 80-IA, and adverting to Sub-section (1) observed that, where the gross total income of an Assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise which are referred to in Sub-section (4), referred to as eligible business, this Section provides that a deduction shall be allowed in computing the total income. Such deduction shall be allowed from the profits and gains of an amount which is equivalent to hundred percent of the profits and gains derived from such business for the first five assessment years as specified in Sub-section (2) and thereafter 25 per cent of the profits and gains for a further period of five assessment years. As per the proviso, if the Assessee is a company, then the benefit for the further five years would be 30 per cent instead of 25 per cent.

As per Sub-section (2), the deduction specified in Sub-section (1) may be claimed by the Assessee at its option for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or generates power or commences transmission or distribution of power.

Adverting to Sub-section (4) of Section 80-IA, the Supreme Court observed that as per Sub-section (4) (iv), Section 80-IA is applicable to an industrial undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period commencing on the 1st day of April 1993 and ending on the 31st day of March, 2003; and starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2003. Proviso below Clause (iv) says that such deduction shall be allowed only in relation to the profits derived from laying of such a network of new lines for transmission or distribution.

According to the Supreme Court, crucial to the issue under consideration was Sub-section (8) of Section 80-IA.

The Supreme Court noted that Sub-section (8) says that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the Assessee or where any goods held for the purposes of any other business carried on by the Assessee are transferred to the eligible business but the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods as on that date. The proviso says that if the Assessing Officer finds exceptional difficulties in computing the profits and gains of the eligible business in the manner specified in Sub-section (8), then in such a case, the Assessing Officer may compute such profits and gains on such a reasonable basis as he may deem fit. The explanation below the proviso defines “market value” for the purpose of Sub-section (8). It says that market value in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market.

The Supreme Court observed that the expression “open market” was however not defined.

The Supreme Court also noted the relevant provisions of the Electricity (Supply) Act, 1948 (“the 1948 Act”), which was the enactment governing the field at the relevant point of time. As per Section 43 of the 1948 Act, the State Electricity Board was empowered to enter into arrangements for purchase or sale of electricity under certain conditions. Sub-section (1) says that the State Electricity Board may enter into arrangements with any person producing electricity within the State for purchase by the State Electricity Board on such terms as may be agreed upon of any surplus electricity which that person may be able to dispose of. Thus, what Sub-section (1) provides is that if any person who produces electricity has surplus electricity, he may dispose of such surplus electricity by entering into an arrangement with the State Electricity Board for supply of such surplus electricity by him and purchase thereof by the State Electricity Board.

Section 43A provides for the terms, conditions and tariff for sale of electricity by a generating company. It says that a generating company may enter into a contract for the sale of electricity generated by it with the State Electricity Board of the State in which the generating station owned or operated by the generating company is located or with any other person with the consent of the competent government.

As per Section 44, no person can establish or acquire a generating station or generate electricity without the previous consent in writing of the State Electricity Board. However, such an embargo would not be applicable to the Central Government or any corporation created by a central act or any generating company. As per Section 45, the State Electricity Board has been empowered to enter upon and shut down a generating station if the same is in operation contravening certain provisions of the 1948 Act.

The Supreme Court noted that since electricity from the State Electricity Board to the industrial units of the Assessee was inadequate, the Assessee had set up captive power plants to supply electricity to its industrial units. For disposal of the surplus electricity, the Assessee could not supply the same to any third-party consumer. Therefore, in terms of the provisions of Section 43A of the 1948 Act, the Assessee had entered into an agreement dated 15th July, 1999 with the State Electricity Board as per which, the Assessee had supplied the surplus electricity to the State Electricity Board at the rate of ₹2.32 per unit determined as per the agreement. Thus, for the assessment year under consideration, the Assessee was paid at the rate of ₹2.32 per unit for the surplus electricity supplied to the State Electricity Board. The Supreme Court also noted that the State Electricity Board had supplied power (electricity) to the industrial consumers at the rate of ₹3.72 per unit

According to the Supreme Court, there was no dispute that the Assessee or rather, the captive power plants of the Assessee are entitled to deduction under Section 80-IA of the Act. For the purpose of computing the profits and gains of the eligible business, which was necessary for quantifying the deduction under Section 80-IA, the Assessee had recorded in its books of accounts that it had supplied power to its industrial units at the rate of R3.72 per unit.

The Supreme Court observed that while the Assessing Officer accepted the claim of the Assessee for deduction under Section 80-IA, he, however, did not accept the profits and gains of the eligible business computed by the Assessee on the ground that those were inflated by showing supply of power to its own industrial units for captive consumption at the rate of ₹3.72 per unit. Assessing Officer took the view that there was no justification on the part of the Assessee to claim electricity charge at the rate of ₹3.72 for supply to its own industrial units when the Assessee was supplying surplus power to the State Electricity Board at the rate of ₹2.32 per unit. Finally, the Assessing Officer held that ₹2.32 per unit was the market value of electricity and on that basis, reduced the profits and gains of the Assessee thereby restricting the claim of deduction of the Assessee under Section 80-IA of the Act.

According to the Supreme Court, there was no dispute that the Assessee was entitled to deduction under Section 80-IA of the Act for the relevant assessment year. The only issue was with regard to the quantum of profits and gains of the eligible business of the Assessee and the resultant deduction under Section 80IA of the Act. The higher the profits and gains, the higher would be the quantum of deduction. Conversely, if the profits and gains of the eligible business of the Assessee is determined at a lower figure, the deduction under Section 80-IA would be on the lower side. Assessee had computed the profits and gains by taking ₹3.72 as the price of electricity per unit supplied by its captive power plants to its industrial units. The basis for taking this figure was that it was the rate at which the State Electricity Board was supplying electricity to its industrial consumers. Assessing Officer repudiated such a claim. According to him, the rate at which the Assessee had supplied the surplus electricity to the State Electricity Board i.e., ₹2.32 per unit, should be the market value of electricity. Assessee cannot claim two rates for the same good i.e., electricity. When it supplies electricity to the State Electricity Board at the rate of R2.32 per unit, it cannot claim R3.72 per unit for supplying the same electricity to its sister concern i.e., the industrial units. This view of the Assessing Officer was confirmed by the CIT (A).

The Supreme Court noted that the Tribunal had rejected such contention of the revenue which had been affirmed by the High Court.

The Supreme Court, reverting back to Sub-section (8) of Section 80-IA, observed that if the Assessing Officer disputes the consideration for supply of any goods by the Assessee as recorded in the accounts of the eligible business on the ground that it does not correspond to the market value of such goods as on the date of the transfer, then for the purpose of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed by adopting arm’s length pricing. In other words, if the Assessing Officer rejects the price as not corresponding to the market value of such good, then he has to compute the sale price of the good at the market value as per his determination. The explanation below the proviso defines market value in relation to any goods to mean the price that such goods would ordinarily fetch on sale in the open market. Thus, as per this definition, the market value of any goods would mean the price that such goods would ordinarily fetch on sale in the open market.

But the expression “open market” was not a defined expression.

The Supreme Court noted that Black’s Law Dictionary, 10th Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. P. Ramanatha Aiyer’s Advanced Law Lexicon has also defined the expression “open market” to mean a market in which goods are available to be bought and sold by anyone who cares to. Prices in an open market are determined by the laws of supply and demand.

Therefore, according to the Supreme Court, the expression “market value” in relation to any goods as defined by the explanation below the proviso to Sub-section (8) of Section 80IA would mean the price of such goods determined in an environment of free trade or competition. “Market value” is an expression which denotes the price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or Regulation; rather, it is determined by the economics of demand and supply.

Section 43A of the 1948 Act lays down the terms and conditions for determining the tariff for supply of electricity. The said provision makes it clear that tariff is determined on the basis of various parameters. That apart, it is only upon granting of specific consent that a private entity could set up a power generating unit. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the concerned State Electricity Board. Thus, determination of tariff of the surplus electricity between a power generating company and the State Electricity Board cannot be said to be an exercise between a buyer and a seller under a competitive environment or a transaction carried out in the ordinary course of trade and commerce. It is determined in an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of the extant statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Consequently, the price determined as per the power purchase agreement cannot be equated with the market value of power as understood in the common parlance. The price at which the surplus power supplied by the Assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory Regulations and the contract. Such a price cannot be equated with the market value as is understood for the purpose of Section 80IA (8). On the contrary, the rate at which the State Electricity Board supplied electricity to the industrial consumers would have to be taken as the market value for computing deduction under Section 80IA of the Act.

Thus, on careful consideration, the Supreme Court was of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board’s rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.

That being the position, the Supreme Court held that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the Assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Therefore, the High Court was fully justified in deciding the appeal against the revenue.

DEPRECIATION-EXERCISE OF OPTION TO ADOPT WRITTEN DOWN VALUE METHOD

The Assessee had purchased 25 MV turbines on and around 8th July, 1998 for the purpose of its eligible business. Assessee claimed depreciation on the said turbines at the rate of 25 per cent on WDV basis.

On perusal of the materials on record, the Assessing Officer held that in view of the change in the law with regard to allowance of depreciation on the assets of the power generating unit w.e.f. 1st April, 1997, the Assessee would be entitled to depreciation on the straight line method in respect of assets acquired on or after 1st April, 1997 as per the specified percentage in terms of Rule 5(1A) of the Income Tax Rules, 1962. Assessing Officer however noted that the Assessee did not exercise the option of claiming depreciation on WDV basis. Therefore, it would be entitled to depreciation on the straight line method. On that basis, as against the depreciation claim of the Assessee of ₹2,85,37,634/-, the Assessing Officer allowed depreciation to the extent of ₹1,59,10,047/-.

In the appeal before the CIT (A), the Assessee contended that the Assessing Officer had erred in limiting the allowance of depreciation on the turbines to ₹1,59,10,047/- as against the claim of ₹2,85,37,634/-. However, vide the appellate order dated 16th May, 2005, CIT (A) confirmed the disallowance of depreciation made by the Assessing Officer.

On further appeal by the Assessee before the Tribunal, vide the order dated 7th June, 2007, the Tribunal on the basis of its previous decision in the case of the Assessee itself for the assessment year 2000-2001 answered this question in favour of the Assessee.

When the matter came up before the High Court in appeal by the revenue under Section 260A of the Act, the High Court referred to the proviso to Sub-rule (1A) of Rule 5 of the Rules and affirmed the view taken by the Tribunal. The High Court held that there was no perversity in the reasoning of the Tribunal and therefore, the question raised by the revenue could not be said to be a substantial question of law.

The Supreme Court noted that Rule 5 provides for the method of calculation of depreciation allowed under Section 32(1) of the Act. It says that such depreciation of any block of assets shall be allowed, subject to provisions of Sub-rule (2), as per the specified percentage mentioned in the second column of the table in Appendix-I to the Rules on the WDV of such block of assets as are used for the purposes of the business or profession of the Assessee during the relevant previous year.

As per Sub-rule (1A), the allowance under Clause (i) of Sub-section (1) of Section 32 of the Act in respect of depreciation of assets acquired on or after the 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the table in Appendix-IA to the Rules. As per the first proviso, the aggregate depreciation of any asset should not exceed the actual cost of that asset. The second proviso says that the undertaking specified in Clause (i) of Sub-section (1) of Section 32 of the Act may instead of the depreciation specified in Appendix-IA may opt for depreciation under Sub-rule (1) read with Appendix-I but such option should be exercised before the due date for furnishing the return of income under Sub-section (1) of Section 139 of the Act. The last proviso clarifies that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

The Supreme Court observed that in the instant case, there was no dispute that the Assessee had claimed depreciation in accordance with Sub-rule (1) read with Appendix-I before the due date of furnishing the return of income. The view taken by the Assessing Officer as affirmed by the first appellate authority that the Assessee should opt for one of the two methods was not a statutory requirement. Therefore, the revenue was not justified in reducing the claim of depreciation of the Assessee on the ground that the Assessee had not specifically opted for the WDV method.

The Supreme Court agreed with the view expressed by the Tribunal and the High Court that there is no requirement under the second proviso to Sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return. All that is required is that the Assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 under the Sub-Rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of Sub-rule (1A) of Rule 5 which the Assessee had done. According to the Supreme Court there was no merit in the question proposed by the revenue. The same is therefore answered in favour of the Assessee and against the revenue.

56 Shah Originals vs. Commissioner of Income Tax-24, Mumbai

(2024) 459 ITR 385 (SC)

Export profits – Deduction under section 80HHC — The gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee — The profit from exchange fluctuation is independent of export earnings and could not be considered for computing deduction under section 80HHC.

The Assessee, a 100 per cent Export-Oriented Unit (EOU), filed its return of income for the assessment year 2000-01 declaring the total taxable income at ₹28,25,080/-. The Assessee for the relevant assessment year had export turnover at ₹8,27,15,688/-. The said turnover included an amount of ₹26,62,927/- being gains on accounts of foreign currency fluctuations in the assessment year 2000-01. The Assessee treated the said earning from foreign currency as income earned by the Assessee in the course of its export of goods/ merchandise out of India, i.e., profits of business from exports outside India. The Assessee claimed deduction under Section 80HHC of the Income Tax Act.

The Assessing Officer (AO), by the assessment order dated 10th February, 2006, disallowed the deduction claim of ₹26,62,927/- and added it to the Assessee’s taxable income. According to the AO, the gain/ profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency (EEFC) account could not be attributed as an earning from the export of goods/ merchandise outside India by the Assessee. The Assessee had completed the export obligations and received the foreign exchange remittances from the buyers / importers of the Assessee’s goods. The credit of the foreign currency in the EEFC account and positive fluctuation at the end of the financial year could not be treated as the Assessee’s income/ receipt from the principal business, i.e., export of goods and merchandise outside India. The AO noted that the Reserve Bank Notification No. FERA.159/94-RB dated 1st March, 1994 permitted foreign exchange earners to open and operate an EEFC account by crediting a percentage of foreign exchange into the account. The guidelines issued in continuation of the Notification dated 1st March, 1994 allow the units covered by the notification to credit twenty-five per cent or as permitted, in the EEFC accounts and operate in foreign currency. In other words, the credit of foreign exchange to the EEFC account facilitated the foreign exchange earners to use the foreign currency in the EEFC account depending upon the business necessities of the exporter.

The AO observed that the Assessee received the foreign exchange remittances and credited the foreign exchange in the EEFC account. At the end of the financial year, the convertible foreign exchange value was reflected in the Assessee’s balance sheet. The Assessee had gained/ earned from the fluctuation in foreign currency credited to its EEFC account. The AO was therefore of the view that the maintenance of an EEFC account was neither necessary nor incidental in any manner to the export activity of the Assessee. Crediting remittances or maintaining a balance in an EEFC account was akin to any deposit held by an Assessee in the Indian Rupee. The Assessee was not entitled to the deduction under Section 80HHC because gains from foreign currency fluctuation were not profit derived from exporting goods / merchandise outside India.

The Assessee, aggrieved by the disallowance, filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the Assessee’s appeal by the order dated 21st November, 2006.

The Assessee filed further appeal before the Income Tax Appellate Tribunal, Mumbai. On 25th October, 2007, the Appellate Tribunal. By an order dated 25th October, 2007, the Tribunal set aside the disallowance of the deduction claimed under Section 80HHC of the Act of the gains earned on account of foreign exchange fluctuations.

The Revenue filed an appeal under Section 260A of the Act. The appeal at the instance of Revenue was allowed by the High Court, resulting in restoring the disallowance of the deduction under Section 80HHC of the Act.

The Assessee filed an appeal before the Supreme Court.

According to the Supreme Court, the following question fell for its consideration: “whether the gain on foreign exchange fluctuation in the EEFC account of the Assessee partakes the character of profits of the business of the Assessee from exports and can the gain be included in the computation of deduction under profits of the business of the Assessee under Section 80HHC of the Act?”

The Supreme Court observed that Section 80HHC provides for the deduction of profits the Assessee derives from exporting such goods/merchandise. The operation of Section 80HHC is substantially dependent on two sets of expressions, viz., (a) is engaged in the business of export outside India of any goods/merchandise; (b) a deduction to the extent of profits defined in Sub-section (1B) derived by the Assessee from the export of such goods / merchandise.

The Supreme Court, after noting the construction/ interpretation of the expression “derived from” adopted by it and by few High Courts, observed that the expressions “derived from” and “since” are used in multiple instances in the Act. Unless the context does not permit, the construction of the expression “derived from” must be consistent.

According to the Supreme Court, in interpreting Section 80HHC, the expression “derived from” has a deciding position with the other expression viz., “from the export of such goods or merchandise”. While appreciating the deduction claimed as profits of a business, the test is whether the income/ profit is derived from the export of such goods/ merchandise.

The Supreme Court observed that the relevant words in Section 80HHC of the Act, are, “derived by the Assessee from the export of such goods or merchandise”, and in the background of interpretation given to the said expression by it in catena of cases, the Section enables deduction to the extent of profits derived by the Assessee from the export of such goods and merchandise and none else.

The Supreme Court observed that the policy behind the deductions of profits from the business of exports was to encourage and incentivise export trade. Through Section 80HHC, the Parliament restricted the deduction of profit from the Assessee’s export of goods/ merchandise. According to the Supreme Court, the interpretation now suggested by the Assessee would add one more source to the sources stated in Section 80HHC of the Act. Such a course was impermissible. The strict interpretation was in line with a few relative words, namely, manufacturer, exporter, purchaser of goods, etc. adverted to in Section 80HHC of the Act. From the requirements of Sub-sections (2) and (3) of Section 80HHC, it should be held that the deduction was intended and restricted only to profits of the business of export of goods and merchandise outside India by the Assessee. Therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80HHC of the Act.

By applying the meaning of the words “derived from”, as held in the catena of cases, the Supreme Court was of the view that profits earned by the Assessee due to price fluctuation, in the facts and circumstances of this case, could not be included or treated as derived from the business of export income of the Assessee.

The Supreme Court concluded that the gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the Assessee. The profit from exchange fluctuation is independent of export earnings.

The Supreme Court consequently dismissed the appeal.

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A)

28 Pravir Polymers Private Limited vs. Income Tax Officer 15(2)(4) and Ors.

Writ Petition No. 2440 of 2023 (Bom.) (HC)

Date of Order: 18th December, 2023 

[ITAT order dated 21st November, 2022 in MA No. 178/MUM/2022 and MA No. 179/ MUM/2022 for Assessment Years 2011-2012]

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A).

The two misc. applications were filed by petitioner (assessee) seeking recall of an order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 along with Cross Objection No. 103/MUM/2021. Following are the mistakes that were alleged to be apparent on record in the impugned order:

“I. Violation of Rule 46A of the Rules: The Revenue had neither raised the violation of the Rule 46A in the grounds of appeal, nor was it argued by the revenue, nor an opportunity was given to the appellant to explain the case there by violating the principle of natural justice.

Without prejudice to the above, If Department has raised the violation of Rule 46A, the respondent would have made an application before the Appellate Tribunal to admit the additional evidence.

II. Sufficient Opportunity of Hearing : The Assessing Officer has not given sufficient opportunity of hearing (Page 51) of paper book I) hence supplementary papers were filed before the CIT(A). Therefore, there is no violation of Rule 46A.

III. Not dealt with the cases relied on by the Applicant: The Hon’ble Tribunal has not dealt with the decision of the Hon’ble Supreme Court, Jurisdictional High Court and Jurisdictional Tribunal, inter alia which were relied on by the Applicant at the time of hearing.

IV. Non-compliance of Daily Order: Direction of the Hon’ble Tribunal via daily Order dated January 24, 2022 to the Departmental Representative to produce information/document to ascertain as to why the assessment was made under section 148 read with section 143(3) of the Act; The same was not complied by the Departmental Representative.”

The misc. applications came to be rejected by the the ITAT, as regards the alleged violation of Rule 46A of the Income Tax Rules, 1962 (the Rules) ITAT has observed that during the course of the hearing before the ITAT, the authorised representative of the assessee was asked whether the assessee could appear before the learned Commissioner of Income Tax (Appeals) [CIT(A)] or the Assessing Officer in case the matter was restored but the counsel of the assessee did not accept that suggestion because according to the assessee’s representative it was not possible for the assessee to produce the parties, from whom the assessee is alleged to have obtained unsecured loans, before the Assessing Officer or the learned CIT(A).

The Assessee contended that it was not within the power of the assessee to produce third parties before the Income Tax officer. If the officer feels presence of certain parties are required for him to probe the matter further or go behind the entries made by the assessee in its books of accounts, the Assessing Officer should exercise his powers under Section 131 of the Act by issuing a summons to those parties. Of course the assessee would provide the address as the assessee may have as on date and also co-operate in tracking those third parties.

As a background, against the Assessing Officer’s order, petitioner had preferred an appeal before the CIT(A). During the proceedings before the CIT(A), the assessee tendered certain documents. Dept contended that the CIT(A), at that stage, should have followed the procedure prescribed under Rule 46A of the Rules, forwarded a copy of those documents to the Assessing Officer and called for a remand report. Instead of calling for such a remand report, the CIT(A) proceeded to consider those documents and passed an order in favour of the assessee. In effect it is the department who is more affected by the CIT(A) not following the procedure prescribed under Rule 46A of the Rules.

The Assessee submitted that no such issue was raised by the Revenue in its grounds of appeal nor an opportunity was given to the assessee to explain the case of violation of principles of natural justice.

The Hon. Court observed that the assessee had relied on certain documents before the CIT(A) whereas the CIT(A) did not follow the procedure prescribed under Rule 46A of the Rules and call for a remand report. Thus instead of making the parties to go back and forth or devoting precious judicial time including in the appeals that have been filed by petitioner against the order dated  29th April, 2022 passed by the ITAT, interest of justice would be meet if the matter is remanded to the CIT(A) for denovo consideration.

The CIT(A) shall follow the procedure as prescribed under Rule 46A of the Rules and may also exercise all powers that he has under the Act to summon third parties to appear before him and record their statements. After hearing the parties, the CIT(A) may pass such orders, as he deems fit, in accordance with law.

In view of the above, the order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 alongwith Cross Objection No. 103/MUM/2021 for Assessment Years 2011–2012 and also the impugned order dated  21st November, 2022 were quashed and set aside.

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income

27 Pr. Commissioner of Income Tax-13 vs. Pinstorm Technologies Pvt Ltd.

ITXA NO. 1117 of 2018 (Bom) (HC)

A.Y.: 2010-11

Date of Order: 20th December, 2023

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income.

The following substantial question of law was proposed:

“Whether on the facts and circumstances and in law, the Hon’ble ITAT erred in appreciating the fact that the error on the part of the assessee was detected during the course of assessment proceeding u/s. 143(3) of the Act on scrutiny by the AO, failing which the error would not had surfaced and therefore, levy of penalty, as a deterrent, was justified and taking any lenient view would encourage the assessee to perpetuate such mistakes?”

The Respondent (assessee) filed the return of income on 14th February, 2012 for A.Y. 2010-2011 declaring loss of ₹16,10,43,542. During the course of assessment, the Assessing Officer (AO) observed that certain expenses which were not allowable expenses under the Act were not added back to the total income in the computation of income to the tune of ₹13,11,45,849. The AO also observed that disallowance of such expenses has been mentioned by the auditors in the tax audit report furnished by assessee. The AO, therefore, disallowed the said expenses of ₹13,11,45,849 and added the same back to the total income of the assessee. During the scrutiny assessment u/s. 143(3) which was completed on 28th February, 2013, a loss of ₹1,81,57,433 was determined.

Subsequently, penalty proceedings were initiated and notice was issued u/s. 274 r.w.s 271 of the Act for concealing/ furnishing inaccurate particulars of income. Assessee responded to the notice and the stand of assessee was that while filing the return electronically, certain disallowances were not properly entered in the column of disallowances and accordingly it showed a loss. Before the Income Tax Appellate Tribunal (ITAT), affidavit of Managing Director of the assessee was filed stating that return was filed by the then CFO Mr. Sudesh Vaidya and the said Mr. Vaidya has since left the company and migrated to United Kingdom, it is assessee’s case that the CFO made an inadvertent error of not considering the disallowances which were mentioned in the tax audit report while uploading the return of income. It was also submitted that the return of income was filed belatedly and, therefore, the same cannot be revised. It was further asserted that even after the subject disallowances, the return of income showed a loss of return and due to delay in filing the return, even the loss could not be carried forward. Therefore, the mistake was not intentional or deliberate and the penalty proceedings were dropped.

The Dept pointed out that the Commissioner of Income Tax (Appeals) (CIT(A)), has made a factual finding that the tax audit report was not filed. The Hon. High court observed that there was an error in such a finding because the AO has accepted that the tax audit report was filed. In fact, even in this appeal in the facts of the case narrated, it is admitted in paragraph 3.1 that the tax audit report was furnished by the assessee.

The Hon. High further court further observed that ITAT has come to a factual finding that there is no intention on the part of assessee to conceal the income or furnish inaccurate particulars of income. It has also accepted the explanation that the CFO was entrusted with the filing of return and the CFO made a mistake in not properly uploading the return by filling up the return with the disallowances which were already reported by the auditors in the tax audit report. The ITAT has come to a factual finding that there was no intention of furnishing any inaccurate particulars or concealment of income as the facts undoubtedly suggest so. The Hon. Court relied on the decision of Apex Court in the case of Price Waterhouse Coopers Pvt Ltd. vs. Commissioner of Income Tax & Anr (2012) 348 ITR 306(SC).

The Hon. Court held that it was only a mistake while uploading the return of income in the given facts and circumstances of the case. The Dept appeal was dismissed.

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest

79 Aricent Technologies (Holdings) Ltd. vs. ACIT

[2023] 458 ITR 578 (Del)

A.Ys.: 2006–07 and 2007–08

Date of Order: 27th February, 2023

Ss. 153(3), 237 and 254 of ITA 1961

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest.

The assessee filed an appeal before the Tribunal against the order passed u/s. 143(3) read with section 144C(13) for the A.Y. 2007–08 against the entity FSS which had since amalgamated with the assessee. By an order dated 7th January, 2016, the Tribunal partly deleted the disallowance of the project expenses, the disallowance of deduction claimed u/s. 10B and the transfer pricing adjustment of corporate charges and remanded the matter to the Assessing Officer. Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, the Assessing Officer did not pass any final order.

The Assessee filed writ petition contending that the amount of refund for the A.Y. 2006–07 due to FSS which was amalgamated with the assessee be refunded with applicable interest on the ground that the assessment for the A.Y. 2007–08 was barred by limitation. The Delhi High Court allowed the writ petition and held as under:

“i) Section 153 of the Income-tax Act, 1961 was amended by the Finance Act, 2017 with retrospective effect from June 1, 2016 and in sub-section (3) thereunder the provision regarding limitation for making an assessment pursuant to any order passed by the Tribunal u/s. 254 was included.

ii) Passing a fresh assessment order pursuant to the Tribunal’s order dated January 7, 2016, was barred by limitation under the provisions of section 153(3) and 153(4) and the income as returned by the amalgamated company FSS for the A.Y. 2007–08 would stand accepted. Consequently, any adjustment that would be made against the refund due to FSS for the A.Y. 2006–07 was not sustainable. Therefore, the amount which was due to FSS as refund for the A.Y. 2006–07 was to be refunded to the assessee with applicable interest.”

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest

78 Grasim Industries Ltd. vs. ACIT

[2023] 458 ITR 1 (Bom.)

A.Ys.: 1990-91 and 1991-92

Date of Order: 1st September, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest.

The assessee entered into a foreign technical collaboration agreement with one M/s. D wherein D agreed to render to the assessee outside India certain engineering and other related services in relation to the project set up for Gas based plant in India. The assessee also entered into supervisory agreement with D to provide supervisory services in India. Under the agreement with D, D had agreed to deliver to the assessee necessary design, drawing, data with respect to the sponge iron plant outside India. D also agreed to train outside India certain employees of the assessee so as to make available to the such employees technical information, scientific knowledge, expertise, etc. for the commissioning, operation and maintenance of the plant. The consideration agreed was a sum of US$ 1,62,31,000 net of tax and it was agreed that any withholding tax required to be deducted will be borne by the assessee and D would be paid a net amount of US$ 1,62,31,000. The assessee sought permission from the AO to make remittance to D without deduction of tax at source. However, the AO held that the amount payable to D was taxable as income in India and the assessee was required to deduct tax at source and deposit the tax with the Income-tax Department. The assessee paid under protest a sum of ₹2,73,73,084 and ₹2,81,83,272 as withholding tax on account of two installments of payments made to D. The assessee claimed that since the withholding tax was borne by the assessee and the payment made to D was not chargeable to tax, the assessee would be entitled to refund.

In the return of income filed by D for A.Ys. 1990–91 and 1991–92, D declared NIL income on the ground that the income received by D neither accrued in India nor received in India therefore not chargeable to tax in India. However, in the assessment of D, it was held that amount received by D under the agreement was chargeable to tax in India and accordingly the withholding tax deducted by the assessee was adjusted towards D’s tax liability. The assessee along with D filed a petition before the Bombay High Court challenging, inter alia, the assessment order and the taxability of the amount received by D under the agreement. Vide order dated 5th May, 2010, the Court held that the assessment orders subjecting the amount received by D under the agreement to tax was not correct and the Department was directed to pass a fresh assessment order excluding the income received by D.

Subsequently, the assessee made a request to the AO to pass an order giving effect to the order of the High Court. Reminder letters were sent to the AO time and again. However, there was no action by the AO. Vide order dated 24th August, 2012, the AO refused to give effect to the order of Bombay High Court holding that the assessee was not entitled to the refund of withholding tax deposited by the assessee as the tax was deducted on behalf of D and therefore no effect could be given in the hands of the assessee.

Therefore, the assessee, by way of writ petition, approached the Bombay High Court. The High Court allowed the petition and held as follows:

“i) Section 248 of the Act, amended by the Finance Bill, 2007 ([2007] 289 ITR (St.) 122), envisages and deals with a situation where a refund could be made to the person by whom the income was payable and who has borne the withholding tax. The amount wrongly deducted or paid to the Revenue authorities where it was not required to be paid would become refundable to the assessee. This is subject to the condition that the person receiving the payment had not claimed credit therefor.

ii) For over 13 years neither D nor its successor-in-interest had claimed any amount from the Revenue but had issued its no objection to the Department making the refund to the assessee. The assessee would be entitled to credit of any tax deducted at source both by the banks and the Department while depositing the amounts with the Prothonotary and Senior Master, High Court, Bombay giving effect to the order of this court by arriving at net amount refundable for the A.Ys. 1990–91 and 1991–92 and after deducting tax at source for the A.Ys. 1990–91 and 1991–92. The amounts having been deposited with Prothonotary and Senior Master, High Court, Bombay, the Prothonotary and Senior Master shall foreclose the fixed deposit and pay over the amount including interest to the assessee.”

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable

77 Nitin Nema vs. Principal CCIT

[2023] 458 ITR 690 (MP)

A.Y.: 2016–17

Date of Order: 16th August, 2023

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable.

Words and phrases — “Income” — “Income chargeable to tax” — Distinction.

For the A.Y. 2016-17, reassessment proceedings were initiated against the assessee on the ground that the assessee had sold 16 scooters and earned ₹72,05,084 which had escaped assessment. The Assessee filed a writ petition challenging the order passed u/s. 148A(d) and the consequential notice issued u/s. 148 of the Act claiming that the income mentioned in the order and the notice was not subject to income tax. What was stated therein was the gross sale consideration and on sale of 16 scooters. The assessee submitted that this income was not subject to tax and therefore sections 148A(d) and 148 did not apply.

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

“i) The expression “income chargeable to tax” is not defined in the Income-tax Act, 1961. However, the provisions with respect to computation of business income make clear that the definitions of the expressions “income” and “income chargeable to tax” are at variance with each other. The expression “income” is inclusively defined u/s. 2(24) whereas “income chargeable to tax” denotes an amount which is less than “income”. The “income chargeable to tax” is arrived at after deducting from “income” the permissible deductions under the Act. Therefore, the quantum of “income” is invariably more than “income chargeable to tax”.

ii) The Department had failed to understand the fundamental difference between sale consideration and income chargeable to tax. It had relied upon sections 2(24), 14, 28 and 44AD to emphasize the expression “income”. Neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 stated that the income alleged to have escaped assessment included land or buildings or shares or equities or loans or advances. The assessee had filed a reply to the notice u/s. 148A(b) wherein it had submitted that the amount of ₹72,05,084 was the gross receipt of sale consideration of 16 scooters which meant that the amount of ₹72,05,084 was the total sale consideration receipt of the transaction in question, and not income chargeable to tax which would obviously be less than such amount. With the reply the assessee had also furnished the details of items sold and payment receipts, computation of total income and the computation of tax on total income and had submitted these to the Assessing Officer before the passing of the order u/s. 148A(b). There was nothing stated in the provisions of section 148, 148A or 149 which could prevent the assessee from taking advantage of these provisions merely because of his failure to file return of income.

iii) Consequently, this petition stands allowed. The impugned order dated March 25, 2023 u/s. 148A(d) of the Income-tax Act vide annexures P-3 and P-4 are quashed. The notice dated March 25, 2023 vide annexure P-5 u/s. 148 issued by the Income-tax Officer, Ward 1(1), Jabalpur is quashed. However, the Department is at liberty to invoke the provisions of section 148A in accordance with law.”

Reassessment – Notice – Sanction of competent authority :- (a) New procedure – Extension of time limits by 2020 Act – Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) – Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) – Notices do not relate back to original date – Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement – Notice for A.Y. 2016-17 issued after April 2021 – More than three years elapsing – Approval to be obtained from Principal Chief Commissioner – Approval taken of Principal Commissioner – Notice issued without sanction of correct authority invalid – CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable – Order and notice quashed

76 Siemens Financial Services Pvt. Ltd. vs. DCIT

[2023] 457 ITR 647 (Bom.)

A.Y.: 2016–17

Date of Order: 25th August, 2023

Ss. 147(1), 148, 148A(d), 149(1)(b), 151(i) and 151(ii) of ITA 1961

Reassessment — Notice — Sanction of competent authority :— (a) New procedure — Extension of time limits by 2020 Act — Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) — Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) — Notices do not relate back to original date — Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement — Notice for A.Y. 2016-17 issued after April 2021 — More than three years elapsing — Approval to be obtained from Principal Chief Commissioner — Approval taken of Principal Commissioner — Notice issued without sanction of correct authority invalid — CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable — Order and notice quashed.

Reassessment — No power to review assessment — Assessee providing relevant information — AO considered the information before passing assessment order and allowed deduction of expenditure on software consumables as revenue expenditure — Re-assessment by the AO to treat the expenditure as capital expenditure — Change of opinion — Order for issue of notice and consequent notice to be quashed.

The assessee, a NBFC, filed its return of income for A.Y. 2016–17 declaring total income of ₹44,92,46,370. Subsequently, the return of income was revised declaring total income of ₹50,67,32,580. The assessee’s case was selected for scrutiny. During the course of assessment, the assessee submitted a transaction-wise summary of expenditure on software consumables. On 23rd December, 2018, assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed without any adjustment to the total income reported in the revised return. On 25th June, 2021, almost after 3 years, notice u/s. 148 of the Act was issued stating that there was reason to believe that assessee’s income for A.Y. 2016–17 has escaped assessment within the meaning of section 147 of the Act. Vide letter dated 22nd July, 2021, the assessee replied to the AO that the notice had been issued under the old provisions of the Act and that after 1st April, 2021, the AO should issue notice as per the amended provisions of the Act. The assessee thus requested the AO to drop the proceedings. Thereafter, the AO issued a notice dated 26th November, 2021 u/s. 142(1) which was replied to by the assessee. Subsequently, the AO issued a letter / show cause notice dated 31st May, 2022 u/s. 148A(b) of the Act wherein the earlier notice dated 25th June, 2021 issued u/s. 148 of the Act and the judgment of the Supreme Court in the case of UOI vs. Ashish Agarwal were referred and the AO stated that notice issued u/s. 148 of the Act be deemed to be issued u/s. 148A(b) of the Act. The AO relied upon the information and material which was annexed with the show cause notice to suggest that income chargeable to tax escaped assessment and also relied upon the approval of the competent authority which was attached with the show cause notice. In response to the show cause notice, the assessee made submissions vide letters dated 9th September, 2022 and 7th July, 2022. Vide order dated 31st July, 2022 passed u/s. 148A(d), the AO rejected the submissions and issued an intimation letter for issue of notice u/s. 148 of the Act and thereafter issued notice dated 31st July, 2022 u/s. 148 of the Act.

The assessee filed writ petition before the Bombay High Court challenging the impugned show cause notice dated 31st May, 2022, the order dated 31st July, 2022 passed u/s. 148A(d) of the Act and the notice dated 31st July, 2022 u/s. 148 of the Act. The Bombay High Court allowed the petition and held as follows:

“(i) The findings of the Bombay High Court in Tata Communications Transformation Services Ltd. v. Asst. CIT [2022] 443 ITR 49 (Bom) (to the effect that section 3(1) of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 does not provide that any notice issued u/s. 148 of the Income-tax Act, 1961 after March 31, 2021 will relate back to the original date such that the provision as existing on such date will be applicable to notices issued relying on the provision of the 2020 Act) have not been disturbed by the Supreme Court in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC). The Supreme Court only modified the orders passed by the respective High Courts to the effect that the notices issued under section 148 of the Act which were subject matter of writ petitions before various High Courts shall be deemed to have been issued u/s. 148A(b) of the Act and the Assessing Officer was directed to provide within 30 days to the respective assessee the information and material relied upon by the Department so that the assessee could reply to the show-cause notices within two weeks thereafter. The Supreme Court held that the Assessing Officer shall thereafter pass orders in terms of section 148A(d) in respect of each of the concerned assessees. Thereafter, after following the procedure as required u/s. 148A may issue notice u/s. 148 (as substituted). The Supreme Court also expressly kept open all contentions which may be available to the assessee including those available u/s. 149 of the Act and all rights and contentions which may be available to the concerned assessee and Department under the Finance Act, 2021 and in law, shall be continued to be available. Even by the finding of the Supreme Court in Ashish Agarwal, only the original notice issued u/s. 148 of the Act was converted into a notice deemed to have been issued u/s. 148A(b) of the Act. The judgment in Ashish Agarwal does not anywhere indicate the notices that could be issued for eternity would be sanctioned by an authority other than the sanctioning authority defined under the Act.

ii) The 2020 Act only seeks to extend the period of limitation and does not affect the scope of section 151. The Assessing Officer cannot rely on the provisions of 2020 Act and the notifications issued thereunder as section 151 has been amended by the Finance Act, 2021 and the provisions of the amended section would have to be complied with by the Assessing Officer, with effect from April 1, 2021. Hence, the Assessing Officer cannot seek to take the shelter of 2020 Act as a subordinate legislation cannot override any statute enacted by Parliament. Further, the notification extending the dates from March 31, 2021 till June 30, 2021 cannot apply once the Finance Act, 2021 is in existence. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. It is not open to the Central Board of Direct Taxes to clarify that the law laid down by the Supreme Court means that the extended reassessment notices will travel back in time to their original date when such notices were to be issued and, then, the new section 149 of the Act is to be applied. The 2020 Act does not envisage travelling back of any notice.

iii) The approval for issuance of notice u/s. 148A(d) of the Act had not been properly obtained because:

‘(a) the petition related to the A.Y. 2016-17, and as the order and notice were issued beyond the period of three years which elapsed on March 31, 2020 the approval as contemplated in section 151(ii) of the Act would have to be obtained which had not been done by the Assessing Officer. The approval had been taken of the Principal Commissioner who was not the specified authority u/s. 151 of the Act. The sanction was required to be obtained by applying the amended section 151(ii) of the Act and since the sanction had been obtained in terms of section 151(i) of the Act, the order and notice are bad in law and should be quashed and set aside.

(b) even assuming that it is held that these notices travel back to the date of the original notice issued on June 25, 2021, the approval of the Principal Chief Commissioner should have to be obtained in terms of section 151(ii) of the Act as a period of three years from the end of the relevant assessment year ended on March 31, 2020 for the A.Y. 2016–17.

(c) Instructions dated May 11, 2022 ([2022] 444 ITR (St.) 43) had no applicability to the facts of this case because they expressly provided that they applied only to the issue of reassessment notice issued by the Assessing Officer during the period beginning April 1, 2020 and ending with June 30, 2021 within the time extended under 2020 Act and various notifications issued thereunder.

(d) since the approval of the specified authority in terms of section 151(ii) of the Act was a jurisdictional requirement and in the absence of compliance with this requirement, the reopening of assessment would fail.’

iv) It is settled law that proceedings u/s. 148 cannot be initiated to review the stand earlier adopted by the Assessing Officer. The Assessing Officer cannot initiate reassessment proceedings to have a relook at the documents that were filed and considered by him in the original assessment proceedings as the power to reassess cannot be exercised to review an assessment. If the change of opinion concept is given a go by, that would result in giving arbitrary powers to the Assessing Officer to reopen assessments. It would in effect be giving power to review which he does not possess. The Assessing Officer has only power to reassess not to review. The concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer.

v) The Assessing Officer did not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information and the Assessing Officer had considered it before passing the assessment order u/s. 143(3) of the Act dated December 23, 2018. The assessee had debited an amount of ₹6,41,87,931 on account of software consumables in the profit and loss account and a detailed break-up of the expenses were submitted before the Assessing Officer during the course of assessment proceedings. The Assessing Officer having allowed the amount of software consumables as a revenue expenditure now sought to treat it as capital expenditure which was a clear change of opinion. This was not permissible.”

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking

75 Principal CIT vs. Jharkhand Tourism Development Corporation Ltd.

[2023] 458 ITR 497 (Jhar.)

A.Ys.: 2012–13 and 2014–15

Date of Order: 21st February, 2023

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking.

The assessee is an undertaking of the State Government of Jharkhand incorporated with the object to promote tourism in the State and to create, operate and maintain infrastructure for tourism on behalf of Central and State Government. The assessee received funds from the Government for making payments in accordance with the guidelines of the Government for approved projects and the assessee was liable to return the unutilized funds to the Government. Under the directions from the Government as well as under an Office Memorandum dated 6th December, 2006 issued by the Ministry of Tourism, the Government of India directed the assessee that funds released as installments of Central Financial Assistance (CFA) from the Ministry of Tourism were to be deposited in saving accounts or fixed deposits in banks. Further it was also directed to ensure utilization of interest earned on deposits for the execution and completion of concerned projects without deviation towards any other expenditure. In case, there was no scope for utilization of the amount, such amount had to be returned to the Ministry of Tourism.

Assessee’s case for A.Y. 2014–15 was selected for scrutiny where under the interest income of ₹4,63,76,660 earned on fixed deposit was taken as income and added to the total income of the assessee. For A.Y. 2012–13, the interest of ₹3,23,99,958 earned on fixed deposit was added to the total income of the assessee. Separate appeals were preferred for each of the years before the CIT(A) which were allowed by the CIT(A). The Tribunal confirmed the action of the CIT(A).

The Department filed appeals before the High Court and contended that interest income was covered under the head “Income from Other Sources”. The guidelines of the Ministry of Tourism could not override the statutory provisions of the Act. Further, the Department contended that the fixed deposits were in the name of the assessee and the TDS on interest was also shown and claimed by the assessee. The Department therefore contended that the AO had rightly treated the interest to be the income of the assessee.

The High Court dismissed the appeals of the Department and held as follows:

“i) The assessee was a Jharkhand State Government undertaking incorporated with the object to promote tourism in the State to create, operate and maintain infrastructure for tourism on behalf of the Central and State Government. The funds from the Central and State Governments were disbursed to the assessee for making payment in accordance with the guidelines of the Government for approved projects and were liable to be refunded if unutilised funds as and when Government made requisition therefor. Thus, the funds always remained the property of the Government and the assessee was authorised to use the funds as well and was duty bound to obey the direction on how to manage the surplus. The assessee under the directions of the Government kept a portion of unutilised funds in short-term bank deposits and interest earned from these deposits was transferred to the respective fund accounts of the Government. As a matter of fact, an office memorandum dated December 6, 2006 issued by the Joint Secretary, Ministry of Tourism, had directed the assessee to deposit funds released as instalments of Central Financial Assistance from the Ministry of Tourism in saving accounts or fixed deposits in banks and as a result a substantial amount accrued as interest on deposits made out of the Central Financial Assistance. It was also directed to ensure utilisation of interest earned on deposits for the execution and completion of the projects without deviation to any other head of expenditure. In case there was no scope to utilise the amount of interest for execution of the project, such amount could be returned to the Ministry of Tourism.

ii) Thus, the income never reached the assessee and was diverted at source by an overriding title. The orders of assessment for the A.Ys. 2012-13 and 2014-15 were not valid.”

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year

74 Smt Kuni Sahoo vs. UOI

[2023] 457 ITR 777 (Guj.)

Date of Order: 30th January, 2023

S. 194A of ITA 1961

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year.

The Petitioners are the wife and the children of the deceased who died in a road accident. Pursuant to the death of the deceased in a road accident on 7th January, 2013, the Petitioners were awarded compensation of ₹17,90,760 along with interest at 7 per cent per annum with effect from date of application till the date of realisation. On appeal by the opposite party, the compensation stood reduced to ₹ 15,00,000 with interest vide order dated 13th July, 2019. The interest pertained to the period 2013–14 to 2019–20, that is, for a period of six years and if the interest was spread over in the case of each petitioner over a period of six years, the annual interest would come around ₹35,944. The said amount being less than ₹ 50,000, no deduction of tax was required in view of section 194A(3)(ixa) as amended. However, the Insurance company deposited cheques after deduction of tax at source on the interest.

The Petitioners filed writ petitions claiming that the Insurance company should have deposited interest without deducting tax at source. The Gujarat High Court allowed the writ petition and held as follows:

“i) Section 194A of the Income-tax Act, 1961 being not a charging provision, deals with deduction of tax at source in respect of “interest other than interest on securities”. Under the provisions of section 145A(b) as it existed prior to amendment by virtue of the and sub-section (1) of section 145B of the Act, after the amendment interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

ii) However, u/s. 194A(3)(ixa) the provisions of the section would not be applicable to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees.

iii) The interest payable under the Motor Vehicles Act, 1988 was relatable to the period 2013–14 to 2019–20. If the interest were spread over year to year, the amount would not exceed ₹50,000. Under such premise, the deduction of tax at source in respect of interest for delay in deposit of compensation before the Motor Accidents Claims Tribunal would attract the provisions of sub-section (3) of section 194A and no deduction of tax at source was required.”

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law

73 Arun Kumar Bose vs. ITO

[2023] 458 ITR 32 (Cal.)

A.Y.: 2014-15

Date of Order: 2nd August, 2023

S. 251(1)(a) of ITA 1961

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law.

The addition made by the AO with respect to sundry creditors was deleted by the Commissioner(Appeals) holding it to be not justified and remanded the matter to the AO for fresh assessment after enquiry. The Tribunal upheld the order of the Commissioner(Appeals) despite there being a specific ground raised by the Assessee challenging the action of the Commissioner(Appeals) in remanding the matter back to the AO.

In appeal filed by the Assessee, following questions were raised before the High Court:

“(i) Whether on the facts and circumstances of the case the learned Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) when the same is beyond the scope and power vested upon the Commissioner of Income-tax (Appeals) under the provisions of section 251(1)(a) of the said Act ?

(ii) Whether on the facts and circumstances of the case when the additions made in respect of the sundry creditors, namely, M/s. Goodwill Corporation (India), M/s. Quality Udyog and M/s. Swastik Trading and Manufacturing Co. were directed to be deleted as being unsustainable can be subject to the enquiries conducted by the Assessing Officer ?”

The Calcutta High Court allowed the appeal and held as under:

“i) U/s. 251(1)(a) of the Income-tax Act, 1961 the Commissioner (Appeals) may confirm, reduce, enhance or annul the assessment. On a reading of the Finance Act, 2001 (Circular No. 14 of 2001), the Commissioner (Appeals) had no power to remand the matter to the Assessing Officer for fresh assessment in accordance with the direction given by him after making such further enquiry as may be necessary. Though such power was conferred on the Commissioner (Appeals), the said provision stood omitted by the Finance Act, 2001. In the light of the Explanatory Notes to the Provisions related to Direct Taxes, under paragraph 78.1 dealing with the powers of the Commissioner (Appeals) with effect from June 1, 2001, the Commissioner (Appeals) could not have remanded the matter to the Assessing Officer after having decided the case in favour of the assessee in its entirety.

ii) Though in the order passed by the Commissioner (Appeals), the word “prima facie” had been used, from a cumulative reading of an order passed by the Commissioner (Appeals), it was found that the case had been discussed on merits and thereafter, a finding had been recorded that the Assessing Officer was not justified in making the addition and there was a positive direction to delete the addition. Though the assessee had raised a specific ground of exceeding the statutory powers conferred u/s. 251(1)(a) before the Tribunal which had been noted by it in paragraph 3 of the impugned order, this aspect had not been dealt with by the Tribunal. The Tribunal had gone into the correctness of the finding of the Commissioner (Appeals) who held in favour of the assessee and thereafter, had recorded his opinion. Admittedly, the Revenue had not challenged the findings rendered by the Commissioner (Appeals) which was in favour of the assessee.

iii) Thus, not only the Commissioner (Appeals) committed an error of law by remanding the matter to the Assessing Officer for a fresh consideration after having held in favour of the assessee, the Tribunal also did not deal with the said issue. In the light of the statutory embargo, the order of remand passed by the Commissioner (Appeals) is not tenable in law and consequently, was required to be set aside as well as the order passed by the Tribunal.”

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax

12 Volvo Information Technology AB, Sweden

vs. DCIT, International Taxation, Circle-3(1)(1), New Delhi

ITA Nos.: 393/Del/2018 and 2780/Del/2022

Member: Shri Kul Bharat, Judicial Member and Dr. B.R.R. Kumar

A.Ys.: 2014–15 and 2015–16

Date of Order: 20th December, 2023

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax.

FACTS

The assessee was a member-company of ‘V Group’, which has global presence. It filed its return of income declaring total income of ₹77.72 crores under the head “income from other sources” and offered the same to tax
@ 10 per cent as per the provisions of DTAA. Subsequently, it revised the return of income declaring nil income.

The AO passed a draft assessment order proposing to assess the total income at ₹77.72 crores by treating the receipts as royalty in terms of section 9(1)(vi) of the Act as well as DTAA and charging tax thereon @ 10 per cent on gross receipts.

The assessee contended that it received the payments for providing facilities to Indian entities of V Group (“Indian entities”), because of which Indian entities were not required to separately obtain right to use the copyright in any of the software / business software / application owned and executed by the assessee.

HELD

  • The issue pertains to characterising the payments of ₹77.72 crores received by the assessee during the relevant year as royalty and taxing them @ 10 per cent of gross receipts.
  • The assessee had raised the same issue in its appeal before this Tribunal in respect of A.Y. 2014–15. In A.Y. 2014–15, while the assessee had declared nil income, the AO treated the entire receipts of ₹119.88 crores from India entities as ‘royalty’ in terms of section 9(1)(vi) of the Act as well as under Article 12(3) of India-Sweden DTAA and had charged the same to tax @ 10 per cent on gross receipts.
  • On the facts and circumstances of the case in respect of A.Y. 2014–15 and in law, this Tribunal held that CIT(A) had erred in treating the payments aggregating to ₹119.88 crores received by the assessee from Indian entities as royalty, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA.
  • Since the facts for the relevant year in question are identical to those of A.Y. 2014–15 in the assessee’s own case, where this Tribunal has held that the receipts in question could not be taxed as ‘royalty’. For the same reasons, the entire receipt of ₹77.72 crores received from Indian entities could not be taxed as ‘royalty’. Accordingly, the orders of authorities were set aside.

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India

11 Dy. CIT/Jt. CIT (OSD), Corporate Circle -1(1) vs. Aspire Systems India (P.) Ltd.

[2023] 157 taxmann.com 699 (Chennai – Trib.)

ITA Nos.: 1069, 1070 & 1071 (Chny.) 2022, 159 & 315 (Chny.) 2023

A.Y.: 2013–14

Date of Order: 13th December, 2023

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India.

FACTS

The assessee was engaged in the business of providing software development services to offshore customers. In connection with such services, it entered into a contract with a foreign service provider (“F Co”) for providing installation and testing services. As per the agreement between the assessee and F Co, F Co carried out testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer. In consideration, the assessee paid outsourcing charges / consultancy charges to F Co in respect of certain American clients of the assessee.

According to the AO, the payments made by the assessee to F Co were in the nature of fee for technical services (FTS) as defined under section 9(1)(vii) of the Act. Accordingly, since the assessee had not deducted tax under section 195 of the Act, the AO disallowed such payments under section 40(a)(i) of the Act.

On appeal, CIT(A) held that the payments made by the assessee to F Co were for rendering services outside India, and hence, they could not be deemed to accrue or arise in India. Therefore, they were not liable for deduction under section 195 of the Act. He further held that services rendered by F Co did not fall under the purview of FTS. Consequently, payments made to F Co could not be disallowed under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act.

HELD

  • F Co carried out testing, implementation, tutoring and demonstrating services. Such services by F Co represented services performed on behalf of the assessee for a client of the assessee located in the USA. From the nature of services provided by F Co, it appears that they were support services and not purely technical services for them to fall under the definition of FTS.
  • Also, for any payment made to a non-resident to be considered as FTS, it should be analysed in light of provisions of section 9(1)(vii) of the Act, read with exceptions thereto. As per clause (b) to section 9(1)(vii) of the Act, payments made by a person who is a non-resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source
    outside India, is outside the scope of section 9(1)(vii) of the Act. From clause (b), it is evident that the services rendered by F Co clearly fall under the exception whereby the same cannot be deemed to accrue or arise in India.
  • From perusal of contract between the assesse and F Co, it is clear that payments made by the assessee to F Co are directly related to services rendered to clients of the assessee outside India and income earned by the assessee from such
    clients forms part of business income of the assessee. Therefore, it falls under the category of services utilised in a business or profession carried on by such person outside India.
  • Second aspect of exception in clause (b) to section 9(1)(vii) of the Act is that the services were utilised for the purpose of making or earning any income from any source outside India.
  • F Co performed services outside India for offshore clients. As the clients were situated outside India and services were utilised for earning income from source outside India, the second part of exception as per section 9(1)(vii)(b) of the Act was also satisfied.
  • Therefore, payments made to F Co were not chargeable to tax in India as they were covered within exception in section 9(1)(vii)(b) of the Act. Accordingly, provisions of section 195 of the Act were not attracted and the question of disallowance under section 40(a)(i) of the Act did not arise.

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act

10 Lex Sportel Vision (P.) Ltd. vs. Income Tax Officer

[2024] 158 taxmann.com 129 (Delhi – Trib.)

ITA No.: 2397/Del/2023

A.Y.: 2018–19

Date of Order: 26th December, 2023

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act.

FACTS

The assessee was engaged in the business of broadcasting or sub-licensing right to broadcast sport events, e.g., golf, cricket, soccer, etc., on live and non-live basis. The assessee filed a return of income for the relevant year declaring nil total income. During the relevant year, the assessee had entered into agreements with certain non-residents for acquiring the following two types of rights.

(a) Right to broadcast live sports events (“Live Rights”).

(b) Right to use audio-visual recording of the sport events for subsequent telecasting, cutting small clips for advertisements, making highlights of the event, etc., (“Non-Live Rights”).

The agreements and the invoices issued by non-residents clearly bifurcated the total consideration between consideration for “Live Rights” and that for “Non-Live Rights”1.

1. The decision does not mention the respective amounts paid for “Live Rights” and “Non-Live Rights”.

The assessee considered payments towards acquisition of “Non-Live Rights” as “Royalty” in terms of section 9(1)(vi) of the Act. And deducted tax thereon under section 195 of the Act. However, the assessee did not deduct tax under section 195 of the Act on the payments made for “Live Rights”.

In appeal, CIT(A) held that the payment for “Live Rights” was chargeable to tax as “Royalty”.

HELD

Whether payments for Live Rights are for use of copyright?

  • The Tribunal examined in detail certain judgments2 on the subject.
  • Based on the examination, broadcasting “Live events” does not amount to a work in which copyright subsists, as right to broadcast live events i.e., “Live Rights” is not “copyright”.
  • Therefore, any payment made towards Live Rights cannot be said to be chargeable to tax as “Royalty” under section 9(1)(vi) of the Act. Further, the judicial authorities have held that when the agreements clearly bifurcate the consideration paid towards Live and Non-Live Rights, it is not open for the Department to deem that the payment made for Live Rights was for a bouquet of rights.
2. CIT vs. Delhi Race Club [2014] 51 taxmann.com 550/[2015] 273 CTR 503/228 Taxman 185 (Hon'ble Delhi HC); Fox Network Group Singapore Pvt. Ltd. vs. ACIT (IT) [2020] 121 taxmann.com 330 (ITAT Delhi); Cricket Australia vs. ACIT (IT) (ITA No. 1179/Delhi/2022) (ITAT Delhi); ESS (formerly known as ESPN Star Sports) vs. ACIT (ITA No. 7903/DEL/2018) (ITAT Delhi); ESPN Star Sports vs. Global Broadcast News Ltd. 2008 (38) PTC 477 (ITA T Delhi); ADIT (IT) vs. Neo Sports Broadcast Pvt. Ltd. [2011] 15 taxmann.com 175/[2011] 133 ITD 468 (ITAT Mumbai); DDIT(IT) vs. Nimbus Communications Ltd (2013) 20 ITR(T) 754 (ITAT Mumbai).

Whether payments were for use of process?

  • As regards the issue whether the payments were made for the use of “process” or not, the payments in dispute were made to overseas rights holders. The said payments were neither made to any satellite operators nor for use of any satellite. Hence, the payments were not made for use of any “process” as defined under section 9(1)(vi) of the Act. Therefore, they cannot be brought to tax as “Royalty” in the hands of the overseas rights holders.
  • Accordingly, while passing the order under section 201 of the Act, the AO erred in law by treating the remittances to have been made for use of a “Process”.

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii)

57 M/s. Ariff & Company vs. ACIT

ITA No.: 140 / Chny/ 2022

A.Y.: 2007–08

Date of Order: 15th December, 2023

Section: 36(1)(iii)

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii).

FACTS

Mr R along with his wife and three children constituted the assessee-partnership firm in 1974, which carried on business of running a hotel called “Hotel President”.

Four partners decided to retire from the firm because they were migrating to the USA, leaving the management completely in the hands of Mr A.

Accordingly, after negotiations, the firm was reconstituted in 2006 with the retirement of four partners and the induction of a new partner, Mrs A.

Before reconstitution of the firm, the assets and liabilities of the firm were revalued and credited in the capital account of partners, and the capital account of the outgoing partners was treated as debt of the partnership firm.

To settle outgoing partners’ capital account, the firm borrowed a loan from Punjab National Bank and paid interest thereon. It had also taken capital contribution from incoming partner, Mrs A and paid interest to her in accordance with section 40(b).

The AO disallowed the interest paid by the assessee-firm to the capital account of partners and on loan borrowed from the Bank on the ground that payment to outgoing partners was nothing but a family settlement.

The disallowance was upheld by CIT(A).

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) interest paid on capital account of partners partakes the nature of funds borrowed for the purpose of business of the assessee, and consequently, interest paid thereon is allowable under section 36(1)(iii);

(b) any loan borrowed for the purpose of settling outgoing partners’ capital account which has been treated as debt in the books of accounts of the firm assumes the character of loan borrowed for the purpose of business of the assessee, and consequently, interest paid on borrowed capital account is allowable under section 36(1)(iii);

(c) when the assets were owned by the partnership firm, any settlement of such assets to the outgoing partners cannot be considered as settlement of family property, just because the partners were family members.

(d) merely because the assets of the firm had been revalued before reconstitution of partnership firm (to ascertain the fair market value of assets of the firm and shares of the outgoing partners), it cannot be a reason for the AO to treat the settlement of firm properties among partners as settlement of family property.

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

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component

56 Tata Sons Pvt. Ltd. vs. DCIT

ITA No.: 2362 / Mum / 2023

A.Y.: 1993–94

Date of Order: 6th December, 2023

Section: 244A

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component.

FACTS

The return of income of the assessee for A.Y. 1993–94 was filed on 31st December, 1993, returning NIL income.

The return was subject to assessment / re-assessment and rectification over a period of time.

Tribunal, through orders dated 4th February, 2015, and 1st January, 2016, gave relief to the assessee.

The AO passed an order giving effect (OGE) dated 8th March, 2016, granting the refund of ₹30,45,62,594, and the assessee received the said refund on 18th August, 2022.

Aggrieved by the short credit of interest on refund, the assessee filed an appeal before CIT(A) / NFAC.

The CIT(A) / NFAC held against the assessee.

Aggrieved, the assessee filed an appeal before the Tribunal, alleging that:

(a) The AO had incorrectly adjusted the earlier refunds, resulting in a short credit of interest of ₹9,93,09,258;

(b) The AO had not calculated the interest for the interim period from when OGE was passed, that is, 8th March, 2016, and the actual receipt of refund, that is, 18th August, 2022, resulting in short credit of interest of ₹11,27,21,927.

(c) The AO had not calculated the interest under section 244A(1A), which led to interest short credit of ₹7,09,13,871.

HELD

Dealing with each of the grievances, the Tribunal held as follows:

(a) The amount of interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, shall be adjusted towards the tax component; accordingly, the assessee would be entitled for interest on the unpaid refunds in accordance with the principle laid out in Grasim Industries Ltd vs. DCIT (2021) 123 taxmann.com 312(Mum);

(b) In light of the issue being squarely covered in favour of the assessee in CIT vs. Pfizer Limited (1991) 191 ITR 626 (Bom), City Bank NA Mumbai vs. CIT, ITA No. 6 of 2001 and CIT vs. K.E.C International in ITA No. 1038 of 2000 (Bom HC), the assessee was justified in seeking interest under section 244A up to the date of receipt of the refund order, i.e. 18th August, 2022;

(c) Applying the ratio laid down by coordinate bench in ACIT vs. Bharat Petroleum Corporation Ltd, ITA No. 5231 to 5233 of 2019, section 244A(1A) would be applicable in assessee’s case from 1st June, 2016, till the date of actual receipt of refund.

Accordingly, the Tribunal directed the AO to recompute the interest on refund in accordance with the order and as per law.

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022

55 Amala Jyothi Vidya Kendra Trust vs. PCIT

ITA Nos.: 458 / Bang / 2023

A.Y.: 2021–22

Date of Order: 1st December, 2023

Section: 12AB(4)

 

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022.

FACTS

The assessee-trust was registered vide trust deed dated 1st April, 2005.

It was registered under the erstwhile section 12AA. Due to the amended provisions with effect from 1st April, 2021, requiring re-registration, the assessee filed an application for registration under section 12A / 12AB, which was granted to it by DIT from A.Y. 2022–23 to A.Y. 2026–27.

On 28th December, 2021, a search was carried out under section 132 in the office premises of assessee-trust in Bangalore.

During the course of search, various incriminating materials were found which were confronted to the trustees and secretary of the assessee-trust, and it was found that they were using the funds of the trust for personal benefit.

Consequently, assessment proceedings were initiated by the AO for A.Y. 2021–22, calling for various details and confronting the evidence collected during the search.

Subsequently, vide letter dated 20th December, 2022, the AO sent a reference to PCIT for A.Y. 2021–22 communicating her satisfaction as per second proviso to section 143(3) of the Act that this was a fit case for cancellation of registration under section 12AB.

Accordingly, on 28th December, 2022, show cause notice was issued by the PCIT requiring the assessee-trust to explain as to why the registration granted to it should not be cancelled under section 12AB.

After considering the reply, the PCIT, invoking the amended provisions of section 12AB(4)(ii) [introduced by the Finance Act, 2022 w.e.f. 1st April, 2022], cancelled the registration granted to the assessee-trust w.e.f. A.Y. 2020–21 and that of subsequent years.

Aggrieved by this, the assessee-trust filed an appeal before the ITAT.

HELD

The Tribunal observed that:

(a) In income-tax matters, law to be applied is the law in force in the assessment year unless otherwise stated or implied. In the present case, the PCIT cancelled the registration granted under section 12AA/12AB w.e.f. previous year 2020–21 relevant to assessment year 2021–22 and therefore, the law as stated in the A.Y. 2021–22 is to be applied and not the law as stood in A.Y. 2022–23;

(b) No retrospective cancellation could be made under section 12AB(4)(ii) since it has not been provided or is seen to have explicitly provided to have a retrospective character or intended. Therefore, without a specific mention of the amended provisions to operate retrospectively, no cancellation for the earlier years could be made;

(c) Since the PCIT invoked section 12AB(4)(ii) which has been introduced by the Finance Act, 2022 w.e.f. 1st April, 2022, so as to cancel the registration with retrospective effect from A.Y. 2021–22, such order is bad in law and deserved to be quashed.

The Tribunal also noted that the same view has been taken by Mumbai ITAT in the case of Heard Foundation of India, ITA No.1524/Mum/2023 vide order dated 27th July, 2023.

In the result, the appeal of the assessee-trust was allowed.

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable

54 Lalit Kumar Kalwar vs. Income-tax Officer

[2023] 106 ITR(T) 373 (Jaipur – Trib.)

ITA No.: 379 (JP) OF 2018

A.Y.: 2013–14

Date of Order: 30th May, 2023

 

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable.

FACTS

The assessee had sold shops and received actual sale consideration of ₹12 lakhs, which was less than the value accepted by the DLC of ₹20.78 lakhs. The assessee claimed long term capital gain (LTCG) at nil after seeking exemption under section 54F, contending that the entire actual sale consideration was invested in the purchase and construction of the residential house.

The Assessing Officer (AO) disallowed the claim of the assessee for the reason that the assessee had not deposited the sale consideration received on transfer of the property in capital gain account as per provisions of section 54F(4).

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT (A) also upheld the order of the AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

After analysing the provisions of S. 54F(1) of the Act, the ITAT found that in Explanation to S. 54F(1), the term “net consideration” means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. The meaning of full value of consideration in Explanation to S. 54F(1) was not to be governed by the meaning of words “full value of consideration” as mentioned in S. 50C.

The ITAT also held that the fiction under S. 50C of the Act is extended only to the aspect of computation of capital gains and the same does not extend to the charging section or the exemptions to the charging section. The legislature consciously intended to apply the fiction under S. 50C of the Act only to the expression used in S. 48 of the Act and not in any other place. The ITAT further observed that the cost of new asset was not less than the net consideration, and thus, the whole of the capital gains was not to be charged even if the capital gains had been computed by adopting the value adopted by stamp registration authority. The requirement of law is that net consideration is required to be appropriated towards the purchase of the new asset. Thus, deduction under S. 54F was clearly applicable.

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

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper

53 Deepak Setia vs. Deputy Commissioner of Income-tax

[2023] 106 ITR(T) 125 (Amritsar – Trib.)ITA NO. 112 (ASR.) OF 2023

A.Y.: 2019–20

Date of Order: 17th June, 2023

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper.

FACTS

A survey was conducted on the assessee’s premises u/s 133A. The assessee surrendered the amount of ₹29 lakhs and offered it for taxation as business income. Subsequently, the case was selected for scrutiny and out of ₹29 lakhs, amount of ₹14.23 lakhs which was related to miscellaneous business income (MBI) was taken as income from an undisclosed source under section 69A, and tax was calculated as per section 115BBE at a special rate. The rest of the surrendered amount was taken as normal business income, and tax was calculated at normal rate.

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT(A) also upheld the order of the AO.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that during survey proceedings, the assessee had surrendered total income of ₹29 lakhs out of which amounted to ₹14.23 lakhs related to other discrepancies / MBI, which was treated as income from undisclosed source u/s 69A and tax thereon was calculated as per section 115BBE at special rate during assessment. The entire addition was certainly without forming proper basis for conversion of business income to non-business income. The revenue was not able to submit any evidence during assessment and appeal proceeding that the said income was not connected with the business income of the assessee or was accumulated from a non-recognising source.

The ITAT held that when all the incomes earned by the assessee were only from the business income of the assessee, there did not arise any question as to the application of provisions of section 69A by following the settled principle that “when there is no other / separate source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only”.

The ITAT had relied on the following Judicial precedents:

1. Harish Sharma vs. ITO [IT Appeal No. 327 (Chd.) of 2020, dated 11th May, 2021]

2. Daulatram Rawatmull vs. CIT [1967] 64 ITR 593 (Cal.)

3. Mansfield & Sons vs. CIT [1963] 48 ITR 254 (Cal.)

4. Sham Jewellers vs. Dy. CIT [IT Appeal No. 375 (Chd.) of 2022, dated 22nd August, 2022]

The ITAT held that the conversion of business income into other income and application of section 69A was bad and illegal and accordingly, levy of tax u/s 115BBE on the business income was liable to be quashed.

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

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material

52 Arun Manohar Pathak vs. ACIT

[2023] 106 ITR(T) 14 (Mumbai – Trib.)

ITA NO.: 489 (MUM.) of 2023

A.Y.: 2017–18

Date of Order: 24th May, 2023

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was carrying on the milk distribution business. He deposited cash of a certain amount in his bank account during the demonetization period in old currency notes, i.e. specified bank notes (SBNs). The assessee submitted that he was a retailer of milk and the said cash deposits in SBNs were out of collection from sale of milk to persons during the demonetization period, and the same had been used to make payment towards purchase of milk to Gujarat Co-operative Milk Marketing Ltd. (GCMM) by way of demand drafts as reflected in the bank statement of the assessee. However, the Assessing Officer (AO) treated cash deposited in the bank during the demonetisation period in SBNs as unexplained and added the same under section 69A of the IT act.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) upheld the order of the AO on the grounds that the assessee was not able to show that he was entitled to claim benefit of Notification No. S.O. 3408(E), issued by the Ministry of Finance (Department of Economic Affairs), dated 8th November, 2016, as the assessee had not filed any material to establish that the assessee qualifies as a milk booth operator under authorisation of Central or State Government.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee had placed on record all the documents which supported the averments made by the assessee before the AO and CIT(A). The assessee had submitted the following documentary evidences to substantiate that he was carrying out milk distribution services and, therefore, was entitled to claim benefit of the notification:

1. Copy of License No. 11512018000623 issued by Government of Maharashtra.

2. Cash book, bank book and bank statement of the assessee.

3. Ledger Account of purchases made from GCMM.

Upon perusal of documents / details on record, the ITAT held that the assessee was able to substantiate the stand during the assessment proceedings, and the burden of proof was on the Revenue.

The ITAT observed that the CIT(A) had not dealt with the documents / details furnished by the assessee and failed to either carry out any inquiry / verification into purchase / sale of milk by the assessee to controvert the averments made by the assessee, or to point out any infirmity in the aforesaid documents / details.

The ITAT held that AO as well as CIT(A) were incorrect in holding that the assessee was not covered by the notification. Even if for the sake of arguments, it is believed that though the assessee was not covered by the aforesaid notification, the assessee had a bona fide belief that the assessee was entitled to the benefit of the notification, and therefore, permitted to receive SBNs, and that the assessee did accept SBNs as valid tender.

The ITAT held that the averments made by the assessee, supported by the documents furnished, went uncontroverted and, accordingly, deleted the addition made under section 69A of the act.

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

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income

51 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017–18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income.

Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by section 270A(6)(a).

FACTS

The assessee filed its return of income declaring total income to be a loss of ₹72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had offered rental income of ₹29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013–14. However, in the instant year, the assessee had declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts are related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the AO assessed the rental income under the head ‘income from business’.

The AO assessed rental income under the head ‘business’ and consequently, the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for levy of penalty under section 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of ₹1,83,550 under section 270A of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A), who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct’”, there is merit in the contention of the assessee that levying of penalty is not automatic, and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised his discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head ‘income from house property’ and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub-section (6) of section 270A of the Act. The Tribunal noted that the Chennai bench of Tribunal has in the case of S Saroja [2023 (5) TMI 1262 – ITAT CHENNAI] held that a bonafide mistake committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement

50 Rekha Singh vs. ITO

ITA No. 2406/Mum/2023

A.Y.: 2015–16

Date of Order: 30th October, 2023

Section: 56(2)(vii)(b)

 

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement.

FACTS

The assessee, an individual, filed a return of income declaring therein a total income of ₹5,93,520 on 27th August, 2015. The case was subjected to limited scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has purchased an immovable property for a consideration of ₹84,15,300 as a co-owner jointly with her husband. The consideration was paid by both co-owners. The assessee was a co-owner for the property being 50 per cent share. The AO noticed that while the consideration was ₹84,15,300 whereas the value of property determined by the stamp valuation authority was ₹1,32,82,000. The AO was of the view that section 56(2)(vii)(b) was to be applied.

The assessee explained that as per the proviso to section 56(2)(vii)(b), the stamp duty value on the date of agreement may be taken for the purpose of this clause. It was explained that the date of agreement (letter of allotment) was 16th December, 2010, whereas the purchase deed was registered on 29th December, 2014, and the first payment of R1 lakh was paid through a banking channel on 18th October, 2010, by the husband of the assessee.

The AO did not agree with the submission of the assessee and since property was transferred for a consideration less than its stamp duty value, therefore, 50 per cent of the total difference was assessable as income in assessee’s hands.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the initial payment before date of registration was made only by the other co-owner, husband of the assessee, the assessee was not entitled to the benefit of the proviso. He, accordingly, confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

In the course of hearing before the Tribunal, on behalf of the assessee, it was submitted that the property was purchased by the assessee in the joint name of the assessee with her husband, and it is immaterial that the initial consideration was paid by the husband of the assessee who was other co-owner. Reliance was placed on the decision of the co-ordinate bench, Mumbai, in the case of Poonam Ramesh Shahjwanv. ITO(IT) 4(2)(1) A.Y. 2014–15 in ITA No. 2252/Mum/2019 and the decision of ITAT, Pune in the case of Sanjay Dattatrya Dapodikarv. ITO, Ward 6(2) [(2019) 107 taxmann.com 219 (Pune Trib.)].

The Tribunal having perused the decision of ITAT in the case of Poonam Ramesh Shahjwan (supra) wherein on the similar facts, the value of the flat was determined on the date of booking of flat after taking into consideration the payment made by the assessee through banking channel before the registration of the flat as laid down in the proviso to section 56(2)(vii)(b) of the Act. The Tribunal also considered the decision of ITAT, Pune bench in the case of Sanjay Dattatraya Dapodikar (supra) wherein it is held that where the date of agreement for fixing the amount of consideration for purchase of a plot of land and the date of registration of sale deed were different but assessee, prior to date of agreement, had paid a part of consideration by cheque, provisos to section 56(2)(vii)(b) being fulfilled, the stamp value as on date of agreement should be applied for purpose of said section.

The Tribunal directed the AO that the stamp duty value on the date of allotment, in the case of the assessee on 16th October, 2010, be taken for the purpose of section 56(2)(vii)(b) of the Act and not stamp value as on the date of registration of sale deed. Further, the Tribunal did not find any merit in the findings of the CIT(A) that before the registration of the flat only other co-owner, i.e., Ajay Kumar Singh, husband of the assessee has made the payment. Since, it was joint property owned by assessee and her husband, it is immaterial who had made payment before the date of registration of the property.

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

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

49 Ravinder Kumar vs. ITO

ITA No. 2265/Del/2023

A.Y.: 2011–12

Date of Order: 8th November, 2023

Section: 54B

 

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

FACTS

The assessee sold agricultural land which gave rise to long-term capital gain of ₹12,78,456. The assessee claimed that it had purchased another agricultural land and, therefore, the entire long term capital gain of ₹12,78,456 is exempt under section 54B of the Act. The Assessing Officer (AO) denied the claim for deduction under section 54B on the grounds that the land had been purchased in the name of the wife of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee, reliance was placed on the decision of Ashok Kumar vs. ITO [ITA No. 7460/Del/2018; AY: 2009–10; Order dated 28th December, 2022] and on behalf of the revenue, reliance was placed on dismissal of SLP by the SC in the case of Bahadur Singh vs. CIT(A) [(2023) 154 taxmann.com 457 (SC)] against the decision of the Punjab & Haryana High Court wherein purchase of agricultural land in the name of the assessee’s wife was not allowed under section 54B relief to the assessee.

HELD

The Tribunal noted the ratio of the decision of the Tribunal in the case of Ashok Kumar (supra). The Tribunal observed that in the decision relied upon by the DR, it was a dismissal of SLP simpliciter by Hon’ble Apex Court against the decision of Hon’ble Punjab & Haryana High Court. The Tribunal noted that dismissal of SLP simpliciter by Hon’ble Supreme Court does not merge the order of Hon’ble High Court with that of Hon’ble Supreme Court. It also noted that there is no jurisdictional High Court decision on this issue. Further, in case of conflicting, Hon’ble High Court decision one in favour of assessee has to be adopted as per Hon’ble Supreme Court decision in Vegetable Products. Accordingly, the Tribunal followed the precedent relied upon by the assessee which also draws support from Hon’ble High Court decisions referred therein.

The Tribunal set aside the order of the Revenue authorities and decided the issue in favour of the assessee.

Loan From Promoters: An Insight

This is a less-covered area—the words directors and promoters are used synonymously but this may not be always true and the consequence of these two on loans and deposits under the Companies Act, 2013 (CA 2013) and the Companies (Acceptance of Deposits) Rules, 2014 (AODR) are discussed hereunder:

The term “deposit” is defined in clause (31) of section 2 of the CA 2013 that states that ‘a deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India’.

Rule 2(1)(c) of AODR prescribes categories of amounts which shall not be termed as ‘deposits’ subject to meeting the prescribed conditions. It should be noted that receipt of money in a different form is also covered under the term “Deposit”.

LOAN AND DEPOSIT

Quite often, these two terms are used synonymously and interchangeably but these terms are different. A loan is repayable when it is contracted / incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan, there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit. The loan is usually at the instance of the borrower whereas in the case of a deposit, it is at the instance of the person placing a deposit.

Thus, to simplify: I want a loan. I am a borrower. I approach the bank which is a lender for a loan. I am taking a premises on rent. I place a deposit with the landlord.

Section 143(1)(d) of CA 2013 [Section 227(1A)(d) of the Companies Act, 1956] provides that the auditor shall
inquire “whether loans and advances made by the company have been shown as deposits”. These provisions indicate that it may not be possible to interchange the terms loan and deposit under the Companies Act.

In a transaction of a deposit of money or a loan, a relationship of a debtor and a creditor must come into existence. The term deposit and loan may not be mutually exclusive, but in each case, one needs to consider the intention of the parties and the circumstances. What is required to be noted further is that under the limitation act, the period when limitation begins in the case of deposit and in the case of loan are different. The limitation period in case of a loan starts on a date on which the amount was repayable as per the agreement. As regards deposit, the limitation period starts from the date the depositor claimed repayment of money. In the case of a deposit, the accrual of interest ceases upon maturity, whereas in a loan, interest is payable up to the date of repayment of the loan itself. However, this does not mean that a loan or deposit necessarily will carry an interest. Thus, we come across interest-free loans and deposits. The onus of repayment of loan vests with the person taking the loan. In the case of a deposit, the depositor has to claim the deposit amount.

DEPOSIT

However, for the purpose of CA 2013, the definition of the term ‘Deposit’ clearly states that it includes ‘any receipt of money by way of deposit or loan or in any other form by a company’. Any loan has to fall within the exclusion from the definition of ‘deposit’ if it were to qualify as loan simpliciter.

Rule 2(1)(c) of the AODR prescribes receipts of money that shall not be treated as a deposit. For the purposes of this article, we shall be discussing only 2 such amounts namely:

AMOUNT RECEIVED FROM THE DIRECTOR

Clause (viii) of Rule 2(1)(c) reads as:

(viii) Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;

As per Notification dated 15th September, 2015, which amended the rule, any amount received from a director of a company or in the case of a private company, from the relative of the director, shall also be exempt, provided that such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others …. The reporting in the Board’s report is a condition imposed by the Amendment Rules which are effective from 15th September, 2015. Hence, all reports of the Board of Directors, signed after this date need to give this disclosure.

It is pertinent to note here that a Hindu Undivided Family shall not be regarded as a relative of the director. Rule 16A of ADOR mandates that every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.

Thus, the essential conditions for this exemption are as under:

  • Amount is received from a person who was a director of the company (whether Private or Public) at the time of the receipt of the amount (so subsequent cessation does not affect this exemption) or
  • In the case of a private company, from the relative of the director.

Such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others and the same is disclosed in the Board’s Report. (One needs to look into the exemption notification dated 5th June, 2015 and applicable conditions)

AMOUNTS FROM PROMOTERS

Let us now see Clause (xiii) of Rule 2(1)(c) that deals with the amount brought in by promoters.

Unsecured loans received from the promoters (as defined in clause (69) of section 2) or their relatives (as defined in clause (77) of section 2) or both as per the stipulation of any lending financial institution or a bank shall not be treated as deposits.

Hence, when the loan is brought in without any stipulation imposed by the lending institution or the loan brought in beyond the amount stipulated by lending institutions, the same will amount to a ‘Deposit’. This exemption is available only till the loan from the lending institution subsists and not after the same is repaid.

As the exemption is available only till the subsistence of the loan, the amount brought in by promoters needs to be repaid along with the loans from lending institutions.

The rule reads as:

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely: –

(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;

(b) The loan is provided by the promoters themselves or by their relatives or by both; and

(c) The exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

One thus notes that conditions are cumulative. Condition (b) in my view implies that a loan cannot be given by third parties as compliance of the stipulation.

This clause and definition of the word promoter needs little elaboration:

As per section 2 (69) of CA 2013, “promoter” means a person—

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act,

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Before we deal with this definition, we may note that this definition is newly introduced in CA 2013. The term promoter was defined in the Companies Act 1956 only for the limited purpose of fixing liability for a misstatement in the prospectus. So, the definition of promoters under CA 2013 can be analysed in three parts. All the parts are separated by ‘or’ and are thus independent of each other, or mutually exclusive, meaning thereby that for being a promoter, a person may fall within any part of S. 2(69). Suffice it to state as an introduction that the promoter in sub clause (a) covers a factual aspect whereas to identify a person as a promoter in sub clause (b) and sub clause (c), the same has to be established with adequate material.

The first part [contained in sub-clause (a) of sub-section 69 of Section 2] lacks legal certainty in as much as instead of explaining the concept, it appears that it upholds as correct, what is mentioned in the documents referred to in the said sub clause. Without elaborating the essentials of the concept, it merely states that a person is a promoter if the name of that person is mentioned as a ‘promoter’ in the Prospectus or in the Annual Return filed under S. 92 of the Act.

In the second independent clause of the definition of ‘promoter’, we find a little objectivity in the definition, as it talks about the presence of one’s control over the affairs of the company as a prerequisite for being classified as a promoter. Such control may arise out of the position of that person as a shareholder, or a director or otherwise. The control envisaged can be direct or indirect. Undoubtedly, the definition also contemplates a person who may neither be a shareholder nor a director, and yet be a promoter if he has control over the affairs of the company. Thus at the same time, every shareholder or director need not be treated as promoter of the company if he does not exercise any control over the affairs of the company.

In this context, it is notable to look into the definition of ‘control’ given under S. 2(27) of the Act. As per section 2 (27), “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

Thus we are told that if a person has a right to appoint the majority of directors or to control the management or policy decisions of a company, then he/she would be considered to be a promoter. But again, what may be classified as control over management and policy decisions is still ambiguous, uncertain, vague & definitely a matter of academic debate and interpretation and thus may lead to two views.

The last part of the definition states that a promoter is a person “(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act”.

This is again vague and from the perspective of a person who is an outsider to the management of the company and this fact may not be evident very easily. So, applying the rules of literal interpretation on S. 2(69) of the Act, and reading all the parts of the definition together, a person may be a promoter of the company even without being a director or a shareholder, if he / she has been named so in the Prospectus or Annual Return of the Company.

Similarly, a person who has been stated to be a promoter in the prospectus of the company or the Annual Return of the Company, would be treated as a promoter even if he / she does not exercise any control over the affairs of the company or even if doesn’t have any right of appointment of a majority of the directors.

Thus, it can be seen that in the formation of a company, people who initially take an active part to give it a concrete shape are known as promoters in the commercial world. The term “promoters” is more familiar with the business than with law. It “involves the idea of exertion for the purpose of forming and starting a company.”

The individuals who not only conduct the task of promotion but also are responsible for all the affairs of the business are the promoters of a company. A promoter of a company is a person or a group of persons who came together with the objective of setting up a business. The promoter can be an individual, a firm or an association of artificial legal persons. To be a promoter, it is not necessary to be a founder of a business; the person who arranges capital and assists in other important works can be equally regarded as a “promoter of a company”. In another sense, the promoters may be called as the Parents of a company on the ideation of whom a company is born.

A person cannot become a promoter merely because he signed the memorandum as a subscriber for one or more shares. The proviso further carves out an exception as to the professionals such as counsels, solicitors, accountants, engineers or other technicians who will not become promoters by reason of acting unless they exceed their professional function and do something more in promoting the company.

TREATMENT OF LOAN RECEIVED FROM MEMBERS / DIRECTORS / PROMOTERS WHEN THEY ARE THE SAME

Let us consider a small Private limited company that has 2 members / shareholders who are directors of the Company. Consider a situation in which these directors lend money to the company for its operations. Since the loan is from the directors, it shall be considered as exempt only if a declaration is obtained from the directors. It is the duty of the concerned director to give the declaration, but it is equally the duty of the company to obtain the declaration. The sub clause granting exemption nowhere says that the director giving loan should not be a shareholder of the company. It similarly does not say that such a director should not be a Managing Director / Whole Time Director / Independent Director / Non-Executive Director / Employee of the Company. Reading any of these things or anything else will amount to inserting words in a statutory provision which we are not allowed to do. So, when a loan is accepted from a director who is a shareholder too, one needs to look into the exemption from the perspective of a loan from the director and one should not travel to other provisions regarding loan from members. If the intention of the rule-making authorities was to debar a company from accepting deposits/loan from their directors who happen to be shareholders of the company, there would have been a clear and explicit provision to that effect in clause (viii). But in the absence of such a provision, we cannot read it in the clause (viii) on our own. Thus loans from directors subject to compliance of conditions shall be treated as exempt deposit under rule 2(1)(c) (viii) of AODR.

Consider further a situation that this company decides to borrow from the financial institution (FI) a term loan of ₹100 crores and FI imposes a condition that promoters of the Company (in this case same 2 directors) bring in ₹10 Crores and such loan from the promoters shall not be repaid till term loan or part thereof continues. It is interesting to see here that such directors / promoters when they bring in a loan pursuant to a condition stipulated, there is no declaration required, and promoters (directors) in such cases, can place the funds with the company out of borrowed funds.

Thus, it is quite logical that with regards to the loans from promoters (who can be even non-individuals) to the company, there cannot be a condition similar to loan from directors or their relatives that they need to be out of their own funds.

Based on the logic explained in the paragraph on loan from directors, not to be treated as loan from members etc, one can conclude that loan from promoters pursuant to a stipulation cannot be considered as a loan from directors even though such promoters are directors and one need not take a declaration from such promoters since this is not prescribed when loan is from promoters.

Rule 2(1)(c) of AODR provides for certain situations in which the receipt of money shall become a deposit:

Any unsecured loans received from the promoters or their relatives or both as per the stipulation of any lending financial institution or a bank which continues beyond the subsistence of such loan from lending financial institution or a bank, shall become deposit.

Other compliances that need to be looked into in the case of loans and / or deposits:

I. CARO 2020 Clause (v) in Para 3 requires reporting in respect of the following:

in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not;

Thus, if loan from promoters does not fall in the four corners of exception, it needs to be reported in CARO.

II. Pursuant to amendments in Schedule III to the Companies Act, companies are required to give certain ratios which includes a ratio related to debts and equity namely Debt Equity ratio. The notification further mentions that the company shall explain the items included in numerator and denominator for computing the above ratios. Guidance note from ICAI further clarifies that the Debt-to-equity ratio compares a Company’s total debt to shareholders’ equity. Both of these numbers can be found in a Company’s balance sheet. Debt-Equity Ratio is defined to mean Total Debt / Shareholder’s Equity.

Is it possible to hold a view that the loan from promoters can be included in Equity for the purposes of this ratio?

CRISIL in its recent publication titled “CRISIL Ratings approach to financial ratios” mentions as under:

RELEVANT EXTRACTS ARE REPRODUCED

Computation of debt and equity has its nuances, especially in the context of promoter / family-owned unlisted entities where a sizeable portion of promoter funds deployed in the business could be in the form of unsecured loans.

These loans are infused either by promoters or family members and are usually subordinated to external debt. Over the years, CRISIL Ratings has observed that this source of funds has demonstrated a high degree of permanence in times of distress, with promoters deferring interest payments on these loans in order to prioritize the servicing of external debt. Furthermore, unsecured loans from promoters in case of promoter owned, unlisted entities are largely viewed as promoter source of funding by lenders and considered subordinate to all other forms of external debt.

Hence, even though as per accounting conventions, unsecured loans are considered part of debt, the aforementioned factors render some equity-like characteristics to these instruments.

CRISIL Ratings, as part of its analytical treatment of unsecured loans, classifies them into one of the following:

  • Part of overall debt,
  • May exclude unsecured loans from computation of debt,
  • In some circumstances, CRISIL Ratings accords partial equity treatment to around 75% of the unsecured loans, while considering the remaining as debt.

In view of the above, it is possible for a company to calculate the ratio treating unsecured loans from promoters as part of Equity.

CONCLUSION

The loans from Directors and Promoters and conditions related to exemptions from AODR are tabulated below:

Particulars Loan from Directors Loan from Promoters
Whether loan from Individuals Only Yes Not necessarily
Whether loan can be out of borrowed funds No Can be permitted
Whether any declaration required that loan is not out of the borrowed funds Yes No
Any Limit on the loan No Yes, subject to limits from Financial Institutions / Banks
Can the loan continue after director ceases to be a director of the Company Yes Not Applicable
Whether loan from relatives is permitted Yes (Only in case of private Limited Company) Yes. Not necessarily in the case of Private Limited Company.
How long loan can continue No such requirement and can be at the instance of the Company Loan can continue till Parent loan from FI continues
Reporting in the Board’s report Yes No such mandatory requirement

Navigating the Landscape: The Integration of ESG Factors Into Business Valuation

In the dynamic world of finance and investment, the integration of Environmental, Social, and Governance (ESG) factors into business valuation has become a paramount consideration. As the global business community grapples with the requirements of sustainability and responsible corporate practices, investors are increasingly recognizing the need to go beyond traditional financial metrics. This article explores the multifaceted realm of ESG, delving into its significance, the process of integrating these factors into business valuation, challenges encountered in this endeavour, and the highlights of Business Responsibility and Sustainability Reporting (“BRSR”) Core which has been introduced recently.

UNDERSTANDING ESG & ITS IMPORTANCE

ESG encompasses a triad of critical factors that collectively shape a company’s approach to sustainability, ethical practices, and corporate governance. Environmental criteria evaluate a company’s impact on the planet, social criteria gauge its relationships with stakeholders, and governance criteria assess the internal structures guiding decision-making. The importance of ESG lies in its ability to provide a holistic view of a company, reflecting its commitment to long-term resilience, ethical conduct, and positive societal impact. Investors are increasingly recognizing that companies with robust ESG practices are not only better equipped to manage risks but are also likely to be more resilient in the face of evolving market dynamics.

INTEGRATION OF ESG INTO VALUATION

The integration of ESG factors into business valuation marks a paradigm shift in how companies are assessed and valued for investment. Traditional valuation methods are being augmented with ESG considerations, as investors seek a more comprehensive understanding of a company’s performance and its ability to create long-term value. ESG integration involves analyzing a company’s ESG practices and assigning a quantitative value to these tangible and intangible factors. These factors become important for the valuation of a business as their impact can be considerable when taken for long periods of time including on its competitive advantages. Below are ways to incorporate the ESG impact under the market and income approach:

  • The Market Approach:

To account for ESG considerations, valuation under the market approach should:

1) Identify and assess ESG practices for comparable companies and industries, then

2) Assess the performance of the subject company for such criteria, and

3) Calibrate the market inputs to the subject entity to take into account the relevant performance as compared to the comparable companies.

An example for adjusting the ESG factor under market approach is as follows:

Relevant ESG Factors GHG Emissions (Co2e) Workplace Accidents
Competitor 1 0.60  65
Competitor 2 0.70 55
Industry Average (a) 0.65 60
ESF factor for Target Company (b) 0.75 70
Premium/(Discount) for ESG factor in comparision to Industry(c) (15%) (17%)
Weights (d) 50% 50%
Industry Average EV/Revenue Multiple (e)*   2.0
Calibrated EV/ Revenue multiple for the Target Company

Considering the ESG Factor (e*d*(1+c))

   1.7

A significant limitation of this method is that ESG data, disclosures, and rating systems are currently in their early stages of development, particularly for entities that are often private companies. Consequently, the scoring process is subjective, as different practitioners may assign varying weightings or scores to distinct ESG factors and practices implemented by companies.

  • The Income Approach:

To account for ESG considerations, valuation under the income approach should consider its impact on the discount rate or cash flows itself.

While discount rate adjustments can be used to incorporate ESG into the Discounted Cashflow approach (DCF), adjusting the discount rate may lead to double counting if beta values have reflected the market’s perspectives on ESG risks. A better way of integrating ESG factors in the DCF can be to adjust future cash flows. This helps the investor to integrate the company’s ESG factors into future cash flows and thus to focus on the relevant material issues. Depending on different industries and company performances, the translation of ESG factors to cash flow adjustments varies. Hence industry to industry lens is very critical since there is no standardized benchmark in ESG integration and adopting industry and company-specific value drivers could help avoid the ambiguity of the cash flow adjustments. Some of the adjustments to be considered include:

– The “E” factor can be incorporated by adjusting the cash flows with additional costs and Capex investments in carbon reduction initiatives and cost savings from the adoption of energy/water saving technology.

– The “S” factor can be incorporated through adjusting costs related to employee training programs, hiring contractual employees on a permanent basis, workplace safety measures and research and development investments to ensure quality and safe products among others.

– The “G” factor can be incorporated through adjusting for fines or penalties imposed by regulatory authorities due to weak governance policies of companies.

An example of adjusting the ESG factor under the income approach is as follows:

Cash Flow Items Amount (INR Mn) ESG Factor Explination of Adjustment
Revenue 1,500    
Revenue Adjustment (300) Social Reduced sales due to consumer boycott pf its products for unethical labour practises such as child labour, poor working conditions or low wages
Adjusted Revenue 1200    
Operating costs and expenses (250)    
Tax Expense (100)    
Tax Adjustment (40) Governance Additional tax payments due to fines imposed by regulatory authorities
Adjusted Net Profits 810    
Depreciation and Amortization 80    
Changes in Net Working Capital 50    
Necessary Capex (200)    
Capex Adjustment (80) Environmental Purchase of machineries necessary to reduce water resource waste
Free cash flow considering ESG Factors 660    

ISSUES IN INTEGRATING ESG FACTORS IN VALUATION

While the integration of ESG factors into business valuation is gaining momentum, it is not without its challenges. One key issue is the lack of standardized metrics and reporting frameworks, making it difficult for investors to compare ESG performance across companies. Additionally, there are concerns about “greenwashing,” where companies may overstate their ESG credentials to appear more attractive to investors. Striking a balance between qualitative and quantitative assessment poses another challenge, as some ESG factors are inherently subjective and context-dependent. Overcoming these challenges requires the development of standardized reporting practices, increased transparency, and ongoing dialogue between investors and companies.

BRSR CORE FRAMEWORK

Recent developments in the ESG landscape include the introduction of the BRSR Core Framework by SEBI, an extension of the existing BRSR framework that delves deeper into ESG integration by providing specific requirements for reporting and assurance. This framework aims to enhance transparency and accountability for companies and further elevate the role of ESG in business valuation.

  • Key Features of BRSR Core:

– Specificity: The framework defines a specific set of ESG indicators that companies must report on, — covering environmental, social, and governance aspects. This specificity ensures consistency and comparability across companies, facilitating easier analysis and assessment for investors.

– Assurance: BRSR Core introduces mandatory assurance requirements for a subset of reported ESG information. This independent verification enhances the credibility and reliability of ESG data, reducing the risk of greenwashing and building investor confidence.

– Value Chain Focus: The framework extends beyond a company’s own operations to include its value chain, requiring reporting on the sustainability practices of its suppliers and partners. This broader scope provides a more comprehensive picture of a company’s overall impact and promotes responsible sourcing practices.

– Phased Implementation: BRSR Core’s implementation is phased, starting with the top 1000 listed entities by market capitalization. This gradual approach allows companies to adapt and implement the framework while minimizing disruption.

Impact on Business Valuation:

– Enhanced Data for Valuation Models: The BRSR Core’s specific and assured ESG data provides valuable input for valuation models, enabling a more comprehensive assessment of a company’s long-term value and risk profile.

– Better Risk Assessment: Deeper insights into a company’s ESG performance through the value chain help identify potential environmental, social, and governance risks that could impact financial performance.

– Improved Comparability: The standardized reporting and assurance requirements facilitate easier comparison of ESG performance across companies, enabling investors to make more informed investment decisions based on ESG considerations.

BRSR Core represents a significant step towards a more integrated and transparent ESG landscape. The BRSR Core framework is still evolving, and its impact on business valuation is likely to grow as companies adapt and investors refine their assessment methods. Ongoing collaboration between regulators, investors, companies, and valuation professionals is crucial to ensure the effectiveness and continued improvement of the framework. Addressing data availability and accessibility, particularly for smaller companies, remains a challenge that needs to be tackled to ensure fair and equitable application of the framework.

CONCLUSION

The integration of ESG factors into business valuation is a transformative trend that reflects the evolving priorities of investors and the broader business ecosystem. ESG considerations are no longer peripheral but integral to evaluating a company’s overall performance and potential for sustained success. While challenges persist, the ongoing evolution of reporting frameworks like BRSR signals a commitment to addressing these issues and advancing the integration of ESG into mainstream financial practices. As businesses navigate this new landscape, embracing ESG not only contributes to a more sustainable future but also positions companies as leaders in an era where responsible practices are synonymous with long-term value creation.

“Wait… What?” Is Singapore Taxing Capital Gains?

A. INTRODUCTION

A.1. To align the tax treatment of gains from the sale of foreign assets to the EU Code of Conduct Group guidance, which aims to address international tax avoidance risks, Singapore has enacted the new Section 10L of the Singapore Income Tax Act (“SITA”), in which gains from the sale of foreign assets that are received in Singapore by businesses without economic substance may be taxable in Singapore.

A.2. The change is in line with the global focus of anchoring substantive economic activities in the relevant jurisdiction.

B. SECTION 10L LAW — GENERAL RULE

B.1. From 1st January, 2024, based on the new Section 10L of the SITA, gains from the sale or disposal by an entity of a relevant group (“Relevant Entity”) of any movable or immovable property situated outside Singapore at the time of such sale or disposal or any rights or interest thereof (“Foreign Assets”) that are received in Singapore from outside Singapore are treated as income chargeable to tax under Section 10(1)(g) if:

a) the gains are not chargeable to tax under Section 10(1)1; or

b) the gains are exempt from tax.

Such gains are referred to in this article as “foreign-sourced disposal gains”.

C. WHAT DOES THIS MEAN?

C.1. Foreign-sourced disposal gains are taxable if all of the following conditions apply:

a) Condition 1: The taxpayer is a “Relevant Entity”;

b) Condition 2: The Relevant Entity is not under a Specified Circumstance; and

c) Condition 3: The disposal gains are “Received in Singapore”.

C.2. To summarise, for the disposal gains to be taxable under Section 10L, the answer to all of the following questions must be “Yes”:

Conditions Yes
Is the taxpayer an Entity? ?
Is the taxpayer a Relevant Entity? ?
Is the Relevant Entity not an Excluded Entity or a Specified Entity? ?
Have the disposal gains been “received” in Singapore? ?

D. WHAT IS A FOREIGN-SOURCED DISPOSAL GAIN?

D.1. Foreign-sourced disposal gains are gains from the sale or disposal of any movable or immovable property situated outside Singapore.

D.2. Common examples where assets are determined to be situated outside Singapore are as follows:

a) immovable property, or any right or interest in immovable property, is physically located outside Singapore;

b) equity securities and debt securities are registered in a foreign exchange;

c) unlisted shares are issued by a company incorporated outside Singapore;

d) loans where the creditor is a resident in a jurisdiction outside Singapore;

e) any shares, equity interests or securities issued by any municipal or governmental authority, or by anybody created by such authority, or any right or interest in such shares, equity interests or securities, are situated outside Singapore if the authority is established outside Singapore;

f) subject to paragraph (e), any shares in or securities issued by a company, or any right or interest in such shares or securities, are situated outside Singapore if the company is incorporated outside Singapore;

g) subject to paragraph (e), any equity interests in any entity which is not a company, or any right or interest in such equity interests, are situated outside Singapore if the operations of the entity are principally carried on outside Singapore;

h) subject to paragraph (e) (and despite paragraphs (f) and (g)), any registered shares, equity interests or securities, and any right or interest in any registered shares, equity interests or securities, are situated outside Singapore if they are registered outside Singapore or, if registered in more than one register, if the principal register is situated outside Singapore.

E. WHAT IS AN ENTITY?

E.1. An entity is defined under Section 10L(16) as:

a) any legal person (including a limited liability partnership) but not an individual;

b) a general partnership or limited partnership; or

c) a trust.

CONDITION 1: IS THE TAXPAYER A RELEVANT ENTITY?

F.1. A Relevant Entity is defined under Section 10L(5) as an entity that is a member of a group of entities if its assets, liabilities, income, expenses and cash flows are:

a) included in the consolidated financial statements of the parent entity of the group; or

b) excluded from the consolidated financial statements of the parent entity of the group solely on size or materiality grounds or on the grounds that the entity is held for sale; and

F.2. A group is a relevant group if:

a) the entities of the group are not all incorporated, registered or established in a single jurisdiction; or

b) any entity of the group has a place of business in more than one jurisdiction.

G. CONDITION 2: IS THE RELEVANT ENTITY UNDER A SPECIFIC CIRCUMSTANCE?

G.1. Foreign-sourced disposal gains are not chargeable to tax in Singapore under either of the specific circumstances mentioned in Points H and I below.

H. CONDITION 2A: THE RELEVANT ENTITY IS AN EXCLUDED ENTITY

H.1. An Excluded Entity is defined under Section 10L(16) of the SITA as either a:

pure equity-holding entity (“PEHE”); or

non-pure equity-holding entity (“non-PEHE”); and

such an entity has adequate Economic Substance in Singapore.

H.2. A PEHE’s function is to hold shares or equity interests in any other entity and has no income other than dividends, disposal gains and incidental income, i.e., bank interest income, foreign exchange gains arising from dividends or similar payments, sale or disposal of shares and bank interest income.

H.3. For a PEHE to meet the economic substance requirement, the following conditions are to be satisfied in the basis period in which the sale or disposal occurs:

a) the entity submits to a public authority any return, statement or account required under the written law under which it is incorporated or registered, being a return, statement or account which it is required by that law to submit to that authority on a regular basis;

b) the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and

c) the entity has adequate human resources and premises in Singapore to carry out the operations of the entity.

H.4. A non-PEHE is defined as an entity that does not meet the definition of a PEHE.

H.5. For a non-PEHE to meet the economic substance requirement, the following conditions are to be satisfied
in the basis period in which the sale or disposal occurs:

a) the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and

b) the entity has adequate economic substance in Singapore, taking into account the following considerations:

i. the number of full-time employees of the entity (or other persons managing or performing the entity’s operations) in Singapore;

ii. the qualifications and experience of such employees or other persons;

iii. the amount of business expenditure incurred by the entity in respect of its operations in Singapore; and

iv. whether the key business decisions of the entity are made by persons in Singapore.

I. CONDITION 2B: THE RELEVANT ENTITY IS A SPECIFIED ENTITY

I.1. Such gain that is carried out as part of, or incidental to, the business activities of:

a) a prescribed financial institution; or

b) specified entities taxed at a concessionary rate of tax / exempt from tax due to an incentive during the basis period in which the sale or disposal occurred.

Note: This currently excludes Section 13O and 13U of the SITA (i.e. the fund / family office exemptions).

J. CONDITION 3: HAVE THE DISPOSAL GAINS BEEN RECEIVED IN SINGAPORE?

J.1. Based on Section 10L(9), foreign-sourced disposal gains are regarded as received in Singapore and chargeable to tax if they are:

a) remitted to, or transmitted or brought into, Singapore;

b) applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; or

c) applied to the purchase of any movable property which is brought into Singapore.

J.2. The foreign-sourced disposal gains are deemed to be received in Singapore only if such gains belong to an entity located in Singapore. Therefore, foreign entities, i.e., not incorporated, registered or established in Singapore, that are not operating in or from Singapore will not be within the scope of Section 10L of the SITA.

J.3. An example of the above would be a foreign entity that only makes use of banking facilities in Singapore and has no operations in Singapore.

K. SECTION 10L LAW — GAINS FROM THE DISPOSAL OF IPRs

K.1 Please note that gains from the disposal of foreign Intellectual Property Rights (“IPRs”) follow different rules than the ones specified above. This will be covered in a separate article in the future.

L. CONCLUSION

L.1 As mentioned above, Singapore has introduced capital gains tax in certain situations where the gains would not have already been taxable under the normal rules of Section 10(1) or where the gains would have been exempt under a specific section of Section 13.

Overview of NFRA Inspection Reports of 2023 on Audit Firms – I

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal will be commencing reporting on NFRA developments. This reporting will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ seeks to bring to light some of the important changes affecting the profession of audit via the NFRA with a view that members and readers can learn from some of these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, you will be pleased to read this article as a prelude to the NFRA Digest, a new feature to cover NFRA updates.)

BACKGROUND

Section 132 (2) of the Companies Act, 2013 (the Act) empowers the National Financial Reporting Authority (NFRA) to oversee the quality of service of the professions associated with ensuring compliance with such standards (previously stated in sub-clause (b)) and suggest measures required for improvement in quality of service and such other related matters as may be prescribed.

The NFRA issued a press release on 11th November, 2022, giving about three pages of Audit Quality Inspection Guidelines (AQIG). The said guidelines (about 2.5 pages of content) state “audit quality inspections are a key tool with the Regulator to fulfil its statutory obligations.” The AQIG also laid out the criteria for such inspections to cover:

  • Provisions in the Act, Rules and amendments thereof
  • SQC1 including the Code of Ethics
  • Standards of Auditing
  • Policies, guidelines, manuals, etc., of the firm
  • Ind-AS as may be applicable to selected individual audit engagements
  • Relevant circulars / directions of other regulators, as applicable
  • Directions issued by internal quality boards / committees and QRB, ICAI, as may be applicable

The AQIG also specified the inspection process:

a. Inspections will be carried out on site;

b. Questionnaires may be issued to ensure readiness;

c. Entry meeting with senior management and heads of different verticals;

d. Enquiry meeting with audit engagement team of selected audits;

e. Execution cycle will comprise site visits, interviews, review of controls, substantive testing, issue of queries and observations and follow-up of previously issued observations (to be relevant in case of recurring inspections);

f. Inspected Audit Firm / Auditor will be required to provide written responses / confirmations to queries and observations raised by NFRA;

g. Inspection will close with a meeting with the senior management of the firm or auditor;

h. NFRA will then issue a draft report to obtain responses;

i. Responses to be given within 30 days from the draft report;

j. Issuance of final report.

These NFRA guidelines are somewhat akin to the lines of PCAOB Inspection Procedures1. The Public Company Accounting Oversight Board (PCAOB), USA, has been issuing inspection reports of firms worldwide since the year 2004. It may be noted that in year 1, it issued four reports, but in the year 2005, it issued 172 reports. PCAOB also has cycles and an interesting “deficiency rate”. “This data point indicates, as a percentage of the number of audits reviewed in a particular inspection, the number of audits with respect to which the inspection identified audit deficiencies of such significance that it appeared that the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or internal control over financial reporting.”

1. https://pcaobus.org/oversight/inspections/inspection-procedures

Coming back to the NFRA mandate, the Audit Quality Inspections objective2 was to evaluate the compliance of the Firm / Auditor with Auditing Standards and Other Regulatory and Professional requirements, and the sufficiency and effectiveness of Quality control systems of the Audit Firm / Auditor, including:

(a) adequacy of the governance framework and its functioning;

(b) effectiveness of the firm’s internal control over audit quality; and

(c) system of assessment and identification of audit risks and mitigating measures.

2 AQIG, Dated 11th November, 2022, Para No 2

2023 INSPECTION REPORTS

Here are the common salient features of these first set of inspection reports3:

a. These are the first set of NFRA Inspection Reports.

b. The choices of the firms are based on the extent of public interest involved as evidenced by the size, composition, and nature of the audit firm, the number of audit engagements carried out during the year, the complexity and diversity of preparer companies and other risk indicators.

c. Inspection Reports

d. Engagements covered were statutory audits for FY ended 31st March, 2021.

e. Audit areas selected for each engagement were Revenue, Trade Receivables and Investments due to their “inherent higher risk of material misstatement”.

f. Other details of this round of inspections are as follows:

Report Number Name of the Firm # of Pages Engagements Selected
132.2-2022-01 SRBC & Co LLP (SRBC) 19 Five
132.2-2022-02 Deloitte Haskins and Sells LLP (DHS) 17 Five
132.2-2022-03 BSR & Co LLP (BSR) 15 Five
132.2-2022-04 Price Waterhouse Chartered Accountants LLP (PWC) 22 Four
132.2-2022-05 Walker Chandiok & Co. LLP (WCCL) 20 Five

Note: In the overview presented further down, the last two digits are referred to identify the report.

3. https://nfra.gov.in/document-category/inspection-reports/

TIMELINES (PART D)

a. The NFRA initiated inspections in November / December 2022;

b. The entry meetings were held with each of the firms between 23rd November, 2022 and 7th December, 2022;

c. Inspection time taken was about 30 to 43 days based on start and end dates given;

d. All on-site inspections were completed in January 2023;

e. Final inspection reports were issued between 22nd December, 2023, to 29th December, 2023.

It is worth noting that the time between the initiation of inspection and the issuance of the final report has taken more than one year. A detailed chronology of events / correspondence forms part of the report in Part D.

STRUCTURE OF INSPECTION REPORTS

Each report is made of Parts A, B, C and D. Part A carries an executive summary, overview, inspection approach, methodology, firm profile and acknowledgement. Part B is on Firm-wide Audit Quality Control System. Part C is on Individual Audit Engagement Files with a focus on selected areas. Part D is on the Chronology of Inspection. Reports end with an Annexure that carries the Firm’s response to the final Inspection Report.

The inspection covered a review of firm-wide quality controls, adherence to Standard on Quality Control (SQC)-1, Code of Ethics, applicable laws and rules and a review of individual Audit Engagement Files for the annual statutory audit of financial statements 31st March, 2021. The 2022 inspection emphasised crucial aspects of the Firms’ quality control systems, including leadership responsibilities, auditor independence, the acceptance and continuation of audit clients, engagement quality control and the internal quality inspection program of the Audit Firms.

CAVEAT AND GUIDANCE

NFRA has given an important statement: “Inspections are, however, not designed to review all aspects and identify all weaknesses in the governance framework or system of internal control or audit risk assessment framework; nor are they designed to provide absolute assurance about the Audit Firm’s quality of audit work. In respect of selected audit assignments, inspections are not designed to identify all the weaknesses in the audit work performed by the auditors in the audit of the financial statements of the selected companies.” Further, the NFRA has clarified that these reports are neither marketing tools nor are they a rating of any sort. The report also states that “selected sample of five individual audit engagements is not representative of the Firm’s total population of the audit engagements completed by the Firm for the year under review.”

It emphatically states that reports are “intended to identify areas and opportunities for improvement in the Audit Firm’s system of quality control.”

FIRM PROFILE, STRUCTURE, NETWORK AND INDEPENDENCE (PART B, C)

1) Each Audit Firm was a member of a domestic network bearing the same / similar name.

2) The flagship firm selected for NFRA review carried the identical / similar / abridged name of the network.

3) Many members of the domestic network were firms bearing similar names and in some cases different names.

4) Each Audit Firm was a member of an international network.

5) Non-provision of domestic network details / agreement to NFRA (para 11, Report No. 01), (para 11, Report No. 03).

6) Provision of domestic network agreement registered with ICAI to NFRA (para 10, Report No. 04), (para 23 and 24, Report No. 02).

7) Denial of part of a network as envisaged by SQC 1 clause 6(k) although registered with ICAI as a domestic network (para 15 (viii), Report No. 05).

8) Provision of international network agreements — whether asked or given is not clear from the NFRA Report.

9) Leadership / Governance Structure of Domestic Network:

a) Through the LLP Format (para 12, Report No. 03), however, NFRA observed that “Firm could not provide sufficient evidence about Leadership, Governance and Management structure to demonstrate compliance to element 1 of SQC 1 regarding Leadership Responsibilities for Quality within the Firm”.

b) Common Leadership Team / Assurance Leadership Team, consisting of partners of domestic network firms; however, no documentation was there between individual firms or network agreement that delineated the leader’s duty, responsibility and accountability (para 19 and 20, Report No. 01). The charter of the leadership team seemed to be a recently drawn-up document without authenticity. NFRA pointed out that “there was no clarity on the assignment of responsibilities, authority with individuals claimed to be part of the leadership structure, reporting hierarchy, and accountability of the leaders and their respective legal entities.”

c) The Audit Firm did not have a Board to oversee the Network as stated in the Networking Agreement signed by the Audit Firm (para 23, Report No. 02).

d) Partner Oversight Committee had oversight over the domestic network firms and for coordination / alignment with global network standards and policies. However, it did not have management control (para 18, Report No. 04). The domestic network had an advisory committee with each member having different roles, with a minimum of two registered Chartered Accountants. The advisory committee provided assistance, etc., to the non-executive chair on various matters (Para 16, Report No 04).

10) Information provided about Indian entities of Global Network (para 12, Report No. 04). Other reports do not carry such information.

11) Partners in Audit Firms were also partners in other network firms (para 11, Report No. 04).

12) One Audit Firm displayed inconsistency in reporting to PCAOB about its two network firms. The audit firm said that it had no audit-related affiliation, membership, or similar arrangement with any other entity; it was part of the Indian network of two firms bearing same / similar names. At the same time, another Indian firm (having connected names) told PCAOB that it was affiliated with the Audit Firm (para 15, Report No. 5).

13) There were references to a common brand traced from quality control policies and e-audit software, although the audit firm denied network arrangement as per SQC 1 (para 16 (i), Report No. 5).

14) The Audit firm’s relationship with the global network was not recognised in the independence policies. NFRA observed that such relationships are included in the definition of Network (Para 25, Report No. 1).

15) The Audit firm’s Indian clients were provided with non-audit services by global network firms in India to the auditee group in violation of Sections 144 and 141 of the Companies Act, 2013 (Para 25, Report No. 1).

16) A possible disqualification of the audit firm as auditor was observed in two samples under Section 141(3)(e) of the Companies Act, 2013, due to global network relationship (Para 26, Report No. 1).

17) The Audit Firm did not provide the details of non-audit services provided by its International network’s India entities to the Audit Firm’s audit clients during the course of the on-site inspection (Para 15, Report No 03).

18) The Audit Firm had made its association with the International network’s India entities clear to PCAOB; it did not fully disclose global network entities to the NFRA (Para 16, Report No 03) .

19) The international network’s India entity partners were designated as the Audit Firm’s partners in the audit firm’s audit files (Para 17, Report No 03).

20) International Network’s India entity’s audit work is performed by the Audit Firm’s personnel as per the PCAOB website (Para 18, Report No 03).

21) An audit firm which maintained that it was independent of a global network, and disclosed one entity of the global network in India subsequently, had several indicators to demonstrate the audit firm’s dependence on the global network such as inter-relationship of leadership, common control and governance structure, global network’s India entity accepting audit on behalf of the audit firm, use of global network’s domain name by audit executive team and sharing core functions (Para 17, Report No 03).

22) Inspection noted that the Audit Firm was not independent of International network’s India entities, who are member entities of the international network (Para 19, Report No 03).

23) As per reporting to PCAOB, the audit firm and global network’s India entities carried out audits where part of the audit was carried out by the global network’s India entity and ICAI registered domestic network (Para 18, Report No 03).

24) During the inspection, the Audit Firm did not provide details of International network entities and non-audit services provided by those entities to audit clients. Therefore, the NFRA team was unable to determine whether there was compliance with the fundamental requirements of the Code of Ethics (Para 20, Report No 03). However, the Audit Firm responded that it had decided that all India entities of the International network will not provide non-audit services to the firm’s NFRA-regulated clients from 1st January, 2024 (Para 21, Report No 03).

25) The Audit Firm disclosed that each network firm was distinct, not an agent of the other firms or the international network. The Indian network had signed an admission and license agreement. The global membership provided various resources, methodologies, etc. (Para 13, Report No 04).

26) NFRA appreciated the steps taken by the Audit Firm and advised to take further steps to avoid the provision of non-audit services to holding companies by network entities, whose subsidiary is under purview of NFRA in India (Para 34, Report No 04).

This is the first in the line of articles that cover an overview of the first five NFRA inspection reports. The inspection process, timelines and structure of inspection reports have been covered. This article also covers important NFRA observations on audit firms relating to governance and leadership structures or lack / non-disclosure thereof, international and domestic networks / affiliations. It also covers some issues in that context by NFRA such as non-audit services provided to audit clients and issues related to SQC 1.

This compilation is done with a view to enable auditors and audit firms to understand the focal points and key issues in these NFRA inspections. These key features will help firms take necessary steps to be compliant with applicable regulations.

The next article will cover NFRA observations on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From that subsequent article, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

R७IMA५INE – 75TH YEAR CELEBRATION

A tribute to the past and a precursor of the future

The Bombay Chartered Accountants’ Society (BCAS), established in 1949, serves as a dynamic hub where the brightest minds meet, fostering a culture of continuous learning and innovation. Through seminars, workshops, conferences, publications and other knowledge dissemination mechanisms, BCAS provides its members with a rich reservoir of insights into the ever-evolving realms of accounting, taxation, finance and much more.

At its core, BCAS is more than a professional association, it is a fraternity that nurtures synergy among its members. Over the years, BCAS has adapted to the changing dynamics of the financial, economic and legal landscape, ensuring that its members are well-equipped to navigate new challenges. This year, BCAS celebrates its 75th year of success and to herald the celebration, we began with a beautiful concept of “Reimagine.”

The idea to Reimagine triggers innovation, creativity and the charm of peeking into the future! Reimagine was a three-day celebration hosting more than a thousand professionals and having experts and visionaries sharing their experiences and perspectives.

Reimagine was not just a commemoration of time; it was a jubilant recognition of resilience, growth and the indomitable spirit of the accounting community. Reimagine was the biggest, most spectacular and ambitious event in the history of BCAS.

The organisation of the event was entrusted to a committee that consisted of two parts – the Celebration Committee and the Technical Committee. Both committees comprised a good mix of youth and experience, past presidents, managing committee and, of course, the office bearers. The youth brigade played a prominent part and shouldered responsibility in making this a memorable event. The event was held at the Jio World Convention Centre, at Bandra Kurla Complex. This is probably the best in the country, newly made and studded with the latest facilities and amenities. The participants came from 75 locations, including Dubai. About 34 per cent of the participants were in the up to 40 years age group and about 50 participants were from corporations.

Opening Day, 4th January, 2024

The event started with diverse Indian folk dances from the east, west, north and south, including a beautiful dance in honour of Shri Ganesh. The society’s president, Chirag Doshi, gave an opening speech highlighting the rich legacy and vision of BCAS. After the speeches by organising committee chairpersons, the event was formally inaugurated with the lighting of the lamp. The youngest and the oldest (93 years old) members of BCAS out of the delegates were joined by the chief guest, Padma Bhushan Mr Kumar Mangalam Birla, together with the President and Vice President, chairpersons of the organising committees, to inaugurate the event formally.

KEYNOTE ADDRESS

Shri Kumar Mangalam Birla, also a Chartered Accountant, set the tone of R७ima५ine by delivering his Keynote on Reimagining India. He said: “I believe that we can use 6 levers to reimagine India’s role in the world as a force for global good.” Today, I am going to talk about reimagining India through the lens of SWADES.

S – Sustainability

W – Women Power

A – Artificial Intelligence

D – Digitisation

E – Entrepreneurial Energy

S – Synergies


The Birla scion emphasised the pivotal role of artificial intelligence (AI) and digitisation in India’s future transformation. He identified AI as the “next frontier” crucial for both corporate entities and nations. Highlighting that early AI experiments primarily focused on liberating creative expression, Mr Birla expressed the belief that there is still much-untapped potential for AI’s impact on businesses and nations. He discussed the prospective applications of AI in sectors such as healthcare and agriculture. Mr Birla also spoke about sustainability, women’s empowerment, entrepreneurial energy and the strategic leveraging of synergies as key components for India’s progress. Acknowledging that India’s infrastructure is still in the development phase, he highlighted the unique opportunity to integrate sustainability into the nation’s growth narrative. Mr Birla stressed the critical role of the private sector in realising India’s ambitious goal of achieving net-zero emissions by 2070. This commitment aligns with the broader vision of incorporating sustainable practices and fostering growth in a nation where much of the infrastructure is yet to be established. Seeing the hall full of Chartered Accountants, Mr Birla narrated an important turning point in his life: “…I am reminded of my own CA journey. When I was in high school, I was pretty convinced that I didn’t want to do my CA. The work pressure would be enormous, and I wanted to enjoy college life. But I didn’t have the courage to tell my father that. After a short discussion he said, ‘If you are not a CA, you can’t join me at our work.’ With that the coin dropped. Within a minute, I could see all my aspirations and ambitions fly out of the window. Few days on, and I had a big pile of thick books on my desk. This was two weeks into my holidays after class X exams.”

Day 1, Thursday, 4th January, 2024 – Sessions:

Digital Infrastructure: A Game Changer: Digital Infrastructure has emerged as a transformative force, revolutionising the way India functions and economies thrive. It serves as a game changer, encompassing the interconnected web of digital networks, data centers and communication technologies that power the modern world. From enhancing communication to fostering e-commerce, healthcare, and education, digital infrastructure has become the backbone of progress. As nations invest in their development, the potential for economic growth, efficiency, and inclusive development expands, marking the era of a digitally empowered future. This and much more were the points for discussion in the fireside chat moderated by CA Ninad Karpe founder and Partner of 100X VC with Mr Deepak Sharma, Chief Digital Officer of Kotak Mahindra Bank and Mr Dilip Asbe, MD and CEO of National Payments Corporation of India. The discussion gave the participants a taste of the enormous digital infrastructure that the nation has already built and its role in transforming the country’s destiny. Mr. Asbe mentioned that currently, the primary focus of the payments system is on providing a viable cash alternative and enhancing the acceptance of the Unified Payments Interface (UPI); but going forward, prominent merchants might be subject to charges for UPI-based payments within the next three years. Looking ahead, Mr Asbe emphasised the necessity for substantial investments in innovations, expanding the user base within the ecosystem, and offering incentives such as cashbacks. He highlighted the goal of bringing another 50 crore people into the system to further its growth. Additionally, Mr Asbe advocated for an increase in spending on cybersecurity and information security, suggesting that it should constitute up to 25 per cent of a bank’s IT budget compared to the current 10 per cent. He said that the threat was “very real”.

Perhaps in anticipation of this chat, the organisers had already distributed NFC cards to the participants. These were personalised digital cards that had names of the members and their other data. On tap, contact and other details could automatically be shared via phones. This initiative by the Society boosts the modern use of visiting cards for professionals while promoting paperless visiting cards.

The next session “Reimagine the new age professional firms” was by CA Jamil Khatri, CEO and Co-Founder, Uniqus Consultech. He said that a new-age professional firm is characterised by agility, technology integration and a client-centric approach. Small and nimble, these firms leverage advanced tools and digital platforms to streamline operations and enhance service delivery. With a focus on flexibility and innovation, they adapt swiftly to industry changes, embracing remote work and harnessing the power of data analytics. In this era, professional firms are not merely service providers but strategic partners, navigating the dynamic landscape with adaptability and forward-thinking strategies.

The last session on Day 1 was the CFO Round Table led by CA Sudhir Soni, Partner at BSR & Co. LLP. Discussions included questions on diverse topics like investments in R&D and their pay-back periods, sustainability, professional opportunities in outsourced finance functions, etc. The Round Table consisted of senior corporate leaders: Ms Ashween Anand, CFO, Starbucks; Ms Rajani Kesari, CFO, Nayara Energy Limited; Mr Ritesh Tiwari, ED and CFO, Hindustan Unilever Limited; Mr Deepesh Baxi, CFO, Castrol India Limited and Mr Nitin Parekh, CFO, Zydus Lifesciences Limited. In the ninety-minute session, the veterans shared their insights. The CFOs shared the transformative potential of cutting-edge technologies, exploring ways to enhance financial strategies through innovation. The discussion extended to eco-friendly practices and responsible business operations. The Round Table encapsulated the dual goals of harnessing technological advancements for financial and, therefore, operational efficiency, symbolising a forward-looking alliance between finance, technology and environment.

The first day ended with a lot of excitement amongst members and a networking dinner.

Day 2, Friday, 5th January, 2024:

The first session was moderated by CA Shariq Contractor, past president of BCAS on the Use of AI / Tech-Data As Evidence In Tax Cases. The panellists consisted of CA Pinakin Desai, past president of BCAS and Advocate Nishith Desai, founder of Nishith Desai Associates. Both the panellists shared insights regarding the anticipated challenges for Chartered Accountants (CAs) due to the increased use of AI and technology in tax administration and tax compliances as well as tax representation and litigation. The panellists also delved into the question of whether robots should be treated as separate entities. One of the key highlights of the session was the question surrounding the prospect of robots subjected to taxation. Mr Desai explored the concept of treating robots as separate entities, drawing attention to the global trend of some countries offering citizenship to robots. The use of AI-based evidence during tax litigations poses challenges for tax professionals. While Section 273B of the Income-tax Act, 1961, provides some relief by exempting penalties in cases of sufficient due diligence, the application of this provision in the context of AI remains uncertain. The intersection of AI, technology and taxation introduces challenges that demand careful consideration by tax professionals and auditors. The evolving landscape requires proactive measures to address uncertainties, ensuring a robust and legally compliant approach to the use of AI and tech data in tax cases. Staying abreast of legal developments and adopting best practices will be essential for navigating this dynamic environment.

The second session on Day 2, was titled Reimagining India’s Capital Market Landscape. Mr. Ashish Chauhan, MD and CEO of the National Stock Exchange (NSE) shared an ambitious forecast. Mr Chauhan predicted that India’s economy is set to reach an incredible $100 trillion in the next 50 years, contributing 30 per cent to global wealth. The transformative power of technology took centre stage, with Mr Chauhan emphasising its role in surpassing cumulative wealth created in the last 10,000 years. He cited several examples to highlight the massive increase in the value created by the capital markets of India and how more and more Indians are now being drawn to the stock market. The forecasts and statistics were mind-boggling as India stared at a sparkling future.

 

The third session on Day 2, titled Changing Corporate Landscape — Professional Opportunities, was moderated by CA Robin Banerjee, Chairman, Nucleon Research Pvt. Ltd. The panel had three senior executives CA Raj Mullick, Sr. Executive Vice President and Controller, Reliance Industries Ltd; Mr Rishi Gupta, MD & CEO, Fino Payment Bank and Mr Satyam Kumar, CEO & Founder, LoanTap Financial Technologies who spoke about the confluence of factors, including technological advancements and changing corporate values which are reshaping business operations. The panellists highlighted the shift towards purpose-driven businesses that integrate ethical practices and contribute positively to societal well-being.

Post lunch, in a captivating session, Padma Vibhushan Vishwanathan Anand, moderated by CA Nandita Parekh, where the chess grandmaster shared his life journey, from being a schoolboy with dreams of becoming a Chartered Accountant to achieving the title of Indian Grandmaster. He gave insights into success and failure and how much hard work and planning go into a single victory. The session was aptly titled “The Victorious — A Model for Leadership”. The grandmaster shared a few real-life examples of mind games playing an important role in his journey and how even a game like chess, which most people would consider as a solo journey, is also a team effort and how he, too, had relied heavily on his own set of team members.

The fifth session on Day 2 was on the intriguing topic of “New Age Wars — The Future of the World”. Advocate M. R. Venkatesh explored this unique idea. He shared the Indian outlook about this. He spoke about two heroes of Indian history where contemplation was a constant, not just “I came, I saw and I conquered”. He offered a glimpse into the challenges and opportunities in the evolving global landscape. He said that Krugman observed at LSE that most macroeconomics of the past 30 years was “spectacularly useless at best” and “harmful at worst”. The world economic crisis is a crisis of economics too. He cited that Dr Manmohan Singh in a previous report said that financial deregulation is bad for developing countries. With powerful examples of how new-age wars are so very different from traditional wars, Mr Venkatesh cautioned participants about the dangers that were lurking around in the modern-day world which could potentially disturb the world order.

Continuing the theme of “Vasudaivaha Kutumbakam,” the sixth and last session was “One World One Tax” moderated by Advocate Mukesh Butani and featured a compelling discussion on global taxation. CA Gautam Doshi was present personally at the venue while international speakers, Mr Pascal Saint-Amans of OECD Centre for Tax Policy and Mr Philip Baker Barrister at Field Court Chambers joined online. They discussed the future of streamlined tax filing processes, envisioning a world where tax authorities have comprehensive visibility into global income.

After two days of intense and insightful sessions, the atmosphere shifted gears as the audience was led to a specially curated “Fountain of Joy” at the Jio Centre. The “Fountain of Joy” is a curated display of lights, water, fire and music, and it lived up to its name, offering a spectacular experience to all present. As the sun set, the allure of the evening was raised to a new level. Participants used the world’s largest lift (elevator) while going down at the Jio Centre, which itself is an architectural marvel of Mumbai if not India.

The day didn’t end there. At 7.30 pm, participants with their families were set for a foot-tapping music extravaganza by popular singer Shaan and his troupe. The stereotype that accountants are good only with numbers was shattered during the cultural entertainment. Participants and their family members showcased their versatility as they sang, danced and tapped their feet on the dance floor. Shaan set the stage on fire, ensuring an exhilarating and enjoyable experience for all. Beyond the discussions and presentations, this show provided a moment of collective joy and celebration, reminding everyone that success and happiness are not only about professional achievements but also about sharing memorable moments with loved ones.

Day 3, Saturday, 6th January, 2024:

Saturday and the last day at BCAS Reimagine commenced with a powerful session “Ride the Capital Market” moderated by Mr Mangalam Maloo, Assistant Editor and Anchor, CNBC TV18. The Panel featured Mr Deven Choksey, Managing Director, DR Choksey Finserv Pvt Ltd; CA Nilesh Shah, Managing Director, Kotak AMC Ltd. and CA Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services Ltd. who expressed confidence in the Indian economy’s potential to thrive in the coming decade. Predicting an extended bull run for the next several years, they highlighted that it was an opportune time for large unlisted companies to go public and exhorted the participants to advise their clients to tap the capital markets at this opportune time. Mr Agrawal termed the surge in demat accounts as a monumental economic event, urging companies to list for sustained growth. All the speakers agreed that in order to successfully ride the capital markets, it was prudent to take a long-term view and not count profits at short intervals. The session ended on a note of caution, urging promoters to uphold integrity and avoid questionable tax practices. They each shared amazing statistics. Nileshbhai shared people come back from Dubai like Bhappi Lahiri when talking about the desire to buy gold. India is a net exporter of capital although better opportunities are here. They each shared their realisations and what they had learned in the last three years. Devenbhai mentioned about Allocation of Capital by companies and how companies that have positive cash flows have compounded wealth for investors. Nileshbhai talked about two things with stories, experiences and humorous anecdotes, with the use of Hindi also. He talked about unlearning and downloading your baggage and appreciating the limitations of other people. Ramdeoji mentioned about his learning from the studies his company does about the use of capital for earning capital, in a capital charge and, therefore, economic profit should be observed for evaluating the value of companies. The concept of economic profit is important although the market is not practicing this.

It was then the turn of auditors to discuss the “Future of Audit Profession”. The panel was moderated by CA P. R. Ramesh, former chairman of Deloitte India. The panel consisting of Mr. Akhilesh Tuteja, Partner and Global Cybersecurity Leader of KPMG India; CA Girish Paranjape, former CEO of Wipro Ltd and independent director and Mr Girdharan Gopalarathnam, Reserve Bank of India had a thought-provoking discussion on the future of the various risks that the audit profession was facing and on the changing expectations from auditors by various stakeholders. The panellists shared their thoughts on whether the ongoing technological revolution poses an existential threat or a game-changing opportunity for the audit profession.

The third post-lunch session was one Giant Leap — Start Ups consisted of Mr Nipun Goel, President at IIFL, Mr Siddharth Shah, Co Founder at PharmEasy, Mr Nitish Mittersain, CEO Nazara Technologies Ltd. and Vamesh Chovatia, Tata Capital Healthcare Fund. The session was led by Ms Avanne Dubash of ET Now. India has attracted $70 B between 2019 and 2023 alone and is home to 950 plus startups started in 2023 alone. While Vamesh shared his take on how as a fund manager they evaluate startups and what he has learnt over the years. Siddharth shared some amazing stories of pledging his family home when he started off and his journey. Nitesh shared his take on all that his successful company has faced. Nipun gave his perspective from the investment banking side on the larger universe of startup challenges.

The final technical session of Day 3, Interchanging Roles delved into how CAs can and have moved from one role to another with ease and met with resounding success. Three speakers gave participants a glimpse into their professional journeys and shared how they had changed and adapted their roles and how they met various challenges in the process. The session shed light on the transitions from practice to CFO roles, CFOs returning to practice, and the broader contribution of CAs to nation-building. CA Charanjit Attra, Gr. COO, Jio Financial Services Ltd; CA Milind Sarwate, Founder & CEO, Increate and Padmashri CA T. N. Manoharan explored the theme of interchanging roles in the professional realm. All the speakers inspired the audience to think out of the box and to take up challenges with the right earnestness and proved that nothing is impossible if one sets out on a journey with determination and conviction.

“Reimagine” not only provided valuable insights into India’s economic future and the corporate landscape but also proved that accounting professionals know how to have a good time. The blend of informative cultural sessions made the event a resounding success, leaving participants enlightened and energised. As the curtains closed on this event, the memories of insightful discussions and lively entertainment lingered, setting the stage for future engagements and collaborations in the dynamic world of finance and business. These were captured in heartfelt articulation in the vote of thanks by Vice President Anand Bathiya, at the end. You had to be there to feel it as a perfectly high ending.

The 75th year celebration also saw BCAS scaling new heights in the use of technology for various matters. The social media presence of the Society was harnessed extremely effectively to market the event as well as to engage with the stakeholders in updating the progress of the events as they unfolded. The use of an online app for seeking live questions from the audience and making them available immediately to the panellists made the sessions engaging. The interesting feature of “upvoting” of questions by the participants on lines similar to the concept of “likes” on Facebook or “upvotes” on Quora ensured that participants thought through their questions and drafted them in an interesting manner so that others upvoted their questions to the top of the list for being answered by the panellists. The commemorative Souvenir (228 pages) was released on this occasion, which every participant carried as a prized possession. During the event, three publications were released. The first was titled “Tax Deduction & Collection at Source — Law & Procedure”, authored by 13 authors and edited by three reviewers (436 pages). The second publication was titled “75 Laws relevant to Direct Taxes”, authored by 16 authors and edited by 12 professionals (896 pages) deals with 75 acts and 924 case laws. A study on Ease of Doing KYC — A Study, authored by Raman Jokhakar, Past President as BCAS’s effort to make a difference to people at large and a study on “Disclosure Overload” issues in Financial Statements by CA (Dr) Anand Banka and CA (Dr) Sushma Vishnani to analyse and advocate rationalisation of disclosures. Two publications are available for sale and two studies are available for free download.

The event concluded with a high tea that matched the grandeur of the entire affair, leaving participants gratified.

“Reimagine” lived up to the expectations, blending profound discussions with moments of joy and appreciation. The diverse sessions touched upon the future of the economy, technological disruptions, professional roles and the essence of gratitude. As participants left with enriched minds and hearts, “Reimagine” marked itself as a truly remarkable and successful mega-event, promising a legacy of knowledge, collaboration and celebration in the years to come.

(The above report was prepared by Nikunj Shah and Eesha Sawla, with inputs from Ameet Patel, Zubin Billimoria and Raman Jokhakar.)

BCAS President CA Chirag Doshi’s Message for the Month of February 2024

“Innovation distinguishes between a leader and a follower.” – Steve Jobs

I am pleased to share with you the outstanding success of our recent Conference ReImagine which took place from 4th to 6th January, 2024 at the Jio World Convention Centre, Mumbai. The event brought together professionals, thought leaders, and experts from Practice and various industries, creating an impactful platform for collaboration, learning, networking, and innovation.

The conference witnessed more than 1000 delegates from 75+ cities and towns. More than 35% were young professionals below the age of 40 years, with an equal number of senior professionals above the age of 60 years participating with full enthusiasm. The Energy, Expertise, and Enthusiasm over the 3 days were mesmerising. On the momentous occasion of the 75th year and the mega conference, our Society also received a commendation letter from the Hon’ble Prime Minister of Bharat, Shri Narendra Modi.

I would like to share key highlights of the ReImagine Conference for the benefit of those who could not be part of this landmark event:

Themes:  The themes planned by the technical committee under the able Chairmanship of CA Shariq Contractor and Co chairmanship of CA Anil Sathe and CA Abhay Mehta were well applauded by all. They were very forward-looking and apt to the current scenario where India is marching towards becoming the third-largest economy in the world. Themes covered various areas of business and services where a finance professional plays a very critical role.

Exceptional Attendance: We witnessed an impressive turnout, with delegates from diverse backgrounds, industries, and geographies. The high attendance reflects the relevance and interest in the themes/topics discussed.

Quality Speakers and Presentations: Our line-up of speakers and pane lists delivered insightful and thought-provoking sessions. Their expertise contributed significantly to the overall success of the conference. We had three Padma Awardees, more than five CFOs of large corporations, CEOs, MDs, Founders, and senior professionals sharing their thoughts and experiences over the 3 days.

Innovative Content: The conference showcased cutting-edge trends, best practices, and innovative solutions. Delegates left with a deeper understanding of emerging opportunities and challenges in the profession and business.

Engagement and Networking Opportunities: Delegates actively engaged in networking sessions, fostering valuable connections and collaborations. The feedback on these interactions has been overwhelmingly positive. The use of technology throughout the 3 days kept the delegates engaged. The conference made use of digital apps to post specific questions to panelists and speakers which were posed before them based on upvoting by participants. There were polls that were conducted digitally.

Positive Feedback: Preliminary feedback from attendees has been exceptionally positive, praising the arrangement, content, and overall experience. The meticulous planning by the celebrations committee under the able chairmanship of CA PranayMarfatia and co-chairmanship of CA UdaySathaye and CA Narayan Pasari was par excellence. We have received numerous expressions of gratitude and satisfaction from all over the globe through various letters, emails, chats, and social media messages.

Media Coverage: The conference garnered significant attention from media houses/agencies, further establishing our Society as a thought leader. The conference was covered in 30+ leading media channels, print and digital. The major coverage was for the keynote session, the digital infrastructure as a game changer, the Use of AI in gathering tax evidence, the Impact of technology on the changing corporate landscape and Ride the Capital market sessions. This demonstrated that the conference met the requirements of current and future times.

Publications: The conference also witnessed the launch of the following books and research papersduring the three days:

  1. Tax Deduction & Collection at Source – Law & Procedure
  2. 75 Laws relevant to Direct Taxes
  3. Ease of Doing KYC – A Study
  4. Disclosure Overload” issues in Financial Statements

75th-year Celebrations: I am thrilled to share an electrifying aspect of the conference that added a vibrant dimension to our celebration. The program also marked the 75th year of BCAS with an evening of the musical fountain show at Nita MukeshAmbani Cultural Center of Jio World, followed by live entertainment by leading Bollywood singer Shaan and his troop. During the evening festivities, the delegates immersed themselves in the joyous atmosphere, dancing exuberantly to the live music that echoed through the venue. The live music performance, carefully curated to cater to diverse tastes, created an energetic ambience that resonated with the spirit of camaraderie and celebration. Delegates and their family members from various backgrounds and professions came together on the dance floor, breaking down barriers and fostering a sense of unity. The lively dance floor was a symbolic representation of the success and dynamism of our organization. It showcased the collective spirit and shared accomplishments that make our community truly special.

Memorable Closing Ceremony: The evening concluded with a memorable closing remark by Vice President CA Anand Bathiya followed by a video displaying the glimpses of 3 days, symbolizing the end of an exceptional conference and the beginning of new opportunities. Delegates left with a sense of accomplishment and pride in being part of our Society.

I would like to express my gratitude to the entire team of BCAS and the volunteers involved in planning and executing this event. Their dedication and hard work were instrumental in achieving such a resounding success.

As we reflect on the outcomes of ReImagine, I am confident that the knowledge shared and connections made will have a lasting impact on our profession and our Society. I look forward to discussing further insights and potential follow-up actions with the Managing committee in the coming month.

Way forward – BCAS @ 75

This Quarter Theme: Future Ready Firms – Innovation, Growth & Succession.

We are living in times when our profession is constantly experiencing change. Change in many ways – change in technology, change in people’s perceptions, change in stakeholder expectations, change in regulations, and so on.

Under these circumstances, CA firms must embrace change positively. This can happen with being future-ready.

Future-ready firms will need to constantly think about innovation in their firms. Innovation in practice management, client services, people processes, and delivery of products. Overall, firms will need to ensure an elevated client experience.

Firms having senior partners need to have a robust succession plan in place to ensure continuity and stability.

Growth will come to firms who embrace these changes – in time and with efficiency.

Here are some themes that BCAS committees and groups shall be focusing on to give effect to some of the above thoughts by way of lecture meetings/seminars/workshops/articles in BCAJ/social media sharing:

– Creating an Innovation culture in the firm
– Practicing systematic innovation
– Succession plan in practice – the how of it?
– Passing on the baton – the do’s and don’ts
– Experience sharing by senior partner(s) of firms having created succession plans and retirement policies and having implemented them
– Merger of practices – consolidation for growth
– Creating a future-ready firm – case studies, successes, learnings
– The key tenets of ensuring sustainable growth for your CA firm
– Building a professional service firm for Growth

“The future belongs to those who prepare for it today.” –  Malcolm X

Occam’s Razor

Now that I am a ‘temping’ as a stopgap Editor for this month, I thought I could write something I have been following for months and enjoying listening to! Budgets are a passé this month as we already had a VOA. Books and Videos and Podcasts I am finding with each passing day have the best ROI over a long period of time as they compound so well. Some 25-odd years ago, you paid lacs of rupees to get information, or to learn live from the smartest / wisest people alive. You travelled far. Say what information a fancy international advisor had is today available freely (if not free) on the internet for a fraction of the cost. In other words, one can learn something that is priceless with about ₹1000 of data!

In November 2023, we lost Charlie Munger, one of the smartest men (super investor) alive, just weeks before he would have turned a hundred. For his age, he had the advantage of being through many more years than most people alive. He was also at a vantage point where most people aren’t – being a top investor in US markets. However, his greatest knack was: seeing what most people didn’t, in a way one needs to see at that point of time and capture and articulate it so brilliantly.

If you haven’t heard of him, read on. If you haven’t heard him, you must. If you have, you should hear him again and read up on him! Just as music is to aficionados of music, so is the light of wisdom to seekers of it. What a way he communicated — a combination of intellectual honesty (churn of learning from experience), with a flow of precise witty directness that penetrates a worthy listener.

In one video, Charlie speaks about ‘tricks’ he learned early in his life. When someone of that stature shares his ninety-plus years of being alive during the most amazing times in human history, one just listens without even blinking their eyes.

I like it when he talks of simple, basic things! In one video, he talks about ‘common sense’. And he calls it – “when a man can operate over a broad range of human territory without making many boners … and that is a very important thing to be good at and the question is how to get it”. We all see how uncommon (common) sense is. Charlie says how he saw someone who was really good at something and he thought he would never be as good as that person. And then he saw all these ‘follies’ out there everywhere. And he thought to himself: “… I suddenly realised (if) I just avoid all the follies, I can get the advantage without having to be really good at anything”. This is a classic Charlie Munger idea which he calls turning something around backwards to find something worthwhile. It is like saying can you stop being stupid, if you can’t be wise; can we stop doing something at least, if we cannot do what should be done?

At another point, he speaks about being a ‘collector of ideas’. “I loved big ideas that had a lot of instructive powers and I didn’t mind when they were in somebody else’s territory.. and I used them to solve problems and do self-education…”. At one point, he says he is a collector of inanities because there are so many of them all around. For all other collections, one needs to put in so much effort. Whereas, collection of inanities and cataloguing them in one’s head, he says has been a wonderful thing. He speaks about interplay of some of these ideas and how the process of synthesis worked in areas other than where the ideas came from.

In his own words, he talks about Occam’s Razor (read more online for this tool for understanding the world) and how things should be made as simple as possible, but not simpler (attributed to Einstein). This is evident from all that Charlie has talked about. How to reduce ideas to irreducible basic elements which are simple and few. Further, he explains how to look at a result that is a lollapalooza. He calls for looking at the ‘confluence of multiple causes’, multiple forces operating in the same direction. He says how with all this he could see more clearly than most experts in that field saw. This is perhaps a key knack to have when investing money apart from everything else in life.

About a specific social science problem, he asks whether we can fix this problem? And, he answers, “Yes.” Then asks whether it is likely to happen? He says, “No.” And this is so true — so many things have absolutely common sense answers that they can be fixed. But when you ask if they are likely to get fixed, the answer is a clear ‘NO’. From a study I did recently on the Ease of Doing KYC, bankers take self-attested PAN cards every two years for KYC, where PAN never changes, and for the existence of customers, they already take a signed form. Now, if you ask the same question – whether this can be fixed by stopping to take self-attested PAN from a biometrically covered nation – the answer is ‘YES’. But if you ask whether this will stop soon, the answer is ‘NO’.

His business partner Buffett says: “Charlie marches to the beat of his own music, and it is music like virtually no one else is listening to.” A good observable generalisation that Charlie points out: “the standard human condition is stupidity … it suffers from mis-cognition”. At another time, he said: “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” He stretched it further when he said “If people weren’t so often wrong, we wouldn’t be so rich.”

I leave you with my favourite ones:

For its potent obviousness: “The best way to get what you want in life is to deserve what you want”.

For its sarcasm coming from an investor: “The derivative accounting in America is a sewer, is an insult to sewage”.

For its self-deprecating humour: Buffet: Charlie is big on lowering expectations. Charlie: “That’s the way I got married, my wife lowered her expectations”.

About fraudulent accounting: “It’s like what they do in Italy when they have trouble sending mails and they pile up and irritate postal employees, they just throw away a few carloads”.

About Understanding (by Samuel Johnson): “I can give you an argument, but I cannot give you an understanding”.

About Investing in Gold: “I think civilized people don’t buy gold, they invest in productive businesses (unless you were a Jewish family in Vienna in 1939)”.

I won’t mention but I know that you know the type of people this quote is talking about: “When they are talking they are lying and when they are quiet they are stealing”.

धर्मो रक्षति रक्षित:

The literal meaning of this proverbial line is ‘If you protect / preserve / guard / watch / tend / observe Dharma, then Dharma, in turn, protects you.’

In the Mahabharata, while the Pandavas were in exile, there was a well-known episode of a Yaksha (demi-god) asking Yudhishthira philosophical questions. Actually, all four brothers of Yudhishthira had disregarded the warning of the yaksha that if they did not answer his questions, they would be dead as soon as they drank the water of the pool he was protecting. Accordingly, all four brothers were dead. Yudhishthira answers all his questions satisfactorily. Pleased by his replies, Yaksha offers to revive any one of his brothers.

Readers may be aware that Yudhishithira, Bhima, and Arjuna were the sons of Kunti; whereas Nakula and Sahdeva were the sons of Madri (his stepmother, the second wife of Pandu). Yudhishthira requests Yaksha to revive Nakula, his stepbrother, so that at least one son of both mothers could survive. As the eldest brother, it was his duty (dharma). Yaksha was very pleased with this answer and revives all four brothers. Yudhishthira therefore performed his dharma diligently and this behaviour eventually protected him and he received a reward. Incidentally, Yudhishthira is popularly known as Dharmaraj (the one endowed with Dharma!)

The text of the two verses is as follows:

राजानं धर्मगोप्तारं धर्मो रक्षति रक्षित: |

इति मे श्रुतमार्यांणाम् त्वां तु मन्ये न रक्षति ||

And

धर्म एव हतो हन्ति धर्मो रक्षति रक्षित: |

तस्माद्धर्म न त्यजामि मा नो धर्मो हतोSवधीत् ||

The second shloka is the converse of the first one — meaning, if we kill dharma, (disregard dharma or perform actions contrary to righteous duty) it in turn, kills us.

Here, it is necessary to understand the correct meaning of the word dharma. Many wrongly attribute dharma to religion, customary limiting observances of a sect, etc. In law, it refers to usage, practice, custom, ordinance, and statute. The most appropriate and important meaning is duty, prescribed code of conduct, right, justice, equity, impartiality, piety, prosperity, decorum; righteous behaviour; peculiarly characteristic property or attribute e.g. it is the dharma of iron to sink in water while that of wood is to float!

The literal meaning of the first shloka —

We have heard from great people that the dharma which is observed (protected) by a King in turn protects the King (and kingdom). However, one often gets a feeling that dharma is not protecting us.

The literal meaning of the second shloka —

If we destroy dharma (breach it), dharma in turn destroys us. Hence, one should never breach the rules of dharma (the conduct).

I reiterate that dharma in our ancient literature never meant religions like Hindu, Muslim, Christian, etc. In fact, it is recognised in the Indian context to be a way of being and living.

There is a set of rules of conduct for every profession or vocation or every person for that matter. Like the dharma of a mother or father, son, daughter, dharma of a teacher, a neighbour, a Brahmin, Kshatriya, a monk or a householder, and so on. Even nature, fire, wind, sun, and moon have their respective dharmas.

Even in our CA Code of Ethics, it is written that COE is not a burden but a shield to protect us. This is very true. If one shows that one has observed all guidelines of the Institute, he will not be held guilty merely because the final professional judgment is proved to be incorrect. A doctor, for that matter, should diagnose a disease only after conducting proper tests. He should treat a patient without waiting for payment of fees. A teacher should impartially teach all students; so also, a judge should act judiciously and impartially, without fear or favour. Once upon a time, lawyers also had some ‘dharma’!

In Bhagwad Geeta, it is clearly said that one should always remain within one’s dharma (duty). Duty is above all! ‘Duty First’! If all keep on observing their respective duties, society automatically gets protected!

Learning Events at BCAS

1. 16th Jal Erach Dastur CA Students’ Annual Day — ‘Tarang @75’ at BCAS Hall on 2nd & 3rd December 2023 and CA Member’s event — JhanCAr on 10th December 2023 at M.M. Pupils School, Khar(W), Mumbai

‘Tarang @75’

In its Platinum Jubilee year, BCAS celebrated student’s annual day viz. ‘Tarang @75’ in a grand style with a huge enrolment of around 500 students. The day began with all of the students unleashing their literary journey with the power of words. The Talk Hawk Competition provided a platform where ideas were presented and stage fear was battled for many. The talks were not only enriching but also highlighted very sensitive areas around men’s mental health, feminism, cancel cultures, etc., the narratives left a lasting impression emphasizing the power of communication and their delivery. The Talk Hawk was followed by a Debate Competition, a dynamic forum of intellectual exchanges and challenging thoughts. It was moderated by CA Parth Patani. As arguments clashed and ideas collided, the atmosphere was charged with discussions and controversies. Thought-provoking perspectives came to life as the students put their points forward with well-researched statistics and their own general understanding of the topics.

The next day, started with enthusiasm of treasures and clues, and students running around the streets of south Bombay and taking photos around the place. ‘Treasure Hunt’ was an event largely participated by the students showing the spirit of adventure and teamwork. The spirit of adventure and teamwork took over the day that began with zeal and zest! After all the chaos and actions, students finally gathered at the BCAS hall with all fun and excitement awaiting how the rest of the day unfolds!

The fun of the evening quickened as the spotlight shifted to a dazzling talent hunt, where students showcased their skills in music, dance, and various performing arts categories. The stage came alive with a fusion of creativity and talent, leaving the audience cheering for their friends and enjoying the love and light of the energies around them.

Almost 279 students participated in various activities like Treasure Hunt, Reel Mix Competition, Photography Competition, Antakshari Competition, Talk Hawk’, Essay Writing Competition and Talent show.

‘JhanCAr 20K3’

JhanCAr 2k23 marked its beginning by kicking off with an exhilarating event Corporate Roadies — a multisport adventure — a team play filled with excitement, surprises, and physical challenges with diverse courses of action!!

As the opening bell chimed, signalling the commencement of the Mock Stock Exchange, the room buzzed with excitement and nervous energy. Participants, each armed with a virtual portfolio and a strategy, gathered around their mobile screens, ready to engage in a thrilling financial adventure. Little did we know that the next few hours would be a rollercoaster of fun, thrills, and chaos. The rounds kicked off with a flurry of buy and sell orders. Excitement was palpable as stock prices fluctuated wildly. Laughter and cheers erupted when someone made a brilliant move, while groans echoed across the room when others faced unexpected losses. With CA Jigar Shah creating expert comments and news being read, the entire place was full of screams and laughter!

Following the physically exhausting games, now finally came the mental exhaustion, where teams gathered, each armed with a case file and a determination to uncover the secrets hidden within the financial statements in the event named ‘Investigator’. As the simulated crime scene unfolded on spreadsheets and balance sheets, teams meticulously combed through financial statements, scrutinizing every transaction, entry, and ledger balance. The case study presented a scenario where the cash flow appeared to be at odds with the company’s reported revenues and expenses, creating a financial puzzle. In the end, the true victory lay not just in solving the financial mystery but in the collaborative spirit that had driven each team.

JhanCAr took an innovative turn with the introduction of a captivating ‘Reverse Shark Tank’ — an investment ideology game. Participants showcased their entrepreneurial acumen by justifying the pitching of unconventional and creative business ideas to a panel of judges. This unique twist added a strategic and competitive edge to Jhancar 2k23, challenging participants to think outside the box and answer questions that judges had for them.

The pulse of the evening quickened as the spotlight shifted to a dazzling talent hunt, -Starquest where individuals and teams showcased their skills in music, dance, and various performing arts categories. The stage came alive with a fusion of creativity and talent, leaving the audience in awe of the diverse abilities displayed by the participants. CA Hrudyesh Pankhania truly brought the event to life with his supercharged energy and shayaris!!

A drumroll of anticipation seemed to echo and the winners were announced. Cheers erupted and the smiles and high-fives were not just a celebration of victory but a testament to the dedication, collaboration, and analytical skillset that had propelled them to the top.

The Winners of various competitions are as under:

Winners- 16th Jal Erach Dastur CA Students’ Annual Day
Treasure Hunt Antakshari
‘Suronke Maharathi’		 Debate
‘War of Words’
Winning Teams
Naman Jogani, Khushi Kaushal Vishesh Mehta
Raghav Singhal, Virati Shah Yash Mehta
Siva Vignesh Shan Ruchita Gupta Arnav Singh
Reel Mix
‘Tarang Reel-Star’		 Photography
‘Khinch Le’		 Talk Hawk
‘Aspire to Inspire’
Best Performers*
Vrushti Mehta Yashwardhan Mandoth Vaidik Parwal
Essay Writing
‘Awaken the Writer Within!’		 Talent Show*
‘CA’s Got Talent’
Music Ashwati Nair
Neha Agnihotri –
1st Prize		 Dancing Tanvi Shenoy
Siddhi Sancheti –
2nd Prize		 Instruments Vineet Mishra
Sunidhi Gaur -3rd Prize Other Performing Arts Sakshi Chaubey

Winners- 16th Jal Erach Dastur CA Students’ Annual Day

Starquest Mock Stock Investigator
Winning Teams
Rishikesh Joshi –
1st Prize		 Bansari Sanghvi Bansari Sanghvi
Sagar Shah –
2nd Prize		 Lokesh Rathod Lokesh Rathod
Nidhi Bawri – 3rd Prize Arnav Goyal Arnav Goyal
Reverse Shark Tank Corporate Roadies Overall games Winners
Winning Teams
Hardik Thakkar Sagar Patel Bansari Sanghvi
Smit Jain Parth Dongra Lokesh Rathod
Vriddhi Rawtani Pushkar Arnav Goyal

As the night progressed, the rhythm intensified with an electrifying Jamming session that got everyone on their feet, celebrating the success of Jhancar 2k23. The event reached its pinnacle with a dinner, providing a perfect finale to a day filled with excitement and creativity.

Both events were conducted by the Human Resource Development Committee (HRD) Team under the able guidance of CA Anand Kothari, CA Jigar Shah, CA Dnyanesh Patade and CA Utsav Shah. The Society is thankful to the Bank of Baroda and J.K.Shah Classes for partnering with BCAS by sponsoring JhanCAr 20K3.

2. The International Tax and Finance Study Circle organised a meeting “Moving to Singapore — A Singapore Perspective” on 12th December, 2023 in an Online Mode.

Group Leader Mr. Sanjay Iyer shared his practical insights with respect to nuances in setting up the presence in Singapore in the session. The topics covered in the discussion were:

1. Recent amendment of capital gains on foreign assets becoming taxable in Singapore.

2. Various routes of investments along with procedures and relevant government authorities involved.

3. Opening of a bank account in Singapore and the potential difficulties a new investee may face.

4. The concepts of Single and Multi-Family Offices along with key processes and potential issues that may arise.

5. Key aspects of succession planning.

Towards the end, some important practical aspects of living in Singapore including an approximate cost of living were also discussed. The session provided great insight into the overall operational aspects of moving to Singapore.

3. HRD Study Circle Meeting held a Film Screening — “The Power of Vision” on 25th November, 2023 @ BCAS.

The participants watched the film “The Power of Vision” by Joel Barker (known as a futuristic visionary) and discussed the same as a case study. Mr. Vinod Kumar Jain explained about the film. He explained the importance and power of having a vision in a person’s life, in a commercial or one’s socio-economic endeavours.

The participants discussed that the said film demonstrated how having a positive vision of the future is the most forceful motivator for change and success that companies, schools, communities, nations, and individuals possess.The film explained how a prisoner found the will to survive suffering on earth — at Auschwitz concentration camp — so he could help others find the meaning of life. How did most students in a neighbourhood finish high school beating all the odds paving their way to college? How do organisations inspire employees to be more than observers, exercise their choices wisely and create their futures?

Futurist Joel Barker showed why a shared vision makes decision-making easier, why effective visions are never expressed in numbers, and why a vision must be inspiring enough to challenge each member of the vision community to grow and reach beyond their previous limits.

“The Power of Vision” showed how in your organisation thinking together, dreaming together, and acting together can make a difference in the world.

Key Learnings:

1. Creating a compelling vision that goes beyond numbers

2. Challenging others to stretch beyond their perceived limits

3. Inspire a personal, daily connection to a shared vision

4. Improved decision making

5. New employee training

6. Leadership

7. Team building

After the screening of the film, participants discussed their learnings from the film, their experiences and how the same can be applied in their personal lives, educating their students and children. They also discussed how our nation’s present image-building action by our government will help our country grow to much greater heights.

4. Webinar on “Digital Brandscaping for Professionals” held on 25th November, 2023 in Online Mode.

The Technology Initiatives Committee of BCAS conducted a Webinar on Digital Brandscapting for Professionals. The webinar was planned to guide professionals in creating and nurturing their brand digitally within the Code Of Ethics of ICAI.

The webinar began with Mr. Mihir Karkare, a founder of a renowned social media marketing company, sharing with the participants the importance of branding digitally on various social media platforms. He also emphasised and shared insights on why digital branding is important for professionals in this digital age and era.

The webinar in its second part, addressed basic but important and relevant questions on balancing digital branding ourselveswith the Code of Ethics of ICAI as far as CAs in profession are concerned. Speaker CA Aseem Trivedi shared the practical aspects and clarified the ambiguity around using social media without violating the code of conduct.

The third part was quite an eye-opening session where our committee member CA Hrudyesh Pankhania gave participants a hands-on demonstration of how to use social media and make every bit of one’s reach count. The session focussed on refining social media networking and reach.

The webinar had participants from 25 cities across all age groups.

5. Suburban Study Circle Meeting on “Recent Litigation Trends in GST” on Friday 24th November, 2023 at Golden Delicacy Multicuisine Restaurant, Borivali (W).

The Group Leader CA Prerana Shah discussed with the group various issues arising in GST Compliance at the time of filing various returns including annual returns and commonly raised issues during assessments. She shared an educative presentation on important points based on judicial precedents/circulars and notifications and her views thereon.

In a knowledge-oriented and practical session, she lucidly covered all important points. She illustrated the interpretation of some of the important provisions with the help of case studies.The session was very interactive with participants deliberating upon a large number of practical queries. CA Prerana’s experience with the subject area was well appreciated by the group.

6. Indirect Tax Laws Study Circle on “GST Portal — Recent Developments and Challenges” held on 24th November, 2023 in Online Mode.

Group leader CA Umang Talati presented various issues & challenges faced by taxpayers on the GST portal as well as various recent developments on the portal. The presentation covered the following aspects for detailed discussion:

1. Discussion on Circular 170/02/2022-GST and its impact on disclosure to be made while filing GSTR-9.

2. New functionality of Electronic Credit Reversal and Reclaimed Statement enabled on the portal.

3. New functionality of Return Compliance Portal — DRC-01B/ DRC-01C enabled on the portal and manner of replying to such notices.

4. Implementation of Rule 37A and associated issues.

5. Procedural challenges in filing an appeal.

6. Geocoding facility on the portal – applicability & other challenges.

7. Utility of verifying RFN facility introduced on the portal.

Around 60 participants from all over India benefitted while taking an active part in the discussion.

7. ITF Study Circle Meeting held on 16th November, 2023 in Online Mode.

In the study circle meeting, the participants discussed the implications of the landmark Supreme Court ruling in the case of Nestle SA on the MFN Clause in a tax treaty:

  • The group leader CA Gunjan Kakkad explained the facts of both the lead cases which were adjudicated in the common order by the Supreme Court, along with providing some background to the controversy at hand.
  • The Supreme Court’s ruling was discussed in great detail.
  • This was followed by a detailed analysis of the ruling and its reasoning.
  • The Way Forward and the potential consequences of the ruling were discussed in detail. Many members expressed divergent views on the potential consequences.
  • There was also a discussion on the potential arguments that may be taken in various proceedings initiated as a result of the Supreme Court ruling.

CPE and COE

Arjun : Hey Bhagwan, I am really tired.

Shrikrishna : That you always are! What is the reason today?

Arjun : Want to complete my CPE hours.

Shrikrishna : What is CPE?

Arjun : As per the Continuing Professional Education (CPE), every member must devote at least 30 hours, every years to studies to keep himself updated.

Shrikrishna : Very good. 10,000 years ago, we also had this system. My Guru Sandipani and all other Gurus used to give us send-off on completion of our education of 12 years. They used to give a few instructions for life, from Taittireeya Upanishad.

Arjun : What were those instructions?

Shrikrishna : ‘Satyam Vada’ – Speak the Truth. Dharmam Chara – Perform your duty religiously and Swadhyayat Ma Pramadah – Never commit default in continuous Studies. Never give up on studies!

Arjun : Oh! I heard somebody saying these are the foundations of our Code of Ethics. Your last point is nothing but our CPE!!

Shrikrishna : Now tell me, what is your difficulty?

Arjun : Somehow, I managed 20 hours out of the target of 30 hours.

Shrikrishna : You people are known as the ones who ‘manage’ everything. Even CPE hours you manage?

Arjun : Yes, Lord, we can’t help it. Who has time to go and attend those boring lectures? From my college days, I lost my habit of attending any lectures and sitting there.

Shrikrishna : In college, was attendance not compulsory?

Arjun : It was; but the muster was kept outside the classroom. We used to sign and be elsewhere! Sometimes, we friends used to sign for one another. Proxy is acceptable in law as well!

Shrikrishna : Oh! So, right from your college days, you had no connection with ethics!

Arjun : Ethics? Ah! Who cares?

Shrikrishna : Still, I didn’t understand your problem.

Arjun : Bhagwan, nowadays our branches and study circles hold many Seminars and lectures to enable the members to complete their CPE Hours. 31st December is the last date.

Shrikrishna : That means, as usual, you wake up not at the 11th hour but at the 11th month! I wonder when you will learn ‘pro-activeness’. First things first!

Arjun : Further trouble is that it is mandatory to complete at least 2 hours on Ethics and at least 2 hours for Standard on Audits. Conveners are saying, “Now all good speakers are booked, and no venue is available!”

Shrikrishna : But why do you wait till the last moment? Your Branches and Study Circles should arrange mandatory lectures at the beginning of the year, between January to June.

Arjun : Nobody attends so early. Lord, we CAs cannot work unless it becomes compulsory. And we are quite used to getting an ‘extension of time’. But nowadays, no extension is granted. So, this ‘running around’.

Shrikrishna : So now, you need to be always on your toes. You can’t afford to relax and take things lightly. Actually, you should learn ethics before you start working on audits and taxation. There is no point in knowing about them when all audits and tax filings are over!

Arjun : Lord, I agree. I will tell the conveners to arrange COE and SA lectures before June every year so that we are equipped with knowledge before doing audits.

Shrikrishna : That’s it. You need to be eternally vigilant and proactive. That is your motto – Ya Esha Supteshu Jagarti.

Arjun : I agree, My Lord!

“Om Shanti”

Note:

This dialogue is based on the need for a proper attitude towards CPE and COE. It is in our interest to understand the spirit behind it.

Interesting Apps

lashDim

Many Android users have marvelled at the ability to control the intensity of the flashlight in iPhones. Your wait is now over! FlashDim does just that.

Once installed, it allows you to adjust the intensity of your flash. This comes in useful when you are using it as a flashlight. The app provides three flash intensity levels: minimum, half and maximum.

It also has an SOS mode, where the flashlight blinks repeatedly at regular intervals, for as long as you wish. You may adjust the frequency of the beats per minute or even adjust the interval time from 50 to 10,000 ms.

A neat little feature is that you can adjust the blips to mimic Morse Code. So you can send messages from a distance to someone in the dark, and he will be able to decipher the same — provided he knows Morse Code.

A very handy tool for day-to-day use.

Android: https://bit.ly/3FTfDDZ

AfterShip

AfterShip is a package tracker which is pretty simple. It allows you to track packages for over 700 carriers worldwide. Just enter your tracking number and sit back and relax!

AfterShip will track your package in real-time. You can check your shipment location on a Map, and get notified of the progress automatically no checking frequently on an app / website for the status of your documents / parcels. Once your package is out for delivery or delivered, it will notify you about that too.

The app is smart. When you enter the tracking number, it will automatically detect the carrier — how cool is that! If, for some reason, it cannot do so, it will give you a few options to choose from, and most likely, the carrier will be one of them! You just have to tap to accept the carrier.

If you link your Gmail account with the app, it can even pick up the tracking number from your Gmail. If you copy a tracking number from your WhatsApp account or any other app on your phone, it will automatically tell you when it detects it in your clipboard and remind you to enter it in the app, for easy access and tracking.

So, if you send / receive many parcels / documents, this is a very easy way to track them. And even if the frequency is less, it is so easy and convenient. Try it out today!

Android: https://bit.ly/3QyY5Su

iOS: https://apple.co/49LojtR

Otter: Transcribe Voice Notes

Otter is a pioneer in transcribing voice to text. Whether you are in a lecture, seminar or classroom, just activate the app, and it will transcribe speech to text on your screen in real-time, so that you can focus on the discussion at hand.

You can even OtterPilot your meetings with AI. Get a meeting assistant that records audio, writes notes, automatically captures slides and generates summaries.

All notes are searchable. The app is currently available only in English. You can collaborate, share and highlight your notes. You can also ask questions for topics covered, and it will point to the exact sections where it has been discussed.

Speech recognition systems are never perfect, but this one is as close to being perfect as it could be.

Android: https://bit.ly/47vZv6U

iOS: https://apple.co/3SxE0OZ

Lensa

Lensa is a different type of photo editor – it combines photo editing with AI art. It is most suitable for retouching portrait selfies. Forget about conventional filters and photo editing tools. The app has many photo editing filters and techniques for pictures to get you a sweet selfie, remove any blurred background or do other necessary editing. With its simple editing features and camera editor effects, you can make every photo perfect.

You can perfect the complexion, make eyes impeccable, adjust the background and even use auto-adjust if you don’t have time to do each of these individually.

You can capture memorable moments and do the necessary photography editing to freeze each moment in time. You don’t need a lab or dark room because within seconds, your peachy selfie is ready. Most of the time, the AI effects are beautiful, though not every picture is perfect.

And now, they have introduced Magic Avatars 2.0, a phenomenal update that empowers you to express yourself in ways you have never imagined. With an entirely new quality level and tens of unique styles, Magic Avatars 2.0 takes the app to new heights. You must try it now!

Android: https://bit.ly/40yqVa2

iOS: https://apple.co/47wMt9t

Miscellanea

1. TECHNOLOGY

1 Apple set to open its fourth iPhone factory in India in a China+1 strategy

Apple is set to get its fourth manufacturing facility in India, with the Tata Group reportedly planning a new factory that will manufacture iPhones, a move that aligns with Apple’s strategy of accelerating its supply chain in India. The new factory, according to a Bloomberg report that cites unnamed sources, is expected to have 20 assembly lines and employ 50,000 staffers within two years of being operational.

The sources further said that the group plans to make the factory operational in the next 12 to 18 months. “India is important to many big tech companies for several reasons — the human capital, relatively cheap labor pool, a maturing supply chain, and the country’s pragmatism,” said Prachir Singh, senior analyst at Counterpoint Research.

In October, the Tata Group acquired an iPhone assembly plant, located in Karnataka, from Taiwanese manufacturing firm Wistron for $125 million. The acquisition is still pending regulatory approval.Queries sent to the Tata Group and Apple went unanswered.

These developments come at a time when Apple is looking to scale down its operations in China, due to the ongoing trade war between Washington and Beijing, and scale up its operations in Asian economies, including India, Thailand, Vietnam and Malaysia.

“Apple has been looking for a second place to expand and diversify its manufacturing operations beyond China. The new plant at Hosur could be a clear indication that India is that second destination,” said Abhilash Kumar, industry analyst at TechInsights. “The year 2023 saw a lot of activity in India that propelled the nation to be the 4th largest in terms of Apple’s supply chain network,” Kumar added.

Apple’s strategy to shift its manufacturing operations to India gained more mileage in January this year as New Delhi provided initial clearance to several Chinese suppliers, who assemble multiple Apple products and sell parts for these products to Apple.

Other than the Tata Group, other contract manufacturers such as Foxconn and Pegatron, are also manufacturing Apple products in India. Foxconn, the largest contract manufacturer globally, has a plant at Sriperumbudur in Tamil Nadu, which manufactures iPhones, metal casings and other components.

The company, which is the only manufacturer of Apple’s latest iPhone 15 and 15 plus models, has announced plans to open two other manufacturing facilities at Devanahalli, Karnataka, and Kongara Kalan, Telangana. Pegatron, which manufactures older models of iPhones at its Singaperumal Koil plant in Tamil Nadu, is also reportedly planning a second plant in Tamil Nadu.

The new plant from Tata Group, according to Kumar, could generate a lot of employment opportunities for Indians while putting the country at the forefront of Apple’s manufacturing plans.

Another proof of India’s growing importance to Apple, Kumar said, is the recent launch of two retail stores by the company in Mumbai and New Delhi.

(Source: www.computerworld.com— 8th December, 2023)

2 Attacks against personal data are up 300 per cent, Apple warns

Apple tells us more than 2.6 billion personal records have already been compromised by data breaches in the past two years.

It’s almost as though the best way to ensure your online data is safe is to make sure no one stores any of it. It feels likely that the Apple-commissioned study (“The Continued Threat to Personal Data”) is designed to reinforce the company’s arguments around the need for strong end-to-end data encryption and security.

• What Apple said?

In a statement, Craig Federighi, Apple’s senior vice president of software engineering, warned:

“Bad actors continue to pour enormous amounts oftime and resources into finding more creative andeffective ways to steal consumer data, and we won’trest in our efforts to stop them. As threats to consumer data grow, we’ll keep finding ways to fight back onbehalf of our users by adding even more powerful protections.”

• Attack velocity is increasing incredibly fast

The study, conducted by Massachusetts Institute of Technology professor Stuart Madnick, found clear proof that data breaches have become a global epidemic. The number of data breaches more than tripled between 2013 and 2022 and has continued to worsen in 2023.

The big message is that robust protection against breaches needs to be mandatory. End-to-end encryption, for example, is all the more important when criminals and dodgy government-backed spies are attempting to break into the servers your data sits on.

That’s less of a problem when even the server doesn’t understand and can’t read that information. If the server can’t read it, chances are neither can the perpetrators.

• We should use Advanced Data Protection

The report also delivers a pretty powerful message of recommendation for the need to enable Apple’s recently introduced Advanced Data Protection for iCloud.

Apple’s data protection already extends to encryption of critical information such as passwords and other sensitive information. Advanced Data Protection adds protection for Notes, iCloud Backup, and Photos to the list, though there are some limitations.

It really should concern anyone online that the momentum of these attacks is increasing so dramatically. In the US alone, there were nearly 20 per cent more breaches in just the first nine months of 2023 than in any prior year, Apple said.

The report also warns that more than 80 per cent of breaches involved data stored in the cloud, even as attacks against cloud infrastructure nearly doubled between 2021 and 2022.

• Attackers are sophisticated and well-resourced

Hackers are becoming more professionalised and better resourced, most security experts agree.Some even run help desks to assist impacted customers!

The deal is that ransomware is a huge business, one that benefits from more sophisticated attackers who have always known how to gather and combine small pieces of data from individuals lower down the enterprise security chain to violate security elsewhere.

Simen Van der Perre, strategic advisor at Orange Cyberdefense, recently warned that many of the most sophisticated ransomware attacks take place over time in different stages.

In this environment, you must expect every small vulnerability to be prodded and explored.

“Hackers are evolving their methods and finding more ways to defeat security practices that once held them back. Consequently, even organizations with the strongest possible security practices are vulnerable to threats in a way that wasn’t true just a few years ago,” Apple said.

• Encrypt all the things

“In recent years, we have seen an unprecedented increase in both the number of cyber threats and their sophistication, with attacks becoming more tailored as criminals aim for maximum impact, and maximum profit,” according to Bernardo Pillot (INTERPOL’s Assistant Director of Cybercrime Operations) who’s quoted in the report.

But making sure data is incomprehensible even if it is accessed is the company’s approach to personal and enterprise security. After all, if someone breaks into your online data but can’t make any sense of it, your data remains effectively safe.

Of course, data isn’t solely a problem for employees and users. All those data lakes held by a myriad of different firms are potential targets, and we’ve seen data brokers and government-related systems broken into enough times to understand that the information those systems hold about people should also be more effectively protected.

• We need bigger walls, not larger gates

Apple warns that because people now live more of their lives online, corporations, governments and other types of organisations collect more and more personal data — sometimes with little choice from individuals.

At the same time, the interconnected nature of global business means a successful hack against one small supplier making use of data about people at the company stolen elsewhere can give attackers access to information stored on servers belonging to a much larger company, putting everyone at risk.

Attacks of this kind can ruin customer relationships and bankrupt companies — and those nations that remove the protection of end-to-end encryption from consumer and business users alike had better recognise the risk they are taking with their population’s digital security and enterprise success.

Strong and robust digital protection is essential in a connected world, weakening that is a luxury no one can afford.

(Source: computerworld.com— 10th December, 2023)

2. ENVIRONMENT

1.World’s biggest iceberg A23a on the move after 30 years

The iceberg, called A23a, split from the Antarctic coastline in 1986. But it swiftly grounded in the Weddell Sea, becoming, essentially, an ice island. At almost 4,000 sq km (1,500 sq miles) in area, it’s more than twice the size of Greater London. The past year has seen it drifting at speed, and the berg is now about to spill beyond Antarctic waters.

A23a is a true colossus, and it’s not just its width that impresses. This slab of ice is some 400m (1,312 ft) thick. For comparison, the London Shard, the tallest skyscraper in Europe, is a mere 310m tall.

A23a was part of a mass outbreak of bergs from the White Continent’s Filchner Ice Shelf. At the time, it was hosting a Soviet research station, which just illustrates how long ago its calving occurred. Moscow dispatched an expedition to remove equipment from the Druzhnaya 1 base, fearing it would be lost. But the tabular berg didn’t move far from the coast before its deep keel anchored it rigidly to the Weddell’s bottommuds.

So, why, after almost 40 years, is A23a on the move now?

“I asked a couple of colleagues about this, wondering if there was any possible change in shelf water temperatures that might have provoked it, but the consensus is the time had just come,” said Dr Andrew Fleming, a remote sensing expert from the British Antarctic Survey.

“It was grounded in 1986 but eventually it was going to decrease (in size) sufficiently to lose grip and start moving. I spotted the first movement back in 2020.” A23a has put on a spurt in recent months, driven by winds and currents, and is now passing the northern tip of the Antarctic Peninsula.

Like most icebergs from the Weddell sector, A23a will almost certainly be ejected into the Antarctic Circumpolar Current, which will throw it towards the South Atlantic on a path that has become known as “iceberg alley”.

Eventually, all bergs, however big, are doomed to melt and wither away. Scientists will be following the progress of A23a closely. If it does land in South Georgia, it might cause problems for the millions of seals, penguins and other seabirds that breed on the island. A23a’s great bulk could disrupt the animals’ normal foraging routes, preventing them from feeding their young ones properly.

But it would be wrong to think of icebergs as being just objects of danger — Titanic and all that. There’s a growing recognition of their importance to the wider environment. As these big bergs melt, they release the mineral dust that was incorporated into their ice when they were part of glaciers scraping along the rock bed of Antarctica. This dust is a source of nutrients for the organisms that form the base of ocean food chains.

“In many ways, these icebergs are life-giving; they are the origin point for a lot of biological activity,” said Dr Catherine Walker, from the Woods Hole Oceanographic Institution, who was born in the same year as A23a. “I identify with it; it’s always been there for me.”

(Source: www.reuters.com— 25th November, 2023)

2 COP28 Summit in Dubai: Indian climate activist Licypriya Kangujam storms the stage

A 12-year-old protester burst onto the stage at the COP28 climate summit in Dubai. Conference of the Parties or COP28 saw many firsts this year. From organising the COP’s first-ever “Health Day” to hosting “the first-ever COP ministerial dialogue on building water-resilient food systems” — there were many events and “landmark” moments that embraced the COP28 climate summit.

Several countries clashed over a possible agreement to phase out fossil fuels at the COP28 summit in Dubai, jeopardising attempts to deliver a first-ever commitment to eventually end the use of oil and gas in 30 years of global warming talks.

Activists designated Saturday a day of protest atthe COP28 summit in Dubai. But the rules of thegame in the tightly controlled United Arab Emirates at the site supervised by the United Nations meant sharp restrictions.

Public protests have been limited at the United Nations talks that are being held in the United Arab Emirates, which bans many organised groups, including political parties and labour unions.

COP28 Summit in Dubai: Who is Licypriya Kangujam, an Indian protestor who dashed onto the stage?

1) Licypriya Kangujam is a child climate justice activist from India who was escorted away as the audience clapped, Reutersreported.

2) She delivered a short speech after rushing onto the stage at the COP28 summit in Dubai. The teenager protested against the use of fossil fuels.

3) “End fossil fuels. Save our planet and our future”, a 12-year-old protester ‘Licypriya Kangujam’ burst onto the stage at the COP28 climate summit in Dubai on Monday, holding a sign above her head.

4) COP28 Director-General Ambassador Majid Al Suwaidi said he admired the enthusiasm of young people at COP28 and encouraged the audience to give Kangujam another round of applause.

5) In a post on X (formerly Twitter), the activist wrote, “Here is the full video of my protest today disrupting the UN High-Level Plenary Session of #COP28UAE. They detained me for over 30 minutes after this protest. My only crime — Asking to Phase out Fossil Fuels, the top cause of the climate crisis today. Now they kicked me out of COP28.”

6) “Governments must work together to phase out coal, oil and gas – the top cause of the climate crisis today. Your action today will decide our future tomorrow. We are already the victims of climate change. I don’t want my future generations to face the same consequences again. Sacrificing the lives of millions of innocent children for the failures of our leaders is unacceptable at any cost,” she said.

7) The teenager also wrote, “Millions of children like me are losing their lives, losing their parents and losing their homes due to climate disasters. This is a real climate emergency. Instead of spending billions of dollars in wars, spend it on ending hunger, giving education and fighting climate change.”

8) “I’m a child who is completely frustrated by today’s climate crisis. We are the first line of victims. I feel the core issues of phasing out fossil fuels are kept inside in the negotiations process going on in the COP28 with over 2,500 fossil fuel lobbyists,” she added.

(Source: www.livemint.com— 12th December, 2023)

Regulatory Referencer

I. COMPANIES ACT, 2013

1. Specified public companies may issue securities for listing on permitted exchanges in permissible foreign jurisdictions: MCA has notified 30th October, 2023 as the effective date for enforcement of section 5 of Companies (Amendment) Act, 2020. Section 5 of Companies (Amendment) Act deals with provisions related to public offers and private placement. New sub-sections have been inserted which states that a specified class of public companies may issue such class of securities for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions or other jurisdictions as may be prescribed. [Notification No. S.O. 4744(E), dated 30th October, 2023]

2. MCA notifies LLP (Significant Beneficial Owners) Rules, 2023: The MCA has notified LLP (Significant Beneficial Owners) Rules, 2023. The provisions of these rules shall apply to all the LLPs. As per the newly notified rules, every reporting LLP shall take steps to find out if there is any individual who is a significant beneficial owner, in relation to that LLP, and if so, identify him and cause such individual to make a declaration in Form No. LLP BEN-I. Existing SBOs shall file a declaration within 90 days from the commencement of these rules. [Notification dated 9th November, 2023]

II. SEBI

3. SEBI redesigns format for Mutual Fund scheme offer documents: In order to enhance the ease of preparation of the Scheme Information Document (SID) by mutual funds and increase its readability for investors, SEBI undertook an exercise to revamp the format of SID. In the revised format, SEBI has mandated AMCs to disclose the risk-o-meter of the Benchmark on the Front page of the initial offering application form, Scheme Information Documents (SID), and Key Information Memorandum (KIM); in the Common application form. The updated format is to be implemented w.e.f. 1st April, 2024.
[Circular No. SEBI/HO/IMD/IMD-RAC-2/P/CIR/2023/000175, dated 1st November, 2023]

4. SEBI introduces a procedural framework for dealing with unclaimed amounts lying with InvITs, REITs & specified entities: SEBI with an objective to make the process of claiming unclaimed funds by investors uniform, has specified a procedural framework for dealing with unclaimed amounts lying with InvITs, REITs and entities having listed non-convertible securities. Further, the norms w.r.t the manner of claiming such unclaimed amounts by investors have also been prescribed. The circular shall be effective from 1st March, 2024.
[Circular No. SEBI/HO/DDHS/DDHS-RAC-1/P/CIR/2023/178, dated 8th November, 2023]

5. SEBI mandates brokers to inform the most important terms and conditions to clients: SEBI with an objective to bring into focus the critical aspects of the broker-client relationship and for ease of understanding of the clients, mandates brokers to inform a standard Most Important Terms and Conditions (MITC) to the clients. Further, this MITC shall be acknowledged by the client. Further, the detailed norms for implementation of MITC shall be published latest by 1st January, 2024, by the Brokers’ Industry Standards Forum (ISF) in consultation with SEBI. [Notification No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/180, dated13th November, 2023]

6. SEBI sets aside the norms w.r.t freezing of folios without PAN, KYC details and nomination: Earlier, the SEBI notified the norms w.r.t furnishing PAN, KYC details and nomination. Under the extant norms, if PAN, nomination, and other details were not submitted by holders of physical securities by 1st October, 2023, the folios shall be frozen by the RTA and shall also be referred by the RTA / company to the administering authority under the Benami Act/ PMLA. Now SEBI has decided to take away this to mitigate unintended challenges on account of freezing of folios. [Circular No. SEBI/HO/MIRSD/POD-1/P/CIR/2023/181, dated17th November, 2023]

III. FEMA AND IFSCA REGULATIONS

1. Permission to International Branch Campuses and Offshore Educational Centres at GIFT-IFSC to avail infrastructure services from Academic Infrastructure Service Providers: The IFSC (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022 enable globally reputed foreign universities or foreign educational institutions to set up International Branch Campuses (IBC) or Offshore Educational Centres (OEC) in IFSC. Based on requests from stakeholders, a circular has been issued allowing IBCs and OECs to avail of infrastructure and other support services from Academic Infrastructure Service Providers (AISP). The circular prescribes several conditions with respect to the type of infrastructure and support services that are permissible; eligibility conditions for the AISP; and obligations of the IBCs/OECs. [Circular eF.No.IFSCA-BDev./FU/1/2023-BD dated 14th December, 2023]

Part A – Company Law

16 Case Law No. 01 /Jan 2024

In the matter of Shri Thiyagarajan Parthasarathy

Registrar of Companies, Tamil Nadu

F.NO.ROC/CHN/THIYAGARAJAN/ADJ ORDER/S.155/2023

Adjudication Order

Date of Order: 10th July, 2023

Adjudication Order for the violation of the provisions of Section 155 of the Companies Act, 2013 which do not permit holding more than one “Director Identification Number” (DIN).

FACTS

Shri Thyagrajan Parthsarathy made an application in DIR 5 before the office of the Regional Director (Northern Region) hereinafter RD for the surrender of his DIN.

RD further observed upon processing of application received in e-form DIR-5 with respect to the surrender of the second DIN that, the applicant earlier had applied for and obtained two DINs on the MCA portal, namely DIN: 03191514 dated 23rd August, 2010 (First DIN) and DIN: 09018479 dated 4th January, 2021 (Second DIN).

Thus, the applicant himself had admitted to holding two DINs and the same had been verified by the e-records of MCA. Further, it was observed that the DIN being surrendered was still associated with a company namely “M/s SPS HPL” and a new DIN was applied, while forming the new company i.e. “M/s SPS MPL”.

Thereafter, on request from the office of RD vide letter dated 5th September, 2022, the Adjudication Office (AO) i.e. Registrar of Companies, Tamil Nadu issued a Show Cause Notice to the director Shri. TP on 19th October, 2022 for violation of provisions of Section 155 of the Companies Act, 2013 for holding 2nd DIN. The AO issued an Adjudication hearing notice to the director Shri. TP vide letter dated 15th June, 2023.

Thereafter, Mr F, Practising Company Secretary representative of the Shri TP had appeared before the AO on 30th June, 2023 and admitted to the violation on behalf of Shri. TP.

Provisions of the Section 155 of the Companies Act, 2013 states that:

“No individual, who has already been allotted a Director Identification Number under Section 154, shall apply for, obtain or process another Director Identification Number.”

Whereas Section 159 of the Companies Act, 2013 reads as under:

“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 rupees for each days after the first during which such default continues.”

HELD

AO after examination and hearing, held that Shri. TP had violated the provisions of Section 155 of the Companies Act, 2013 for which a penalty was imposed as per Section 159 of the Companies Act, 20l3. Further, AO noted that the clarification provided with respect to duplication did not seem satisfactory and that the 2nd DIN was obtained in violation of Section 155 of the Companies Act, 2013.

Therefore, in the exercise of the powers vested with AO under Section 454 (l) & (3) of the Companies Act, 2013 penalty imposed was as follows:

Name of the Officer in default Amount of Penalty for 1st Default Additional Penalty for Continuing Offence Total amount of Penalty Imposed
Shri TP ₹50,000 ₹4,53,500
(500*907)
No. of days of default: 907 days		 ₹5,03,500

17 Case Law No. 02/Jan 2024

M/s Sarada Pleasure And Adventure Limited

No. ROC/PAT/Sec. 88/13364/691

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of Order: 27th July, 2023

Penalty order for non-maintenance of Statutory Registers under section 88 of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“RoC”) during the course of their inquiry, noticed that M/s SPAL had failed to maintain the statutory registers as required under sections 88 of the Companies Act, 2013. Thus, M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL had violated the provisions of section 88(1) of the Companies Act, 2013 w.r.t. non-maintenance of the register of members, etc.

As per Section 88(1) of the Companies Act, 2013: Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India;

(b) register of debenture-holders; and

(c) register of any other security holders.

Further, RoC had issued a show cause notice to M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL for default under section 88(1) of the Companies Act, 2013 vide office letter dated 12th June, 2023 on which no reply was received.

Hence, RoC observed that the provisions of Section 88 (1) of the Companies Act, 2013 were contravened by M/s SPAL and therefore were liable for penalty under section 88 (5) of the Companies Act, 2013.

Section 88(5) of Companies Act, 2013 states that:

“If a company does not maintain a register of members or debenture-holders or other security holders or fails to maintain them in accordance with the provisions of sub-section (1) or sub-section (2), the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees”.

It was further observed that, as per the MCA portal, the paid-up capital of M/s SPAL is ₹2,22,56,77,000. As regards to its turnover, M/s SPAL has not filed its balance sheet since the financial year 2014-2015, hence the turnover M/s SPAL could not be ascertained. Therefore, the benefits of a small company under Section 446B could not be extended to M/s SPAL while adjudicating penalty.

HELD

The Adjudicating Officer (“AO”) after considering the facts and circumstances of the case, imposed a penalty as stated below for violation of Section 88(1) of the Companies Act, 2013 and the matter was disposed of.

Penalty on M/s SPAL: ₹3,00,000

Penalty on officers in default:

Mr RS (Director of M/s SPAL): ₹50,000
Mr SD (Director of M/s SPAL): ₹50,000
Mr SR (Director of M/s SPAL): ₹50,000

Further, it was directed to pay the penalty within 90 days of the date of the order.

Part B – Service Tax

I. TRIBUNAL

25 Ours Aariya Bhavan vs. CGST & CE

2023-TIOL-1-36-CESTAT-MAD

Date of Order: 13th October, 2023

Whether service charge for the supply of bed rolls for the use of passengers travelling in A/C and First Class during train journeys would amount to business auxiliary service. Held, No.

FACTS

Appellant vide an agreement with Indian Railways Catering and Touring Corporation (IRCTC) supplied bed rolls for the use by passengers and collected a service charge from IRCTC and paid no service tax. A show-cause notice was issued proposing to levy service tax considering the activity and service charge towards business auxiliary service along with interest and imposed penalties. It was upheld by the adjudicating authority and also in the first appeal. It was argued for appellant that the clause (vi) of definition of business auxiliary service contained in section 65(19) of Finance Act, 1994 (the Act) relates to rendering of a service on behalf of a client whereas the service in the instant case of providing bed rolls is rendered to IRCTC and charge also is collected from them and no amount is collected from passengers. According to the department, the demand was legal and proper as the appellant had to clean bed rolls periodically and supply the same for passengers. Hence, it was covered by the definition of business auxiliary service in the clause invoked.

HELD

On examining the definition contained in section 65(19) of the Act, there was no merit found in sustainability of demand apart from non-justification of invoking of extended period.
Appeal was thus allowed on merits.

26 HSBC Electronic Data Processing India Pvt. Ltd. vs. CCT
2023-TIOL-1102-CESTAT-HYD
Date of Order: 20th November, 2023

Input services of advertising, air travel agents, courier services, erection, commissioning insurance, insurance auxiliary service, management consultancy etc., whether can be disallowed ad hoc?

FACTS

Appellant provided Information Technology (IT) or IT enabled service and claimed CENVAT credit on input services utilized for providing these output services. However, credit was disallowed under Rule 14 of CCR though a similar issue involved in refund proceeding under Rule 5 of CCR read with Notification No. 26/2012 and nexus theory was examined in detail allowing CENVAT credit. Hence, pursuant to the order of Commissioner (Appeals) which recorded that disallowances were arbitrarily done during adjudication and as a result of inadequate effort to determine justifiability, the eligibility or otherwise of the credit of tax on input services was in dispute. Considering the nature of activity, its relevance and judicial rulings, the benefit was extended to appellants on input services listed above in the said refund proceeding.

HELD

It was observed that the proceedings under Rule 14 and Rule 5 of CCR are similar in nature. Taking notice, the order of the Commissioner (Appeals), it was found that the issue involved was already adjudicated in detail and has been allowed in favour of appellants.

Hence the order was set aside.

27 Hawkins Cookers Ltd vs. CCGST & CE
2023-TIOL-1136-CESTAT-MUM
Date of Order: 6th November, 2023

CENVAT credit of service tax on outdoor catering service provided for canteen facilities for employees and staff during shifts and office hours, whether an eligible input service.

FACTS

Appellant, a manufacturer registered under Central Excise and also under service tax under reverse charge mechanism had a dispute with the department on eligibility of CENVAT credit of service tax paid on canteen facility provided by outdoor caterer. Per department, outdoor catering service is excluded from the definition of “input service” contained in Rule 2(l) of CCR for the period 1st January, 2016 to 30th June, 2016, and hence credit is disallowable with interest and attracting penalty under section 78. Both adjudicating authority and the appellate authority confirmed the liability with interest and penalties and hence, the present appeal. For appellant, it was conceded that the issue stood covered in the Larger Bench of the Tribunal in the case of Wipro Ltd. vs. CCE Bangalore – III 2018-TIOL-3256-CESTAT-Bang-LB. However, the extended period of limitation along with imposition of interest and penalty are not sustainable in view of the decisions of higher judicial forum in support of the same. Reliance was placed on:

a) ICCE 7 ST Rohtak vs. Merino Panel products Ltd. 2023 9383) ELT 129 (SC)

b) Hindustan Coca Cola Beverages Ltd. vs. CCE & ST Vadodara (2023) 2 CENTAX 116 (Tri. Ahmd), and

c) Sasken Technologies Ltd. vs. CCE Bangalore 2019-TIOL-3374 CESTAT Bang.

It was submitted for appellant that for the earlier period in their own case, Tribunal had allowed the appeal by way of remand for verification and passing of fresh order vide order dated 29th November, 2017. Thus it was claimed that the department was well aware of the issue of taking credit in respect of outdoor catering service. According to the department, however the issue has attained finality when Supreme Court upheld Karnataka High Court’s order denying credit of service tax on outdoor catering services in the case of Toyota Kirloskar Motors Pvt. Ltd. 2021(55) GSTL129 (SC) post 01/04/2011 and interest on irregular availment of CENVAT credit is provided under section 75 read with Rule 14 of CCR and consequently penalty imposed was sustainable.

HELD

Submissions of both the parties were heard, considered and discussed in detail to reach a conclusion that the appellant was registered under both Central Excise and Service Tax, and the department was well aware of the factual matrix of the case and grounds of suppression was unable to be accepted. Reliance in this context was placed on the case of Pushpam Pharmaceutical Company vs. CCE Bombay 1995 (78) ELT 401 (S.C) ruling that when the Revenue is aware of the facts, issuance of show cause notice should be confined to normal period. Also it was observed, similar situation and decision in the case of Anand Nishi Kawa Co. Ltd. vs. CCE Meerut 2005 (188) ELT 149 (SC) and it was observed and held that various Tribunal decisions bring out the fact that there was lack of clarity during the disputed period on the issue of availment of CENVAT credit of service tax on outdoor catering service and hence, was considered an interpretational issue. There were divergent views prevailing until it got settled by the Larger Bench in case of Wipro (supra) and ultimately also at the highest forum in Toyota Kirloskar (supra). Hence, invoking suppression and penalty under Rule 15(2) for demanding inadmissible credit cannot sustain. Hence, interest and penalty imposed were set aside and the matter was remanded back to original authority for re-quantification of demand for the normal period with regard to outdoor catering service and thus allowed appeal partly.

28 Naya Sarai SSS Ltd vs. CST & Others

2023-TIOL-1135-CESTAT-KOL

Date of Order: 23rd November, 2023

When work order clearly provided for execution of jobs as contractors, confirmation of demand as manpower supply was unsustainable.

FACTS

All the three appellant societies involved executed various jobs entrusted to them by Heavy Engineering Corporation Ltd. (HEC) and the impugned common order was passed for all the three appellants. Hence, all are taken together. As per specimen work order issued by HEC, according to appellants, fixed rate on Tonnage basis and the quantity was specified and not the number of workers to be employed. It had to be decided by each of the appellant societies to display the workers as required and number of days as they deemed appropriate. HEC being a PSU, however was responsible to avoid exploitation of labour and hence ensured adherence by appellants of Minimum Wages Act, deductions of ESI, CPF etc. and depositing the same to the respective authorities. The execution of work did not amount to supply of manpower as defined in section 65(68) of the Act read with section 65(105)(L). Reliance was placed inter alia on 2016 (41) STR 806 (Bom) CCCEX & ST Aurangabad vs. Shri Samarth Sevabhavi Trust and 2023 (73) GSTL 363 (Tri. Chennai) S Selvam vs. CCE & ST Tiruchirapally.

HELD

After interpreting the contract between the parties and perusing statutory provisions of manpower recruitment and supply agency and considering relied upon authorities, it was held that the work orders issued by HEC clearly revealed job and the quantity by contractors and not to supply or recruit manpower.

Hence, the orders were set aside.

Effect of Unregistered Documents

INTRODUCTION

A transfer of a movable property can be affected by mere delivery and possession. However, any transfer of interest in an immovable property requires an instrument which is duly registered. What happens when such an instrument which needs to be registered is not registered? Can it transfer any interest or can it be used for any other purpose? Can it attract income-tax liability on the transferor? What would be the position under the Stamp Act on such unregistered instruments? These are some of the very interesting questions in this respect which have been answered by different decisions of the Supreme Court and High Courts. This article analyses some of the key principles and pronouncements on this very important facet of conveyancing law.

REGISTRATION ACT

The Registration Act, 1908 (“the Act”) provides for the registration of various documents. Under the Act, certain documents are subject to compulsory registration while for certain documents registration is optional. Under the Act, instruments which create, declare, assign, limit or extinguish any right, title or interest (vested or contingent) in any immovable property, exceeding ₹100 in value, need to be compulsorily registered. Similarly, leases of immovable properties which are made on a yearly basis exceeding a term of one year or reserving a yearly rent.

Documents containing contracts to transfer for consideration any immovable property in Part Performance of a Contract u/s. 53A of the Transfer of Property Act, 1882, which was executed on or after 24th September, 2001 must be compulsorily registered. It has been further provided that if such documents are not registered, then they shall not have any effect for the purposes of s. 53A of the Transfer of Property Act, 1882. A corresponding amendment has also been made to the Transfer of Property Act. In this respect, the decision in Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra, 2004 (8) SCC 614 is relevant wherein it held:

“Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party.”

In addition to the Registration Act which specifies registration of certain documents, some other Statutes also provide for registration of documents pertaining to immovable properties. For instance, s. 54 of the Transfer of Property Act, 1882 provides that sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Such a transfer, in the case of tangible immovable property of the value of ₹100 and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument. It further provides that a contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not, of itself, create any interest in or charge on such property. In Narandas Karsondas vs. S.A. Kamtam (1977) 3 SCC 247, the Supreme Court observed:

“A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967] 1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein.”

U/s. 107 of the Transfer of Property Act, 1882, a lease of immovable property from year to year for any term exceeding one year or reserving a yearly rent can be made only by way of a registered instrument. It further provides that all other leases of immovable property may be made by a registered instrument or by an oral agreement accompanied by delivery of possession.

EFFECT OF NON-REGISTRATION

U/s. 49 of the Act, any document which is required to be registered and is not registered shall not affect any immovable property, comprised in the document, or be received as evidence of any transaction affecting such property. S. 50 provides that registered documents shall in respect of the property they comprise, take effect against every unregistered document relating to the same property.

However, an unregistered document pertaining to immovable property and which is required to be compulsorily registered either under the Act or under the Transfer of Property Act shall still be admitted as evidence in a suit for specific performance or as evidence for any collateral transaction which does not require a registered instrument.

SC IN SURAJ LAMPS

The Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd. vs. State of Haryana, (2012) 1 SCC is of great significance in this respect. In that decision, the issue was the legality of the transfer of immovable property in the National Capital Region by executing an unregistered Agreement of Sale + an unregistered General Power of Attorney from the seller to the buyer and a Will executed by the Seller in favour of the buyer bequeathing the property to the buyer as a safeguard against the consequences of the death of the vendor before the transfer. This hybrid system was devised as an alternative to obtaining a registered and stamped conveyance for the property. The Court was faced with the validity of such an arrangement.

Ill-effects – The Court frowned on such hybrid arrangements and held that its consequences were disturbing and far-reaching, adversely affecting the economy, civil society and law and order. Firstly, it enabled large scale evasion of income tax, wealth tax, stamp duty and registration fees thereby denying the benefit of such revenue to the government and the public. Secondly, such transactions enabled persons with undisclosed wealth / income to invest their black money and also earn profit / income, thereby encouraging the circulation of black money and corruption. These transactions also had disastrous collateral effects. For example, when the market value increased, many vendors (who effected power of attorney sales without registration) were tempted to resell the property taking advantage of the fact that there was no registered instrument or record in any public office thereby cheating the purchaser. Such power of attorney sales indirectly led to the growth of the real estate mafia and the criminalisation of real estate transactions.

Agreement to Sale – The Supreme Court next considered the effect of an unregistered agreement to sell. It held that a transfer of immovable property by way of sale could only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property could be transferred. Any contract of sale (agreement to sell) which was not registered would fall short of the requirements of sections 54 and 55 of the Transfer of Property Act and would not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of that Act). According to that Act, an agreement of sale, whether with possession or without possession, was not a conveyance. Section 54 of the TP Act enacted that a sale of immovable property could only be made by a registered instrument and an agreement of sale did not create any interest or charge on its subject matter.

Power of Attorney – It then considered the scope of a Power of Attorney and held that a power of attorney was not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney was the creation of an agency whereby the grantor authorised the grantee to do the acts specified therein, on behalf of the grantor, which when executed were binding on the grantor as if done by him.

Will – Lastly, it is considered the essence of a Will. According to the Court, a Will was the testament of the testator. It was a posthumous disposition of the estate of the testator directing the distribution of his estate upon his death. It was not a transfer inter vivos, i.e., between living persons. The two essential characteristics of a Will were that it was intended to come into effect only after the death of the testator and was revocable at any time during the lifetime of the testator. So long as the testator was alive, a Will was not worth the paper on which it was written, as the testator could at any time revoke it. In the case under review, the seller was an individual and the buyer was a company. The seller had executed a Will in favour of the buyer. The Supreme Court observed:

“Execution of a Will by an individual bequeathing an immovable property to a company, is also incongruous and absurd.”

It is respectfully submitted that the above statement of the Court made in the context of the case needs reconsideration. There is no bar as to who can be a beneficiary under a Will. In this context the decision of the Supreme Court in Krishna Kumar Birla vs. Rajendra Singh Lodha, (2008) 4 SCC 300, is relevant. It was concerned with a Will being affected in favour of a `stranger’. It held that why an owner of the property executed a Will in favour of another was a matter of his / her choice. She had a right to do so. The court was only concerned with the genuineness of the Will. If it was found to be valid, no further question as to why she did so would be completely out of its domain. It concluded that a Will may be executed even for the benefit of anyone including animals.

SUBSEQUENT CASES

The above decision of Suraj Lamps has been endorsed by several subsequent Supreme Court decisions, including the latest one in Shakeel Ahmed vs. Syed Akhlaq Hussain, CA 1598/2023, Order dated 1st November, 2023, which it has again held that the law is well settled that no right, title or interest in an immovable property can be conferred without a registered document. It also held that the decision of Suraj Lamps is retrospective in nature since it emanates from various Statutes and earlier judgments on the same point. Hence, the principles laid down therein applied even to unregistered agreements to sale executed prior to the date of the decision, i.e., before 2009.

On facts similar to those found in Suraj Lamps, the Karnataka High Court in Smt. K. Shashikala vs. ACIT, [2023] 147 taxmann.com 315 (Kar)has held that in order to attract Section 2(47)(v) of the IT Act, it is absolutely essential that the sale agreement should be a registered agreement to sale. In the absence of the same, there was no transfer under the Income-tax Act by the land owner in favour of the buyer and hence, there was no liability to capital gains tax.

UNREGISTERED JDA

In the case of CIT vs. Balbir Singh Maini, [2017] 86 taxmann.com 94 (SC),the Supreme Court considered whether capital gains arose to the land owner by executing an unregistered joint development agreement (JDA). The Court negated this argument and analysed the provisions of s. 2(47) of the Income-tax Act along with s.53A of the Transfer of Property Act. It held that it was well-settled law that the protection provided under Section 53A was only a shield, and could only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. The Court held that this position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act were omitted. Simultaneously, Sections 17 and 49 of the 1908 Act were amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of the 1882 Act) was registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The Supreme Court held that the effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA, was not registered, then it had no effect in law for the purposes of Section 53A. In short, there was no agreement in the eyes of law which could be enforced under Section 53A of the Transfer of Property Act. Thus, in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act showed that in the eyes of the law, there was no contract which could be taken cognizance of, for the purpose specified in Section 53A. Hence, it concluded that there was no contract in the eyes of law in force under Section 53A after 2001 unless the said contract was registered. This being the case, and it being clear that the said JDA was never registered, since the JDA had no efficacy in the eyes of the law, no “transfer” under the Income-tax Act could be said to have taken place under the JDA.

POSITION UNDER MAHARASHTRA STAMP ACT

It may be noted that even though the legal position is as stated above, the Maharashtra Stamp Act, 1958 has amended the definition of conveyance in Article 25 of Schedule I to the Stamp Act. It provides that in the case of an agreement to sell immovable property, where the possession of any immovable property was transferred or agreed to be transferred to the purchaser before the execution, or at the time of execution, or after the execution of, such agreement, then such Agreement to Sell is deemed to be a conveyance, and stamp duty thereon shall be leviable accordingly. Hence, the net effect of this is that in the State of Maharashtra, an Agreement to Sell is stamped as if it were a conveyance.

Based on this feature in the Stamp Act, a question arose whether such an agreement changed the legal position in Maharashtra. The Bombay High Court in Naginbhai P. Desai vs. Taraben A. Sheth, 2003 AIR(Bom.) 192 answered the question in the negative. The Court held that Section 54 of the Transfer of Property Act specifically provided that an Agreement for Sale by itself did not create any interest in or charge on the property agreed to be sold. There was no transfer of any interest in the property. The fiction created by Explanation I to Article 25 of the Bombay Stamp Act by which the agreement for sale was to be treated conveyance was limited only for the purposes of the Stamp Act and for no other purpose.

USE FOR COLLATERAL PURPOSES

The Supreme Court in K.B. Saha and Sons P Ltd vs. Development Consultant Ltd, (2008) 8 SCC 564 has laid down how an unregistered document can be considered for collateral purposes. It could be used as evidence of collateral purpose as provided in s. 49 of the Registration Act. A collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration. A collateral transaction must be a transaction, not itself required to be effected by a registered document, that is, a transaction creating, etc. any right, title or interest in immovable property.

In M/s Paul Rubber Industries P Ltd vs. Amit Chand Mitra, CA No. 1598/2023,the Supreme Court held that the determination of the nature and character of a lease could not be treated as collateral under an unregistered lease deed since that constituted the primary dispute and hence the Court was excluded by law from examining the unregistered deed for that purpose.

It has been held in Ameer Minhaj vs. Dierdre Elizabeth (Wright) Issar,(2018) 7 SCC 639, that a contract to transfer the right, title or interest in an immovable property for consideration is required to be registered if the party wants to rely on the same for the purposes of Section 53A of the Transfer of Property Act to protect its possession over the stated property. However, when an unregistered sale deed is tendered in evidence, not as evidence of a completed sale, but as proof of an oral agreement of sale, then such a deed can be received as evidence. However, an endorsement needs to be made that it is received only as evidence of an oral agreement of sale. The Court held that the document is received as evidence of a contract in a suit for specific performance and nothing more.

In Balram Singh vs. Kelo Devi, CA 6733/2022, the Supreme Court was considering a question of the use of an unregistered Agreement to Sale for collateral purposes. It had to decide whether a decree for a permanent injunction could be passed on the basis of such an agreement which restrained the defendant from interfering with her possession. The Court held that such an unregistered document / agreement to sell was not admissible as evidence. The Supreme Court disallowed the permanent injunction. It held that being conscious of the fact that the plaintiff might not succeed in getting the relief of specific performance for such an unregistered Agreement to Sale, the plaintiff filed a simple suit for permanent injunction. While it was true that in a given case, an unregistered document could be used and/or considered for collateral purposes, but the plaintiff could not get the relief indirectly which otherwise he cannot get in a suit for substantive relief, namely, the relief for specific performance. Therefore, the Court held that the plaintiff could not get the relief even for a permanent injunction on the basis of such an unregistered document / agreement to sell.

It appears that this decision of Balram Singh is somewhat of a variance to the above-mentioned decision in the case of Ameer Minhaj. In Ameer Minhaj’s case, the Court allowed an unregistered contract as evidence in a suit for specific performance whereas in this case, the Court made an observation that the plaintiff would not succeed in getting the relief of specific performance for such an unregistered contract.

EPILOGUE

As would be evident from the above discussion, an unregistered document offers very little protection. Registering a document offers a “notice to the entire world” regarding the execution of the document. Registration also leads to revenue in the form of stamp duty and helps curb undervalued transactions in immovable properties.

Part A – Goods and Services Tax

I. HIGH COURT

71 Xilinx India Technology Services Pvt. Ltd vs. Special Commissioner, Zone-VIII
2023 (78) GSTL 24 (Del.)
Date of Order: 1st September, 2023 

Refund of IGST of a Subsidiary EOU incorporated in India providing services to its holding company outside India, cannot be denied by contending that the condition stated under section 2(6)(v) of the IGST Act 2017 are not satisfied.

FACTS

Petitioner, an Export Oriented Unit, had entered into an intercompany service agreement with its holding company located in the USA for export of information technology software services. Petitioner filed an application for refund of IGST amounting to ₹1,83,34,289 which was rejected by the respondent. A SCN was issued contending that condition under section 2(6)(v) of IGST Act which -provides that the petitioner and its holding company are merely establishments of a distinct person. Hence the condition was not satisfied and thus service provided did not constitute as export of services. Reply was filed by petitioner after referring to Circular No. 161/17/2021-GST dated 20th September, 2021 which expressly clarified that supply of services by a subsidiary of a foreign company, incorporated in India by establishment of said foreign company located outside India would not be barred by the condition stipulated under section 2(6)(v) of IGST Act. Petitioner further stated that the services provided were on their own account and were on principal-to-principal basis. Despite the detailed reasoning, the respondent without referring to the circular simply passed an order rejecting the refund.

HELD

The Hon’ble High Court held that services provided by a subsidiary of foreign company to its holding company are not covered under section 2(6)(v) of IGST Act. Impugned order was passed mechanically without application of mind ignoring and disregarding the basic provisions of law and circular. The respondent was directed to process the refund along with interest. Accordingly, petition was allowed in favour of the assessee.

72 Modern Insecticides Ltd. vs.
Commissioner CGST 
2023 (78) GSTL 423 (P & H.)
Date of Order: 19th April, 2023 

Amount deposited during the search operation cannot be treated as voluntary where no proceedings under section 74 of CGST Act, 2017 have been initiated and hence liable to be refunded to petitioner.

FACTS

Petitioner was a manufacturer of pesticides. On  5th March, 2020, respondent conducted a search operation at factory premises of petitioner, during which respondent seized all the documents and prepared a panchnama on the same day. Further, the respondent created an artificial shortage of goods without actual stock count which involved the GST and penalty amounting to ₹34,04,855 and ₹5,10,728, respectively. Petitioner deposited the said amount under pressure. Subsequently, a second search was conducted on 15th January, 2021, wherein director and CA of petitioner were detained. Both were released on a condition of deposit of ₹2.15 cr which was paid by reversing the ITC and surrender of refund application filed. Petitioner requested to refund the total amount of ₹2.54 cr as no proceedings were initiated by issuance of notice and no summons were issued under section 74(1) of the Act from the date of search till the amount deposited. Respondent contended that since petitioner had deposited money voluntarily, no notice was required to be issued. Being aggrieved, petitioner preferred this petition before Hon’ble High Court.

HELD

The Hon’ble High Court, relying upon the decision of Delhi High Court in case of Vallabh Textiles vs. senior intelligence officer and others2023 (70) STL 3 (Del) held that the amount deposited during search operation cannot be considered as voluntary. Department cannot issue Form GST DRC-01A for tax recovery since no proceedings were initiated by the department till date. The deposit of tax amount during search cannot be retained by the department and accordingly, the department was directed to refund the deposited amount along with interest.

73 Shyam Sel and Power Ltd. vs. State of U.P.
2023 (78) G.S.T.L. 283 (All.) 
Date of Order: 5th October, 2023 

Penalty under sections 129(3) and 130 should not be levied where there was a minor breach and no intention to evade tax was observed.

FACTS

Petitioner was engaged in manufacture and sale of industrial grade steel components. Goods sold by the petitioner were in transit from West Bengal to Kanpur were accompanied with all necessary documents such as tax invoice, e-way bill and goods receipts. Subsequently, these goods were intercepted by concerned authorities on the way and on verification it was found that the e-way bill had already been cancelled by the purchaser without informing the petitioner, the reason being disagreement with valuation and quantum of goods. Form MOV 06 was issued and goods were seized. Further, GST MOV 07 was issued seeking response from petitioner wherein no intention to evade tax was observed. Response submitted by petitioner that all e-way bills were filled up and they were unaware that the same were cancelled by purchaser was rejected. Further, order in Form MOV 09 was passed and penalty was imposed under sections 129(3) and 130 of CGST Act. Subsequently, an appeal filed by the petitioner was rejected. Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

High Court relying upon decision of Apex Court in case of Asstt. Commissioner (ST) vs. Satyam Shivam Papers (P.) Ltd. 2022 (57) GSTL 97 (SC), held that there was no intent to evade tax and goods in question did not reach the destination only due to circumstances beyond the control of petitioner. No such intention was observed for invoking proceedings under section 129(3) and 130 of CGST Act. It was a minor breach and proceedings should have been initiated under section 122 of CGST Act. Impugned order was set aside.

74 M. Sathess Kumar vs. Deputy State Tax Officer-2
2023 (78) GSTL 388 (Mad.) 
Date of Order: 30th August, 2023 

No Assessment Order shall be passed under section 73 of CGST Act, 2017 before considering the reply filed by the petitioner.

FACTS

Petitioner was engaged in providing works contract services to Government departments and local bodies. Subsequent to the increase in the rate of GST from 12 per cent to 18 per cent, notice was issued by respondent stating that petitioner had not paid excess liability. Petitioner submitted a reply on 24th July, 2023 but an order was passed by respondent on 25th July, 2023 without considering the reply submitted on the ground that petitioner failed to appear and submit their reply during 3 personal hearings granted previously. Aggrieved, writ petition was filed before Hon’ble High Court to quash the impugned order.

HELD

It was held that assessment order was passed by violating the principle of natural justice and the respondent is bound to consider the response submitted by the appellant before passing any impugned order. Respondent to grant one or more opportunities for personal hearing before passing a speaking order.

75 Rane Madras Ltd. vs.
Assistant Commercial Tax Officer (Appeals)
2023 (77) GSTL 382 (Mad.)
Date of Order: 2nd August, 2023 

Appeal filed manually due to technical glitches on portal against TRAN-1/2 Order before issuance of Notification No. 29/2023-CT dated 31st July, 2023 cannot be rejected merely on account of delay as specified under Section 107 of CGST Act.

FACTS

Petitioner attempted to file an appeal against the TRAN-1 rejection order dated 28th February, 2023 electronically as per Rule 108 of CGST Rules. Due to technical glitches on the portal, the petitioner was not able to upload the appeal. Another attempt was made to file an appeal online which was unsuccessful. Subsequently petitioner filed a complaint on the portal on 31st May, 2023 to which there was a reply from GST Helpdesk on 13th June, 2023 that TRAN-1/2 orders are not enabled for Appeal on GST Portal and petitioner was asked to wait till further instructions were issued on this matter. Meanwhile, the petitioner filed an appeal manually on 12th June, 2023 which was rejected by respondent by issuing order on the ground that appeal was filed after time specified under section 107 of CGST Act. Aggrieved, writ petition was filed before Hon’ble High Court.

HELD

It was held that appeal should not be rejected on the ground of delay, where due to absence of facility on GST portal, appeal was filed manually. Petitioner had already complied with Notification No. 29/2023-Central Tax dated 31st July, 2023. Any appeal filed before issuance of this notification was considered to be filed on time and hence cannot be rejected on the basis of delay in filing appeal as per section 107 of the CGST Act. Respondent directed to dispose off the order on merits.

76 Vriddhi Infratech India (P.) Ltd vs. Commissioner, Commercial Tax
[2023] 157 taxmann.com 278 (Allahabad) 
Date of Order: 23rd February, 2023 

Whether the authorities have misread Form GSTR-9 by not taking into consideration the entire form, the orders passed confirming the demands are set aside. 

FACTS

Notice under section 61 of the CGST Act was served upon the petitioner, claiming that in the annual return filed in the form GSTR-09, he has shown his turnover as R129.52 lakh which does not tally with his Bank Statement. The demand was confirmed by both the original as well as appellate authorities. The petitioner contended that the very basis of the notice is wrong since in his GSTR-9, the turnover of an amount R129.52 lakh is shown as only with regard to supply made to unregistered persons i.e., under the B2C category. It was thus contended that the authorities did not read the form as a whole.

HELD

The Hon’ble Court held that since the authorities concerned failed to take into consideration the entire form which at its end shows a total turnover of R2037 lakh in GSTR-9 and have committed the said misreading of GSTR-9, both the orders are liable to be set aside.

Note: The SLP filed against the said judgment is dismissed by the Hon’ble Supreme Court Refer (2023) 57 taxmann.com 279 (SC) dated 24th November, 2023. 

77 Sine Automation and Integration (P.) Ltd.
vs. UOI 
[2023] 157 taxmann.com 259 (Bom) Date of Order: 29th November, 2023 

Where the petitioner filed a refund application for the period April 2018 to July 2019 and included therein ITC attributable to F.Y. 2017–18 which was standing to the credit of the petitioner in the form of a running account, the order rejecting the refund on the ground that it was not permissible for the petitioner to club both the periods i.e., period before 1st April, 2018 and subsequent period is set aside. 

FACTS

The petitioner had made an application for a refund of the unutilized ITC under section 54(3) of the CGST Act, 2017 on export of goods under Letter of Undertaking (LOU) for the period April 2018 to July 2019. The said refund application included certain credits claimed even for the financial year 2017–18. The refund was sanctioned after due verification, however, the said order was challenged by the department before the Commissioner (Appeals) and the order directing payback of the refund was passed on the ground that as per Circular dated  18th November, 2019, the refund claim filed could not be spread across different financial years.

HELD

The Hon’ble Court held that as the credit which was available for the period prior to 1st April, 2018 pertained to the financial year 2017–18 the same was certainly available to the petitioner in its electronic ledger in the form of a running account, such refund cannot be denied.

78 Nemi Pharma Chem vs. Additional Commissioner of CGST & CX
[2023] 157 taxmann.com 478 (Bombay) 
Date of Order: 14th December, 2023

Whether the assessee filed a request for adjournment allowing 30 days to make submissions, the Order passed without responding to the said adjournment request and without giving an opportunity of being heard is liable to be set aside.

FACTS

The petitioner was issued a show cause notice on  12th April 2023, however, there was no compliance of the said show cause notice by the petitioner. On  26th June, 2023, the petitioner filed a letter requesting the respondents to provide a copy of the said show cause notice, since the address at which it was issued was no more occupied by the petitioner and also requested for an adjournment of 30 days, so as to enable him to make submissions and for personal hearing. The respondents handed over the hard copy of the show cause notice dated 27th June, 2023. Thereafter, on 21st July, 2023, an Order-in-Original came to be passed.

HELD

The Hon’ble Court observed that the impugned order came to be passed within two weeks from the date of application for adjournment, without the respondents replying to the request for adjournment of the petitioner. The Court further held that the respondents ought to have also complied with the provisions of section 75(4) and provided an opportunity for a hearing where any adverse decision was contemplated against such a person. The Hon’ble Court held that since there has been a violation of principles of natural justice and the mandatory provision of section 75(4) of the CGST Act, the impugned Order was quashed with a direction to decide the matter afresh and for passing a reasoned order after considering the submissions made by the petitioners.

Note: The attention is also invited to the decision in the case of Cart2India Online Retail (P.) Ltd. vs. UOI [2023] 157 taxmann.com 212 (Bombay) wherein the Hon’ble Court held that where the petitioner had sufficiently indicated that he needed a personal hearing, merely because the petitioner did not appear on a scheduled date, in the absence of a valid reason, it should not have been presumed by the State Tax Officer that the petitioner is not interested in hearing.

79 Saloom Trading vs. Superintendent, Central Goods and Services Tax and Central Excise
[2023] 157 taxmann.com 46 (Kerala) 
Date of Order: 22nd November, 2023 

The Hon’ble Court recorded a prima facie view that the benefit of waiver of late fees for delay in filing of GSTR-9 for F.Ys. 2017–18 to 2020–21, granted by Notification No.8/2023 dated 31st March, 2023, should also be extended to persons who have filed the returns before 1st April, 2023. 

FACTS

The issue before the Court was whether the benefit of waiver of late fee for delay in filing of GSTR-9 for the financial years from 2017–18 to 2021–22 filed during the period 1st April, 2023 to 31st August, 2023 as provided in Notification no. 08/2023 dated 31st March, 2023 should be extended to persons who have filed GSTR-9 before 1st April, 2023.

HELD

The Hon’ble Court granted one week’s time to file an affidavit on what basis different treatment is sought to be given to assessee’s filing GSTR-9 prior to  1st April, 2023, and thereafter for the purpose of treating differently for the purpose of benefit under the Amnesty Scheme. However, the Hon’ble Court recorded a prima facie view that any person who has filed GSTR 9/9C in respect of the financial years 2017–18, 2018–19, 2019–20, 2020–21, 2021–22 up to 31st August, 2023 should be eligible for the concessional late fee as mentioned in the said notification.Otherwise,it would amount to a violation of Article 14 of the Constitution of India since no intelligible differentia is coming out from the Scheme to differentiate an assessee/dealer who had filed GSTR-9/9C before 1st April, 2023 and an assessee/dealer who has filed GSTR-9/9C in between 1st April, 2023 to  31st August, 2023.

80 Nexus Motors (P.) Ltd vs. State of Bihar
[2023] 157 taxmann.com 538 (Patna) 
Date of Order: 30th November, 2023 

Although Notification No.53/2023-CT restricts the benefit of Amnesty allowing belated filing of appeals beyond the condonable period for orders passed up to 31st March, 2023, the High Court extended the said benefit even where the impugned order was passed after the said date stating that the order passed in at least three months before the date of the said notification i.e., 2nd November, 2023 should be considered for the beneficial treatment. 

FACTS

The proper officer passed the order in original on  27th April, 2023, which was challenged by the petitioner before the first appellate authority five days after the condonable period of one month for filing of appeal u/s 107(4) of the CGST Act had expired.

HELD

The Court held that there is no power vested either in the Appellate Authority or in a Constitutional Court acting under Article 226 to extend the period of limitation, especially when there is a specific stipulation and period prescribed for the purpose of filing a delayed appeal. The Court however referred to the Amnesty Scheme notified under Notification No.53/2023- CT dated 2nd November, 2023, permitting the belated filing of appeal only in respect of orders passed by the proper officer on or before 31st March, 2023. The Court held that there is no rationale for the date of 31st March, 2023 fixed as a cut-off date and that the Notification itself was brought out on 2nd November, 2023. The Hon’ble Court therefore held that in such circumstances any order passed during at least three months before that date; the time provided for filing an appeal, ought to have been considered for such beneficial treatment. The Court, therefore, allowed the benefit under the notification to the petitioner and the order rejecting the appeal was set aside.

81 Diamond Beverages (P.) Ltd vs. Assistant Commissioner of CGST & CX
[2023] 157 taxmann.com 479 (Calcutta) 
Date of Order: 15th December, 2023 

A show cause notice reproducing the reply of the appellant and containing allegations without dealing with the contentions of the appellant cannot be said to have been issued with proper application of mind. Such a notice issued without considering the reply to the pre-show cause notice and without conducting any inquiry or investigation at the supplier’s end is liable to be set aside. 

FACTS

The appellants were issued certain notices pointing out certain discrepancies and alleging that the appellants had availed/utilised input tax credit during the financial year 2018–19 on suppliers whose registration was cancelled retrospectively, and who had not filed GSTR3B Returns during the financial year 2018–19. The appellants filed a reply to the said notices from time to time. However, without considering the said reply to a pre-show cause notice in Part -A of Form DRC-01A was issued to the appellant computing a demand pertaining to the same allegations. The appellant submitted a very detailed reply to the pre-show cause notice giving all the factual details and also placing reliance on certain decisions of this Court as well as the Hon’ble Supreme Court. The appellant specifically sought an opportunity for a personal hearing. However, the impugned show-cause notice was issued to the appellant without considering the said reply. On challenging the said show cause notice, the learned Single Judge Bench disposed of the writ petition by directing the appellants to submit a reply to the show cause notice and raise all issues of facts as well as on law and also place the decisions on which they placed reliance. Aggrieved by the same, the petitioners filed an appeal before the division bench.

HELD

The Hon’ble Court noted that essentially, in their replies the appellants requested the authority to investigate at the supplier’s end, where there was an allegation of retrospective cancellation of the supplier’s registration and allegations, where the suppliers did not file the returns for the concerned financial year. The court therefore held that the authority was required to examine the reply given in the pre-show cause notice and considering the nature of allegations in the pre-show cause notice, it was supposed to investigate or inquire into the matter by taking note of the relevant details at the supplier’s end. The court further held that if that is not done, the true facts will not emerge and consequently, issuance of any show cause notice will be a fait accompli. The Hon’ble court noted that in the instant case, the authority has not conducted any such investigation and proceeded to issue the impugned show cause notice under section 73(1) of the Act.

The department argued that the replies given by the assessee were considered before issuing the impugned show cause notice. The Hon’ble Court observed that except for extracting the reply given by the appellants, the authority has not dealt with the contentions that were placed by the appellants in the reply to the pre-show cause notice. The court therefore held that the show-cause notice has been issued without due application of mind. Accordingly, the impugned show-cause notice was set aside and the matter is remanded back to the adjudicating authority to the stage of pre-show cause notice.

Recent Developments in GST

A. NOTIFICATION 

 

Notification No. 54/2023-Central Tax
dated 17th November, 2023

 

By above notification, the notification 27/2022 dated 26th December, 2022, is amended to notify Biometric Based Aadhaar authentication for GST registration in Andhra Pradesh.

 

B. ADVISORY / INSTRUCTIONS 

 

a) The GSTN has issued Advisory dated 14th November, 2023, for Online Compliance pertaining to ITC mismatch-GST-DRC-01C.

 

b) Further Advisory dated 14th November, 2023, regarding ITC reversal on account of Rule 37(A) is issued.

 

c) Advisories dated 10th November, 2023, and 28th November, 2023, regarding procedure for provision related to the amnesty for tax payers who missed the appeal filing deadlines for the orders passed on or before 31st March, 2023, are issued.

 

d) Advisory dated 1st December, 2023, is issued about two-factor authentication for Taxpayers.

 

e) Further Advisory dated 1st December, 2023, regarding Pilot Project of Biometric-Based Aadhaar Authentication and Document verification, of GST registration applications of Andhra Pradesh, is issued.

 

f) Instruction No. 4/2023-GST dated  23rd November, 2023, is issued which is regarding serving of the summary of notice in Form GST-DRC-01 and uploading of summary of order in Form GST-DRC-07 electronically on the portal by the proper officer.

 

C. ADVANCE RULINGS

 

45. Liability on Canteen recovery — ITC — Inward transportation service 
Kirby Building Systems & Structures India P. Ltd. (Order No. A. R. Com/21/2022
dated 15th November, 2023, (Telangana)) 

 

The facts are that the applicant M/s. Kirby Building Systems & Structures India Private Limited, Sangareddy, is into the manufacture and supply of pre-engineered buildings and storage racking systems. They provide canteen and transportation facilities to its employees at subsidised rates as per the terms of the employment agreement entered between the applicant and the employees.

 

In light of the above agreement, the applicant further submitted that by virtue of Section 46 of the Factories Act, 1948, they are obliged to run and maintain a canteen for their employees and for said purpose they are procuring canteen services from a third party who in turn is issuing invoice to the applicant by charging GST at a rate of 5 per cent.

 

The applicant submitted its say in brief as under:

 

“i. According to the applicant the canteen facilities provided to its employees do not qualify as supply u/s. 7 of the CGST Act and therefore no GST is leviable on the same.

 

ii. The applicant further relies on clarification provided by CBIC in Circular No. 172/04/2022 dt: 06.07.2022 and the press release no. 73/2017 dt: 10.07.2017 wherein it was clarified by the CBIC that prerequisites provided by the employer to its employees in terms of contractual agreement will not be subjected to GST.

 

iii. Further the applicant claims eligibility to ITC on the GST paid on canteen services in terms of provision to Section 17(5)(b) of the CGST Act, 2017 wherein it is provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

 

In respect of transportation service to employees, the applicant submitted that they are arranging for transportation facilities for the employees and recovering nominal amounts from the employees’ salaries towards the cost incurred for providing such transportation facility, without any commercial objective. It was submitted that:

 

“i. Such supply of transportation service shall not be treated as supply in terms of Section 7 of the CGST Act, 2017.

 

ii. That vide Notification No. 12/2017 dt: 28.06.2017, the intra-state supply of transport of passengers in non-air conditioned contract carriage, excluding tourism shall be exempted from the payment of Central tax; and that they are providing a service for transport of passengers in non-air conditioned contract carriage and therefore the service provided by them is exempt from tax.

 

iii. That the applicant is procuring bus services to facilitate smooth functioning of his business in the course of furtherance of his business and the cost incurred by the applicant pertaining to the transport facility provided to its employees is the expenditure incurred by the applicant in terms of the contract between the employer and employee. Therefore, that the applicant is eligible for input tax credit on the tax paid on hire of such vehicles.”

 

With the above background, following questions were raised.

 

“1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen and transportation facilities provided to them?

 

2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen and transportation facilities?”

 

The learned members gave their different but concurring orders.

 

The sum and substance of the said order is that the canteen facility is as per requirement of Factories Act,1948, and the applicant is entitled to recover the cost as per Rule 68 of AP Factories Rules,1950, as adopted under Telangana Factories Rules.

 

The ld. members, in general, observed that if cost is fully recovered, then no cost will be borne by the applicant and hence no ITC. However, if only nominal amount recovered and rest born as cost, then the applicant will be eligible to ITC, as it is allowable as per section 17(5)(b) read with proviso thereto.

 

In respect of traveling inward, the ld. members were of the view that it is not under any statutory requirement but in the nature of personal consumption for employees.

 

Therefore, on inward transportation service, ITC is not eligible in view of section 17(5)(b), observed the ld. AAR.

 

On the supply outward side in both cases, it is held that if the providing service is as part of perquisite, then no liability to GST, but if it is against consideration as business, then such action will be liable to GST.

 

The ruling given by ld. AAR is as under:

 

Questions Ruling
1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen facilities provided to them? If it is by way of perquisites not liable. However, if canteen services as a business are liable to GST.
2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen facilities? ITC will be eligible in view of section 17(5)(b).
3. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the transportation facilities provided to them? If it is by way of perquisites not liable. However, if such services as business are liable to GST.
4. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing transportation facilities? No ITC as it will be personal consumption.

 

46 Supply by sub-contractor to Contractor — separate supply than by principal contractor to its contractee 
Immense Construction Co.
(Order No. A.R. Comm/13/2023
dated 13th November, 2022 (Telangana))

 

The Applicant M/s Immense Construction Company is a Firm registered under the Goods and Services Tax Act, 2017. It undertakes contracts / subcontracts of the entire work for Operation and Maintenance of Water Supply Projects / Sewerage Projects / Facilities.

 

The Applicant is awarded a contract by M/s. The Indian Hume Pipe Company Ltd. (referred to as “Principal Contractor”).

 

The Principal Contractor is awarded a contract by the State of Telangana, Mission Bhagiratha.

 

The subcontract agreement is carved out of the Principal Contract, and it clearly indicates scope of the work to be undertaken and obligations of such subcontractor. The conditions of subcontract also provide that the subcontract agreement is liable to termination if the work is not executed and maintained as per Guidelines of Mission Bhagiratha, State Government of Telangana.

 

It is also mentioned by applicant that value of goods is not more than 25 per cent of the subcontracted value (as can be verified from the Contract so awarded) and therefore exempted from payment of GST in terms of entry 3A in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 Central Tax (Rate) dated 25th January, 2018; and that the subcontract only for supply of Man Power is Pure Service and hence exempted from payment of GST in terms of Entry 3 in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 – Central Tax (Rate) dated 25th January, 2018.

 

The applicant further presented its Interpretation of Law for each of the above questions as under:

 

“a) That services provided by the Applicants are Pure Services;

 

b) That these services are ultimately provided to the State Government of Telangana;

 

c) That these services are in relation a function entrusted to a Municipality under Article 243W of the Constitution (the present work falls under Serial No. 5 of 12th Schedule being water supply for domestic purpose);

 

d) That the services are covered by the Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017;

 

e) That the Applicant draws support from Circular No. 147/16/2011-Service Tax dated 21st October, 2011 issued under the erstwhile Service Tax regime wherein under similar situations the Department had clarified that the services provided by the subcontractors to the main contractors in relation to those very projects which are classifiable as Infrastructure Projects Works Contract Services, then they too will get the benefit of exemption so long as they are in relation to the very same Infrastructure Projects i.e. WCS;

 

f) That the Applicant also draws support from the observations of the Hon’ble Apex Court in the case of State of Andhra Pradesh vs. Larsen and Toubro 17 VST 1 (SC) – 2008-VIL-30-SC wherein it was submitted by the Company and upheld by the Court that the transfer of property in goods, as effected by the sub-contract, resulted in direct sale to the Contractee and consequently it did not involve multiple sales either in favour of the main contractor or in favour of the Contractee.”

 

In respect of ‘Pure Service’ they further submitted that the said transaction is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017, as amended by Notification No. 2/2018 dated 25/01/2018 under Entry 3 and it is exempt from Tax.

 

With above facts, following questions were raised:

 

“a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 – Central Tax (Rate) dated 25/01/2018;

 

b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 Central Tax (Rate) dated 25/01/2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and

 

c. In case, if the supplies as per Question (a) are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017.”

 

Based on above, the ld. AAR observed that the basic enquiry in this proceeding is regarding.

 

“1. Whether the supply of works contract services by a contractor and his procurement works contract services constitute two independent taxable events under the CGST Act.

 

2. Whether an exemption extended to a contractor supplying works contract services is applicable to his procurement of works contract.”

 

The ld. AAR made reference to the Notification No. 12/2017 – Central Tax (Rate), dated 28th June, 2017, which is amended vide Notification 2/2018 – Central Tax (Rate), dated 25th January, 2018, to include entry 3A in same in order to exempt works contract with value of supply of goods less than 25 per cent, when the said supply is made to the Central Government, State Government or Local Authority, etc., and if the activity is related to any function entrusted under Article 243G or 243W of the Constitution of India.

 

The ld. AAR observed that the exemption is not a general exemption but subject to conditions that the supply has to be made to Central Government, State Government or Local Authority, etc. The ld. AAR found that there is no mention in entry of sub-contractors making supply of such services to a contractor who in turn is making supplies under entry 3A of Notification 12/2017, as amended above.

 

The ld. AAR, making reference to judgments, held that the exemption entry is to be interpreted strictly. It is also observed that where it is felt necessary, the Government has mentioned the category of sub-contract also for grant of concession like, in Notification no. 1/2018 – Central Tax (Rate) dated 25th January, 2018, r/w. Notification no. 11/2017. The ld. AAR observed that though the CGST Act does not define a subcontractor, however, the Notification 11/2017, as amended, makes a mention of the subcontractor whose services are procured by the main contractor. Accordingly, the ld. AAR observed that the Scheme of the Act clearly identifies the subcontractor as a supplier of works contract services to the main contractor.

 

With above observations, the ld. AAR passed ruling as under:

 

“Questions Ruling
a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017 as amended by Notification No. 2/2018 – Central Tax (Rate) dated

25th January, 2018;

 No
b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28th November, 2017 as amended by Notification No. 2/2018 Central Tax (Rate) dated

25th January, 2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and

 Not Applicable
c. In case if the supplies as per Question a are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017. 9 per cent CGST + 9 per cent SGST”

 

47 Business — Composite Supply in Education / Healthcare Services 
Kasturba Health Society (Order No. MAH/AAAR/DS-RM/13/2022-23
dated 5th December, 2022, (MAH)) 

 

The facts are that the appellant had earlier filed an AR application, which was rejected. Against the said rejection, appeal was filed before AAAR. The said appeal was also rejected. Therefore, a writ petition was filed in Bombay High Court and Hon. Bombay High Court directed the authorities to decide the question raised in the AR application. Accordingly, the AAR decided issues vide its order in GST-AAR-120/2018-2019/B-90 dated 30th November, 2021. Some questions were decided against the appellant and hence, this appeal was filed before AAAR.

 

The basic facts are that the Kasturba Health Society was formed as a Charitable Institution by way of Registration under the Societies Registration Act, 1860, and also under The Bombay Public Trust Act, 1950, with the sole objective of attending the health needs of rural India.

 

The Appellant society was also registered under Section 12AA of the Income Tax Act, 1961, and it has other registrations also.

 

The appellant is imparting Medical Education, till Post Graduation. The appellant has its setup in the form of a “Medical College” named as “Mahatma Gandhi Institute of Medical Science”, at Village Sewagram. Dist. Wardha, which is attached with a clinical laboratory named as “Kasturba Hospital”.

 

The appellant was not registered under earlier BST/MVAT Act or Service Tax. However, entertaining doubt, this application for AR was filed under GST.

 

The questions put forward by appellant in its AR application and its replies by AAR are as under:

 

i. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution”, can be said to be engaged in the business so as to cast an obligation upon it to comply with the provisions of Central Goods and Service Tax Act, 2017, and Maharashtra Goods and Service Tax Act, 2017 in totality.

 

Reply: Appellant engaged in business.

 

ii. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution” is liable for registration under the provisions of section 22 of the Central Goods and Services Tax Act, 2017 and Maharashtra Goods and Services Tax Act, 2017, or it can remain outside the purview of registration in view of the provisions of section 23 of the said act as there is no taxable supply.

 

Reply: Liable for registration.

 

iii. In a situation, if above questions are answered against the contention of the appellant institution, then following further questions were raised for the kind consideration by the Honourable Bench.

 

a. Whether the fees and other charges received from students and recoupment charges received from patients (who is an essential clinical material for education laboratory) would constitute as “outward supply” as defined in section 2(83) of The Central Goods and Service Tax Act, 2017 and Maharashtra Goods and Service Tax Act, 2017, and if yes, then whether it will fall in classification entry at Sr. No. 66 or the portion of nominal amount received from patients (who is an essential clinical material for education laboratory) at Sr. No. 74 in terms of Notification 12/2017 Central Tax(R) – dated 28th June, 2017.

 

Reply: Charges are exempt from GST.

 

b. Whether the cost of Medicines and Consumables recovered from OPD patients along with nominal charges collected for Diagnosing by the pathological investigations, other investigation such as CT-Scan, MRI, Colour Doppler, Angiography, Gastroscopy, Sonography during the course of diagnosis and treatment of disease would fall within the meaning of “composite supply” qualifying for exemption under the category of “educational and /or health care services.”

 

Reply: Charges are exempt from GST.

 

c. Whether the nominal charges received from patients (who is an essential clinical material for education laboratory) towards an “Unparalleled Health Insurance Scheme” to retain their flow at one end for the purpose of imparting medical education as a result to provide them the benefit of concessional rates for investigations and treatment at other end would fall within the meaning of “supply” eligible for exemption under the category of “Education and/or Health Care Services.”

 

Reply: The charges are liable to 18 per cent GST. 

 

d. Whether the nominal amount received for making space available for essential facilities needed by the students and staffs such as Banking, Parking, Refreshment, etc. which are support activities for attainment of main activities and further amount received on account of disposal of wastage would fall within the meaning of “supply”, qualifying for exemption under the category of “educational and / or health care services”.

 

Reply: The charges are liable to 18 per cent GST.

 

This appeal was filed against the above ruling of ld. AAR. In appeal, the appellant mainly contended that it is not doing any business and, therefore, GST not applicable to it.

 

Similarly, the ruling about taxability of charges was contested as erroneous.

 

In the course of appeal, the department also made its submission and reiterated that the AR is correctly decided.

 

The ld. AAAR thereafter analysed the argument of both sides.

 

Regarding the first issue as to whether the impugned activities of Appellant of providing educational services by way of imparting medical education through MGIMS, and providing the health care services through Kasturba Hospital, can be construed as “Business” in terms of the provisions of CGST Act, 2017, the ld. AAAR examined the definition of “Business” provided under section 2(17) of the CGST Act, 2017.

 

The ld. AAAR also observed that the appellant is doing such job or work which requires the services of highly educated, trained and skilled persons in the form of doctors hired by them for imparting the medical education to the students and hence, the said work done by the appellant is in the nature of “profession”, and accordingly, it is to be construed as “business” in terms of the GST provisions. The provision of health care services by the Appellant through its establishment, Kasturba Hospital, is also “profession” as envisaged under the definition of the term “business” provided under the GST law. The ld. AAAR held that the appellant is in business.

 

The ld. AAAR also examined whether the said activities of educational services and health care services undertaken by the Appellant will be construed as “supply” in terms of section 7(1)(a) of the CGST Act, 2017 or not. The definition of “supply” also reproduced as under:

 

“Section 7

 

(1) For the purposes of this Act, the expression ‘supply’ includes-

 

(a) ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.’”

 

The ld. AAAR observed that following criteria is to be fulfilled for activity to be ‘supply’.

 

“i. that such supply should be made by a person for a consideration;

 

ii. that such supply should be made in the course or furtherance of business;”

 

The ld. AAAR held that the appellant fulfils criteria of being a person, the activity being in the course of business and hence, the activities are ‘supply’ under GST.

 

Coming to the next issue about exemption, the ld. AAAR held that the activities of imparting medical education
to the students squarely fit under entry at Sl. No. 66 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017, which reads as under:

 

“Sl.

No.

 Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate

(percentage)

 Conditions
66 Heading 9902 Services provided – (a) by an educational institution to its students, faculty and staff; NIL NIL”

 

The ld. AAAR observed that the services of medical education provided by the Appellant-Society is recognised by the Maharashtra University of Health Sciences, Nashik and Nagpur University, hence it falls under the category of “educational institution” as defined under the GST law, and accordingly, the ld. AAAR held that the medical education services provided by the Appellant to the students will attract NIL rate of GST as per the aforesaid entry 66, and allowed it as exempt.

 

Regarding the second activity of the health care services also, the ld. AAAR held that it will squarely fit under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T.(Rate) dated 28th June, 2017, which reads as under:
“Sl.

No.

 Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate

(percentage)

 Conditions
74 Heading 9993 (a) Services by way of (a) health care services by a clinical establishment, an authorized medical practitioner or paramedics;

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.

 NIL NIL”

 

The ld. AAAR observed that the services of appellant are ‘health care services’ and will be exempt from the payment of GST in terms of the entry at Sl. No. 74 above.

 

The learned AAAR observed that the above services are ‘outward services’ as appellant receives charges from students and recoupment charges from patients which constitute consideration for outward supply.

 

Accordingly, the ld. AAAR held that the core services of the Appellant, viz. provision of medical education to the students and provision of health care services to the patients, are exempted supplies.

 

In respect of cost of medicines and consumables recovered from OPD, patients along with nominal charges collected for diagnosis etc. during the course of diagnosis and treatment of disease, the ld. AAAR held that they are covered by scope of ‘composite supply’ as defined in section 2(30) of GST Act.

 

The ld. AAAR, therefore, held that they are exempt along with core health care services.

 

Regarding the recovery under the second activity, namely, “Unparallel Health Insurance Scheme” under which the Appellant collects a nominal specific amount from the public who intends to avail the health care services from the Appellant in future at the concessional rate, the ld. AAAR observed that it is not an insurance service in real terms as it is not under licence from IRDAI. The AAR has classified the said activities as liable to GST at 18 per cent. However, the ld. AAAR concurred with the Appellant’s contention that the said nominal amount being charged by them are in the nature of advances towards the provision of the health services which would be provided to the subscribers of the said scheme. Therefore, the ld. AAAR held that receipts are eligible for exemption under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017.

 

Regarding further activity of providing space for the facilities, like Banking, Parking, Refreshment Canteen, etc., the ld. AAAR observed that the said activities are not directly provided to the students or patients, who are the recipients of the main services of the Appellant. The receipts are from third parties for renting of immovable property by way of providing space for the facilities like banking etc., who are running these establishments on their own account.

 

The ld. AAAR held that they are, therefore, not composite supply as not provided to the same one person but two separate persons.

 

Accordingly, the ld. AAAR held the said receipts taxable at the applicable rate of 18 per cent.

 

In respect of receipts on account of disposal of wastes such as medical equipment, apparatus and other instruments, etc., by selling them to the interested vendors, the ld. AAAR held them as independent activity and hence ruled as liable to tax.

 

Accordingly, the ld. AAAR concurred with replies of AAR mentioned in questions (i), (ii), (iii)(b) and (iii)(d). The ld. AAAR modified the ruling in respect of (iii)(a) and (iii)(c) to hold said activities as exempt.

 

Classification — ‘Honeycomb paper for wrapping’
V. M. Technocoatings (AR No. UP-ADRG-11/2022 dated 30th August, 2022 (UP)) 

 

The applicant is undertaking a process to prepare eco-friendly expandable paper wrap (replacement of bubble wrap) from kraft paper and to sell the same in open market.

 

The process is explained as under:

 

“First they prepare the core material by using the two or more sheets of honeycomb like structure kraft paper which is glued together in an alternate glue strip pattern to create structure of multiple layers of kraft paper in vertical direction. These corrugated layers open out in the form of continuous honeycomb like grid with center of each corrugated strip attached to another layer of corrugated strip upon expansion. Depending upon the product being packed with this material, multiple paper honeycomb wrap may be glued together to make specific design of packing material.

 

These paper honeycomb used in the primary packing of goods as a cushioning material, separators or edge protector, to make shipping cartons of goods and as pallets and pallet boxes.

 

This paper honeycomb wrap consists of 80 to 90% of kraft paper and rest is other adhesive, hence this paper honeycomb wrap classifies under HSN 4808 category. Contrary to this, 4823-chapter heading is more oriented towards ‘other paper, paperboard, cellulose wadding and webs of cellulose fibers’ etc. and not specific to kraft paper products.”

 

The applicant made reference to the fact that the main raw material to make honeycomb wrapping paper contains 80–90 per cent of kraft paper, and the rest other things are consumable items.

 

Reliance placed on order of Karnataka AAR in the case of M/s. Lsquare Ecoproducts Pvt. Ltd. (2020 (37) GSTL 394 (AAR-GST-Kar-2020-VIL-123-AAR)) where in it held as below:

 

“Therefore, on verification of the structure and purpose for which kraft paper honeycomb board or paper honeycomb board used are similar to the corrugated paperboard (listed under 4808 10 00), only difference is that this paper honeycomb board consists of honeycomb like structure core material at the center and on either side of this one or more layer of kraft paper is glued by using adhesive with fluting direction being perpendicular to corrugated boards. Hence this honeycomb paperboard classified under the Heading 4808 90 00 as other instead 4808 10 00.”

 

In the above case, the same item is held as covered by heading 4808-9000 attracting GST at 12 per cent.

 

The applicant also referred to the setting of heading 4808 in Custom Tariff.

 

The ld. AAR also considered the submission of the department, wherein they submitted that the item is classifiable under Chapter Sub-heading No. 48239013.

 

The ld. AAR observed about meaning of ‘paper’ referring to dictionary as under:

 

Meaning of the said word is explained in The Shorter Oxford Dictionary [Volume 2 (Third Edition)] as- “a substance composed of fibres interlaced into a compact web, made from linen and cotton rags, straw, wood, certain grasses, etc. which are messed into a pulp, and pressed; it is used for writing, printing, or drawing on, wrapping things in, for covering the interior or walls, etc.”

 

Encyclopaedia Britannica says – “Paper, the general name for the substance commonly used for writing upon or for wrapping things in.”

 

In Unabridged Edition of the Random House Dictionary of the English Language the word “paper” has been defined as “a substance made from rags, straw, wood or other fibrous material, usually in thin sheets, used to bear writing or printing on or for wrapping things, decorating walls etc.”

 

As per Webster’s Dictionary- “Paper, a thin flexible material made in leaves or sheets from the pulp of rags, straw, wood or other fibrous material and used for writing or printing upon or for wrapping and various other purposes.”

 

Accordingly, the ld. AAR observed that in popular parlance the word “paper” is understood as meaning a substance which is used for writing or printing, or for packing or for drawing on, or for decorating, or covering walls.

 

The ld. AAR after referring to the process adopted by the applicant also made reference to judgment of Hon’ble Rajasthan High Court in the case of Deepak Agencies vs. Assistant Commercial Tax Officer, (1993) 90 STC 376 (Raj) to ascertain the meaning of ‘paper’.

 

The ld. AAR held that the intended use of the material in question should be the guiding factor for deciding the classification of the commodity.

 

The ld. AAR also referred to the scheme of classification under GST with reference to Notification no. 1/2017-Central Tax (Rate) dated 28th June, 2017, and also to General Rules for the Interpretation of Import Tariff which provides for classification of goods in this Schedule.

 

After examining the schedule of Tariff, the ld. AAR observed as under:

 

“As per Rule 3(a) of General Rules for the Interpretation of Import Tariff, the heading which provides the most specific description shall be preferred to headings providing general description. The Tariff item 48239013 contains specific description of Packing and wrapping paper. The product ‘eco-friendly expandable paper wrap (honeycomb paper for wrapping)’ is manufactured from the kraft paper and adhesives and the same is used in wrapping/packing as such Rule 3(a) of General Rules for the Interpretation of Import Tariff will apply and the same merits classification under HSN 48239013.”

 

After considering the above position the ld. AAR gave ruling as under:

 

“25. Ques. Whether HSN applicable to eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013 or 48084090?

 

Answer- The HSN code of the product namely “eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013.” 

Corporate Guarantee: Quasi Capital or Taxable Service

Business Conglomerates fund their SPVs, subsidiaries, joint ventures, etc., with self-generated capital and / or leveraged capital. The downstream entity may not be capable of attracting debt capital based on its own net-worth and would require an intervention of the parent entity to guarantee such debt. In many cases, they are also issued to notch-up the credibility of the debt entity and reduce the cost of debt capital.

These Guarantees are reported in the financial statements (as contingent liabilities), Transfer pricing reports (as international transactions), Bank sanction letters and have caught the taxman’s eye of a possible revenue leakage, creating significant litigation under the Direct and Indirect Taxes domain. Therefore, it would be apt to unravel the concept of Guarantees, their forms / types, and the tax exposure they carry under the GST law.

COMMERCIAL UNDERSTANDING

Guarantees are contracts which grant the financier of capital the “assurance” over the repayment capacity of the borrower and carry an “obligation” to make good any default by the borrower entity. In many cases, promoters / directors of the Company (being the deployers of the capital) are also roped into the financial arrangement and made personally liable in case of any default. Such guarantees may also be backed with realisable security (such as deposits, capital assets, mortgageable / pledge assets, etc.,) to secure any default of the guarantor itself.

TYPES OF GUARANTEES

1) Bank guarantees / performance bank guarantees — Banks and FIs issue Guarantees to third parties at the insistence of their customer securing the performance of a financial obligation by the said customer. These guarantees are backed with liquid or illiquid securities which secure any possibility of default by the entity whose obligations are being underwritten. These are issued in Government / large contracts where a contractor must project his financial commitment to deliver such contracts. Banks charge a guarantee commission for the issuance of such guarantee which is liable to GST.

2) Corporate / personal guarantees — Banks / FIs insist that debt capital is supported by due corporate guarantees from their parent entities and hence incorporate guarantee conditions. The parent companies may not charge any fee from the funded entity towards such a guarantee. Promoters / Directors, etc., also extend personal guarantees and are barred from recovering any fee from the related entity in terms of the RBI Master Circular No. RBI/2021-22/121 dated 9th November, 2021.

3) Commercial / standby letter of credit (LC) — This is used commonly in international trade1. LC is an undertaking, or a guarantee issued, generally by a Bank, to pay to the beneficiary a certain or determinable amount upon simple demand or on presentation of specified documents. Commercial LCs are distinct from standby LCs to the extent that the former involves an upfront payment obligation to the beneficiary while in the case of the latter, the payment obligation is triggered only on a default by the person whose obligation is being guaranteed. Like the Bank guarantee commission, the LC issuance fee is liable to GST.

4) Contractual Performance Guarantee — Similar to bank performance guarantee, the parent entity also guarantees that its SPV, being the awardee of the contract, would successfully and satisfactorily execute the obligations under the contract. It also includes a guarantee that the contract would be performed with the material and workmanship meeting the required standards.

5) Letter of Comfort — Letters of comfort are issued by the Parent entity, more as a moral commitment rather than a legally binding obligation, to discharge the debts of the funded entity in case of there being any default therein. No explicit cost is charged either by the bank / FI from the parent entity for this facility.

Among the above, guarantees by third parties (such as Banks / FIs) are simple and against valuable consideration, and are clearly chargeable to GST. Other forms of guarantee involving related entities (such as Corporate / personal Guarantees, etc.,) have come to the forefront regarding the applicability of GST, in the absence of any visible consideration in the contract. We could address this by going back to the genesis of guarantees from the Contract Act.

1. Governed by Uniform Customs & Practice for Documentary Credits (UCP-600)

INDIAN CONTRACT ACT, 1872

Chapter VIII of the Indian Contract Act, 1872 titled as “Indemnity and Guarantee” contains special provisions for Contract of Guarantee:

“126. A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

127. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

145. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.”

Contracts are a set of promises and counter-promises wherein each party undertakes an obligation for the benefit of the other. Section 2 of the Contract Act beautifully lays down the sequence in the formation of a contract – a proposal by the promisor, its acceptance by the promisee, leading to an agreement between the promisor and promisee and then finally being sealed as an enforceable contract. Guarantees are one such type of contract of counter-promises which have to evolve through this very same process.

Unlike typical contracts, the definition of guarantee identifies three parties to a contract – “Surety / Guarantor” giving the guarantee, such guarantee being given to the “principal creditor” and the guarantee being rendered in respect of the default of “principal debtor”. The subject-matter of the guarantee (when invoked by the Creditor) could be the “performance of a promise” or “discharge of a liability” of the principal debtor. Each of these terms / phrases are significant and have to be specifically identified in a contract of guarantee. Pictorially it would appear as follows:

Speaking in contract language, the Surety promises / assures the Creditor that the financial assistance proposed to be issued to the Debtor is backed by its guarantee and in the event of the default being committed by the Debtor, the Surety would step into the shoes of such debtor and make good the financial assistance which has been rendered to the Debtor. In the tri-party arrangement, the liability of the debtor and the surety are co-extensive and alteration of the liability simultaneously alters the rights of both parties vis-à-vis the Creditor.

The subject-matter of a contract of guarantee flows from the Surety to the Creditor i.e. the promise of a guarantee, and the recipient of such guarantee is the Principal Creditor. It is against the promise of guarantee that the Principal Creditor extends the financial assistance to the Principal Debtor. Therefore, there are two sets of promises in such a scenario (a) one being the promise of guarantee by the Surety / Guarantor (as a promisor); and (b) the promise of rendering the due financial assistance by the Creditor to the debtor (being the consideration against the promise of guarantee). This would be crucial while applying the concept of supply and consideration under section 7 of the GST law (elaborated later).

After defining the contract of guarantee, section 127 now proceeds to define the consideration of the contract of guarantee. One may note that the Creditor and the Debtor are engaged in an independent debtor-creditor arrangement2. The contract of guarantee acts as a top-up to the underlying arrangement where the surety may not receive any direct benefit from the Creditor for extending its assurance / promise. As can be seen from the diagram above, the assurance / guarantee does not have any reciprocal flow of consideration back to the Surety / Guarantor either from the Creditor of Debtor. Thus, in the absence of any consideration, direct or indirect, flowing to the Surety, it was imperative that such contracts are given statutory enforceability, else may constitute a void contract. Section 127 fills this gap by stating that the ‘financial assistance to the Debtor’ against the ‘promise of Guarantee’ would constitute sufficient consideration to the Surety for a rendition of the promise of Guarantee. Technically speaking, the financial assistance to the debtor would constitute sufficient discharge by the Creditor under the contract of guarantee and the Surety cannot claim any further consideration from the Creditor for rendition of such guarantee. However, there is an option for the Surety, though no contractual obligation, to claim a consideration from the Debtor for agreeing to issue such a guarantee.

2. Mak Impex Chemicals vs. UOI AIR 2003 Bom 88

Section 128–144 of the said Act defines the rights, obligations, liabilities, and discharge of the Surety on account of the guarantee extended to the Creditor. Section 145 is critical as it defines the relationship between the Debtor and Surety—it states that there is an implied responsibility by the Debtor to ‘indemnify’ the Surety against all costs which the surety has rightfully incurred under the Contract of guarantee (including costs of defending suits, etc.,). This section grants legal protection to the Surety to proceed against the Debtor for recovery of all costs under this contract despite there being no express contract between these parties. This is akin to an implied contract of indemnity underlying the contract of guarantee and establishes an indemnifier-indemnity holder relationship.

REVENUE’S CONTENTION UNDER GST

Now turning to the revenue’s understanding of this arrangement. Revenue claims that Banks generally charge a fee from third parties for the issuance of Bank guarantees. Corporates issuing guarantees within group entities ought to charge a similar fee to be considered at arm’s length. The issuance of the guarantee is at the request of the related entity. Hence, there is a service being rendered by Surety in delivering a guarantee to the Bank. Thus, the transaction aptly fits into Entry 2/4 of Schedule I and is liable to tax in the hands of the Surety under the residuary services entry @ 18 per cent. In cases where the Surety is located outside India or personal guarantees are provided by Promoter-Directors, RCM is proposed by the Debtor Company as a “recipient” of Corporate Guarantee services. To further the case of the revenue, the GST council has inserted Rule 28(2) to provide a mechanism to value such services. A Circular has also been issued elaborating on the valuation methodology in corporate / personal guarantees.

APPLICATION OF GST LAW

With this backdrop, the points for examination would be as follows:

a) Is there any service between the Surety and the Debtor (as related persons) under a contract of guarantee?

b) Can the guarantee form part of the ‘shareholder function’ as it is provided by the parent company in respect of its related company whose shares it holds?

c) If at all there is a service being imputed under law, what is the taxable value of such service?

Section 7 of GST law stands upon four important pillars (a) an act of supply of goods / service; (b) supplier-recipient relationship; (c) consideration for such supply; (d) supply being in the course or furtherance of business. In cases where a service is being imported from outside India, it is taxable whether or not, it is in the course of business. In respect of related parties, Entry 2/4 of Schedule I excludes the requirement of ‘consideration’ for an activity to constitute a supply.

GST being levied on a transaction of supply can be termed as a “transaction-based tax” involving two or more persons. The Contract Act lays down the foundation for transactions which emanate from contracts between two or more persons. Thus, it is important to intertwine the contract law and the GST law to understand the deemed GST implications in case of related entities located either in India or outside India. The analysis is to take place in two parts (a) Cases where no commission / fee is charged for such activity from related parties (b) Cases wherein a specific charge is made from the related party for such activity. For analysis, “A” may be considered as the Creditor; “C” as the Debtor and “B” as the Guarantor / Surety for the Debtor, with B and C being related entities.

A) Cases where no fee is charged from the Debtor

Is there an Act / Contract of Supply between B and C?

The primary question is whether at all, there is a service being rendered by B to C by issuing guarantee to A, or is it a self-activity done by B for its own interest?

At the outset “activity of supply” should be viewed as emerging from an “enforceable contract” between the contracting parties. The essential elements of a contract should clearly be reflected in the contract of supply for it to be taxable under section 7 of GST law. Invalid, incomplete, or non-existent contracts cannot be considered as taxable or even imputable into section 7. The Bombay High Court in Bai Mamubai Trust3 placed the requirement of an enforceable contract and contractual reciprocity between parties as quintessential for a taxable supply. The Court very finely distinguishes payment of sums in respect of a disputed price of a taxable supply vs. payment of sums towards restitution or damages for an illegal act. Payment of sums for wrongful unilateral acts or damages were not emerging from reciprocal obligations and hence not considered as passing the “supply doctrine”.

Thus, the ingredients of the contract (as elaborated above) are core to the taxation of supply under GST. The terms supplier (promisor), recipient (promisee), the act of supply (promise) and consideration should be explicit and agreed upon by the contracting parties. If a transaction is to be considered as a supply, the contractual obligations and promises should also align with the act of supply i.e. if a service is said to be taxed between a supplier and a recipient, there has to be a contractual obligation by the supplier to render such a service to the recipient. Without any contractual obligation, a service cannot be said to have been agreed between the contracting parties. Gratuitous acts are not meant to be taxed under the GST law4. Thus, there is no room for intendment or imputation of a ‘contract’ even by way of a statutory fiction under section 7 of GST law.

3. 2019 (31) G.S.T.L. 193 (Bom.)
4. Circular No. 116/35/2019-GST, dated 11th October, 2019 issued on donations and free gifts

Contract of Guarantee is clearly between B and A under which the promise of guarantee flows from B to A. In consideration for the receipt of the guarantee from B, A renders financial assistance to C. Clearly, C is the only beneficiary of reciprocal obligations between A and B. Neither are B and C acting on behalf of each other while contracting with A. Both the parties have their respective obligations to A: C has its primary obligation to repay the financial debt and B has the co-existent secondary obligation to repay in case it is called upon to do so by A. C (though a witness / signatory) does not have contractual privity to the promise of guarantee. C’s obligation to A emerges from the separate loan contract between A and C. C cannot enforce any of the obligations or promises which is agreed upon between A and B and they stand on an independent footing.

Any supplier-recipient identification under GST law should have contractual authenticity. Similarly, the guarantee service sought to be deemed under Schedule I by the revenue should also possess valid contractual obligations between B and C. Yet Revenue through the CBIC Circular (discussed later) claims that there is a flow of guarantee service by B to C. If we attempt to implement the course adopted by the CBIC circular, we may reach a conclusion which is in direct opposition to sections 125 and 126 of the Contract Act:

Party Contractual Status GST imputed status Implication on account of deeming fiction
B Guarantor / Promisor Supplier of Guarantee B issuing the assurance to C that the Debt will be repaid by C
C Beneficiary of funds Recipient of Guarantee C would be receiving the promise of guarantee for the debt availed by itself
A Guaranteed entity / Promisee Neither supplier or recipient A would be considered as an outsider in this supplier-recipient relationship between B and C

The above table depicts the anomaly which results in imputing a contract of guarantee between B and C. The Contract Act does not identify or even deem any flow of a guarantee obligation by B to C. Therefore, any attempt to impute a contract of guarantee between B to C for the purpose of taxation would be fatal to commercial reality itself.

This brings us to the question as to the true nature of the relationship between B and C. The answer is spelled out in section 145 of the Contract Act. It states that Surety B has an implied right of indemnity against the Debtor C to the extent of financial loss incurred because of the contract of guarantee. Clearly, the consequence of any wrong-doing by C in defaulting in the payment obligation to A, would trigger A’s right to recover the sums from B. B after settling the debts due to A can now claim the said sums as damages indemnifiable under this implied contract. Therefore, the true relationship etched by the Contract Act is that of ‘indemnity’ rather than the act of service by B to C.

Then for what benefit does B issue a guarantee to A where no counter-benefit arises either from A or C? Does the act of agreeing to issue the guarantee constitute a legal obligation by B to C? Can C claim that by virtue of being an invested entity, it can enforce B to issue a guarantee for all the loans C avails from A? Certainly Not. B would have its own vested interests in issuing the guarantee in favour of C. Such issuance would be without any contractual consensus with C. Unless there is an agreed contract, C cannot as a matter of right direct B to issue a guarantee on its behalf. Thus, the issuance of the guarantee by B is on its own account and not ‘on behalf’ of C. Probably, B performs this act for protecting / enhancing its ownership interest in C. B may choose (out of its own volition) to refrain from issuing any guarantee, in which case, the only consequence would be that C may not receive the financial assistance and would be remediless without any legal recourse of B.

This therefore brings us to the commercial rationale of the issuance of Corporate / personal guarantees. As one would appreciate, a guarantee is issued by the Company / person on account of the ownership / financial interest over the entity for whom it is being issued. If not for such interest, the guarantee would not have been issued at all. Thus, the key driver for such a guarantee is the protection / enrichment of its own ownership interest in the subject entity and nothing beyond this. It is a ‘self-activity’ and does not warrant any counter-consideration either from the recipient or the debtor.

In transfer-pricing context, this act was termed as a ‘shareholder function’. Whether a corporate guarantee issued in favour of its subsidiary constituted an ‘international transaction between related parties’ warranting a benchmarking of the said activity to the arm’s length price. This issue was raised based on the definition of ‘international transaction’ (prior to 2012) which required a transaction between related parties having a bearing on the profits, incomes, losses or assets of the related entity. Taxpayers claimed that such issuance did not entail any explicit cost and was part of the shareholder obligation to adequately fund the entity for its business operations. Reliance was placed on OECD Transfer Pricing guidelines which is extracted below:

“Shareholding Activity – An activity which is performed by a member of an MNE (multinational enterprise group) (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.”

When an Activity is considered / not considered as intra-group service

“7.6………………………..This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm’s length principle.”

“7.9. A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to other group members. Instead, the costs associated with this type of activity should be borne and allocated at the level of the shareholder. ……”

“7.13. Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. See Section D.8 of Chapter I on MNE group synergies.”

The above extract clearly ruled out the possibility of an intra-group service to a related entity in case it incidentally benefited from a guarantee issued by its parent entity. A similar analysis was performed by the Income tax appellate Tribunal in Micro Ink’s case5 wherein it was examined whether corporate guarantees issued by the Parent Company were not in the nature of ‘provision for service’ but a shareholder function to the invested entity. A retrospective amendment in the definition of ‘international transaction’ vide Finance Act 2012 led to a deemed inclusion of Corporate guarantees as an international transaction. Yet, the decision in Micro Ink’s case considered the retrospective insertion and held that since the said guarantee did not meet the primary threshold of the ‘transaction having a bearing on profits, income, assets or losses’, it was still outside the ambit of the definition. However, subsequent to this, there was an overturn of decisions based on the High Court’s / Tribunal’s view6 that such activity was deemed to be an international transaction by virtue of an explicit amendment. While one may believe that this would have limited applicability in view of the distinct fabric of Income tax and GST law, it certainly leaves us with an important conclusion that in the absence of deeming fiction akin to ‘international transactions’ under Income tax, such corporate guarantees may not be considered as a transaction at all, but a self-activity as part of shareholders responsibilities and hence outside the tax net itself.

5. Micro Inks Ltd. vs. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 (Ahd. – Trib.)
6. PCIT vs. Redington (India) Ltd. reported in 122 taxmann.com 136 (Mad-HC) affirming Prolifics Corporation Ltd. vs. Dy. CIT – Hyderabad ITAT[[TS-497-ITAT-2014(HYD)-TP] ]; Infotech Enterprises Ltd. vs. Addl. CIT - Hyderabad ITAT [TS-159-ITAT-2018(HYD)-TP]; Nimbus Communications Ltd – Mumbai ITAT[TS-43-ITAT-2016(Mum)-TP]

SCOPE OF SCHEDULE I

The role of Schedule I also comes to the forefront when taxpayers claim that there is no service between the related parties and the activity is for ‘own account’. Revenue invokes Schedule I and claims that the relationship has disguised the performance of guarantee service between B and C. B has rendered the guarantee service and has deliberately not charged a consideration. Schedule I addresses such situations and brings to tax the service rendered by B to C.

Truly speaking, Schedule I has been legislated by virtue of section 7(1)(c) to give legal sanctity to acts without consideration in specified cases. If the law was to tax any and every activity (including self-activity), Schedule I need not have to be made so restrictive. Section 7(1)(c) could have simply stated that all acts without consideration are taxable as supply. The purpose of legislating limited entries in Schedule I is to identify commercial cases where consideration may not be charged on certain counts even-though there exists a contractual obligation (oral / written) between the parties concerned. The question to be asked before applying Schedule I is this – “Whether there exists any contractual obligation between the related parties?” If the answer is in the negative (like a gratuitous or self-act), one may not even enter Schedule I for application. To reiterate, Schedule I is designed only to fill the gap of consideration but not to deem / impute a contract itself between related parties.

This conclusion also emerges from the title of Schedule I which uses the phrase “Activities treated as supply even if without consideration” indicating that only activities which fall short of being treated as supply u/s 7(1) on account of a ‘lack of consideration’ would be deemed as supply. As a corollary, it means that a mere existence of a relationship would not constitute a supply of goods / services. There must necessarily be an identifiable supply under section 7(1), albeit absent a consideration, prior to invoking the entries in Schedule I. Guidance is obtained from the entries and adjunct circulars on this aspect.

  • Section 7(1)(c) itself deems an act as ‘Supply’ under Schedule I only if it is “made” or “agreed to be made”. Making of an agreement cannot be with oneself and requires the consensus of another person.
  • Use of the phrase ‘transfer’, ‘supply’, ‘import of service’ in the entries itself emphasise that other requirements of supply (u/s section 7(1)) are mandatory.
  • Supply being a commercial term is used in trade or business involving sale, transfer etc., for consumption. The deeming fiction in Schedule I is an extension of such supply-consumption theory;
  • In the context of goods, circulars have treated mere movement of goods without any transfer as not involving as supply (e.g., warranty replacement, job work movement, inter-state movement of goods rigs / equipment, free supply or gifts to customers, etc.,).
  • In the context of services, circular on liquidated damages, penalties, late payment charges etc., emphasise the requirement of an agreement or contract for the provision of service for the imposition of tax i.e., contractual relationship is an essential element of supply;

Thus Schedule I is to be invoked only when a service (guarantee or any other identifiable service) is provided between the related parties concerned. Any artificial imputation of a contract of guarantee between B and C would result in grave anomaly as tabulated above. It’s a different matter that revenue may claim that the activity is in the nature of a support function to agree to issue the guarantee, but certainly cannot claim it to be a guarantee service.

IS THERE A SERVICE PROVIDER — RECIPIENT RELATIONSHIP?

This now takes us to the question of whether at all there is a service provider-recipient relationship between the parent and related entity. Of course, once it is established that there is no service at all and the entire activity is a shareholder function, there is no requirement to examine this point. Yet to allay any doubts, an examination of the strict definition of service provider (supplier) and service recipient (recipient) can be made. Typically, revenue places the argument that an act of guarantee by the Surety constitutes a service provider-recipient relationship between the B as a service provider and the C as a service recipient. This is on the premise that a service flows from Surety to Debtor.

Supplier — Section 2(105) defines a supplier as the person supplying the service and includes an agent acting on his behalf. Under Section 126 of the Contract Act, the promise of the contract of guarantee (being the rendition of the service) flows from the Surety (say Parent Co / Director) to the Principal Creditor (Banks / FIs). In such contracts, the supplier of a service (if any), in terms of 2(105), is clearly the Surety / Guarantor who is issuing the promise of guarantee and rendering the service. Till this juncture the contract law and GST law are aligned as the Surety is the person who is rendering the guarantee promise and liable to be called a supplier.

Recipient — 2(93) defines a recipient as the person who is “liable to pay” the consideration for the rendition of service and where no consideration is payable, the person “to whom the service is rendered”. It is here where the legal error appears to be committed by the Revenue. Contractually, the service of guarantee is being rendered only to the Banks / FIs. Banks are also the ‘beneficiary of the guarantee obligation’ which is being issued by the Surety. In the eventuality of any default, the promise / assurance to recoup the loss endures to the benefit of the Creditor. The confusion arises because the ‘beneficiary of funds’ is mixed with ‘beneficiary of the guarantee service’. This fine distinction can only be solved by appreciating the contract law implications as elaborated above.

C has undoubtedly been the beneficiary of the loan, but that does not by implication make it the beneficiary of the guaranteed service. The loan may be disbursed as a consequence of the guarantee obligation. The debtor (except where a fee is being specifically charged) in no circumstance can be treated as the contractual recipient of the guarantee. Clearly, there is no service provider-recipient relationship between the B as a Surety and the C as Debtor. Thus, revenue’s contention that the Debtor is a ‘recipient’ of the guarantee service and liable to tax under reverse charge provisions fails on this front.

FLOW OF CONSIDERATION FOR SUPPLY?

One may traverse further into the scope of the term consideration. Section 2(31) defines consideration as any monetary or non-monetary act in response to or in respect of or for inducement of the act of supply. To impose a tax on the guarantee, it is imperative that C should be liable to pay a consideration to B. C would be liable to pay a consideration only if B was obligated to render the Guarantee service. But since B performs the guarantee on its own behest as a shareholder function, it cannot be said that C has induced the performance of the guarantee service. While one may say that the relationship between B and C has induced the act of guarantee, the mere existence of a relationship between B and C cannot be termed as a consideration in terms of 2(31) of the GST law.

The revenue places reliance on the Edelweiss Financial Services decision (refer to later para) to claim that the element of consideration which was absent in the service tax regime has been made good by virtue of Schedule I and hence the transaction is now taxable. However, this argument fails to appreciate that there is certainly a consideration in this contract in terms of section 126. Section 126 of the Contract Act identifies the consideration in the said contract of guarantee as being the financial assistance by A to C i.e. involving the issuance of the debt itself. B has been the recipient of the consideration in terms of the Contract Act in the form of the disbursement to C. In which case it would be incorrect to state that guarantee service has been rendered without consideration. No other consideration has been identified under the Contract law and hence one cannot impute a consideration between B and C merely to invoke Schedule I between the parties. The act of the revenue to invoke Schedule I on the premise that there is no consideration flowing to B is against the contract law provisions itself.

RECENT DEVELOPMENTS

An issue arose before the Supreme Court in the context of the negative list regime of service tax in the case of Edelweiss Financial Services7. The Court while affirming the decision of the Mumbai tribunal held that “consideration” is an inevitable requirement of taxation and the absence of such consideration to compensate for the corporate guarantee activity, rendered the transaction as non-taxable. Amidst this uproar, 51st GST Council took cognizance and recommended legislation of a deemed valuation rule in the form of Rule 28(2) w.e.f. 26th October, 2023:

“(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, BY WAY of providing corporate guarantee to any banking company or financial institution ON BEHALF of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.”

Parallelly, CBIC’s Circular8 clarifies the issue from a valuation perspective:

Issue of corporate guarantees by Corporates to related entities In view of Schedule I and section 15, the activity of providing “guarantee by the parent entity to the Bank / FIs” is treated as a “service by the parent entity to the related entity”. Valuation is to be performed in terms of Rule 28. W.e.f. 26th October, 2023 – rule 28(2) deems the value of such service at 1 per cent of the amount guaranteed
Issue of personal guarantees by Directors to related entities While the issuance of personal guarantees is a deemed service in terms of Schedule I, in view of RBI’s circular9 which bars charging any commission or fee for such activity, it was clarified that there cannot be an open market value for such activity and hence the said activity is not taxable. It is surprising that the circular reaches the conclusion of non-taxability without testing other valuation alternatives and Rule 31 (residual method). 
7. [2023] 149 taxmann.com 76 (SC) affirming (2023) 5 Centax 57 (Tri.-Bom)
8. Circular No. 204/16/2023-GST dated 27th October, 2023
9. Para 2.2.9 (C) of RBI's Circular No. RBI/2021-22/121, dated 9th November, 2021

The GST council has curiously introduced Rule 28(2) for the valuation of Corporate / Personal Guarantees, by-passing the examination of taxability itself. The GST council has presumed that there is a guarantee service activity which flows from the Surety (B) to the Debtor (C) in all cases. This is evident from the literal wordings of Rule 28(2) which identifies the supply as being ‘by way of’ providing a corporate guarantee service to a Company / FI ‘on behalf of’ a recipient.

Rule 28(2) and circular seem to be creating a dichotomy by attempting to identify the service as a ‘guarantee service’ and also deeming it to be rendered to the Debtor. This clearly does not align well with the contractual structure prescribed in the Contract Act. Neither the definition of recipient nor section 7(1)(c) r.w. Schedule I, permits the rules to deem the ‘guarantee service’ as flowing from the Surety to the Debtor.

One may only probably view the rule to be applicable where an enforceable contract is agreed between B and C, wherein B takes on an obligation to issue a guarantee to A. The obligation under the contract would merely be an ‘agreement to issue a corporate guarantee to the Bank’ but would not be the act of guarantee itself. One may call it a financial support activity or by any other nomenclature but in substance such obligation cannot be the guarantee obligation as understood in terms of section 125 of the Contract Act.

Taking this perspective forward, Rule 28 would now attempt to value the support activity between related persons. Pre-amendment, in the absence of any consideration being charged, the said rule would rely upon the ‘open market value’ or the ‘value of like services’ or the ‘cost approach’. The first proviso to the said rule also provided flexibility to adopt a nominal fee as low as even “Zero” if the recipient was eligible to avail input tax credit. In view of this subjectivity, the manner of valuation of the open market value varied across various jurisdictions—while some adopted the SBI / Bank rate for guarantee commissions, others adopted ad-hoc rates leaving it to the taxpayer to defend with a better alternative. The amendment has now swept away the flexibility. It pegs the rate at 1 per cent of the amount of guarantee or the actual consideration, whichever being higher10.

10. The practice of fixing such ad-hoc rates through valuation rules is a separate debate.

Assuming the rule is valid, the intriguing question is whether the amended rule in its zeal to value the support activity misdirected itself in going after a non-taxable guarantee activity. Special importance should be placed on the phrase ‘by way of providing corporate guarantee’ and ‘on behalf of the recipient’ in the said Rule. Since the presence of a guarantee is already negated, the ad-hoc valuation rules introduced do not seem to be valuing the support function between B and C. Though support function may ultimately lead into a guarantee provided to the Bank / FI but the mere agreement to do so (between B and C) is not guarantee service per se. Hence one can clearly claim that in such a fact pattern, Rule 28(2) does not have applicability, and one may have to fall back upon the default option as available pre-amendment i.e. open market value, etc., As a consequence, the flexibility of 1st proviso granting the leverage to adopt any value (subject to full input tax credit at the recipient’s end) would now become available. Propagators of this rule may contend that this interpretation would make the rule itself redundant and inapplicable in all cases. Probably the rule would have limited applicability within Banking sectors where Bank / FIs act as co-guarantors in large arrangements. However, redundancy (if any) cannot result in forceful application of the provisions to a non-existent contract.

B) Cases where a consideration is charged or a contract is entered

No doubt the scenario changes completely if B and C enter into a specific contract wherein B is obligated to issue a corporate guarantee in consideration for a commission. This would be an enforceable contract wherein B would be receiving consideration in exchange for the promise of guarantee by B to A. In such case, the guarantee service has been induced by virtue of the contractual obligation and against a consideration flowing from C to B. Section 2(31) r.w. 2(93) clearly spells out that where a specific consideration is charged, the person liable to pay consideration would be termed as a ‘recipient’ of service. In view of the specific provision to treat C as the recipient of service and an identifiable flow of consideration inducing the guarantee, tax may possibly be invoked in such cases.

In summary, the legislation has not permitted imputation of any contract of guarantee de hors the contract law legislation. Thus, any assumption of a guarantee service by Surety to the Debtor is unwarranted. The service, if any, between the related entities may be a support function if the Surety takes it as part of a contractual obligation (such as under a shareholder agreement, etc.,). In case a consideration is charged by the Surety to the Debtor, such consideration is not towards the guarantee service, but rather a support function and is liable to be taxed accordingly. Though the law is settled under the service tax regime, the unfolding of the true picture under the GST setting would certainly be an interesting journey.

From Published Accounts

Compilers’ Note:

Illustration of accounting treatment and disclosures for a proposed scheme of arrangement under implementation and pending regulatory approvals.

Zee Entertainment Enterprises Ltd (31st March, 2023)

From Auditors’ Report

(₹ million)

Key audit matter How our audit addressed the key audit matter
Proposed Merger with Sony Pictures Networks India Private Limited (Refer to note 30, 40 and 58 of Standalone financial statements):

 

The company has entered into a proposed Scheme of arrangement with Sony Pictures Networks India Private Limited in the current year. The Company has obtained approvals from stock exchanges, the Competition Commission of India (CCI), Shareholders of the Company and the Registrar of Companies (ROC) for the proposed scheme of arrangement and the draft scheme is currently pending for final approval with NCLT as at 31st March, 2023.

 

As per the above approvals and condition precedents of the Merger Co-Operation Agreement (MCA), the management is in the process of either liquidating or selling the components not forming part of the aforesaid Scheme of the merger. Accordingly, investment and other balances in relation to these components are classified as Non-current Assets held for sale / disposal in accordance with IND AS 105 (Non-current Assets Held for Sale and Discontinued Operations). Considering these assets are held for sale, the assets have been recorded at their realisable value and an impairment loss of R3,313 million has been recorded in the financial statements which has been disclosed as an exceptional item.

 

Further, to expedite the merger process, the company settled certain objection applications / insolvency proceedings

 Our audit included, but was not limited to, the following procedures:

 

• Obtained an understanding of management’s process to identify key financial reporting elements of the Scheme of arrangement, Merger Cooperation agreement;

 

• Evaluated the design, implementation and tested the operating effectiveness of key controls that the Company has in relation to the aforesaid process;

 

• Evaluated the orders received from BSE, NSE, NCLT and CCI;

 

• Obtained and examined the details of objection filed against the merger in the NCLT, reply filed by the Company and settlement agreement entered into by the Company;

 

• Assessed the trigger to classify the excluded entities as business held for sale in line with management action and NCLT approval as Non-current assets held for sale in accordance with Ind AS 105 — Non-current Assets Held for Sale and Discontinued Operations;

 

• Tested on a sample basis the merger cost recorded as exceptional items in the standalone financial statements;

 

• Evaluated the adequacy of
filed by operational creditors and bankers for a total amount of ₹2,230 million (₹1960 million already provided). Accordingly, an additional charge of ₹270 million has been recorded as an exceptional item.

 

The Company has also incurred expenses aggregating to R1,762 million pursuant to such scheme of merger which has also been disclosed under exception items.

 

Considering the uncertainty of the impact on standalone financial statements because of the entire merger process including approvals from various regulatory authorities, the outcome of various litigations and materiality of the amount allocated for expenses in relation to the merger, the above matter has been considered as a Key Audit Matter for the current period audit.

 disclosures given in the standalone financial statements with regard to the merger.

From Notes to financial statements

30. EXCEPTIONAL ITEMS

(₹ million)

Mar–23 Mar–22
Provision for trade and other receivables (Refer note 43(d)(ii)A) 1,068 527
Provision for diminution in value of investments classified as held for sale
(Refer note 40)		 3,313 –
Provision for diminution in value of investment * 255 –
Other exceptional expenses # 2,032 744
Total 6,668 1,271

# During the previous year, the Board of Directors approved payment of a one-time bonus as part of the Talent Retention Plan, payable in two tranches. Accordingly, an amount aggregating ₹671 million was accounted for during the previous year.

Further, during the year, the Company has accounted for ₹1,762 million (₹73 million) for certain employee and legal expenses pertaining to the proposed Scheme of Arrangement. The said amount is disclosed as a part of ‘Exceptional items’ (Refer to note 54).

During the year, the Company has settled the dispute with Indian Performing Rights Society Limited (IPRS) in relation to the consideration to be paid towards royalty for the usage of literary and musical works. On 6th March, 2023, the Company entered into agreement with IPRS to settle its old disputes in light of the impending merger. The agreement entails the settlement of the dues for the period 1st April, 2018 to 31st March, 2023. Accordingly, all the legal cases and proceedings filed by IPRS at various forums stand withdrawn. During the year ended 31st March, 2023, the Company has recorded an additional liability of 270 million pertaining to earlier years as an ‘Exceptional Item’ by virtue of this settlement.

40. NON-CURRENT ASSET CLASSIFIED AS HELD FOR SALE

(₹ million)

Mar–23 Mar–22
Investment in subsidiary and others # 3,850 –
Less: Provision for diminution in value of investment 3,313 –
537 –
Receivables from subsidiary# 372 –
Freehold land and building $ 573 –
Total 1,482 –

# The Management as part of its portfolio rationalisation initiative and conditions of impending merger; is in the process of either liquidating / discontinuing / selling certain entities (primarily Margo Networks Private Limited). Based on the same, the Management has classified the investment in relation to these entities as Non-current Assets held for sale / disposal under IND AS 105 (‘Non-current Assets Held for Sale and Discontinued Operations’). Considering these assets are held for sale, the assets have been recorded at their realisable value. Accordingly, the Company recorded an impairment of ₹3,313 million on such assets which has been disclosed as an exceptional item.

$ The Company has entered into a memorandum of understanding for the disposal of freehold land which it no longer intends to use and the sale transaction is in progress and is expected to be completed in the next 12 months. Accordingly, the same has been classified as a Non-current asset classified as held for sale.

58. The Board of Directors of the Company, at its meeting on 21st December, 2021, has considered and approved the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 (Scheme), whereby the Company and Bangla Entertainment Private Limited (an affiliate of Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited)) shall merge in Culver Max Entertainment Private Limited. After receipt of requisite approvals / NOCs from shareholders and certain regulators including SEBI, CCI, ROC etc., the Company has filed a petition with NCLT for approval of the Scheme which shall be effective NCLT approval and balance regulatory approvals / completion formalities.

From Directors’ report

8. COMPOSITE SCHEME OF ARRANGEMENT

The Board of Directors of the Company at its Board Meeting held on 21st December, 2021 had considered and approved (subject to requisite approvals consents) the Scheme of Arrangement under Sections 230 to 232 and other applicable provisions of the Act amongst the Company, Bangla Entertainment Private Limited (BEPL) and Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited) (CMEPL) and their respective shareholders and creditors (Scheme). The Scheme provides for, inter alia, the merger of the Company and BEPL into CMEPL; the consequent issue of equity shares of CMEPL to the shareholders of the Company and BEPL, in accordance with Sections 230 to 232 of the Act; dissolution without winding up of the Company and BEPL; appointment of Mr. Punit Goenka, Managing Director & Chief Executive Officer of CMEPL on the terms set out in the Scheme; and amendment of the Articles of Association of CMEPL. The Scheme is sanctioned/approved by:

  • The BSE Limited and the National Stock Exchange of India Limited vide their observation letters dated 29th July, 2022;
  • The Competition Commission of India vide its letter dated 4th October, 2022;
  • Shareholders of the Company at the meeting held on 14th October, 2022 convened under the directions of the National Company Law Tribunal, Mumbai Bench (‘NCLT’);
  • The Official Liquidator by way of report dated 3rd January, 2023 on the Scheme, inter alia, stating that the affairs of the Company have been conducted in a proper manner and raising no objections to the Scheme;
  • The Regional Director, Western Region, Ministry of Corporate Affairs, by way of the report dated 10th January, 2023, inter alia, stating that he did not have any objections to the Scheme; and
  • On the basis of the above no-objections and approvals, the NCLT by order dated 10th August, 2023 sanctioned the Scheme.

The Company is in the process of making an application with the Ministry of Information and Broadcasting for the transfer of the licenses relating to the up-linking and down-linking of television channels obtained by the Company to CMEPL, pursuant to the Scheme.

The Scheme shall become effective upon fulfilment of all the conditions and precedents mentioned in the Scheme.

The Scheme is in the interest of the shareholders, creditors, and all other stakeholders of the Company, CMEPL, BEPL and the public at large.

Streaming Arrangements

Mining companies (also referred to as producers) use metal streaming arrangements to raise funds. The Producer enters into a metal streaming arrangement with a streaming company (the “Investor) where the Producer may receive an upfront cash payment plus ongoing predetermined per unit payments for part or all of the metal production and sometimes by-product metals (e.g., silver extracting from zinc ores). This enables the Producer to access funding by monetizing the product or by-product metal. The Investor too is assured of a supply of metals without having to develop or operate the mine. The accounting of such arrangements can be extremely complex and is dealt with below.

QUERY

Hindustan Metal (HM), owns iron ore mines. HM enters into a streaming arrangement with the Investor. HM commits to deliver 60 per cent of the iron ore production of the mine over the life of the mine in exchange for an upfront advance of $100 million and the lesser of, $120 and the market price per tonne of iron ore, for each future tonne or iron ore delivered. The upfront advance funds generally will be used to finance capital expenditures in the development of the mine project for which HM holds the mineral rights. When the market price exceeds $120 / tonne, the notional drawdown of the upfront advance funds is based on the difference between the market price of iron ore at the time of delivery and the actual amount received (i.e., the $120 / tonne.). Even if the advance is reduced to zero, HM is still contractually obligated to deliver iron ore over the remaining term of the arrangement and will receive the lesser of $120 / tonne and the market price. The balance of the upfront advance may be reimbursable (in cash, usually without interest) to the Investor at a specified date or the end of the life of the mine if the amount has not previously been reduced to zero. How is the arrangement recorded in the books of HM?

RESPONSE

Streaming arrangements may be accounted for by the Producer in a number of ways based on an analysis of all of the relevant facts and circumstances. Potential methods of accounting for these streaming arrangements by the Producer include, but are not necessarily limited to be discussed after the accounting standard references below:

ACCOUNTING STANDARD REFERENCES

Ind AS 109 Financial Instruments

Paragraph 2.4

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

Paragraph 2.6

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

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

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

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

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

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

RESPONSE
Following are some of the factors (not an exhaustive list) to be considered when making an assessment of the appropriate accounting for streaming arrangements:

  • The settlement mechanism of the upfront advance (e.g., through delivery of the commodity, cash or other financial assets)? Settlement through the delivery of commodity may suggest that own-use exemption may apply.
  • When settlement happens fully or partly using cash or another financial asset, the following aspects may need to be considered:
  • Contingent settlement provisions, whereby the Producer is required to pay cash only under certain conditions and the genuineness of those conditions;
  • Provisions which allow the Investor the right or option to receive cash instead of commodity;
  • The right of the Investor to cancel the arrangement and require the Producer to make a lump sum cash payment or transfer other financial assets;
  • Reimbursement of the upfront advance at a specified date or the end of the life of the mine if the upfront advance has not been reduced to zero and whether such an amount could be significant.
  • When settled through delivery of the commodity, will it always be obtained from the Producer’s operations or expected to be purchased from the open market or a third party? Own-use exemption may not apply when settlement is the basis of the purchase from an open market or third party, which may be suggestive of a derivative contract. Other related factors to consider may be:
  • The amount of the commodity required to settle the arrangement compared to expected future production from the Producer’s operation and estimated mineral quantity;
  • The timing of expected future production from the operation compared to any specific delivery dates per the arrangement;
  • The past business practice of the producer for similar arrangements;
  • The term of the arrangement in relation to the expected life of the mine;
  • Understanding how the risks are shared between the Producer and the Investor if the output of the mine is not as expected or changes in government policy regulating mines?
  • Which party bears the price risk of the underlying commodity?
  • Which party bears the risk that the cost of developing the mine is higher than anticipated?
  • Whether the Producer or the Investor controls the mines and who has the right to take significant decisions relating to the operation of the mine, such as a go or no-go area?
  • Can the commodity be readily converted to cash? Is the commodity indexed to a quoted price?
  • Provisions relating to defaults, e.g., the right of the Investor to levy a penalty on the Producer for not delivering the commodity as per the agreed schedule. Such a right may be suggestive that the risks relating to the mine are not shared by the Investor, and therefore, the arrangement may not qualify as a part sale of assets. It would mean that such arrangements are commodity arrangements and assessment would be required to determine if an own-use exemption applies.
  • Is there an explicit or implicit and significant financing component (e.g., rate of interest) in the arrangement?

COMMODITY ARRANGEMENT

This arrangement may qualify as a commodity arrangement that is outside of the scope of Ind AS 109 provided the streaming arrangement is determined to be an executory arrangement to deliver an expected amount of the commodity to the Investor from the Producer’s own operation (i.e., it meets the “own-use” exemption as set out in paragraph 2.4 of Ind AS 109). For the “own-use exemption” to apply, the arrangement must always be settled through the delivery of the commodity which has been obtained by the Producer as part of its own operations.

If the own-use exemption applies, then the arrangement is treated as an executory arrangement to be fulfilled on an ongoing basis, and the upfront advance received by the Producer is accounted as an advance payment (unearned revenue) related to the future sale of commodities. Care is needed when analysing all the terms of the arrangement to determine whether they give rise to separable embedded derivatives (such as caps, floors and collars) that need to be separated and accounted for as derivatives.

DERIVATIVE CONTRACT

If the “own-use exemption” does not apply, the streaming arrangement may qualify as a derivative under Ind AS 109. When the commodity is readily convertible to cash, or either party can settle net in cash or has a past practice of doing so, and delivery will not be made with the Producer’s own production, the arrangement would qualify as a derivative. If the streaming arrangement is considered a derivative, it would be measured at fair value through profit and loss (“FVTPL”). In such an assessment, the upfront advance made under the streaming arrangement would make the derivative partially pre-paid.

FINANCIAL LIABILITY

The arrangement may qualify as a financial liability (i.e., debt) in accordance with Ind AS 109 when the streaming arrangement establishes a contractual obligation for the Producer to deliver cash or another financial asset. An example of net settlement in cash is where a commodity producer enters into a contract to supply a specified amount of a commodity and, in addition, pays or receives an amount in cash based on the difference between the market price of the commodity on the date of its supply and the price stated in the contract. Settlement may be part or the entire contract can be paid in cash, instead of through the physical delivery of the commodity.

When the streaming arrangement is classified as a financial liability, the commodity-linked principal (and interest) may be separated from the host debt instrument and accounted for at FVTPL because it is exposed to dissimilar risks and would not be closely related. Alternatively, a company could elect for the entire instrument to be measured at FVTPL. A call, put, or prepayment option embedded in a host debt instrument should be reviewed to determine if separation is required. Caution needs to be exercised when analysing all the terms of the arrangement to determine whether they give rise to other embedded derivatives and/or if they are important in the assessment of the classification of the streaming arrangement.

SALE OF A MINERAL INTEREST AND A CONTRACT TO PROVIDE SERVICES

Such an arrangement may qualify as a sale of a mineral interest and a contract to provide services — such as extraction, refining, etc., in accordance with Ind AS 16 Property, Plant and Equipment and Ind AS 115 Revenue from Contracts with Customers when the streaming arrangement meets the criteria under Ind AS 115 for a sale.

Under the sale of the mineral interest classification, an argument might be made that the upfront advance relates to the sale of a portion of the mineral interest, and the price per unit payments made by the Investor as the commodity is delivered in the future relates to the cost of the services (e.g., extraction, refining, etc.) provided by the Producer to the Investor.

The service portion of the arrangement may include a “cap” or “out-of-the-money floor” on the selling price of a commodity that may need to be accounted for separately as an embedded derivative. Caution needs to be exercised to determine whether such features give rise to embedded derivatives or if they are determinative in the assessment of the classification of the streaming arrangement.

CONCLUSION

Determining the appropriate accounting approach is not an accounting policy choice but rather an assessment of the specific facts and circumstances. Examples of additional terms that can be found in these arrangements include a cap on the price per tonne, interest-bearing upfront advance, a commitment to deliver a minimum quantity within a specified limit, time-bound arrangements, buy-back rights of the producer, etc. Some arrangements may include by-products only, e.g., fines (pieces of iron ore) rather than the iron ore.

The determination of how to account for a streaming arrangement requires significant judgment and careful consideration of the facts and circumstances, as discussed above. Globally, it appears that there is a mixed practice for the accounting of streaming arrangements.

Allied Laws

41 Cox and Kings Ltd vs. SAP India Pvt Ltd

[2023] 157 taxmann.com 142 (SC)

Date of Order: 6th December, 2023

Arbitration — The validity of the ‘group companies’ doctrine — non-signatory parties can be bound by an arbitration agreement [Arbitration and Conciliation Act, 1996, 1 S. 2, S. 7].

FACTS

Five judges of the Hon’ble Supreme Court were called upon to determine the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration. The challenge was to figure out whether there can be reconciliation between the group of companies’ doctrine and well-settled legal principles of corporate law and contract law.

HELD

The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act, 1996 (ACA) includes both the signatory as well as non-signatory parties. The conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. The requirement of a written arbitration agreement under Section 7 of the ACA does not exclude the possibility of binding non-signatory parties. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement.

The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the ACA. Further, to apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Oil and Natural Gas Corporation Ltd vs. Discovery Enterprises (2022) 8 SCC 42. Resultantly, the principle of a single economic unit cannot be the sole basis for invoking the group of companies doctrine.

The group of companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and in the course of this judgment, any authoritative determination given by this Court pertaining to the
group of companies doctrine should not be interpretedto exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

42 Vijay vs. UOI & Ors

CA No. 4910 of 2023 (SC)

Date of Order: 29th November, 2023

Secondary Evidence — Admissibility — Agreement for sale — Executed prior to the amendment — Allowed [Indian Stamp Act, 1899, S. 35].

FACTS

The Original Plaintiff and Defendant entered into an agreement to sell a property on 4th February, 1998, and pursuant to that, Plaintiff was allegedly put in possession of the property by the Defendant. When the Defendant denied the existence of such an agreement, Plaintiff filed a suit for specific performance of the contract. In the said suit, Plaintiff moved an application to file a copy of the agreement to sell, among other documents, as secondary evidence. Initially, the said application was allowed but when the Defendant sought a review of the order, the Court held that secondary evidence of an agreement to sell could not be allowed as it was not executed on a proper stamp, thus barred under section 35 of the Indian Stamp Act, 1899 (Stamp Act). Subsequently, the Plaintiff filed a Writ Petition challenging the review order and the Constitutional validity of Section 35 of the Stamp Act. The High Court upheld the validity of the said section and the order of the Review Court.

On Appeal.

HELD

The Explanation deeming certain ‘agreements to sell’ as conveyance (and thus making them liable to be stamped as conveyance) inserted in Article 23 of Schedule I-A contained in the Stamp Act (vide MP Amendment Act, 1990) creates a new obligation for the party and, therefore, cannot be given retrospective application. Thus, it will not affect the agreement(s) executed before such amendments. Hence, the documents in question were not required to be stamped at the relevant period to attract the bar of Section 35 of the Stamp Act. Thus, a copy of a document can be adduced as secondary evidence if other legal requirements are met.

The Appeal was allowed.

43 Manu Gupta vs. Sujata Sharma & Ors

RFA (OS) 13 of 2016 (Del)(HC)

Date of Order: 4th December, 2023

Hindu Undivided Family — Right of a female coparcener to be Karta — Held Yes. [Hindu Succession Act, 1956, S. 6].

FACTS

The Appeal was preferred by the appellant / Manu Gupta (defendant No.1 in the main Suit), against the Judgement whereby the Suit for Declaration for declaring the plaintiff (respondent No.1 herein) as the Karta of Late Shri D.R. Gupta and Sons, HUF, has been allowed.

On an appeal.

HELD

The explicit language of Section 6 of the 2005 Amendment Act makes it abundantly clear that though the reference in the Preamble may be to inheritance, but conferring “same” rights would include all other rights that a coparcener has, which includes a woman’s right to be a Karta. Thus, if a woman can be a coparcener but not a Karta of HUF, would be giving an interpretation that would not only be anomalous but also against the stated Object of the introduction of the Amendment.

The appeal was dismissed.

44 Anumolu Nageswara Rao vs. AVRL Narasimha Rao

AIR 2023 TELANGANA 178 (FB)

Date of Order: 27th June, 2023

Rights of adoptee — Right of a coparcener — In the family of birth — Ceases on adoption — unless partition before adoption. [Hindu Adoption and Maintenance Act, 1956, S. 12].

FACTS

A full bench was constituted to address the question of whether the rights of a coparcener in the joint possession and enjoyment of the property is a clear vesting of title in the coparcener even before partition, and can he be said to be short of rights of a full owner or whether his rights would get crystallized into definite share only on an actual partition, and whether by virtue of the proviso (b) to Section 12 of the Adoption Act, the undivided interest in the property of a coparcener will not, on his adoption, be divested, but will continue to vest in him even after his adoption.

HELD

On adoption by another family, the adoptee becomes a coparcener of the adoptive family and ceases to have any connection with the family of his birth. He / she ceases to perform funeral ceremonies and loses all rights of inheritance as completely as if he / she had never been born. Court held that the child ceases to be a coparcener of the family of his / her birth and forgoes interest in the ancestral property in the family of his birth. Only if a partition has taken place before the adoption and property is allotted to his share or self-acquired, obtained by will, inherited from his natural father or other ancestor or collateral which is not coparcenary property held along with other coparceners and property held by him as sole surviving coparcener, he carries that property with him to the adoptive family with corresponding obligations.

Claim of Loss in Revised Return of Income

ISSUE FOR CONSIDERATION

The provisions relating to filing of return of income are contained in section 139 of the Income Tax Act, 1961. A return of income filed within the due date is governed by sub-section (1) of section 139 Sub-section (3) deals with a return of loss. A return not filed in time can be furnished within the time prescribed under sub-section(4). The return furnished under sub-section (1) or (4) can be revised as per sub-section (5) of section 139.

Section 139(5) reads as under:

“If any person, having furnished a return under sub-section (1) or sub-section (4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before three months prior to the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.”

Section 80 provides that no loss shall be carried forward and set off unless such loss has been determined in pursuance of a return filed in accordance with sub-section (3) of section 139. Section 80 reads as under:

“Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.”

Sub-section (3) of section 139 reads as under:

“If any person who has sustained a loss in any previous year under the head “Profits and gains of business or profession” or under the head “Capital gains” and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).”

A question had earlier arisen before the courts as to whether a return of income filed under section 139(1) declaring a positive income, could be revised under section 139(5) to declare a loss, which could be carried forward for set-off as per s.80 by treating such a return as the one filed under s. 139(3) of the Act. The Gujarat High Court in the case of Pr CIT vs. Babubhai Ramanbhai Patel 249 Taxman 470, the Madras High Court in the case of CIT vs. Periyar District Co-op. Milk Producers Union Ltd 266 ITR 705, and various benches of the Tribunal, in the cases of Sujani Textiles (P) Ltd 88 ITD 317 (Mad), Sarvajit Bhatia vs. ITO ITA No 6695/Del/2018, and The Dhrangadhra Peoples Co-op. Bank Ltd vs. DCIT 2019 (12) TMI 976 – ITAT Rajkot had all taken a view that it was permissible to file a return of loss for revising the return of income, and such a loss so declared in the revised return could be carried forward for set off. The Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, however, held to the contrary disallowing the right of set-off in the case where the original return of income was for a positive income,

The position believed to be settled was disturbed by a decision of the Supreme Court. The Supreme Court, in the case of Pr CIT vs. Wipro Ltd 446 ITR 1, in the context of withdrawal of a claim for exemption (of a loss) under section 10B through a revised return under section 139(5) claiming to carry forward of such loss (not claimed in view of s.10B exemption), has observed that the Revenue was right in claiming that the revised return filed by the assessee under section 139(5) can only substitute its original return under section 139(1) and cannot transform it into a return under section 139(3), in order to avail the benefit of carry forward or set off of any loss under section 80. The review petition against this order was dismissed by the Supreme Court vide its order reported at 289 Taxman 621.

Subsequent to this Supreme Court decision, the controversy has arisen before the Tribunal as to whether the Supreme Court’s decision has impacted the allowance of a claim for carry forward or set off of a loss not made in the original return by filing a revised return filed under section 139(5), after the due date of filing of the return under section 139(1). While the Pune Bench of the Tribunal has held that a claim of enhanced loss under a revised return is permissible, the Delhi Bench has taken a view that a claim of loss under a revised return would not enable the assessee to carry forward or set off a loss claimed for the first time in the revised return of income.

BILCARE’S DECISION

The issue first came up for discussion before the Pune bench of the Tribunal in the case of Dy CIT vs. Bilcare Ltd 106 ITR(T) 411, the relevant assessment year being the assessment year 2016-17.

In this case, the assessee had a wholly-owned subsidiary in Singapore, which went into liquidation. While the company was ordered to be liquidated within 30 days in February 2014, the assessee made an application to the High Court of Singapore in October 2015 seeking permission to transfer the shares held by it in the Singapore subsidiary to another foreign subsidiary incorporated in Mauritius for a consideration of SGD 1. The permission was granted by the Singapore High Court in October 2015, and the transfer of shares was completed on 22nd October, 2015.

The assessee had not reflected this sale of shares of the Singapore subsidiary in its audited financial statements. The assessee had filed its original return before the due date on 28th November, 2016, declaring a loss of ₹45.98 crore, not taking into consideration such loss on the sale of shares of the Singapore subsidiary. The return was revised after the due date on 29th March, 2018, increasing the loss to ₹968.31 crore. The increase in loss was on account of the claim for long-term capital loss of ₹922.33 crore arising on transfer of shares of the Singapore subsidiary of the company, which claim was not made in the original return of income.

In the draft assessment order, the assessing officer refused to take cognizance of the revised return of income, in which the claim for such long-term capital loss was made. The assessee filed an application before the Joint Commissioner of Income Tax under section 144A for issuance of a direction on the issue of disallowance of the long-term capital loss arising on the sale of shares of the subsidiary of ₹922.33 crore. The Joint Commissioner directed that the loss on sale of shares claimed in the revised return should not be entertained, but that the claim of capital loss of ₹922.33 crore made during the course of assessment proceedings may be examined on merits.

The assessing officer disallowed the claim of long-term capital loss on the sale of shares of the foreign subsidiary on the following grounds:

(i) the claim for deduction of loss on the sale of shares in the revised return of income was not valid in law as the necessity for filing the revised return of income was not on account of any omission or wrong statement in the original return of income;

(ii) the Singapore High Court simply permitted the assessee to sell the shares of the Singapore subsidiary without mentioning the consideration for the sale of shares, and therefore the transaction of sale of shares was not by operation of law;

(iii) the assessee only sold the shares of the Singapore subsidiary to another wholly-owned subsidiary in Mauritius, and there being complete unity of control between the seller and purchaser, the transaction was not undertaken at arm’s length;

(iv) the assessee failed to furnish the information sought by the AO in order to determine the fair market value of the shares in terms of the provisions of rule 11UA of the Income Tax Rules, 1962.

The assessing officer was of the view that it was a dubious method adopted by the assessee in order to avail the benefit of set-off of the long-term capital loss arising on the sale of the shares of the subsidiary. Invoking the doctrine laid down by the Supreme Court in the case of McDowell and Co Ltd vs. CTO 154 ITR 148, the AO denied the claim for deduction of long-term capital loss of ₹922.33 crore arising on sale of shares of the Singapore subsidiary.

The Commissioner (Appeals) considered the chronology of events and facts of the case and upheld the finding of the AO that the long-term capital loss could not have been claimed through a revised return of income. He however held that since the assessee had suffered a loss, the claim made during the course of assessment proceedings could also be considered, placing reliance on the decision of the Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders 349 ITR 336. He therefore directed the AO to allow the loss as the claim was genuine and bona fide.

Before the tribunal, on behalf of the revenue, it was contended that the revised return of income was not valid in law and that the Commissioner (Appeals) ought not to have applied the ratio of the Bombay High Court decision in the case of Pruthvi Brokers & Shareholder (supra), as the decision related to a claim made for the first time before the Commissioner (Appeals) and that the ratio of the decision of the Supreme Court in the case of Goetze (India) Ltd 284 ITR 323 was squarely applicable to the facts of the case. It was further claimed that the Commissioner (Appeals) had failed to examine the colourful device adopted by the assessee and that the transactions of sale of shares of the Singapore subsidiary to another wholly-owned foreign subsidiary were not at arm’s length price.

On behalf of the revenue, it was further claimed that the revised return of income was not valid in law, as the assessee had chosen not to challenge this finding before the tribunal. It was claimed that the Commissioner (Appeals) had failed to take cognizance of the provisions of section 139(3) read with section 80. Reliance was placed on the decision of the Supreme Court in the case of Wipro Ltd (supra).

On behalf of the assessee, it was submitted that the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) had no application to the facts of the case, as the issue before the Supreme Court was regarding the interpretation of the provisions of section 10B(8). It was further submitted that the claim of the assessee in the case before the tribunal was totally different from the facts in the case of Wipro Ltd (supra), and therefore the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) could not be applied to the facts of the case before the tribunal. It was submitted that the material on record clearly showed that after meeting the liabilities of creditors of the Singapore subsidiary, nothing remained to be distributed amongst the shareholders. Therefore the intrinsic value of the shares was nil, and that there could not be any dispute with regard to consideration received on the sale of the shares.

It was further pointed out on behalf of the assessee that rule 11UA did not apply to the year under consideration, since it came into effect from 1st April, 2018. It was further submitted that the transaction was not a dubious transaction but was a real transaction, as evidenced by the documents showing the completeness of the transaction of the sale of shares. It was argued that the ratio of the decision in the case of McDowell & Co Ltd (supra) had no application to the facts of the case as it was a real transaction, and citizens were free to arrange affairs in order to minimise the tax liability.

Analysing the provisions of section 139, the tribunal observed that there was no dispute that the original return was filed within the due date for filing of the return of income under section 139(1). Even the revised return of income was filed within the prescribed period as required by section 139(5). The revised return could be filed in a situation where an assessee discovered any omission or any wrong statement made in the original return of income. The circumstances that led the assessee not to claim the long-term capital loss in the original return of income were explained before the AO, and which explanation remained uncontroverted. Therefore, according to the tribunal, it could not be said that it was not a bona fide omission made in the original return of income, or that the assessee had failed to satisfy the conditions prescribed under section 139(5) for filing the revised return of income. The Tribunal therefore held that the AO was not justified in not accepting the revised return of income filed by the assessee.

The tribunal observed that it was a settled position of law that an assessee was entitled to revise the return of income within the time allowed under section 139(5). Once the revised return of income was filed, the natural consequence was that the original return of income was effaced or obliterated for all purposes, and it was not open to the AO to revert to the original return of income. This position of law was approved by the Supreme Court in the case of CIT vs. Mahendra Mills/Arun Textile C/Humphreys Glasgow Consultants 243 ITR 56.

As regards the applicability of the Supreme Court decision in the case of Wipro Ltd (supra), the tribunal observed that, in that case, the Supreme Court was concerned with the interpretation of the provisions of section 10B(8), and had made a passing remark that the revised return of income filed by the assessee under section 139(5) only substituted original return of income under section 139(1), and such a return could not be transformed as return of loss filed under section 139(3) in order to avail the benefit of carry forward and set off of any loss under the provisions of section 80. The issue of interpretation of the provisions of section 139(3) and section 80 was not before the Supreme Court in the case of Wipro Ltd (supra). According to the tribunal, it was a settled legal position that every interpretation made by the Honourable Judges did not constitute the ratio decidendi. The tribunal further observed that the observations made by the Supreme Court had no application to the facts of the case before it, as the assessee had filed the original return of income showing loss within the time prescribed under section 139(1), and therefore the decision of the Supreme Court was distinguishable on facts.

According to the tribunal, it was clear that the assessee had discovered and omitted to claim a genuine loss arising on sale of shares, and therefore filed a revised return of income under section 139(5) within the prescribed time limit claiming the determination and carry forward of loss. It was a valid revised return of income filed under section 139(5). Therefore, the findings of the AO as well as the Commissioner (Appeals) to the extent that the revised return of income was not a valid one, was reversed by the tribunal.

The tribunal further rejected the arguments made on behalf of the revenue, that the finding that the revised return of income was not valid was accepted by the assessee as the issue was neither raised in cross-appeal nor in cross-objection, observing that respondent to an appeal could always support the order of the Commissioner (Appeals) on the ground decided against him under the provisions of rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. The tribunal observed that it was a settled position of law that in a case where the assessee filed the return of loss within the time prescribed under section 139(1), there was no bar under the provisions of the Income Tax Act to claim a higher loss during the course of assessment proceedings, nor were there any fetters on the AO to allow such higher loss.

Placing reliance on the decisions of the Delhi High Court in the case of CIT vs. Nalwa Investment Ltd 427 ITR 229 and Karnataka High Court in the case of CIT vs. Srinivasa Builders 369 ITR 69, the tribunal observed that when the assessee had claimed a lower amount of loss erroneously, which was sought to be corrected during the course of assessment proceedings, the AO was not justified in not determining and allowing the carry forward and set off of the loss, as the conditions for triggering the provisions of section 80 would not apply.

The Tribunal therefore held that the reasoning of the AO, that the loss not claimed in the original return of income but claimed in the revised return of income could not be allowed, was not sustainable in the eyes of the law.

RRPR HOLDING’S DECISION

The issue again came up before the Delhi bench of the tribunal in the case of RRPR Holding (P) Ltd vs. DyCIT 201 ITD 781.

The assessee was an investment holding company set up to acquire and hold shares of NDTV Ltd and its group companies. It filed its original return of income under section 139(1) on 15th October, 2010, declaring total income at ₹4,17,005. The original return was subjected to scrutiny assessment by the issuance of notice under section 143(2) dated 29th August, 2011. Pending completion of assessment under section 143(3), the assessee filed a revised return under section 139(5) on 2nd February, 2012 within the prescribed time. As per the revised return, the assessee claimed a long-term capital loss of ₹206.25 crore arising on the sale of shares, along with the income from other sources of ₹4,17,005 declared in the original return and claimed to carry forward of such loss.

The AO noted that no such loss arising on the sale of shares was claimed in the original return filed by the assessee. Subsequently, according to the AO, enquiries in respect of certain transactions entered into by the assessee were carried out by the Investigation Wing. Following the same, the assessee revised its return of income after a lapse of 17 months and filed a revised return claiming the long-term capital loss. The AO observed that such a revised return was not a valid return, and therefore non-est in the eyes of law. The AO noted that there was not even an iota of reference to any transaction involving any capital gains or capital loss in the original return. As per the AO, for entitlement of carry forward of losses, as per section 139(3), the loss return had to be necessarily filed within the time allowed for filing return under section 139(1), whereas the capital loss had been claimed for the first time in the revised return filed beyond the time limit stipulated under section 139(1). Thus, the AO refused to admit the claim of long-term capital loss and denied carrying forward and setting off of such loss.

The Commissioner (Appeals) upheld the denial of the long-term capital loss, on the ground that the return had to be necessarily filed within the time limit prescribed under section 139(1), but that the loss had been claimed by filing a revised return under section 139(5) beyond the time limit prescribed under section 139(1).

Before the tribunal, on behalf of the assessee, it was contended that where the original return had been filed on or before the due date under section 139(1), the assessee was entitled in law to revise the return under section 139(5) within the due date prescribed therein. The assessee had filed the original return as well as the revised return within the due dates prescribed under the respective sub-sections (1) and (5) of section 139. Thus the loss arising on the sale of the shares claimed as long-term capital loss was not hit by the embargo placed by section 80. Reliance was placed on the decisions of the High Courts in the case of Babubhai Ramanbhai Patel (supra), Dharampur Sugar Mills Ltd (supra), and the decision of the Mumbai bench of the tribunal in the case of Ramesh R Shah vs. ACIT 143 TTJ 166 (Mum) in support of this proposition. It was submitted that the denial of carry forward of losses claimed in the revised return was opposed to the scheme of the Act as interpreted by the judicial dicta and hence was required to be reversed by admitting the claim made towards long-term capital losses by way of revised return, and allowing carry forward and set off of such losses.

On behalf of the revenue, it was submitted that the loss return under section 139(3) must be necessarily filed within the due date prescribed under section 139(1) to avoid the rigours of section 80. The losses claimed had come into consideration by virtue of a revised return which was filed subsequent to the due date prescribed under section 139 (1), and thus the revised return to make a new claim giving rise to losses, could not be allowed in defiance of the provisions of the Act, regardless of the fact that the revised return had been filed within the due date prescribed under section 139(5). It was further submitted that the claim of capital loss had been made for the first time in the revised return, and it was not a case where the claim of loss made in the original return had been modified in the revised return. It was further pointed out that such a huge loss was claimed for the first time by way of a revised return, and that there was no reference to the loss in the original return or in the profit and loss account. It was contended that such an omission to claim the loss in the original return was prima facie willful to hide the transactions from the knowledge of the Department, and therefore the claim of loss made by filing the revised return should not be granted.

The tribunal observed that the moot question in the case was whether the assessee was entitled in law to make an altogether new claim of capital loss in the revised return which was filed within the due date prescribed under section 139(5) but subsequent to the due date prescribed under section 139(1), and consequently, whether the assessee was entitled to carry forward such capital losses claimed in the revised return. The other integral issue was whether the loss claimed in the revised return met the requirement of section 139(5).

The tribunal analysed the provisions of sections 139(1), 139(3), 139(5) and 80. It noted that section 80 began with a non-obstante clause, unequivocally laying down that to get the benefit of carry forward of loss pertaining to capital gains, the return of loss had to be filed within the time allowed under section 139(1). Section 80 therefore prohibited the claim of carry forward of such losses unless determined under section 139(3). Section 139(3) in turn made the mandate of the law clear that the loss return must be filed within the time limit permitted under section 139(1). The revision of the return under section 139(5) was also circumscribed by the expression “discovers any omission or any wrong statement in the original return”.

Analysing the facts of the case before it, the tribunal noted that the original return filed under section 139(1) did not make reference to the existence of any capital loss at all. The loss had been claimed for the first time in the revised return of income filed beyond the time limit prescribed under section 139(1). According to the tribunal, the provisions of section 80 thus came into play. The tribunal observed that the law codified was plain and clear and did not have any ambiguity. Therefore, the tribunal was of the view that the capital loss claimed under a return filed beyond the time limit under section 139(1) could not be carried forward under section 74.

The tribunal was of the view that the decision of the Allahabad High Court in the case of Dhampur Sugar Mills Ltd (supra) did not apply as the facts of the case before it were quite different. The tribunal refused to follow the decision of the Gujarat High Court in Babubhai Ramanbhai Patel (supra) on the ground that section 80 had not been pressed for the consideration of the High Court at all, and reliance upon such judgment rendered without reference to section 80, which was pivotal to the controversy, was of no relevance, and the observations made therein could not be applied to the facts of the case before it.

The tribunal further observed that no explanation was given as to how the omission to account for such a large loss had resulted, and therefore the propriety of such capital loss itself was under a cloud. It was therefore difficult for the tribunal to affirm that the omission or wrongful statement in the original return was sheer inadvertence and not deliberate or willful. The revised return could be filed only if there was an omission or wrong statement. A reference was made by the tribunal to the decision of the Supreme Court in the case of Kumar Jagdish Chandra Sinha vs. CIT 220 ITR 67, where it was held that a revised return could not be filed to cover up deliberate omission etc. in the original return.

The Tribunal therefore upheld the order of the AO.

OBSERVATIONS

There are various facets to the issue of claim of loss vis-à-vis a revised return;

  • A claim of increased loss where the original return declared loss that was increased in the revised return,
  • A claim of loss vide a revised return of income filed within the due date prescribed under s. 139(1),
  • Where the claim for loss was made during the course of assessment before the AO,
  • Where the claim for loss was made before the appellate authorities.
  • A claim of loss where the original return disclosed positive income,
  • Where the omission or wrong statement was conscious.

In Wipro’s case, the Supreme Court has rejected the claim for set-off and carry forward of the loss on two grounds;

  • the reason for filing the revised return could not be attributed to a mistake or a wrong statement, and
  • the return so filed could not transform itself into a return of loss under s. 139(3).

The Supreme Court in Wipro’s case considered the facts where the assessee filed a return under section 139(1), claiming exemption under section 10B, and therefore did not claim carry forward of the loss otherwise incurred. After the due date, it filed the declaration under section 10B(8) claiming that the provisions of section 10B should not apply, and claimed loss and the right to carry forward of losses under section 72, withdrawing its claim under section 10B. It may be noted that section 10B(8) requires the filing of the declaration to opt out before the due date prescribed under section 139(1). The Supreme Court held that the requirement to file the declaration under section 10B(8) was a mandatory requirement and not a directory one, and therefore filing the revised return under section 139(5) could not help the assessee to withdraw the claim under s. 10B of the Act and in its place stake a claim for the loss.

The Supreme Court also held that the assessee could file a revised return in a case only where there was an omission or a wrong statement. As per the Supreme Court, the revised return of income could not be filed to withdraw the claim of exemption and stake a claim for set-off of loss and to carry forward such loss. The Court held that the filing of a revised return to take a contrary stand regarding the claim of exemption was not permissible. In deciding so, the Supreme Court observed that the revised return filed by the assessee under section 139(5) only substituted the original return under section 139(1) and could not transform the original return into a return under section 139(3) in order to avail the benefit of carry forward or set-off of any loss under section 80. The issue in Wipro’s case was more about the right to withdraw the claim for an exemption by filing a revised return, and less about the right to claim a loss for the first time in a revised return of income.

In a situation where an original return of income is filed claiming a loss, either under the head “Business or Profession” or “Capital Gains” or both, which is filed within the time limit specified in section 139(1), what has undoubtedly been filed is a return of loss as envisaged by section 139(3), which is regarded as a return under section 139(1) by reason of operation of section 139(3). As held by the Supreme Court in Mahendra Mills case (supra), the revised return effaces or obliterates or replaces the original return, which original return cannot be acted upon by the AO. Any mistake or wrong statement made in a return furnished under section 139(1) can be corrected by filing a revised return under section 139(5) within the time specified in that sub-section. Therefore, logically, a return under section 139(3) declaring a loss under any one of the two heads of income can be revised to disclose a further loss under any of those heads (either the head with a positive income or the head with a loss in the original return) not disclosed in the original return. In Bilcare’s case, this was the position. The Delhi High Court supports this proposition in Nalwa Investments (supra) case, where a higher loss than that filed in the original return was claimed during assessment proceedings and allowed by the High Court. The Madras High Court also supports this proposition in the case of Periyar District Co-op. Milk Producers Union Ltd (supra), where it held that in view of the expression “all the provisions of this Act shall apply as if it were a return under sub-section (1)” contained in section 139(3), there was no reason to exclude the applicability of sub-section (5) to a return filed under sub-section (3). A similar view was taken by the Pune Tribunal in the case of Anagha Vijay Deshmukh vs. DyCIT 199 ITD 409, where a revised return was filed to claim a higher capital loss than that claimed in the original return.

In Bilcare’s case, the tribunal was concerned with a case where the original return of loss was revised and the claim of loss was substituted with the higher loss. This made it easier for the tribunal to hold the case in favour of the assessee as the original return was a return under s. 139(3). The facts presented by the assessee substantiated that there was an omission while filing the original return which was circumstantial and not deliberate. On a co-joint reading of the provisions of s. 139(3) and (5) along with sub-section (1), it is correct to hold that a return of loss filed under s. 139(3) can be revised under s.139(5) of the Act. In our considered view, there is no room for doubt about this position in law. The ratio of the decision in the case of Wipro was not applicable in this case, even where its decision in the context was not held to be obiter dicta.

Likewise, a case where the assessee has filed the revised return filed before the expiry of time prescribed under s.139(1), for claiming the loss for the first time should not pose a problem as such a return is nonetheless within the time permissible under s. 139(3) of the Act. The case of the assessee will be better served where there was a mistake in omitting to claim the loss originally.

A claim for deduction or expenditure is permissible to be made during the course of assessment or appellate proceedings, and such a claim resulting in assessed loss should not be disallowed and should be eligible for carry forward as long as the return of income was filed within the due date of s.139(1).

The challenge remains in a case where the original return of income filed u/s 139(1) was for a positive income which was changed to loss while filing the revised return under s. 139(5), outside the time prescribed under s.139(1) of the Act. It is in such a case that the Supreme Court in Wipro’s case held that it was not possible to grant the claim of loss staked under the revised return. The facts in RRPR’s case were similar to the facts in Wipro’s case, and therefore the tribunal in that case had no option but to apply the ratio of the decision of the Supreme Court.

In all cases of the revised return under s.139(5), the assessee has to establish that the revision was on account of the omission or a wrong statement and was not a deliberate and conscious act. Kumar Jagdish Chandra Sinha (supra),

Assuming that a given case does not suffer from the handicap of the deliberate or intentional act on the part of the assessee, one can perhaps analyse the issue in the absence of Wipro’s decision, notwithstanding the fact that even the application for the review of Wipro’s decision is rejected.

  • A situation where the income declared in the original return is a positive income under both heads of income, “Business or Profession” as well as “Capital Gains”, but a loss under either head is sought to be claimed in a revised return, as was the situation in RRPR Holding’s case. These were the facts before the Gujarat High Court in Babubhai Ramanbhai Patel’s case, where a positive return of income that was filed was sought to be revised disclosing such income, but also disclosing a speculation loss. While the Gujarat High Court did not expressly refer to section 80, they did hold that accepting the contention of the revenue would amount to limiting the scope of revision of the return, which did not flow from the language of section 139(5).
  • Similarly, the Karnataka High Court, in the case of Srinivas Builders (supra) allowed the claim for loss made during assessment proceedings, where the return of income originally filed was of a positive income.
  • A contrary view was taken by the Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, where the High Court held that when a return is originally filed under section 139(1), the enabling provision under section 139(5) to file a revised return only enables the substitution or revision of the original return filed. On a revised return filed, it can only be a return under section 139(1) and not one under section 139(3). The Kerala High Court relied (perhaps unjustifiably) on the decision of the Punjab & Haryana High Court in the case of CIT vs. Haryana Hotels Ltd 276 ITR 521, which was a case where a loss of an earlier year was claimed for set off without a return of income being filed at all and without any assessment having been done for that earlier year.
  • In Ramesh R Shah’s case (supra), a return of positive income was sought to be revised by claiming a long-term capital loss which was to be carried forward, in addition to the income declared in the original return. In that case, the Tribunal observed as under:

“In our humble opinion correct interpretation of section 80, as per the language used by the Legislature, condition for filing revised return of loss under section 139(3) is confined to the cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of said loss. Once, assessee declares positive income in original return filed under section 139(1) but subsequently finds some mistake or wrong statement and files revised return declaring loss then can he be deprived of the benefit of carry forward of such loss? In our humble opinion, if we accept interpretation given by the authorities below, it would frustrate the object of section 80. Section 80 is a cap on the right of the assessee, when the assessee claims that he has no taxable income but only a loss but does not file the return of income declaring the said loss as provided in sub-section (3) of section 139. It is pertinent to note here that Legislature has dealt with two specific situations (i) under section 139(1), if the assessee has a taxable income chargeable to tax then it is a statutory obligation to file the return of income within the time allowed under section 139(1). So far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in sub-section (3) to section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim said loss to be carried forward and set off in future assessment years. Sub-section (1) of section 139 cast statutory obligation on the assessee when there is positive income. In the present case, admittedly, the assessee filed the return of income declaring the positive income and even in the revised return, the assessee has declared the positive income as the loss in respect of the sale of shares, which could not be set off, inter-source or inter-head under section 70 or 71 of the Act.

11. We have to interpret the provisions of any statute to make the same workable to the logical ends. As per the provisions of sub-section (5) to section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. In the present case, as the assessee filed its original return declaring the positive income and hence, in our opinion, subsequent revised return is valid return also and the assessee is entitled to carry forward of ‘long-term capital loss’. Sub-sections (1) and (3) of section 139 provides for the different situations and in our opinion, there is no conflict in applicability of both the provisions as both the provisions are applicable in the different situations. We are, therefore, of the opinion that there is no justification to deny the assessee to carry forward the loss.”

  • Unfortunately, the decision in Ramesh R Shah’s case, though cited before the Tribunal in RRPR Holding’s case, was not considered by it in deciding the matter. It appears that the decision in RRPR Holding’s case was swayed by the assessee’s failure to furnish an explanation of the nature and character of transactions resulting in the capital loss, and therefore the genuineness of the transactions.
  • This view taken in Ramesh R Shah’s case has also been followed by the Tribunal in the case of Mukund N Shah vs. ACIT, ITA No 4311/Mum/2009 dated 17th August, 2011, where a revised return was filed during the course of assessment proceedings, claiming a capital loss which had not been claimed in the original return filed under section 139(1). The Tribunal held that once the return is revised the original return filed gets substituted by a revised return, and therefore, loss determined as per the revised return was to be treated as loss declared under section 139(3), because the original return was filed within the time allowed under section 139(1). Therefore, the loss determined has to be taken as a loss computed in accordance with the provisions of section 139(3) and such loss has to be allowed to be carried forward under the provisions of section 80. The Tribunal also looked at it from a different angle. If the assessee had not revised the return at all and no loss was shown in the original return due to some mistake, the AO in the assessment under section 143(3) was required to compute income or loss correctly. Once the loss had been determined by the AO under section 143(3), it cannot be said that the loss cannot be allowed to be carried forward when the return has been filed within the time allowed under section 139(1).

A harmonious reading of the provisions of sub-sections (1),(3),(5) of s. 139 with s.80 of the Act reveals that the return of income is to be filed under s.139(1) and of loss under s. 139(3) and both the returns are to be filed within the time prescribed under s.139(1). The reading also confirms that both of these returns can be revised under sub-section (5). There is no express or implicit condition in s.139 that stipulates that a return of income cannot be revised to declare loss for the first time.

Importantly s.139(3) clearly states that all the provisions of the Act shall apply to such a return as if the return of loss is the return of income furnished under s.139(1) of the Act. In our respectful opinion, it is clear that no further transformation is called for where the legislature itself had bestowed the return of loss with the status of a return under s.139(1), and no further aid is required from the provisions of sub-section (5) to further transform the return filed thereunder as one under sub-section (3).

The purpose of section 80 is that, while there is no obligation to file a return of income under section 139(1), the assessee should file a return of income and have the loss determined in order to be able to claim carry forward and set off of the loss. This purpose is achieved even in a situation where the original return declaring a positive income is filed in time but is revised on account of a mistake to reflect a loss. Further, if a return of loss can be revised to claim a higher loss or can be assessed at a higher loss on account of a claim made in assessment proceedings, there is no justification in denying a claim of a loss merely because it was made through a revised return and not through the original return. This view also results in a harmonious interpretation of sections 80, 139(3) and 139(5).

There is no doubt that the ratio of the Supreme Court‘s decision in Wipro Ltd.’s case will be applicable to cases with identical facts, till such time the relevant part of the decision is read as obiter dicta by the courts or the same is reconsidered by the Supreme Court itself. Better still is for the legislature to come forward and correct an aberration that is harmful, and the harm is unintended.

Principle Of Mutuality Cannot Be Extended To Interest Earned By Mutual Concern On Fixed Deposits Placed With Member Banks

INTRODUCTION

1.1 Section 4 of the Income-tax Act, 1961 (‘the Act’) provides that income-tax shall be charged for any assessment year in respect of the ‘total income’ of the previous year of every person. It is a well-settled law that no person can earn profits from himself. This is the basis of the principle of mutuality which has been accepted by the Courts in their decisions rendered from time to time.

1.2 One such decision is that of the Supreme Court in the case of CIT vs. Bankipur Club Ltd. [(1997) 226 ITR 97 –SC)] which was analysed in this column in the August 1998 issue of the BCAJ. In this case, a batch of appeals filed by the department came up before the Supreme Court, and the same were divided into 5 groups. One of the assessees – Cawnpore Club Ltd. which was initially a part of this group of matters was subsequently delinked and kept for hearing separately. While delinking the matter, the Supreme Court observed that it did not appear that the issue of income being exempt on the ground of mutuality was decided in favour of the assessee and the only issue in that appeal filed by the tax department was whether certain income could be taxed under the head Income from house property. In the remaining group of cases, the assessees were companies registered under section 25 of the Companies Act, 1956, and were mutual undertakings in the nature of ‘Members’ clubs’. The issue before the Supreme Court was as to whether the surplus receipts of the clubs earned from providing facilities to its members was in the nature of ‘income’ chargeable to tax. The income received by the clubs from providing facilities to non-members was not an issue before the Supreme Court. The Court held that it was not necessary that the individual identity of contributors and participants should be established for an entity to be regarded as a Mutual Concern. Such identity should be established between the class of contributors and the class of participants. The Court after setting out the facts in each of these groups of cases observed that the receipts for the various facilities extended by the assessee clubs to its members as part of the usual privileges, advantages, and conveniences, attached to the membership of the club could not be said to be ‘a trading activity’ and held that the surplus as a result of mutual arrangement could not be said to be ‘income’ of the assessees.

1.3 Thereafter, the case of CIT vs. Cawnpore Club Ltd. [(2004) 140 Taxman 378 -SC], which was delinked in the above group of cases, was separately taken up by the Supreme Court. The Supreme Court in Cawnpore’s case noted that one of the questions which the High Court had decided in other cases relating to the same assessee was that the doctrine of mutuality applied and, therefore, the income earned by the assessee from the rooms let out to its members could not be subjected to tax. The Supreme Court further noted that no appeal had been filed against the said decision of the High Court and the matter stood concluded in favour of the assessee. Having noted so, the Supreme Court observed that there was no point in proceeding with the appeals on the other questions.

1.4 In the case of Bangalore Club vs. CIT [(2013) 350 ITR 509 –SC], the assessee relying on the principle of mutuality took a stand that interest earned on the fixed deposits kept with certain banks which were corporate members of the assessee was not chargeable to tax. The tax was, however, paid by the assessee on the interest earned on fixed deposits kept with non-member banks. The Supreme Court denied the assessee’s claim for exemption on the basis of mutuality principle. The Supreme Court held that (i) the arrangement lacked a complete identity between the contributors and the participants as once the surplus funds were placed in fixed deposits, the closed flow of funds between the assessee and the member banks was broken and the use of these funds by the member banks for advancing loans to third parties and engaging in commercial operations ruptured the privity of mutuality; (ii) the excess funds of a mutual concern must be used in furtherance of its objects which was not so in the present case and (iii) the third condition that the funds must be returned to the contributors as well as expended solely on the contributors was violated in the present case once the deposits placed by the assessee with the banks were given to third parties by the bank for commercial reasons.

1.5 Recently, this issue of taxability of interest earned by a mutual concern from fixed deposits placed with banks came up before the Supreme Court in the case of Secundrabad Club vs. CIT and it is thought fit to consider the said decision in this column.

Secundrabad Club vs. CIT (2023) 457 ITR 263 – SC

2.1 In this case, the Supreme Court heard a batch of appeals filed by the respective assessees from the decision of the Andhra Pradesh High Court in the case of Secunderabad Club [(2012) 340 ITR 121] and from the decisions of the Madras High Court in the cases of Madras Gymkhana Club [(2010) 328 ITR 348], Madras Cricket Club [(2011) 334 ITR 238], etc. The High Courts in all these cases concluded that the deposit of surplus funds by the appellant Clubs by way of bank deposits in various banks was liable to be taxed in the hands of the Clubs and that the principle of mutuality would not apply in such a case.

2.1.1 Before the Supreme Court, one of the primary arguments urged by the assessee in these appeals against the aforesaid High Court judgments was that the Supreme Court’s decision in the case of Bangalore Club (para 1.4 above) called for a reconsideration in view of the Court’s earlier decision in the case of Cawnpore Club (para 1.3 above).

2.2 The assessee submitted that the two-judge bench decision of the Supreme Court in the case of Bangalore Club was not a binding precedent as the same did not notice the order passed in the case of Cawnpore Club and, therefore, the decision of Bangalore Club required reconsideration. The assessee urged that prior to the decision in the case of Bangalore Club, all interest earned from fixed deposits, and post office deposits by the clubs were entitled to exemption from income tax as the same was surplus income of the clubs earned without any profit motive and such interest income earned from the deposits was exclusively used for the benefit of the clubs and its members.

2.2.1 The assessee further submitted that the reasoning of the Supreme Court in the case of Bangalore Club was flawed and, further, such judgment being contrary to the order passed in Cawnpore Club was per incuriam and not a binding precedent. The assessee pointed out that the Bangalore Club failed to note that once there is no profit motive in the activities of a club and despite such fact, a surplus is generated, the activities and income of the club cannot be tainted with commerciality. The assessee also placed reliance on the Supreme Court’s decision in the case of Kunhayammed vs. State of Kerala [(2000) 6 SCC 359] to urge that when a special leave petition (in the case of Cawnpore Club) is converted into a Civil Appeal and a judgment is rendered in the Civil Appeal, the same is a binding precedent to be followed subsequently by all courts which was not done by the Court in Bangalore Club. The assessee also submitted that as two decisions of the Supreme Court in the case of Cawnpore Club and Bangalore Club took two diametrically opposite views, a reference ought to be made to a larger bench to lay down the correct law.

2.2.2 The assessee also contended that once the triple test for the applicability of the principle of mutuality is satisfied, the notion of rupture of mutuality or one-to-one identity could not have been the basis for denying exemption on the interest income generated by the clubs.

2.2.3 The assessee further urged that for social clubs and mutual associations, the character and nature of the receipt are immaterial and the only thing which is of significance is the utilisation of the income earned by a club only for the benefit of its members. The assessee urged that irrespective of whether the banks are corporate members of the club or not, there is complete identity between the source of deposits made by the Club in banks, post offices etc., and the beneficiaries of the interest earned, as the interest earned on the said deposits are being used for the benefit of the members of the Club.

2.2.4 The assessee submitted that the aspect of profit motive could not be attributed to clubs, as the only intention behind depositing surplus funds of the clubs in a bank was a matter of prudence, and the interest earned thereon along with the principal amount deposited would only be used for the benefit of the members of a club.

2.2.5 The assessee also placed reliance on the decision of the Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund vs. DCIT [(2010) 308 ITR 202] where on the facts of that case, the Karnataka High Court had held that the principle of mutuality would apply even to interest earned from fixed deposits, National Savings Certificates etc., invested by the appellant-Clubs in various banks who may or may not be corporate members of these Clubs.

2.3 On the other hand, the Revenue submitted that the impugned judgments of the High Courts did not require any interference. The Revenue also submitted that the decision of the Supreme Court in Bangalore Club squarely covered the issue at hand and did not call for any reconsideration.

2.3.1 The Revenue placed reliance on Bangalore Club’s decision to urge that the principle of mutuality applied to the generation of surplus funds but once the funds were invested in the form of fixed deposits in the banks (whether corporate members of the club or not), in post offices or through national savings certificates etc., the funds suffer a deflection as a result of being exposed to commercial banking operations or operations of the post offices which use the said funds for advancing loans to their customers and thus, generate a higher income by lending it at a higher rate to the third party customers and pay a lower rate of interest on the fixed deposits made by the clubs.

2.3.2 The Revenue further submitted that the Bombay High Court and the Madras High Court had not concurred with the judgment of the Karnataka High Court in Canara Bank, and had observed that the said judgment may be restricted to the facts of that case alone and cannot act as a precedent, particularly in view of the judgment of the Supreme Court in Bangalore Club. The Revenue contended that the judgment in Bangalore Club had impliedly overruled the decision of the Karnataka High Court in Canara Bank’s case.

2.4 Rebutting the Revenue’s arguments, the assessee pointed out that the Supreme Court had dismissed the special leave petition filed by the Revenue against the judgment of the Karnataka High Court in Canara Bank’s case. The assessee submitted that once the Supreme Court had affirmed the Karnataka High Court’s judgment in the case of Canara Bank which was in line with the judgment of the Supreme Court in Cawnpore Club, the subsequent judgment in Bangalore Club taking a totally contrary view required reconsideration.

2.5 After considering the rival contentions, the Supreme Court set out the jurisprudence on the principle of mutuality and then proceeded to decide the issue.

2.5.1 With respect to the binding nature of Cawnpore Club’s judgment, the Supreme Court held that there was no ratio decidendi that arose from Cawnpore Club’s order which could be treated as a binding precedent for subsequent cases. The relevant observations of the Supreme Court, in this regard, are as follows [page 301]:

“ ……..It must be remembered that the appeals in the case of Cawnpore Club were filed by the Revenue and merely because the Revenue did not press its appeal in respect of the other aspects of the case and this Court found that the income earned by the assessee from the rooms let out to its members could not be subjected to tax on the principle of mutuality, it would not mean that the other questions which were not pressed by the Revenue in the said appeal stood answered in favour of the assessee and against the Revenue. On the other hand, in the absence of there being any indication in the order as to what “the other questions” were in respect of which the principle of mutuality applied, in our view, there is no ratio decidendi emanating from the said order which would be a binding precedent for subsequent cases. In view of the disposal of Revenue’s appeals in the case of Cawnpore Club by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent which has been ignored by another Coordinate Bench of this Court while deciding Bangalore Club. In our view, the Order passed in Cawnpore Club binds only the parties in those appeals and cannot be understood as a precedent for subsequent cases.”

2.5.2 The Supreme Court held that there was no need to refer the decision in Bangalore Club’s case to a larger bench as there was no binding ratio decidendi which was laid down in Cawnpore Club’s order which could be said to have been ignored in Bangalore Club’s case. The relevant observations of the Supreme Court are as under [pages 305/306]:

“When the appeals were considered thereafter in the case of Cawnpore Club this Court simply applied the principle of mutuality to the income earned by the club from rooms rented out to its members as not being subject to tax. As far as the other questions were concerned, this Court only observed that “no useful purpose would be served in proceeding with the appeals on the other questions when the respondent cannot be taxed because of the principle of mutuality.” This observation in Cawnpore Club must be juxtaposed with the observations expressed above in Bankipur Club. When the aforesaid observations made in Cawnpore Club are considered in light of the larger plea, we find that the same was not answered in Bankipur Club nor in Cawnpore Club. But, the subsequent decision in Bangalore Club ultimately answered the said larger plea through a detailed reasoning. Therefore, it cannot be held that the short order passed in Cawnpore Club is a precedent which was ignored by a Coordinate Bench of two judges in Bangalore Club, so as to make the latter decision per incuriam. On the other hand, we are of the view that the larger plea which was neither considered in Bankipur Club nor in Cawnpore Club was ultimately considered and answered in Bangalore Club by a detailed judgment.

Therefore, we do not find any fault in a subsequent Coordinate Bench of this Court in Bangalore Club in not noticing the Order passed in the case of Cawnpore Club while dealing, in a detailed manner, on the taxability of the income earned from the interest on fixed deposits made by the said Club in banks, whether the banks are members of the clubs or not………”

2.5.3 The Supreme Court noted that Bangalore Club had noted the three principles of mutuality, namely, (i) complete identity between contributors and participators, (ii) action of the participators and contributors which are in furtherance of the mandate of the associations or the Clubs and (iii) no scope for profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The Supreme Court concurred with the decision in Bangalore Club and held that the aforementioned tests of mutuality were not satisfied when the assessee club made an investment in fixed deposits of a bank. The Supreme Court observed as under [page 311]:

“………These appellant Clubs just like Bangalore Club are social clubs, and it is the surplus funds earned through various activities of the Clubs which are deposited as fixed deposit in the banks so as to earn an interest owing to the business of banking. In the absence of the said fixed deposits being utilized by the banks for their transactions with their customers, no interest can be payable on the fixed deposits. This is so in respect of any customer of a bank who would deposit surplus funds in a bank. It may be that the interest income would be ultimately used for the benefit of the members of the Clubs but that is not a consideration which would have an impact on satisfying the triple test of mutuality. It was observed in Bangalore Club that even if ultimately the interest income and surplus funds in the fixed deposit are utilised for the benefit of the members of the clubs, the fact remains that when the fixed deposits were made by the clubs in the banks, they were exposed to transactions with third parties, i.e., between the banks and its customers and this would snap the principle of mutuality breaching the triple test. When the reasoning of this Court in Bangalore Club is considered in light of the judgments of overseas jurisdictions, it is noted that this proposition would squarely apply even to fixed deposits made in banks which are members of the clubs. In other words, it is only profit generated from the payments made by the members of the clubs, which would not be taxable…….”

2.5.4 With respect to the reliance by the assessee on the decision of the Karnataka High Court in the case of Canara Bank, the Supreme Court observed that the said decision must be restricted to apply to the facts of that case only and cannot be a precedent for subsequent cases as the judgment of the Karnataka High Court in Bangalore Club’s case was not brought to the notice of the judges hearing the Canara Bank’s case.

2.5.5 The Supreme Court concluded that the reasoning given in its earlier decision of Bangalore Club was proper and did not call for reconsideration and held that interest income earned by the clubs on fixed deposits made in the banks or any income earned from persons who are not members of the club would be liable to be taxed.

CONCLUSION

3.1 In view of the above judgment of the Supreme Court, the issue now stands settled, that any interest income earned by a mutual concern or club from interest on fixed deposits placed with member banks of the club would be subjected to tax and the principle of mutuality would have no applicability in such an instance. For a concern to claim exemption on account of mutuality, it will be necessary to demonstrate that the three tests of mutuality laid down by the Court which are extracted in para 2.5.3 above are fulfilled.

3.2 In light of the Supreme Court’s decision, the fact that the interest earned on the fixed deposits is used only towards the objects of the mutual concern or club is also irrelevant once the surplus has been invested in the fixed deposits which are used by banks to give loans to third parties.

3.3 In the past, the issue had also come up as to whether the ‘annual letting value’ [‘deemed house property income’] of vacant immovable property owned by the Members Club [which is otherwise entitled to benefit of Principle of Mutuality] is liable to tax or the same will not be liable to tax applying the Principle of Mutuality. This issue was considered by the Apex Court in the case of Chelmsford Club Ltd [(2000) 243 ITR 89 -SC] wherein the Court has taken a view that even such ‘deemed house property income’ can be governed by the Principle of Mutuality. This judgment was analysed in this column in the August, 2000 issue of BCAJ.

Glimpses of Supreme Court Rulings

53 Kotak Mahindra Bank Limited vs. Commissioner of Income Tax, Bangalore (2023) 458 ITR 113(SC)

Settlement Commission — Immunity from prosecution and penalty as contemplated — Section 245H — Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act — The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The facts giving rise to the present appeal, in a nutshell, are that the Appellant-Assessee, Kotak Mahindra Bank Limited (formerly, “M/s. ING Vysya Bank Limited”) is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the Appellant also carries out leasing business on receiving approval from the Reserve Bank of India (hereinafter “RBI” for short) vide Circular dated 19th February, 1994. Thus, the Appellant derives its income, inter alia, from banking activities as well as from leasing transactions.

The Appellant filed its income tax returns for the assessment years 1994–1995 to 1999–2000, and assessment orders were passed up to the assessment year 1997–1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997–1998, the Assessing Officer (AO) made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994–1995 to 1996–1997 were proposed to be reopened. The AO then passed an Assessment Order dated 30th March, 2000, for the assessment year 1997–1998. The main issue pertained to the income with respect to the activity of leasing. As per the Assessment Order, the Appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In other words, the Appellant treated such leases as loans granted to the “purported” lessees to purchase assets. In such cases, the ownership of the assets is vested with the lessees. However, the Appellant claimed depreciation on those assets under Section 32 of the Income-tax Act, 1961 (“the Act”) though the Appellant was not the owner of the assets for the purpose of the said transactions.

On 9th June, 2000, the AO issued a notice under Section 148 of the Act for the reassessment of income for the aforesaid assessment years. The AO also passed a penalty order dated 14th June, 2000, levying a penalty under Section 271(1)(c) of the Act, after being satisfied that the Appellant had concealed its income as regards lease rental.

While various proceedings, such as an appeal before the CIT(A) for the assessment year 1997–1998, re-assessment proceedings for the assessment years 1994–1995 to 1996–1997 and regular assessment proceedings for the assessment years 1998–1999 and 1999–2000 were pending before various income tax authorities, the Appellant, on 10th July, 2000, approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C(1) of the Act. The Appellant sought for determination of its taxable income for the assessment years 1994–1995 to 1999–2000, after considering the issues pertaining to the income assessable in respect of its leasing transaction; eligibility to avail depreciation in respect of leased assets; the quantum of allowable deduction under Section 80M and exemption under Sections 10(15) and 10(23G); and depreciation on the investments portfolio of the bank classified as permanent investments.

When matters stood thus, the concluded assessments for earlier assessment years were reopened by the issuance of notices under Section 148 of the Act. The Appellant filed returns under protest with respect to the said assessment years.

Before the Settlement Commission, the Respondents-Revenue raised a preliminary objection contending that the Appellant did not fulfil the qualifying criteria as contemplated under Section 245C(1) and, hence, the application filed by the Appellant was not maintainable, as, under the said provision, the Appellant was required to make an application in the prescribed manner containing full and true disclosure of its income which had not been disclosed before the AO and also the manner in which such income had been derived. That unless there is a true and full disclosure there would be no valid application and the Settlement Commission will not be able to assume jurisdiction to proceed with the admission of the application. It was thus contended that the purported application made before the Settlement Commission was not an application as contemplated under Section 245C(1) of the Act for the reason that the Appellant had not made a full and true disclosure of its income which had not been disclosed before the AO.

After considering the contentions of both parties, the Settlement Commission passed an Order dated 11th December, 2000, entertaining the application filed by the Appellant under Section 245C and rejecting the preliminary objections raised by the Revenue. The Settlement Commission allowed the application filed by the Appellant by way of a speaking order and permitted the Appellant to pursue its claim under Section 245D. Thus, the application proceeded further under Section 245D(1) of the Act.

The Revenue challenged the Order dated 11th December, 2000, passed by the Settlement Commission before the High Court of Karnataka at Bangalore by way of Writ Petition No. 13111 of 2001. The Revenue questioned the jurisdiction of the Settlement Commission in entertaining the application filed by the Appellant under Section 245C(1) of the Act.

The learned Single Judge of the High Court of Karnataka, after going through the legislative history of the provisions of Chapter-XIXA, accepted the argument advanced by the Appellant that the proviso to Section 245C as it stood earlier, which enabled the Commissioner to raise an objection even at the threshold to entertain an application of this nature had been later shifted to sub-section (l)(A) of Section 245D and from the year 1991, it had been totally omitted, and in the light of such legislative history, it was not open to the Revenue to raise any such preliminary objection regarding maintainability of the application itself. It was further held that the application can be proceeded with by the Settlement Commission for determination of the same on merits and it was not necessary that the Revenue should be permitted to raise a preliminary objection as to the maintainability of the application.

The learned Single Judge disposed of the above Writ Petition by way of an Order dated 18th August, 2005, in favour of the Appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Single Judge was of the view that it was not necessary to examine the legal position that may require an interpretation of provisions of Section 245C at that stage when the matter itself was still at large before the Settlement Commission as the very object of Chapter-XIXA was to settle cases and to reduce the disputes and not to prolong litigation. Thus, the High Court disposed of the Writ Petition, holding that it was open to the parties to raise all their contentions before the Commission at the stage of disposal of the application and the Commission may, independent of the findings which it has given under the Order dated 11th December, 2000, examine all the contentions and proceed to pass orders on merits in accordance with the provisions of the Act.

As a result of the Order dated 18th August, 2005, passed by the High Court of Karnataka, the Settlement Commission heard both parties on merits as well as on the issue of maintainability. The Settlement Commission upheld the maintainability of the application filed by the Appellant and passed an Order dated 4th March, 2008, under Sections 245D(1) and 245D(4), determining the additional income at ₹196,36,06,201. As regards the issue of immunity from penalty and prosecution, the Commission, having regard to the fact that the Appellant had co-operated in the proceedings before the Settlement Commission, and true and full disclosure was made by the Appellant before the Commission, granted immunity under Section 245H(1) from the imposition of penalty and prosecution under the Act and the relevant Sections of the Indian Penal Code. Further, the Settlement Commission annulled the penalty levied by the AO under Section 271(1)(c) for the assessment year 1997–1998 in respect of non-disclosure of lease rental income. The same was annulled considering that the non-disclosure was on account of RBI guidelines and subsequent disclosure on the part of the Appellant, of additional income of the lease income before the Settlement Commission when the Appellant realised the omission to disclose the same as per income tax law.

Being aggrieved by the Order dated 4th March, 2008, passed by the Settlement Commission, the Respondent-Revenue preferred Writ Petition bearing No. 12239 of 2008 (T-IT) before the High Court of Karnataka assailing the said Order. The learned Single Judge of the High Court vide Order dated 20th May, 2010, upheld the Order of the Settlement Commission as regards the jurisdiction to entertain the application and also as regards the correctness of the Order passed by the Settlement Commission in determining the tax liability, but found fault with the Commission in so far as granting immunity to the Appellant from the levy of penalty and initiation of prosecution was concerned. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles and that the burden was on the Appellant herein to prove that there was no concealment or wilful neglect on its part and in the absence of such evidence before the Settlement Commission, the Order granting immunity from penalty and prosecution was an illegal order. The learned Single Judge, thus, remanded the matter to the Settlement Commission for the limited purpose of reconsidering the question of immunity from levy of penalty and prosecution and the Order of the AO levying penalty, after providing an opportunity to both parties.

Being aggrieved by the remand order passed by the learned Single Judge, the Appellant preferred Writ Appeal No. 2458 of 2018 before a Division Bench of the High Court.

In the meanwhile, Revenue preferred Special Leave Petition (C) CC No. 19663 of 2010 before the Supreme Court against the Order dated 20th May, 2010, passed by the learned Single Judge in Writ Petition No. 12239 of 2008. On 6th January, 2012, the Supreme Court directed the Special Leave Petition to stand over for eight weeks and directed the Settlement Commission to dispose of the matter remanded to it by the High Court. In pursuance of the Order dated 6th January, 2012, passed by this Court, the Settlement Commission, Chennai, issued a notice in the remanded matter on 30th January, 2012.

On 10th February, 2012, the Appellant moved an application before the Supreme Court seeking modification of its Order dated 6th January, 2012, by issuing a direction to the High Court to dispose of Writ Appeal No. 2458 of 2010. It was contended that the filing of a Special Leave Petition against the order of the learned Single Judge was not proper as a Writ Appeal should have been filed. That admittedly, Writ Appeal No. 2458 of 2010 was pending before the High Court and the Revenue suppressed this vital information while filing the Special Leave Petition. The Supreme Court by way of an Order dated 21st February, 2012, recalled its earlier Order dated 6th January, 2012, passed in SLP (C) CC No. 19663 of 2010 and directed the High Court to dispose of Writ Appeal No. 2458 of 2010 within a period of two months.

Following the same, a Division Bench of the High Court of Karnataka vide Order dated 6th July, 2012, dismissed the Writ Appeal preferred by the Appellant and upheld the Order passed by the learned Single Judge. It was observed that the Order of the learned Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Aggrieved by the judgment dated 6th July, 2012, in Writ Appeal No. 2458 of 2010, the Appellant has preferred Civil Appeal before the Supreme Court.

According to the Supreme Court, the following points emerged for its consideration:

“Whether the Division Bench of the High Court was right in affirming the findings of the learned Single Judge, to the effect that the Settlement Commission ought not to have exercised discretion under Section 245H of the Act and granted immunity to the Assessee de hors any material to demonstrate that there was no wilful concealment on the part of the Assessee to evade tax and on that ground, remanding the matter to the Commission for fresh consideration?”

The Supreme Court found that in the present case, the Settlement Commission had rightly considered the relevant facts and material and, accordingly, decided to grant immunity to the Appellant from prosecution and penalty. The Supreme Court arrived at this conclusion having regard to the following aspects of the matter, recorded by the Settlement Commission:

The Commission in its order dated 4th March, 2008, had noted that the Appellant had realised while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the Appellant offered additional income under various heads, which were not considered by the AO. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to proceed under Section 245D(1) of the Act and that prima facie, a full and true disclosure of income not disclosed before the AO had been made by the Appellant. The findings of the Commission to this effect are usefully extracted as under:

“4.3 We have considered the rival submissions. We are of the opinion that there is no bar for banking companies to approach the Commission. The disclosure of the material facts in the return of income or the documents accompanying return of income is not a bar for the applicant to approach the Commission. In view of this, we hold that the applicant is eligible to approach the Commission.
…

5.1 Finally we have carefully gone through the settlement application and the confidential annexures and are satisfied that the complexities of investigation as brought out in the application do exist. We have also considered the nature and circumstances of the case as explained by the applicant’s representative. The applicant is an established scheduled bank with several branches. The applicant has realized that when adhering to RBI guidelines of accounting of lease income there was an error in not disclosing the full lease rental receipts as per income tax law. In addition the applicant has offered additional income under various heads not considered by the Assessing Officer. We are satisfied that the nature and circumstances and the complexities of investigation involved do warrant the application to be proceeded with under Section 245D(1) of the Act. We are also reasonably satisfied that, prima facie, a full and true disclosure of income not disclosed before the Assessing Officer has been made by the applicant. Additionally, taking a practical view of the case, we are also concerned by the time taken to dispose of this application, particularly in respect of a scheduled bank. We feel that the matters need to be given a quietus and brought to close as speedy collection of taxes is also an important function of the Settlement Commission. We therefore allow the application to be proceeded with Under Section 245D(1) of the Act.”

According to the Supreme Court, the aforesaid findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the Assessee. Having noted that non-disclosure was on account of RBI guidelines, which required a different standard of disclosure, the Commission decided to grant immunity to the Appellant from prosecution and penalty.

In the light of the aforesaid discussion, the Supreme Court was of the view that the learned Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such a view of the learned Single Judge. The Supreme Court was of the view that the Commission had adequately applied its mind to the circumstances of the case, as well as to the relevant law and accordingly exercised its discretion to proceed with the application for settlement and grant immunity to the Assessee from penalty and prosecution. The Order of the Commission dated 4th March, 2008, did not suffer from such infirmity as would warrant interference by the High Court, by passing an order of remand.

The Supreme Court concluded that in the present case, the Appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The Supreme Court was of the view that the Order of the Settlement Commission dated 4th March, 2008, was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 6th July, 2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20th May, 2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, was set aside by the Supreme Court. Consequently, the order of the learned Single Judge was also set aside. The Order of the Settlement Commission dated 4th March, 2008, was restored. The appeal was accordingly allowed.

54 Director of Income Tax, New Delhi vs. Travelport Inc. Civil
(2023) 454 ITR 289 (SC)

India-USA DTAA – Article 7 — Under Explanation 1(a) under clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India — What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact — Article 7 of DTAA is of no assistance as the entire income was taxable in contracting state.

Before the Supreme Court, the Respondents in the appeals before it were in the business of providing electronic global distribution services to Airlines through what is known as “Computerized Reservation System” (hereinafter referred to as CRS). For the said purpose, the Respondents maintain and operate a Master Computer System, said to consist of several mainframe computers and servers located in other countries, including the USA. This Master Computer System is connected to airlines’ servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

In order to market and distribute the CRS services to travel agents in India, the Respondents had appointed Indian entities and had entered into distribution agreements with them.

The Respondents earned an amount of USD 3 / EURO 3 accordingly, as the case may be, per booking made in India. Out of the said earnings, of USD 3 / EURO 3, the Respondents paid various amounts to the Indian entities, which ranged from USD / EURO 1 to USD / EURO 1.8. In other words, the amount paid by the Respondents to their Indian entities ranged from 33.33 per cent to about 60 per cent of their total earnings.

The respective Assessing Officers in the original proceedings came to the conclusion that the entire income earned out of India by the Respondents was taxable. This was on the basis that the income was earned through the hardware installed by the Respondents in the premises of the travel agents and that, therefore, the total income of USD / EURO 3 was taxable.

The orders of assessment so passed were upheld by the respective Commissioners of Income Tax (Appeals) by independent orders.

Appeals were filed by the Respondents before the Tribunal and the Revenue also filed cross objections on a different aspect. The Tribunal held that the Respondents herein constitute Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE). At the same time, the Tribunal also held that the lion’s share of activity was processed in the host computers in USA / Europe and that the activities in India were only minuscule in nature. Therefore, as regards attribution to the PE constituted in India, the Tribunal assessed it at 15 per cent of the revenue and held, on the basis of the functions performed, assets used and risks undertaken (FAR), that this 15 per cent of the total revenue was the income accruing or arising in India. This 15 per cent worked out to 0.45 cents. However, the payment made to the distribution agents was USD 1 / EURO 1 in many cases and much more in some cases. Therefore, the Tribunal held that no further income was taxable in India.

The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal, clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.

Appeals were filed both by the Revenue and Assesses against the orders of the Tribunal before the Delhi High Court. The Delhi High Court dismissed the appeals filed by the Revenue on the grounds that no question of law arose in these matters. The Delhi High Court held that insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.

Aggrieved by the orders passed by the Delhi High Court, the Revenue has come up with the above appeals.

Assailing the judgment of the High Court, it was argued by the learned Additional Solicitor General: (i) that the attribution of only 15 per cent of the revenue as income accruing / arising in India within the meaning of Section 9(1)(i) of the Income-tax Act, 1961 read with Article 7 of the Treaty, was completely wrong; and (ii) that the computers placed in the premises of the travel agents and the nodes / leased lines form a fixed place PE of the Respondent in India.

The Supreme Court was of the view that there was no need to go into the second contention of the learned Additional Solicitor General because the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.

So far as the first contentions were concerned, the Tribunal had arrived at the quantum of revenue accruing to the Respondent in respect of bookings in India, which could be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The Commission paid to the distribution agents by the Respondents was more than twice the amount of attribution, and this had already been taxed. Therefore, the Tribunal had rightly concluded that the same extinguished the assessment.

Further, the question as to what proportion of profits arose or accrued in India was essentially one of the facts. Therefore, according to the Supreme Court, the concurrent orders of the Tribunal and the High Court did not call for any interference.

The Supreme Court observed that under Explanation 1(a), under clause (i) of Sub-section (1) of Section 9
of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal had taken into account relevant factors.

According to the Supreme Court, Article 7 of the India-USA DTAA also may not really come to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the Respondents, namely, USD / EURO 3 would be taxable. That is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.

Therefore, the Supreme Court was of the view that the impugned order(s) of the High Court did not call for interference. Insofar as the second issue, namely, the question of permanent establishment was concerned, the Supreme Court did not go into the same, as it had concurred with the High Court on the first issue.

All the appeals filed by the Appellant-Department of Income Tax were, therefore, dismissed.

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax

26 Ramona Pinto vs. Dy. Dy. CIT – 23(3), Mumbai

ITXA No. 2610 Of 2018, (Bom.) (HC)

A.Y.: 2010–2011

Date of Order: 8th November, 2023.

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax. 

The Assessee — Appellant has preferred an appeal against the impugned order dated 2nd April, 2018, passed by the Tribunal. The following substantial questions of law was admitted:

(i) Whether the Tribunal ought to have held the Respondent No. 1 had assumed jurisdiction under section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction?

(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of R28 crores received by the Appellant as per the arbitration Award was not chargeable to tax?

A partnership firm by name M/s. P. N. Writer & Co. (the said Firm) was established in or about the year 1954 between Appellant’s late father Mr. Charles D’Souza and one Mr. P. N. Writer. The said Firm was reconstituted from time to time, and the last partnership deed in this regard, according to Appellant, was executed on 18th January, 1979. As per the partnership deed, Appellant along with her late father and brothers were the partners in the said Firm. Appellant was entitled to a share of 20 per cent in the profits or losses made by the said Firm.

Appellant’s father Mr. Charles D’Souza expired on  24th November, 1997 leaving behind his last Will and Testament dated 16th September, 1990. Appellant was bequeathed a further share of 5 per cent in the profits and losses of the said Firm. Accordingly, the Appellant became entitled to a 25 per cent share in the profits and losses of the said Firm. This fact has been also mentioned in the application for probate filed by Appellant’s brother.

It is Appellant’s case that somewhere in 2005, Appellant realised that the said Firm was reconstituted vide a Deed of Partnership dated 25th November, 1997, entered into between Appellant’s brothers. According to the said Deed, Appellant was treated as having retired from the Firm as and from the close of business on 24th November, 1997. The said Firm had filed its return of income for Assessment Year 1998–1999, enclosing reconstituted Deed of Partnership and financial showing Appellant as an erstwhile partner. Appellant’s case was that she continued to be a partner in the said Firm.

Since disputes arose, Appellant and the continuing partners of the said Firm decided to refer their matter to arbitration. Finally, by an interim order dated  20th July, 2007, the Apex Court directed the said Firm to pay an amount of R50,000 per month to the Appellant. Subsequently, by a final order dated 28th March, 2008, the Apex Court appointed a sole Arbitrator to decide the disputes between Appellant, her siblings and the said Firm.

Claims and counter-claims were filed before the Arbitrator. During the course of arbitration proceedings, the parties arrived at consent terms, which was taken on record by the Arbitrator and an award in terms of the consent terms was passed on 25th September, 2009. As per the consent terms, Appellant relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, Appellant was to receive an amount of ₹28 crores. Appellant was to be paid an amount of ₹7 crores on or before 25th December, 2009 and the balance amount of ₹21 crores was to be paid, in seven equal installments of ₹3 crores, on or before  25th December of each subsequent year.

The Appellant, pursuant to the interim order dated  20th July, 2007, of the Apex Court referred earlier, received an amount of ₹5 lakhs in the previous year relevant to Assessment Year 2008–2009. In the course of assessment proceedings, Respondent no. 1 issued a show cause notice for assessment of the said receipt wherein Appellant contended that the receipt was related to her retirement from the said Firm and was, therefore, not chargeable to tax under the Act. Being satisfied, no addition in respect of the said receipt was made in the assessment order dated 26th November, 2010, passed under Section 143(3) of the Act.

As per the consent terms, during the previous year ending 31st March, 2010, Appellant received an amount of ₹7 crores. Appellant filed return of income for Assessment Year 2010–2011 on 16th July, 2010, offering to tax a total income of ₹18,91,589. In the note annexed to the return of income, Appellant referred to the receipt of ₹7 crores pursuant to the arbitration award. Reference was also made to ₹4,82,258 received during the Financial Year 2009–2010 pursuant to the interim order dated 20th July, 2007 passed by the Apex Court. Appellant claimed that as the amounts were received upon her retirement from the said Firm, the same were not chargeable to tax under the Act. Appellant also relied on various decisions of the Apex Court and of this Court.

The return of income filed by Appellant was processed by the Assessing Officer (AO), on 20th March, 2012, under Section 143(1) of the Act, whereby, the total income as offered by Appellant in her return of income was accepted.

Almost two years later, the Appellant received a notice dated 19th March, 2014, from the AO under Section 148 of the Act alleging escapement of income for Assessment Year 2010–2011. Appellant was directed to file return of income once again which was complied with. Appellant also received a copy of the reasons for reopening. The said reasons referred to the information received in respect of an order dated 21st July, 2007, passed by the Supreme Court as well as the arbitration award dated 25th September, 2009. The reasons also made reference to the fact that the amount of ₹7 crores received by Appellant during the Financial Year 2009–2010, corresponding to Assessment Year 2010–2011, has not been offered for tax in the return of income. Based on this, Respondent no. 1 has formed his belief that income of ₹7 crores chargeable to tax for Assessment Year 2010-2011 has escaped assessment.

The AO passed the assessment order on 30th March, 2015, determining Appellant’s total income at ₹28,18,91,590. Therein, the amount of ₹28 crores was added as business income by invoking Section 28(iv) of the Act. Alternatively, he held that the amount of arbitration award was chargeable to tax as capital gains. It was further alleged that Appellant had not retired from the said Firm because the consent terms did not mention so and further held that the entire amount was not towards her retirement from the said Firm.

Aggrieved by the assessment order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. During the course of hearing before the CIT(A), Appellant filed valuation reports in respect of various properties owned by the said Firm to justify the amount of ₹28 crores that was received as her share from the said Firm. The CIT(A) dismissed the appeal by an order dated 3rd February, 2017. While dismissing the appeal, the CIT(A), however, accepted Appellant’s contention that the provisions of Section 28(iv) had no application to the present case and that the amount of ₹28 crores could not be assessed as capital gains in the hands of the Appellant. The CIT(A), however, held the amount of the arbitration award as income from other sources under Section 56(1) of the Act because the amount had been received for settlement of a composite bundle of rights. It is Appellant’s case that the CIT(A) failed to appreciate that the dispute between Appellant and her brothers was primarily in respect to her wrongful retirement from the said Firm and as reference was also made to the inheritance from the father which also mainly comprised of further partnership interest of 5 per cent in the said Firm being given to her, even assuming that any part of the said award also related to the inheritance right as per the father’s Will, no part
of such amount would be chargeable to tax under the Act.

The Appellant filed an appeal before the Tribunal. Appellant raised all grounds before the Tribunal which dismissed the appeal by the impugned order dated 2nd April, 2018. The Tribunal upheld the reassessment proceedings to be valid on the ground that prima facie there was material on record which shows that income chargeable to tax had escaped assessment. The Tribunal, however, referred to the amount of arbitration award as special income which has to be considered in a wider sense. Miscellaneous application was filed before the Tribunal which came to be dismissed.

The Hon. Court observed that the jurisdictional pre-conditions have not been fulfilled. Therefore, it can be stated that the assumption of jurisdiction by the AO under Section 148 of the Act to reassess the Appellant’s income is without jurisdiction.

The Hon. Court observed that on a bare perusal of the reasons shows that there was no mention as to whether and how the amount as per the arbitration Award was in the nature of income. Apart from referring to the fact that there was a decision of the Supreme Court as well as an arbitration award pursuant to which Appellant had received the amount of ₹7 crores, nothing else has been mentioned in the reasons. The belief formed by the AO without any statement on whether and how the receipt was of an income nature would render the reasons as vague and incomplete thereby making the reassessment proceedings initiated under Section 148 of the Act bad in law. The AO while disposing the objections raised by Appellant to his assumption of jurisdiction under Section 148 of the Act has stated that the receipt of ₹7 crores was not in respect of Appellant’s retirement from the said Firm. The order, however, states that the information / material available with the AO at the time of formation of his belief consisted of information received by him from the AO of P. N. Writer & Co. as well as the note placed by Appellant in her return of income filed for Assessment Year 2010–2011. The information reveals that the said receipt was towards the Appellant’s retirement from the said Firm. Therefore, justification given by the AO in the order dated 21st August, 2014, for taxability of the said receipt as not relating to Appellant’s retirement from the said Firm was contrary to the information / material available with him.

The law is very settled in as much as the belief formed by the AO has to be based on the information / material available with him at the time of formation of the belief. There was no material whatsoever available with the AO at that point of time to show that the said receipt of R7 crores by Appellant as referred to in the reasons did not relate to her retirement from the said Firm. In the absence of any statement in the reasons recorded for reopening the assessment regarding taxability of the said receipt and in view of non-sustainability of the justification provided by the AO, the reassessment proceedings initiated under Section 148 of the Act is bad in law.

The Court further observed that for Assessment Year 2008–2009 also, Appellant had received similar amounts from the said Firm. After scrutinising the character of such receipt, it was held by the predecessor of the AO that the receipt was not taxable in nature. Therefore, the formation of the belief that the amount received for the current year was taxable, tantamount to a change of opinion which is not permissible in law.

The Court further observed that in the present case, as the AO has initiated reassessment proceedings without forming the requisite belief and only with a view to enquire / investigate into the facts, his assumption of jurisdiction under Section 148 of the Act would be bad in law. Moreover, it also indicates that even at the stage of disposing the objections, the AO was not clear on the basis why Appellant’s income chargeable to tax has escaped assessment.

As regards taxability of the amount is concerned, the court observed that having considered the consent terms with the arbitration award and the statement of claim, it is clear, the amount of ₹28 crores was receivable by Appellant in terms of the arbitration award dated 25th September, 2009. As per the award, Appellant has relinquished all her claims against the partnership firm of P. N. Writer & Co. as well as the partners. Appellant had initiated arbitration proceedings as she was wrongfully shown as retired from the said Firm. This is brought out by the statement of claim made by the Appellant before the Arbitrator. Even the claim based on the father’s Will was mainly related to the additional 5 per cent share of the said Firm. Therefore, the real dispute between the parties related to the termination of Appellant’s partnership interest in the said Firm. The consent terms were arrived at between the parties with a view to settle this dispute. It goes without saying that when Appellant’s rights and claims in the said Firm were settled by the consent terms and the arbitration award, there could not be her continuance as a partner with the said Firm. Therefore, the arbitration award was receivable by Appellant in respect of her retirement from the said Firm. As held by the Apex Court in Mohanbhai Pamabhai ((1987) 165 ITR 166) and this Court in Prashant S. Joshi ((2010) 324 ITR 154 (Bom)), the amount receivable upon retirement from the said Firm could not be of an income nature. Therefore, the Tribunal was not correct in holding that the amount of arbitration award receivable by Appellant was not relatable to her retirement from the said Firm.

The Tribunal has failed to appreciate that there was a dispute between Appellant and her brothers with respect to her wrongful retirement from the said Firm. For invocation of arbitration proceedings, the matter was carried right up to the Hon’ble Supreme Court. The settlement amount was receivable by Appellant for relinquishment of her rights and claims as a partner of the said Firm. In these circumstances, though there may be no mention of her retirement from the said Firm in the consent terms or the arbitration award, the only inference possible would be that she no longer continued as a partner of the said Firm after such settlement. It is also not anybody’s case that the Appellant has not played any role in the said Firm or received any share from the said Firm after the settlement.

Further, the said Firm — P. N. Writer & Co. had also filed the relevant information with respect to change of constitution of the firm with the Registrar of Firms which showed that Appellant had retired from the said Firm with effect from 24th November, 1997. The arbitration award was also given for withdrawal of all claims and rights in respect of the suits filed by Appellant against the said Firm and its partners. This fact also supports Appellant’s claim to show that the rights settled were in respect of her partnership interest in the said Firm. As regards the observation on no positive balance in Appellant’s capital account with the said Firm, the same is an irrelevant factor because for working out of rights upon retirement, one is not required to look at the balance in the capital account. Further, Appellant had produced a valuation report valuing the immovable assets of the partnership firm which discloses that the value of the immovable properties of the said Firm was more than ₹100 crores. The fact that the partners agreed to a payment of  ₹28 crores fits in with this value. Further, the said Firm had also transferred its business on a going concern basis to a private limited company by name P. N. Writer & Co. Pvt. Ltd., in the Financial Year 1992–1993. The Balance Sheet of the said company as on 31st March, 2006, revealed that there were substantial reserves which showed that the business of the said Firm was extremely profitable. Therefore, the Tribunal was not correct in holding that the amount of the arbitration award was not relatable to the Appellant’s retirement from the said Firm.

Moreover, the amount of the arbitration award was also related to the settlement of the inheritance rights which the Appellant was entitled to under her father’s Will. An amount received in satisfaction of the inheritance rights also cannot be regarded as of an income nature chargeable to tax under the Act. The Tribunal failed to appreciate that the relevant details formed part of the arbitration proceedings, and Appellant had raised this as an alternative claim in view of the stand taken by the AO in the assessment order and the CIT(A) in the appellate order.

The court further observed that the dominant component in the settlement was Appellant’s separation from the said Firm. The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by Appellant and bifurcated the amount of arbitration award between each of such rights and claims. Instead of doing this exercise and considering whether the amount was capital or revenue in nature, the ITAT has simpliciter accepted the conclusion reached by the CIT(A) to the effect that such receipt is of an income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective.

The Tribunal failed to appreciate that a receipt on capital account cannot be assessed as income unless it was specifically brought within the scope of the definition of the term “income” in Section 2(24) of the Act . The Tribunal erred in evolving a concept of “special income” when no such concept exists either in the Act or in the jurisprudence and saying that the same is judicially settled.

The Court further held that even if the portion of the arbitration award relates to the inheritance by Appellant under the Will of her late father or otherwise, in the absence of Estate Duty or a similar tax, no tax is chargeable in respect of the same. In any event, the same would be on the estate and not on a legatee. Even the provisions of Section 56(2)(vii) which seek to tax an amount received without consideration specifically excludes from the ambit of the charge any amount received pursuant to a bequest.

Alternatively, even if the amount received / receivable under the arbitration award is regarded as damages, the nature of the dispute which was settled was with respect to disputes pertaining to the partnership firm or inheritance and, hence, the receipt should be capital in nature (CIT v/s. Saurashtra Cement Ltd.18). Further, it has been held by this Court in CIT v/s. Abbasbhoy A. Dehgamwalla19 that the amount received as damages also cannot be brought to tax as capital gains.

Burden to show that a particular receipt is of an income nature is on the Revenue which has not been discharged in the facts of the present case. The mere rejection of an assessee’s explanation without any positive finding as to the true character of the receipt cannot justify a conclusion being reached by an AO that the amount is of an income nature.

Therefore, the amount of ₹28 crores can be considered as the amount received by a partner upon retirement from the said Firm and is not chargeable to tax.

In the circumstances, the substantial questions of law were answered in favour of the Appellant. It was held that the reassessment proceedings were without jurisdiction. Further, the Tribunal ought to have held that the amount of ₹28 crores received by Appellant as per the arbitration award was not chargeable to tax.

TDS ­­­— Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract

25 The Commissioner Of Income Tax (TDS) And Another vs. Lalitpur Power Generation Co. Ltd.

ITXA No. 111 of 2018, (All.) (HC)

Date of Order: 16th November, 2023

[Arising from Income Tax Appellate Tribunal, Delhi Bench “C” New Delhi order dated: 20th February, 2018 (Assessment Year 2013–2014)].

TDS ­­­— Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract.

The assessee was engaged in the business of generation of power. It set up a 3×660 MW (Mega Watt) Super Critical Thermal Power Plant at District-Lalitpur, Uttar Pradesh. For that purpose, the assessee was incorporated as a Special Purpose Vehicle (“SPV”) by the State Government of Uttar Pradesh. Later, its ownership was transferred to a private company.

To set up that thermal power plant, the assessee entered into two sets of contracts. First, with Bharat Heavy Electric Ltd. (“BHEL”) to set up a Boiler Turbine Generator (“BTG”) and the second with Carbery Infrastructure Pvt. Ltd. (“CIPL”) to set up a Balance of Plant (“BOP”).

The contract entered into between the assessee and the BHEL involved services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG, for consideration ₹689 crores. Similarly, the contract with CIPL involved Erection, Installation and Commissioning of BOP for ₹197 crores.

These two contracts included description and execution of other work as well, inasmuch as the contract with BHEL for BTG involved supply of BTG package equipments of value ₹5,311 crores, whereas the contract for BOP with CIPL involved procurement and supply of equipments and civil constructions, structural works, engineering, information, design and drawings and project management of value ₹2,008 crores. The supply component under the two contracts entered into by the assessee with BHEL and CIPL does not form the subject matter of dispute in these appeal proceedings.

On 19th June, 2014, individual orders came to be passed under Section 201 of the Act describing the assessee to be in default of deduction of TDS required to be made by it at the higher rate of 10 per cent (under Section 194J of the Act) against the lower rate of 2 per cent (under Section 194C of the Act) applied by the assessee, to the payments made by the assessee in each year, against the two contracts for the works done under the head of “services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG”, awarded to BHEL and also the work under the head of “Erection, Installation and Commissioning of BOP”, awarded to CIPL.

Thus, under the assessment order dated 15th January, 2015 passed by the Assistant Commissioner of Income Tax (TDS), Noida for the Assessment Years 2012–2013, 2013-2014 and 2014–2015, demand for short deduction of TDS and the corresponding demand of interest were raised. The Orders were confirmed on appeal by common order dated 16th March, 2016, passed by the Commissioner of Income Tax (Appeals)-I, Noida.

Upon further appeal, the Income Tax Appellate Tribunal, vide its common order dated 20th February, 2018, allowed the appeals preferred by the assessee.

The Revenue appeal was admitted on following substantial question of law:

Question No. 1

Whether the Tribunal has erred in annulling the assessment order and reaching to a conclusion that Tax Deduction at Source (for short “TDS”) was required to be made under Section 194C of the Act and not under Section 194J of the Income-tax Act, 1961 without first dealing with the reasons and findings recorded by the assessing authority, as affirmed in first appeal?

Question No. 2

Whether, in absence of proper books maintained to establish the exact expenditure incurred by the assessee in availing technical services, the Tribunal has erroneously granted relief to the assessee?

The revenue contended that the assessing authority had made a detailed consideration of facts. It was found that the assessee had not maintained any account to establish the actual payment made to BHEL for the work of Testing and Commissioning of BTG. Similarly, the assessee had not maintained a separate account to establish the payment made to CIPL for Installation and Commissioning of BOP. Since payments for those works performed by the BHEL and CIPL fell under the head “fees for technical services” as defined under clause (b) of sub-section (1) of Section 194J of the Act, read with Explanation [2] to clause (vii) to sub-section (1) of Section 9 of the Act, the assessee was liable to deduct the Tax at Source / TDS, at the rate of 10 per cent in terms of Explanation (b) to section 194J of the Act. Relying on the reasoning given by the assessing authority, it was submitted that it cannot be denied that BHEL had performed Testing and Commissioning of BTG and similarly, CIPL had performed the work of Installation of Commissioning of BOP.

The revenue further contended that since the payments made to BHEL and CIPL were “fees for the technical services”, rendered to the assessee by BHEL and CIPL, the Assessing Officer had not erred in determining the default in deduction of TDS by the assessee.

The assessee contended that the contracts awarded by the assessee to BHEL and CIPL were exactly identical to that awarded to BHEL, as was considered by the Punjab and Haryana High Court in Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (2017) 390 ITR (P&H).

The assessee further contended that the contract awarded to BHEL was for BTG and the contract awarded to CIPL was for BOP and the reliance placed by the revenue to non-specification or quantification of value of sub-components or parts of the contracts awarded to the BHEL and CIPL is inconsequential. Those contracts remained indivisible or composite. The revenue authorities being obligated to assess income tax payable by the assessee, they could not have broken down that indivisible contract for wholly artificial reasons-to discover on an assumptive basis, the alleged component of “fees for technical services”. The undisputed fact remains that the work awarded to the BHEL was for commissioning of BTG and that awarded to CIPL was for BOP, the contract clauses should have been read in light of that main object. In absence of any internal tool arising therefrom and in absence of any legal provision allowing the assessing authority to break down the indivisibility or composite nature and character of the contract, the exercise carried out by the assessing authority is described as erroneous and impermissible in law.

Reliance was placed on the decision of the division bench of the Karnataka High Court in the case of Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (2022) 449 ITR 431 (Karnataka).

The assessee alternatively submitted that it was only a payer. The payees i.e., BHEL and CIPL were subjected to tax. Upon completion of their assessment, those payers were also issued certificates of full payment of tax due. Therefore, if at all the assessee may only be liable for delay in payment of TDS. Yet, liability of short deduction of TDS could not be imposed.

The Hon Court held that it has not been disputed that the essence of the contract involved in the present case and that involved in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) were similar — to set up a thermal power plant. In both cases, the dispute arose upon a survey. That inconsequential similarity apart, it is undisputed that in both cases, the element of testing and commissioning of technical works etc. was part of the main contract — to set up a thermal power plant including therein the work of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG and also Commissioning of BOP.

In view of the undisputed similarity between two cases, the court followed the reasoning given by the division bench of Punjab and Haryana High Court in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) that the work of testing etc., had to be performed by the contractor not by way of independent work awarded to it but by way of execution of the whole contract that was to set up a thermal power plant.

Thus, Punjab and Haryana High Court has principally reasoned that the primary / dominant object of the contract would govern or subsume the other object /clause therein. In absence of any internal tool shown to exist (in the contract), it was incorrect to reach an inference that the contracting parties, i.e., assessee on one hand and BHEL and CIPL on the other, had intended to treat the work of Testing and Commissioning, separate / independent of the contract to set up BTG and BOP by those contracting parties. Further, in absence of any enabling law, it never became open to the taxing authorities to overlook the dominant object of the contract and reach to a conclusion, because part of the contract involved Testing, Commissioning, etc., necessarily, there would exist component of “fees for technical services”, by necessary implication.

Then, the Karnataka High Court in Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (supra) has further reasoned that an indivisible / composite contract may not be bifurcated to cull out any indivisible component of such contract, to make a higher deduction of tax at source. Thus, that Court applied the principle of indivisibility of a composite contract. It may not be bifurcated to subject a part of the contract to higher TDS. Thus, that Court applied the principle of indivisibility of a contract, that may not be artificially dissected at the hands of a taxing authority, to the prejudice of the assessee.

On plain reading, the contracts executed by the assessee with BHEL and CIPL were indivisible contracts for BTG and BOP, respectively. The taxing authorities exist to apply the taxing statute to the proven facts of a case. Such facts are not for the taxing authority to imagine or presume or assume. Therefore, the burden existed on the revenue authorities to establish that they were enabled in law and also that the proven facts of the case permitted them to divide an otherwise indivisible / composite contracts executed by the assessee with the BHEL and CIPL. Unless that exercise had been carried out by the assessing authority, no presumption was available in law.

Accordingly, the first question of law framed was answered in negative, i.e., in favour of the assessee and against the revenue.

The question no. 2 was left unanswered, at this stage. Accordingly, the revenue appeal was dismissed.

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous

72 Principal CIT vs. Kutch Salt and Allied Industries Ltd.

[2023] 457 ITR 44 (Guj)

A.Y.: 2007–08

Date of Order: 5th May, 2023

Ss. 132(1), 143(3) and 153A of ITA 1961

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous.

For the A.Y. 2007–08, the Assessing Officer in his order u/s. 143(3) read with section 153A(1)(b) of the Income-tax Act, 1961, made disallowances on account of power and fuel expenses, Registrar of Companies and stamping expenses, sale made to group concern, transportation expenses and interest u/s. 36(1)(iii).

The Commissioner (Appeals) recorded a finding that no incriminating material was found at the premises of the assessee during the search u/s. 132(1) and deleted the additions. The Tribunal upheld his order.

The Gujarat High Court dismissed the appeal filed by the Revenue and held as under:

“The Tribunal had not erred in holding that addition during the assessment u/s. 153A had to be confined to the incriminating material found during the course of search u/s. 132(1). No question of law arose.”

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence

71 Murali Krishna Chakrala vs. Deputy Director, Directorate of Enforcement

[2023] 457 ITR 579 (Mad)

Date of Order: 23rd November, 2022

R. 37BB of Income Tax Rules 1962

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence.

On a complaint given by the Deputy Manager of a Bank, a case was registered against six accused. Since the FIR disclosed the commission of a scheduled offense under the Prevention of Money Laundering Act, 2002, the Enforcement Directorate, took up the investigation of the case. The case was related to moneys remitted abroad on the basis of forged documents. The allegations were to the effect that these persons had opened fictitious bank accounts, submitted forged bills of entry, parked huge amounts in those bank accounts and had them transferred to various parties abroad through the bank in order to make it a legitimate transaction for the alleged purpose of import.

In the course of its investigation, the ED came across 15CB certificates issued by the accused MKC, a Chartered Accountant. In the interrogation, the accused MKC submitted that one of his clients, Mr. KM, approached him for issuance of Form 15CB under Rule 37BB of the Income-tax Rules, 1962, and submitted the documents in support of his request. On perusal of the documents, the accused MKC issued certificates to the effect that it was not necessary to issue Form 15CB for remittances abroad in respect of imports. The certificate numbers were uploaded on the Income-tax portal and copies of certificates were also submitted to the Branch Manager for transferring a sum of R3.45 crores to various entities in Hong Kong.

After completing the investigation, a supplementary complaint was filed by which MKC, inter alia, was declared an accused.

The discharge application was dismissed by the trial court. The Madras High Court allowed the revision petition and held as follows:

i) In issuing form 15CB under rule 37BB of the Income-tax Rules, 1962, a chartered accountant is required only to examine the nature of the remittance and nothing more. The chartered accountant is not required to go into the genuineness or otherwise of the documents submitted by his clients.

ii) The accused MKC had issued five form 15CB in favour of B, which were handed over by him to his client K for which, a sum of ₹1,000 per certificate was given to him as remuneration. The prosecution of MKC in the facts and circumstances of the case at hand, could not be sustained.”

Insurance Business — Computation of profits — Effect of S. 44

70 Sahara India Life Insurance Co. Ltd. vs. ACIT
[2023] 457 ITR 548 (Del.)
A.Y.: 2014–15 
Date of Order: 22nd February, 2023 
S. 44 of ITA 1961

 

Insurance Business — Computation of profits — Effect of S. 44.

 

The assessee carries on a life insurance business. In the assessment for the A.Y. 2014–15, the Assessing Officer (AO) made four disallowances, viz. disallowance on account of amortization of investment, disallowance of interest on TDS, disallowance of unpaid bonus and disallowance on account of unpaid leave encashment.

 

CIT(A) allowed the assessee’s appeal and deleted all the additions. Except on the ground of amortization of investment, the Tribunal reversed the order of the CIT(A) and upheld the disallowances made by the AO.

 

In an appeal by the assessee, the High Court framed the following question of law:

 

“(i) Whether the Tribunal misdirected itself in law and on facts in not appreciating that the profits and gains of the appellant-assessee were to be computed in accordance with the provisions of section 44 read with First Schedule to the Income-tax Act, 1961?”

 

The Delhi High Court allowed the appeal and held as follows:

 

“i) What emerges upon perusal of section 44 of the Income-tax Act, 1961 is that it contains a non-obstante clause, which excludes the application of all provisions contained in the Act, which relate to computation of income chargeable under the heads referred to therein, by providing that computation of income qua the said heads will be made in accordance with rules contained in the First Schedule. Therefore, in the event of any dissonance, the provisions of the rules contained in the First Schedule will prevail over the provisions of the Act.

 

ii) Section 44 of the Act provides for a statutory mechanism for computing profits and gains of an insurance business and includes, in this context, the business carried on by a mutual insurance company or even by a co-operative society. In that sense, it moves away from the usual and general method of computing income chargeable to tax by bearing in mind the heads of income referred to in section 14 of the Act. This is plainly evident, since there is a specific reference to section 199, (which broadly deals with granting credit to the person from whose income tax has been deducted at source) and the sections spanning between sections 28 and 43B. The rules contained in the First Schedule appended to the Act will determine the manner in which the profits and gains of the insurance business are to be ascertained.

 

iii) Thus, according to us, the Tribunal has committed an error in law, which needs to be corrected.

 

iv) Therefore, for the foregoing reasons, we allow the appeal and set aside the impugned order. Consequently, the question of law, as framed, is answered in favour of the appellant-assessee and against the respondent-Revenue.”

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss

69 Principal CIT vs. Pawa Infrastructure Pvt. Ltd.

[2023] 457 ITR 392 (Del)

A.Y.: 2013–14

Date of Order: 18th November, 2022

S. 2(14) of ITA 1961

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss.

The petitioner, a real estate developer, was allotted a plot of land in Goa by the Government in September 2006. The lease deed was executed and registered in favour of the assessee for an initial period of 30 years which could be further extended by 60 years. The assessee had shown the property as a Fixed Asset in its books of account. Due to a change in the policy, the allotment was subsequently cancelled, and the assessee received ₹28,03,68,246. The said amount included compensation of ₹9,86,07,762. After reducing the indexed cost of cancellation of ₹30,49,54,129, the assessee claimed a long-term capital loss of ₹2,45,85,883 in the return of income filed for the A.Y. 2013–14. On scrutiny assessment, the return of income filed by the assessee was accepted by the Assessing Officer (AO) after considering the replies filed by the assessee with respect to the compensation received on cancellation of allotment of plot.

Subsequently, the Principal Commissioner issued notice u/s. 263 of the Income-tax Act, 1961, for revision of order and directed the AO to pass a fresh order keeping in mind that the assessee had wrongly treated the property in question as a capital asset and the assessee’s claim of indexed cost of acquisition could not be allowed.

The Tribunal allowed the assesee’s appeal and held that compensation received for the cancellation of the plot was capital in nature and not revenue receipt.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) The leasehold rights held by the assessee in the plot created an interest in the land in favour of the assessee. The assessee under the terms of the agreement not only had the right to construct on this plot but it had a further right to transfer and alienate the building along with the land to third parties and, therefore, the leased land came within the definition of capital asset u/s. 2(14) of the Act. Further, in this case, the allotment of land was cancelled by the Government of Goa in pursuance of the Act of 2012. The payment received by the assessee towards compensation was in terms of sub-sections (3) and (5) of section 3 of the Act of 2012. The leasehold rights held by the assessee in the plot were a capital asset and the compensation received by the assessee from the Government of Goa on the cancellation of the plot was a capital receipt and not a revenue receipt.

ii) The Assessing Officer’s order was correct and did not suffer from any error, justifying the invocation of powers u/s. 263 of the Act by the Principal Commissioner.”

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share

68 Smt. Durga Kumari Bobba vs. DCIT

[2023] 457 ITR 118 (Kar)

A.Y.: 2009–10

Date of Order: 4th July, 2022

S. 48 of ITA 1961

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share.

The assessee agreed to sell her shares in a company for a consideration of ₹2,70,32,278. Clause 7 of the agreement dealt with the payment of taxes, and it had been agreed between the parties that the seller would reimburse the tax that may be levied on the company up to the closing date. In substance, what the parties agreed was for consideration towards the sale of shares at ₹2,70,32,278 minus the tax component of ₹90,74,103. The assessee claimed deduction under the head “Capital gains” on the tax component u/s. 48 of the Income-tax Act, 1961. The Assessing Officer did not allow the claim for deduction.

The Commissioner of Income-tax (Appeals) allowed the appeal in part. The Tribunal dismissed the appeal of the assessee.

On further appeal to the High Court, it was contended by the assessee that the assessee realised the full value of consideration after excluding the tax component. On the other hand, the Department contended that the tax component which was being claimed as a deduction by the assessee was neither an expenditure in connection with transfer nor was it the cost of acquisition being the only permissible deductions u/s. 48 of the Act. Further, it was contended that since a company is not allowed to claim the tax paid as deduction, applying the same analogy, the assessee cannot be allowed the deduction of tax from the sale consideration.

The Karnataka High Court held as follows:

“i) In the facts of this case, the total amount realised, or in other words, which the appellant got in her hand, is R1.80 crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that the intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component.

ii) The contention urged by the Department that tax components should be distributed among both sellers merits consideration. Therefore, the appellant shall be entitled to a deduction of only 50 per cent of the tax component proportionate to her shareholding.”

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted

67 Shelf Drilling Ron Tappmeyer Ltd. vs. ACIT(IT)

[2023] 457 ITR 161 (Bom.)

A.Ys.: 2014–15 and 2018–19

Date of Order: 4th August, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted.

For the A.Y. 2014–15, the assessee filed its return of income declaring a loss of R120,18,44,672 after fulfilling the condition u/s. 44BB(3) of the Act by exercising the option available to compute its income under the regular provisions of the Act. The asssessee’s case was selected for scrutiny and a draft assessment order was passed on 26th December, 2016, after rejecting the books of account and invoking section 145 of the Act. Despite the option exercised by the assessee, the assessee’s income was computed u/s. 44BB(1) of the Act on the presumptive basis at 10 per cent of the gross receipts.

Objections were filed before the DRP against the draft assessment order. The DRP rejected the objections and gave its directions vide order dated 28th September, 2017, and based on such DRP directions, the final assessment order was passed on 30th October, 2017, u/s. 143(3) read with section 144C(13) of the Act.

On appeal, vide order dated 4th October, 2019, the Tribunal disposed of the appeal by remanding the matter back to the Assessing Officer (AO) for fresh adjudication.

The assessee, vide letter dated 5th February, 2020, informed the AO about the order passed by the Tribunal and requested for early disposal of the same. The assessee followed up with the oral requests. Over one year later, on 22nd February, 2021, the AO called upon the assessee to produce the details of contracts entered into by it and reasons for loss incurred during the A.Y. 2014–15. Details were called in time and again, which were replied to. Thereafter, the AO passed an assessment order dated 28th September, 2021, which read like the final assessment order. However, vide communication dated 29th September, 2021, the AO clarified that it was only a draft order. In order to safeguard against the objections being treated as delayed, the assessee filed its objections on 27th October, 2021, before the DRP.

Meanwhile, the assessee also filed a writ petition challenging the order dated 28th September, 2021, on various grounds. The main objection being that the limitation to pass the final order expired on 30th September, 2021, u/s. 153(3) of the Act read with the provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, and the notifications issued thereunder. Therefore, no final assessment order can be passed in the present case, and the same is time-barred, and therefore, the return filed by the assessee should be accepted.

The Bombay High Court allowed the petition and held as under:

“i) Although in passing a final assessment order, sub-section (13) of section 144C of the Income-tax Act, 1961 specifically excludes the provisions of section 153 stating that the Assessing Officer shall pass a final order of assessment even without hearing the assessee, in conformity with the directions issued by the Dispute Resolution Panel within one month from the end of the month when such directions were received by him, the exclusion of section 153 or section 153B is specific to, and comes in only at the stage of, passing of the final assessment order after directions are received from the Dispute Resolution Panel and not at any other stage of the proceedings u/s. 144C. Hence, the entire proceedings would have to be concluded within the time limits prescribed.

ii) No doubt, section 144C is a self contained code for assessment and time limits are in-built at each stage of the procedure contemplated. Section 144C envisions a special assessment, one which includes the determination of the arm’s length price of international transactions engaged in by the assessee. The Dispute Resolution Panel was constituted bearing in mind the necessity for an expert body to look into intricate matters concerning valuation and transfer pricing and it is for this reason that specific timelines have been drawn within the framework of section 144C to ensure prompt and expeditious finalisation of this special assessment. The purpose is to fast-track a special type of assessment. That cannot be considered to mean that overall time limits prescribed have been given a go-by in the process.

iii) Wherever the Legislature intended extra time to be provided, it expressly provided therefore in section 153. Sub-section (3) of section 153 also applies to a fresh order u/s. 92CA being passed in pursuance of an order of the Tribunal u/s. 254. Sub-section (4) of section 153 specifically provides that notwithstanding anything contained in sub-sections (1), (1A), (2), (3) and (3A) where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under these sub-sections shall be extended by twelve months. Explanation 1 below section 153 also provides for the periods which have to be excluded while computing the twelve-month period mentioned in section 153(3). However, there is no mention anywhere of section 144C.

iv) The time limit prescribed u/s. 153 would prevail over and above the assessment time limit prescribed u/s. 144C since the Assessing Officer may follow the procedure prescribed u/s. 144C, if he deems fit and necessary but then the entire procedure has to be commenced and concluded within the twelve-month period provided u/s. 153(3) because, the procedure u/s. 144C(1) also has to be followed by the Assessing Officer if he proposes to make any variation that is prejudicial to the interest of the eligible assessee. If the Assessing Officer did not wish to make any variation that is prejudicial to the interest of the eligible assessee, he need not go through the procedure prescribed u/s. 144C.

v) The exclusion of applicability of section 153, in so far as the non-obstante clause in sub-section (13) of section 144C is concerned, is for the limited purpose to ensure that de hors the larger time available, an order based on the directions of the Dispute Resolution Panel is passed within 30 days from the date of the receipt of such directions. Section and subsection have to be read as a whole with connected provisions to decipher the meaning and intentions. A similar non-obstante clause is also used in section 144C(4) with the same limited purpose, even though there might be a larger time limit u/s. 153, once the matter is remanded to the Assessing Officer by the Tribunal u/s. 254, so that the process to pass the final order u/s. 144C is taken immediately. The object is to conclude the proceedings as expeditiously as possible. There is a limit prescribed under the statute for the Assessing Officer and therefore, it is his duty to pass an order in time.

vi) The date on which the draft assessment order had been passed was 28th September, 2021. Therefore, there was no possibility of passing any final assessment order as the matter had got time-barred on 30th September, 2021. Since the final assessment order had not been passed before this date the proceedings were barred by limitation. Therefore, the return as filed by the assessee should be accepted. Since the order had been passed by the Tribunal on 4th October, 2019, the time would be twelve months from the end of the financial year in which the order u/s. 254 was received. The submission of the Department that when there was a remand the Assessing Officer was unfettered by limitation would run counter to the avowed object of provisions that were considered while framing the provisions of section 144C. The assessment should have been concluded within twelve months as provided in section 153(3) when there had been remand to the Assessing Officer by the Tribunal’s order u/s. 254. Within these twelve months prescribed, the Assessing Officer was to ensure that the entire procedure prescribed u/s. 144C was completed. Since no final assessment order could be passed as it was time-barred, the return of income as filed by the assessee was to be accepted.

vii) This would however, not preclude the Department from taking any other steps in accordance with law.”

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

66 CIT(IT & TP) vs. Star Rays

[2023] 457 ITR 1 (Guj)

A.Y.: 2015–16

Date of Order: 31st July, 2023

Ss. 9(1)(vii)(b), 201(1), 201(1A) and 260A of ITA 1961; DTAA between India and USA

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

The assessee was in the business of cutting, polishing and export of diamonds. For purposes of testing and certification services, the assessee entered into a customer services agreement with GIA, USA, which set up a laboratory in Hong Kong. The invoices were raised by GIA, USA, instructing the assessee to make payment to the offshore bank accounts of GIA, Hong Kong with which the assessee had no direct relationship or any agreement. The assessee made the payments accordingly but erroneously mentioned the name of the beneficiary in forms 15CA and 15CB as GIA, Hong Kong. The Assessing Officer (AO) was of the view that the remittance made by the assessee for diamond testing certification charges to GIA’s Hong Kong laboratory was in the nature of “fees for technical services” u/s. 9(1)(vii)(b) of the Income-tax Act, 1961, which was applicable in the absence of a Double Taxation Avoidance Agreement between India and China or Hong Kong and treated the assessee as in default u/s. 201(1) for non-deduction of tax at source. He held that the assessee having made payments to GIA’s Hong Kong laboratory could not claim the benefit of the Double Taxation Avoidance Agreement between India and USA, and that the assessee ought to have deducted tax on those payments and accordingly passed an order u/s. 201(1) read with section 201(1A). GIA, Hong Kong did not have a permanent establishment in India.

The Tribunal held that in view of the tax residency certificate and form 10F furnished by GIA, USA from the tax authority of that country for the A.Y. 2015–16, the assessee was entitled to the benefits of the Double Taxation Avoidance Agreement between India and USA, even though such services were not rendered by the USA entity but the service was rendered by a subsidiary situated in Hong Kong, and the payment was merely routed through GIA, USA.

The Gujarat High Court dismissed the appeal filed by the Revenue and held as under:

“i) The concurrent findings of fact by the authorities were that there was a “take in window” where articles were delivered but the service agreement was between the assessee and GIA, USA. The rightful owner of the remittances was also the U.S.A. entity. Based on factual appreciation, especially the condition in the customer service agreement, the bank invoice and the bank remittance advice, a finding of fact had been arrived at that the assessee was protected under the Double Taxation Avoidance Agreement between India and the U.S.A. and that mere rendering of services could not be roped into fees for technical services unless the person utilising the services was able to make use of the technical knowledge. A simple rendering of the services was not sufficient to qualify the payment as fees for technical services.

ii) The orders of the Commissioner (Appeals) and the Tribunal were based on appreciation of facts in the right perspective. No question of law arose.”

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

65 Mrs. Malini Ravindran vs. CIT(A)

[2023] 457 ITR 401 (Mad)

A.Ys.: 2011–12, 2012–13 and 2013–14

Date of Order: 14th November, 2022

Ss. 119 and 234B of ITA 1961

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

The assessee entered into an MOU with a company on 12th December, 2010, for the sale of property for a sale consideration of ₹121,65,21,000. The sale took place over the A.Ys. 2011–12, 2012–13 and 2013–14, and the assessee had computed and paid capital gains for each of the years and also paid advance tax during each of the corresponding financial years. Returns filed by the assessee had become final.

Subsequently, the assessments were re-opened, wherein the Assessing Officer (AO) held that the transfer took place upon the execution of MOU, that is, on 12th December, 2010, and the entire sale consideration was taxable in the A.Y. 2011–12. The AO also made assessments for A.Ys. 2012-13 and 2013-14 on a protective basis.

In the appeal before the first appellate authority, the assessee agreed that the gains were taxable in year one, and the entire demand arose in A.Y. 2011–12. The assessee confirmed that substantive assessment for A.Y. 2011–12 could be confirmed, and the protective assessments for A.Ys. 2012–13 and 2013–14 be cancelled. The CIT(A) confirmed the position vide order dated 31st January, 2019.

While giving effect to the orders passed by the CIT(A), a demand of ₹40,78,17,870 was raised for A.Y. 2011–12 and refunds were due for A.Ys. 2012–13 and 2013–14. The refunds were adjusted against the demand for A.Y. 2011–12 and after adjustment, a sum of ₹8,30,05,290 was determined to be payable by the assessee. The total demand for A.Y. 2011–12 included a sum of ₹19,43,57,718 as interest u/s. 234B of the Act.

The assessee submitted a request for waiver of interest u/s. 234B on the grounds that self-assessment tax / advance tax paid for A.Ys. 2012–13 and 2013–14 be considered as paid towards A.Y. 2011–12. The AO did not accede to her request and held that there was no provision for adjustment of tax paid in one year as against the liability of another year.

Against the said order of rejection of waiver by the AO, as well as the order of the appellate authorities, the petitions were preferred before the High Court. The Madras High Court partly allowing the writ petitions held as under:

“i) The advance taxes relevant to the assessment years 2012–13 and 2013-14 had been paid in time, in the course of financial years 2011–12 and 2012-13, respectively. The reassessments had transpired on 29th December, 2017. The payments were not ad hoc, and had been made specifically towards advance tax for liability towards capital gains in the financial years 2011–12 and 2012–13.

ii) Moreover, the Department had been in possession of the entire amounts from the financial years 2011–12 and 2012–13, since the assessee had satisfied the demands for the corresponding assessment years by way of advance and self-assessment taxes. It was those amounts that had been adjusted against the liability for the assessment year 2011–12 and therefore, substantially revenue neutral.

iii) The phrase ‘or otherwise’ used in section 234B(2) would encompass situations of remittances made in any other context, wherein the amounts paid stood to the credit of the assessee. However, the liability to advance tax had commenced from the financial year relevant to the assessment year in question 2011–12. The assessee sought for credit in respect of the advance tax remitted during the financial years 2011–12 and 2012–13, relevant to the A.Ys. 2012–13 and 2013–14 and there was a delay of one and two years, respectively, since the amounts for which credit was sought for ought to have been remitted in the financial year 2010–11, relevant to the A.Y. 2011–12. To such extent, the assessee was liable to interest u/s. 234B. The order rejecting waiver of interest was set aside to that extent. There was no justification in the challenge to the order of the Commissioner (Appeals) and the consequential order passed by the Assessing Officer.”

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue. When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

48 Sarita Gupta vs. PCIT

ITA No. 1174/Del/2022

A.Y.: 2012–13

Date of Order: 7th December, 2023

Sections: 54, 263

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue.

When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

FACTS

The assessee, a resident, filed a return of income declaring total income of ₹6,42,740. The AO upon receiving information that the assessee has sold immovable property for a consideration of ₹62,06,000 issued a notice under section 147. The assessee, in response, filed a return of income declaring the income to be the same as that declared in the original return of income.

In the course of assessment proceedings, the AO asked the assessee to submit details relating to property sold and capital gain arising out of such property. From the documents, the AO observed that the assessee along with one another had purchased the property for ₹20 lakh of which ₹10 lakh was contributed by the assessee. The property was sold for ₹62,06,000, out of which, the share of the assessee was ₹31,03,000. After reducing the indexed cost of acquisition, the long-term capital gain aggregated to ₹14,59,324. The assessee made purchase of a new residential property and consequently claimed that the entire long-term capital gain to be exempt under section 54. The AO completed the assessment accepting the returned income.

Subsequently, PCIT called for an examined assessment record and found that the amount of capital gain was not deposited in the capital gain account scheme during the interim period till its utilisation in purchase / construction of new property. The PCIT was of the view that these facts were not looked into by the AO and therefore the assessment order is erroneous and prejudicial to the interest of the revenue. After issuing a show cause notice and considering the response of the assessee thereto, the PCIT set aside the assessment order with a direction to disallow the deduction claimed under section 54 of the Act as the assessee has failed to deposit the amount of capital gain in the capital gain account scheme.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in the course of assessment proceedings, the AO had thoroughly examined the issue of the sale of immovable property and the resultant capital gain arising from such sale. The AO had called upon the assessee to furnish details of exemption claimed under section 54 of the Act with supporting evidence. The Tribunal held that the AO has duly examined the issue relating to capital gain from the sale of the property as well as assessee’s claim of deduction under section 54 of the Act.

The Tribunal noted that the PCIT had not doubted the amount of capital gain arising in the hands of the assessee, and also the fact that such capital gain was invested in purchase / construction of residential house within the time limit mentioned in section 54(1) of the Act. It is only because the capital gain was not deposited in the capital gain account scheme, the revisionary authority has treated the assessment order to be erroneous and prejudicial to the interest of the revenue.

The Tribunal held that in its view, the PCIT adopted a hyper technical approach while dealing with the issue. The Tribunal held that when the basic conditions of section 54(1) have been satisfied, the assessee remains entitled to claim deduction under section 54 of the Act. The Tribunal also held that in any case of the matter, there is no prejudice caused to the Revenue as the assessee in terms of section 54(1) of the Act is entitled to deduction. The Tribunal held that exercise of power under section 263 of the Act to revise the assessment order to be invalid. The Tribunal quashed the order passed under section 263 of the Act and restored the assessment order.

The appeal filed by the assessee was allowed.

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act. Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

47 JCIT vs. Vijay Kumar Saini

ITA No. 371/Jaipur/2023

A.Y.: 2020–21

Date of Order: 8th November, 2023

Section: 271AAB

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act.

Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

FACTS

A search under section 132 of the Act was carried out at the premises of the assessee in connection with search and seizure action on Saini Gupta Malpani — Somani Group of Ajmer on 13th February, 2020. During the year, under consideration, the assessee filed the return of income on 25th February, 2021, declaring a total income of ₹3,34,40,150. During the course of assessment proceedings, the assessee only furnished revised computation of the total income but the revised return of income was not found on the e-filing portal, nor was it furnished by the assessee. Revised computation of total income was not given cognizance and the assessment of total income was completed by making an addition of ₹2,87,50,000 to the returned income on account of an undisclosed business income, and assessing the total income at ₹6,21,90,150 vide order dated 29th September, 2021 passed under section 143(3) of the Act. The AO also initiated proceedings for levy of penalty under section 271AAB(1A) by issuing a show cause notice without specifying the default prescribed under section 271AAB(1A) of the Act.

In response to the show cause notice, the assessee furnished the reply but the same did not find favour with the AO and he held that the assessee is liable for penalty under section 271AAB(1A) @ 60 per cent of the undisclosed income of ₹2,87,50,000 and he levied a penalty of ₹1,72,50,000. In the penalty order, the AO did not point out any specific document and the nature of transactions recorded therein which may substantiate the charge that undisclosed income was detected during the course of search.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the order of CIT(A) by observing the appellant to be guilty of mischief of clause (a) of section 271AAB(1A) instead of clause (b) under which penalty was supposedly levied by the AO. Thus, CIT(A) granted partial relief to the assessee.

Aggrieved, by the order passed by the CIT(A), revenue preferred an appeal to the Tribunal.

HELD

At the outset, the Tribunal observed that this appeal by the revenue is a cross appeal against order passed by CIT(A) against which order, the assessee preferred an appeal being ITA No. 303/Jp/2023 raising common issue as raised by the revenue and the said appeal of the assessee has been disposed off vide Tribunal’s order dated 25th July, 2023. It observed that the appeal of the assessee has been decided on legal issues as well as on merits in favour of the assessee after elaborately discussing the matter at great length, and after considering the identical issues as have been decided by the co-ordinate benches in the case of Ravi Mathur vs. DCIT [ITA No. 969/Jp./2017; Order dated 9th April, 2019, and Rajendra Kumar Gupta vs. DCIT [ITA No. 359/Jp./2017; Order dated 18th January, 2019.

The Tribunal noted the decision in the appeal filed by the assessee wherein the Tribunal interalia observed that the assessee, in the course of search, admitted an undisclosed sales of ₹5 crore and offered the same for taxation, and therefore, penalty cannot be levied under section 271AAB of the Act. The Tribunal held that —

(i) it is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of `undisclosed income’ as defined in Explanation to section 271AAB(1A) of the Act;

(ii) the question whether the income disclosed by the assessee is undisclosed income in terms of definition of section 271AAB has to be considered and decided in penalty proceedings;

(iii) since the assessee has offered the said income to buy peace and avoid litigation with the department, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise, and only when AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per definition in section 271AAB. Therefore, the AO in proceedings under section 271AAB has to examine all the facts of the case as well as the basis of surrender and then arrive at the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income.

(iv) it did not agree with the CIT(A) that levy of penalty under section 271AAB is mandatory simply because AO has to first issue a show cause notice and then has to make a decision for levy of penalty after considering the fact that all the conditions provided for in section 271AAB are satisfied. It relied on the ratio of the decision of the co-ordinate bench of the Tribunal in the case of Ravi Mathur vs. DCIT.

As regards the second issue regarding validity of initiation, the Tribunal while deciding the appeal of the assessee held —

“We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. Thus it is clear that the show cause notice issued by the AO for initiation of penalty proceedings under section 271AAB(1A) is very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 6th December, 2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed.”

Since Revenue did not place any material to controvert the submissions of the assessee, the Tribunal on the basis of observations made while deciding the appeal filed by the assessee, allowed the appeal of the assessee and dismissed the appeal filed by the Revenue as it had become infructuous.

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government

46 Vishal Pachisia vs. ITO

ITA No.: 764/Kol/2023

A.Y.: 2016–17

Date of Order: 7th November, 2023

Section: 205

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government.

FACTS

The assessee, a salaried employee, received a salary of ₹17,40,264. The employer deducted tax at source of ₹3,96,700. The employer did not deposit the tax deducted in the government treasury. The assessee in its return of income claimed credit of taxes deducted at source which interalia included the tax of ₹3,96,700 deducted at source by the employer. The AO, CPC denied the credit in respect of the tax deducted at source by the employer on the ground that the same was not deposited by the employer in the government treasury.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that since the employer of the assessee has not deposited the tax so deducted into the government treasury, the assessee is not entitled to claim the credit.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the case of the assessee is covered in its favour by Departmental Circular No. F.No. 275/29//2014–IT(B) and also by decision in Unique Buildcon Private Limited vs. ITO in W.P.(C) 7797/2003 order dated 31st March, 2023, and also decision of co-ordinate bench Pune in the case of Mukesh Padamchand Sogani vs. ACIT in ITA No. 29/Pune/2022 order dated 30th January, 2023.

The Tribunal observed that in all the above cases the issue of non-deposit of TDS by the deductor has been allowed in favour of the assessee by holding that once TDS is deducted then liability resulting from non-deposit of TDS by the deductor cannot be fastened upon the assessee.

The Tribunal having reproduced the operative part of the decision of the Pune bench in the case of Mukesh Padamchand Sognai (supra) followed the said decision and set aside the order of CIT(A) and directed the AO to allow the credit of TDS to the assessee.

The appeal filed by the assessee was allowed.

BCAS President CA Chirag Doshi’s Message for the Month of January 2024

Dear BCAS Family,

At the start of the New Year 2024, BCAS is celebrating its 75th year with a 3-day conference from 4th to 6th January, 2024, with topics on Reimagining the way the World, India, and the Profession will be unfolding in the future.

I, therefore, felt that it would be apt to share my thoughts on the way we can ReImagine to be of relevance going forward as well as be part of the change that we envisage for a better world in the future.

REIMAGINE

Reimagine as a vibrant tapestry of innovation, sustainability, and inclusive growth. Imagine a healthcare system that prioritizes preventive care and embraces technological advancements for universal well-being. Envisage governance that is transparent, accountable, and participatory, fostering a strong democracy. Reimagine the world not just in economic terms but as a beacon of social harmony, cultural richness, and sustainable development, inspiring the overall trajectory of progress.

REIMAGINE INDIA

Envision a nation where diverse cultures and traditions coalesce into a harmonious mosaic, fostering unity amidst diversity. Picture a dynamic economy propelled by cutting-edge technology, entrepreneurship, and green initiatives ensuring a balance between progress and environmental stewardship. See education as the cornerstone, empowering every citizen with knowledge and skills, and bridging urban-rural gaps. Taking a pole position not just in the economic diaspora but also becoming an ambassador of peace and sustainability.

REIMAGINE TAX

Integrate digital taxation models to address the challenges of the modern, globalized economy. Environmental and social impact taxes to incentivize sustainability and fund social initiatives. Simplify tax codes for clarity and reduce administrative complexities.

“One World, One Tax” envisions a unified global tax system, transcending national boundaries for simplicity and fairness. This concept involves a harmonised approach to taxation, minimizing complexities and disparities across countries. It aims to prevent tax evasion, ensure a level-playing field for businesses, and foster international economic cooperation.

“Let us redefine the narrative of taxation, moving from a story of burdens to a tale of empowerment and abundance – where taxes are not only paid but invested in a better future for all.”

REIMAGINE ACCOUNTING AND AUDITING

a. AI for Accounting

Accountants and Chief Information Officers (CIOs) agree that artificial intelligence software is one of the new technologies that will shape the industry’s future.

b. Big Data

Big data has always been preferable for financial experts and accountants whenever it comes to resorting to crucial financial task completion. This technological form is imperative in transforming vital internal data sets into dynamic, secure data analysis.

c. Automated Accounting Process

Automation has drastically changed most industries, and accounting is no exception. The entire management process has become automated with comprehensive solutions. It has helped reduce errors and eliminate confusion.  Since the process relies on computers and servers, businesses tend to fall into money scams and compromised security attacks. This, in turn, raises the demand for in-house auditors to check the financial inputs and data accuracy.

d. Outsourcing the Accounting Functions

Outsourcing is a new way of making advancements in the accounting business. It helps the firms to focus more on their core work rather than worrying over petty issues.  By 2027, the market for outsourcing financial and accounting functions is expected to grow to $56.6 billion.

REIMAGINE AUDIT

“The future of audit is a symphony of innovation, where artificial intelligence and human expertise harmonise to unveil insights that transcend numbers.”
The future of audit is poised for a transformative shift driven by advanced technologies and evolving methodologies. Artificial intelligence and machine learning will play a central role, enhancing risk assessment, automating routine tasks, and providing deep insights into complex data sets. Continuous auditing frameworks will replace periodic assessments, offering real-time monitoring and adaptive risk management. Environmental, social, and governance (ESG) considerations will become integral to audit practices, reflecting a broader commitment to sustainability and responsible corporate practices. The future of audit envisions a dynamic, technology-driven, and collaborative ecosystem that goes beyond financial scrutiny to encompass a holistic evaluation of business performance and ethical standards.

“Audit’s evolution is not just about embracing technology; it’s a commitment to crafting narratives that tell the full story of a company’s impact on the world.”

To stay a step ahead of corporate transformation, auditors must be agile and achieve technological fluency with data and analytics, AI, and robotic process automation.

Way Forward (NFRA)

The establishment of NFRA is a significant step toward improving financial reporting and auditing practices in India. By ensuring transparency, accountability, and adherence to international standards, NFRA contributes to the overall health and trustworthiness of the Indian financial system. However, its success will depend on its ability to navigate challenges, engage stakeholders, and adapt to evolving economic and technological landscapes.

Changing Corporate Landscape – Culture of Innovation and Technology

Cultivating a culture of innovation is essential for organisations aiming to thrive in a rapidly changing environment. It begins by creating an environment that encourages and rewards creativity. When employees feel empowered to think outside the box, share ideas, and experiment without the fear of failure, true innovation can thrive. Collaboration across functional lines and platforms for idea sharing fosters diverse perspectives and sparks innovative solutions.

Technology also plays a vital role in driving innovation and agility in businesses.

“As we look ahead, fintech’s future promises a seismic shift towards democratising finance. Startups are driving this transformation, embodying the spirit of change as expressed by Elon Musk: ‘The first step is to establish that something is possible; then probability will occur.’ Fintech is not just proving the possibility; it’s redefining the probability of financial accessibility for diverse populations globally.”

“As we conclude, we see a narrative of continual evolution, driven by a commitment to innovation, inclusivity, and responsible finance. The words of Steve Jobs resonate: ‘Innovation distinguishes between a leader and a follower.’ Fintech is not just leading; it is pioneering a future where financial technology becomes a force for positive change, shaping a world where finance is a tool for empowerment and inclusion.”

“Also, the Banks of the future are not just witnesses to change; they actively shape a future where banking transcends its traditional boundaries, embracing technological evolution, and fostering financial landscapes that are inclusive, efficient, and resilient.”

Let us celebrate not just our achievements but the spirit of resilience, adaptability, and innovation that defines us as a nation. As we step into this reimagined future, let the journey continue, fuelled by the collective aspirations of a nation that embraces change as a catalyst for progress.

Hope to see you all at the BCAS mega conference – ReImagine, at the Jio World Convention Centre, Mumbai.

Navigating the “CA (E)Volution”: Balancing Responsibility and Compliance in the Fight Against Money Laundering

“The Expanded Role of Chartered Accountants: Implications, Obligations, and Considerations under the New PMLA Rule in India”

The regulatory landscape in India has undergone a significant change with the new rule incorporating Chartered Accountants (CAs), along with Company Secretaries (CSs) and CMAs, as reporting entities under the Prevention of Money Laundering Act (PMLA). CAs, considered the warriors of the national economy, are expected to take the role of reporting entities as a vital role-upgradation for safeguarding the financial system and countering financial crimes. This expansion of reporting requirements places the role of CAs in the spotlight in combating money laundering and terrorism financing. As trusted professionals and gatekeepers of financial information, CAs now have the responsibility of detecting and reporting suspicious transactions linked to illicit activities or money laundering.

This article examines the concerns and considerations faced by CAs, compares approaches in other countries and provides insights on effective ways for CAs to equip themselves in light of the new rule. While there are already sources available for professionals to understand the notification and rules under the PMLA, this article primarily focuses on examining the specific implications and effects on CAs as reporting entities, providing insights and guidance relevant to their role in combating money laundering and terrorist financing.

BACKGROUND

In the context of combating money laundering and terrorist financing, the Financial Action Task Force (FATF), established by the G-7 countries as a global money-laundering watchdog headquartered in Paris under the OECD Secretariat, assumes great significance. This organisation sets global standards to combat money laundering, terrorist financing and other threats to the international financial system. FATF has developed 40 recommendations on legal, financial regulatory, and international cooperation that serve as a framework for countries to collectively address the challenges of money laundering, terrorist financing, and the financing of proliferation. These recommendations are meant to guide countries in effectively implementing measures within their national systems. The accounting profession plays a vital role in supporting the FATF 40 Recommendations in two key methods. Firstly, the “General Framework” recommendations align with the profession’s mission of promoting transparency and facilitating multilateral cooperation. Secondly, the “Financial System” recommendations emphasise the importance of record-keeping, reporting and promoting transparency, which directly aligns with the core competencies of the accounting profession, such as implementing controls and systems and maintaining audit trails.

One such recommendation is Recommendation 29, which requires the establishment of a Financial Intelligence Unit (FIU) in each country. The FIU serves as a central authority responsible for receiving, analysing and disseminating information related to suspicious transactions and financial intelligence. Reporting entities (RE), such as banks, financial institutions and other relevant businesses, are obligated to submit reports to the FIU in accordance with national laws and regulations.

In India, the FIU is known as FIU-IND and operates under the provisions of the PMLA. FIU-IND serves as the national centre for receiving, analysing and disseminating reports on suspicious transactions, money laundering activities, associated predicate offences and terrorist financing. This includes Suspicious Transaction Reports (STRs), Cash Transaction Reports (CTRs) and reports on cross-border wire transfers. The FIU utilises advanced analytics and intelligence tools to analyse the data received from these reports and shares actionable intelligence with law enforcement agencies.

With the recent rule, CAs have also been included as RE under the PMLA, expanding the concept to include them as well. This brings an important understanding of the differentiation between ‘reporting entities (RE)’ and ‘relevant persons.’ Relevant persons, including practising CAs, CSs and Cost and Works Accountants, become RE when they engage in specified financial transactions, thereby requiring them to comply with the necessary regulatory obligations. As relevant persons, CAs are included in the category of professionals who carry out specified financial transactions on behalf of their clients. These financial transactions fall within the ambit of RE, which means that CAs have reporting obligations under the PMLA. Hence, CAs can be referred to as both relevant persons and RE in the context of the PMLA.

As mentioned earlier, the PMLA encompasses a broad range of entities and individuals involved in designated businesses or professions. To specify the scope of RE, the Ministry of Finance, empowered by the PMLA, has outlined certain financial transactions conducted by relevant persons. These transactions pertain to diverse areas such as property dealings, management of client assets and establishment or administration of companies. The Ministry has further clarified that relevant persons encompass practising individuals or firms who hold certificates of practice under the Chartered Accountants Act, 1949, Company Secretaries Act, 1980 or Cost and Works Accountants Act, 1959. This inclusion aligns with the definition of a “person carrying on designated business or profession” and encompasses these professionals undertaking financial transactions on behalf of their clients. Consequently, these professionals assume the role of RE and are obligated to fulfil the requisite compliance obligations stipulated by the PMLA.

Recommendation 22

The above inclusion by PMLA aligns with Recommendation 22 of the FATF on Designated Non-Financial Businesses and Professions (DNFBPs). Recommendation 22 outlines the customer due diligence and record-keeping requirements that apply to DNFBPs in specific situations. These situations include activities carried out by lawyers, notaries, other independent legal professionals and accountants on behalf of their clients.

Recommendation 22(d): “The CDD and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17 apply to designated non-financial businesses and professions (DNFBPs) in the following situations: Lawyers, notaries, other independent legal professionals, and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

  • buying and selling of real estate;
  • managing of client money, securities, or other assets;
  • management of bank, savings, or securities accounts;
  • organisation of contributions for the creation, operation, or management of companies;
  • creation, operation or management of legal persons or arrangements, and buying and selling of business entities.”

By including CAs as RE and imposing compliance obligations on them, the PMLA takes reference from and assumes importance with the customer due diligence and record-keeping requirements outlined by the FATF for DNFBPs. While legal professionals like lawyers are excluded from this rule, unlike in other countries, the inclusion of CAs highlights their crucial role as relevant persons engaged in financial transactions, actively contributing to the fight against money laundering and other illicit activities. Consequently, this ensures that valuable information is gathered as part of the reports collected by FIU-IND, enhancing overall efforts to combat financial crimes.

ACCOUNTANTS AS RE IN OTHER COUNTRIES

In several countries, accountants have been included as RE under their respective Anti-Money Laundering (AML) acts or regimes.

The International Federation of Accountants (IFAC) highlights that while national AML regulations may not explicitly assign accountants specific responsibilities, practitioners are still obligated to adhere to the standards and guidelines set by local accounting bodies. Money laundering is generally not as directly impactful on financial statements as other forms of fraud, like misappropriation. Therefore, detecting money laundering through a financial statement audit is unlikely. However, the indirect consequences of money laundering can still affect an entity’s financial statements, which make it an area of concern for external auditors.

This leads us to the important question of the specific obligations imposed on CAs under this new rule.

THE TRANSITION OF OBLIGATIONS

When interpreting the notification, it is crucial to consider the purpose of the PMLA, which is to combat money laundering and terrorist activities. Suppose a transaction involves the client’s use or sourcing of funds and raises suspicions regarding money laundering or terrorism financing. In that case, the professional cannot claim ignorance of the client’s credentials, as due diligence on the client is a requirement. Additionally, if the professional identifies transactions that require reporting to the FIU-IND, they are obligated to report such transactions.

Comprehensively, below are the factors to be considered or that are expected by the CA to be performed.

1. Enhanced Customer Due Diligence (CDD): There is a need to implement robust CDD measures when establishing a business relationship with a client or when conducting occasional transactions above a certain threshold. Further, the professionals need to gather and verify information about the client’s identity, beneficial ownership and the purpose of the transaction.

2. Transaction Monitoring: The professionals ought to enhance their transaction monitoring systems to detect and report any suspicious transactions. They need to develop an understanding of the typical transaction patterns for each client and be alert to any anomalies or red flags.

3. Suspicious Transaction Reporting: If the professional identifies any suspicious transactions during their audit or through their transaction monitoring systems, they have a legal obligation to report these to the FIU-IND in a timely manner. This involves preparing an STR and submitting it as per the prescribed format and timelines.

4. Record Keeping: The professional must maintain detailed records of their clients, transactions and the measures taken to comply with the reporting obligations. These records should be readily accessible for review by regulatory authorities.

5. Compliance Training and Policies: There is a need for practising professionals to provide appropriate training to their staff on AML / CFT compliance, including recognising and reporting suspicious transactions. They should also update their internal policies and procedures to reflect the new reporting requirements and ensure adherence across the organisation.

As a result, CAs, in addition to the traditional roles in financial auditing, now need to be proactive in identifying and reporting suspicious transactions as per the new PMLA rule. This transition requires them to enhance their knowledge, implement new procedures and stay vigilant in their efforts to combat money laundering.

In practical terms, it is beneficial for CAs to consider the following points, drawing inspiration from a money laundering guide for lawyers. These recommendations encompass similar activities and requirements that can be relevant for CA professionals.

FATF Recommendation Key Consideration Relevance Recommended Actions
10 Customer due diligence Identifying clients and their ownership – Identify the client and their beneficial owner.
– Use reliable, independent source documents or information.
– Request a structure map and details of beneficial ownership for corporate clients.
– Understand the business relationship and the purpose of the transaction.
– Conduct ongoing due diligence to align with your knowledge of the client’s profile and source of funds.
– Refrain from establishing or continuing the business relationship if satisfactory due diligence cannot be carried out.

– Consider reporting suspicious transactions.
11 Record-keeping requirements Maintaining records – Keep copies or originals of documents obtained during CDD measures.
– Maintain files and business correspondence for a specified period or as per the recommended period by the PMLA.
– Include electronic and physical communications and documentation.
– Ensure records are sufficient to reconstruct individual transactions as potential evidence in suits.
12 Enhanced CDD for politically exposed persons (PEPs) Dealing with high-risk clients – Obtain senior partner approval for establishing or continuing a business relationship with PEPs, their families or close associates.
– Take reasonable steps to determine the source of wealth and funds.
– Conduct enhanced ongoing monitoring of the business relationship.
15 New technologies Keeping pace with emerging risks – Identify, assess and manage risks associated with new products, business practices and technologies used by lawyers.
17 Reliance on third parties and group-wide compliance Partnering with reliable entities – Ensure third parties have a good reputation and are regulated, supervised and monitored.
– Confirm that third parties have measures in place to comply with CDD and record-keeping requirements.
– Obtain necessary CDD information from third parties and ensure availability of identification data and documentation upon request.
20 Suspicious transaction reporting Identifying and reporting suspicious activity – Familiarise yourself with the requirements for reporting suspicious transactions in the relevant jurisdiction.
– Report suspicions of criminal or terrorist activity to the FIU-IND as per requirements.

These guidelines, based on the specific recommendations, provide suggested actions for CA professionals to follow in order to comply with the new PMLA rules and effectively prevent money laundering activities. Each recommendation highlights the key consideration, its relevance and the suggested actions to be taken by CAs to fulfil their obligations under the new rule.

ETHICAL CONSIDERATIONS AND CONCERNS

As with any new rule, the implementation of the amended PMLA raises several ethical considerations and concerns that the CA professionals need to navigate. One such consideration is the delicate balance between client confidentiality and reporting obligations. Professionals often face the challenge of deciding when and how to disclose information while upholding the privacy and trust of their clients. One may come across a suspicious transaction involving a client but revealing that information could potentially breach the client’s confidentiality. Striking the right balance requires a deep understanding of the legal framework and clear guidelines. Not to mention the significant effort and investment in conducting thorough due diligence on clients, monitoring transactions and maintaining records.

The enhanced requirements and extensive documentation can be time-consuming and resource-intensive, which requires professionals to allocate sufficient resources to meet these obligations while also ensuring the smooth functioning of their practice.

Importantly, the potential for bias and subjective interpretation in identifying suspicious transactions is also a valid concern. Professionals must ensure they approach their work with objectivity and avoid unintended biases. This can be particularly challenging in cases where transactions may appear suspicious based on subjective criteria. For instance, two professionals may have different interpretations of a transaction’s suspicious nature, leading to inconsistent reporting. Clear guidelines, regular training and collaboration with industry peers can help address this concern.

In light of the new obligations, the CA professionals should equip themselves in the following ways and prepare for the coming days:

The inclusion of professionals like CAs under the PMLA is a significant and welcome development in the fight against money laundering. This expansion of their role emphasises the critical responsibility they hold as warriors safeguarding the financial integrity of the nation. Despite the criticisms surrounding the lower contribution of accountants in terms of STRs compared to other contributors in the global scenario, it remains crucial to strike a balance between compliance efforts and conviction rates in India as the regulatory landscape evolves to combat financial crimes. For instance, although all DNFBPs are required to report suspicious activity reports (SARs), there is underreporting from higher-risk sectors such as trust and company service providers, lawyers and accountants in the UK. It is key to achieving the objective of ensuring that heightened compliance measures effectively translate into successful convictions without imposing an excessive burden on professionals.

The upcoming FATF assessment in 2023 will shed light on the effectiveness of the new notification in addressing financial crimes in India. It is imperative for CA professionals to step up their game by staying updated on compliance regulations, embracing technology and fostering a strong ethical framework. This expanded role signifies a crucial step towards curbing money laundering in India, reinforcing the collective effort to preserve the integrity of our financial system and protecting the interests of our nation.

REFERENCES

1. A Lawyer’s Guide to Detecting and Preventing Money Laundering October 2014, A collaborative publication of the International Bar Association, the American Bar Association, and the Council of Bars and Law Societies of Europe.

2. https://www.nortonrosefulbright.com/en-au/knowledge/publications/bae065f5/tranche-2

3. Anti-money laundering, 2nd edition by IFAC.

4. Extending the Reach: CAs, CMAs and CSs brought under the ambit of PMLA reporting entities by Dr (CA) Durgesh Pandey.

5. https://legal.thomsonreuters.com/en/insights/articles/what-is-a-suspicious-activity-report

6. Requiring Lawyers to Submit Suspicious Transaction Reports: Implementation Issues and Current International Trends by George V. Carmona, Chief of Party, ROLE – USAID

7. Guideline: Accountants Complying with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, March 2018, published by New Zealand Government

8. https://fintrac-canafe.canada.ca/re-ed/accts-eng

9. https://ec.europa.eu/commission/presscorner/detail/en/MEMO_13_64

10. https://alessa.com/blog/compliance-with-bank-secrecy-act-aml-requirements/

11. https://cfatf-gafic.org/index.php/documents/fatf-40r/388-fatf-recommendation-22-dnfbps-customer-due-diligence

12. https://www.cfatf-gafic.org/index.php/documents/fatf-40r/395-fatf-recommendation-29-financial-intelligence-units

13. https://www.rupanjanade.com/post/the-role-of-professionals-under-the-redefined-pmla

वसुधैव कुटुम्बकम् | अहोरूपमहो ध्वनि: |

Friends, in the present article, we will discuss two well-known shlokas. The first one is:

अयं निज: परो वेति गणना लघुचेतसाम् |

उदारचरितानां तु वसुधैव कुटुम्बकम् ||

Literal meaning —

‘This person is mine, while this person is a stranger — this type of thinking is that of narrow-minded people. On the other hand, for people with liberal thinking, the whole earth (world) is one family.

This is a great message from our rich Indian culture. Our philosophy is ‘inclusive’ and not ‘exclusive’. No other
country or community has ever thought of treating all the people in the world as family members. This thought is deeply rooted in Indian hearts. Of late, due to vicious politics, people are promoting or encouraging communalism, separatism, a divide between two sects, two groups, two ideologies, etc. They have vested interests in it. Our ancient sages never thought along these lines.

Indians never invaded any country. Indians won over others through their trade, quality products, education, and above all, honesty and affection. We had no specific religion, no single founder, and no single religious book. We were never possessive about anything. Knowledge was freely available to all. In ancient literature, Dharma referred to one’s duty and not to the ‘religion’ as we understand it today.

There was not even the concept of belonging to the family. That is the joint family system or in modern times, thanks to tax laws, popularly known as ‘HUF’. That is why there was no concept of ‘Will’ in our culture. Nothing belonged to anyone personally.

That is also the reason why and how we Indians accommodated and absorbed even the invaders of the country — despite their cruelty and narrow-minded attitude.

The ‘world family’ is not our hypocrisy or ‘agenda’. All sages and saints not only preached it but practised it. It came naturally to them. Society harassed the saints, they still gave back to society everything with love and affection. This is possible only when we consider all of them as our family members. That should give rise to mutual love, affection, and cordiality.

Swami Vivekanand won the hearts of all present at the Chicago World Religious Congress with just two words — ‘My brothers and sisters of America’. These words can be uttered only by a firm believer in the principle of ‘Vasudhaiva Kutumbakam’. Needless to say that Vasudha (earth) includes the whole of nature — trees, animals, birds, and everything!

We worship nature — trees, rivers, ocean, mountains, animals, and so on. People are realising its importance now — when they shout about ‘environment’.

Sant Dnyaneshwar’s prayer Passayadaan (पसायदान) is full of this feeling of वसुधैव कुटुम्बकम्.

Let us reinforce this great principle and become a real “Vishwa-guru”

अहोरूपमहो ध्वनि: |

Full shloka reads as follows:

उष्ट्राणां च विवाहेषु गीतं गायन्ति गर्दभा: |

परस्परं प्रशंसन्ति अहोरूपम् अहो ध्वनि: ||

Once at a wedding function of Camels (उष्ट्र), Donkeys (गर्दभ) were singing. Both were praising each other.

Donkeys said about Camels – ‘what a handsome appearance’. Camels reciprocated by saying ‘what a melodious voice’.

In today’s world, mediocre things become popular since the high taste of the elite class has deteriorated and diluted. In reality shows on TV channels, praise is showered on each other in ‘superlative’ words. Modern dances, which are in the nature of acrobatics, suppress the real classical dances. The loud orchestras have suppressed classical music. The same is the position in other arts and literature. So also, in politics, mediocre leaders put up big banners for self-promotion. The honest and dedicated leaders who have a genuine desire to do something good for society and who put in genuine efforts are often side-lined.

Such mediocre and inefficient people have no identity of their own, no talent, no recognition. They stay in mobs and they form a ‘Mutual Admiration Club’.

That is nothing but ‘अहोरूपमहो ध्वनि: |

Taxpayers’ Charter – Implement It in Letter and Spirit (Respect Begets Respect)

One would like to visit a place often where one gets respect. More than what we are treated with, “how” we are treated is important. And therefore, one would shudder to go to a Police Station. However, some people have a similar feeling while visiting the Income tax office. The trust deficit between the Income-tax department and the taxpayer is so high that both suspect and disrespect each other. Respect for the fellow human being is the cardinal principle of a civilized society. However, it is not to be found while dealing with some government agencies.

In this connection, the first two declarations of the Taxpayers’ Charter by the Income-tax Department1, which was issued on 13th August, 2020, deserve our attention.

  1. https://incometaxindia.gov.in/Documents/taxpayer-charter.pdf

They are as follows:

“The Income Tax Department is committed to:

1. Provide fair, courteous, and reasonable treatment

The Department shall provide prompt, courteous, and professional assistance in all dealings with the taxpayer.

2. Treat taxpayer as honest

The Department shall treat every taxpayer as honest unless there is a reason to believe otherwise.”

In all, there are 14 declarations in the Taxpayers’ Charter. However, even if the first two declarations cited above are implemented in letter and spirit, they can help to reduce the trust deficit to a great extent.

When one looks at the language of the notices or summons issued by the Income-tax department, one feels that much needs to be done to implement these two declarations in the Charter. Of late, summons are sent by the Investigation Wing of the Income-tax department even to non-residents who have been living abroad for ages, seeking details of their worldwide affairs without jurisdiction. Moreover, the notices threaten to levy a penalty for non-attendance and contain a direction not to leave the officer’s chamber until permitted to do so. Such an attitude creates fear and causes reluctance in nonresidents in even venturing into obtaining a PAN in India. Notices from the Income-tax department use unfriendly language and end with a threat to levy a penalty for noncompliance. The tone of the communication from the Income-tax department is that taxpayers are suspected tax evaders. These attitudes need to be changed with soft skills training for officers on the approach to taxpayers.

It is worth noting the remarks made by the Prime Minister while launching the Taxpayers’ Charter – “it is a significant step where the taxpayer is now assured of fair, courteous and rational behaviour.” He said the charter takes care of maintaining the dignity and sensitivity of the taxpayer and that is based on a trust factor and that the assessee cannot be merely doubted without a basis. Many steps have been taken by the Government to improve taxpayers’ services, such as the use of technology, faceless assessments, faceless appeals, etc.; however, much more remains to be done.

The experience of the taxpayer is quite dismal when it comes to fair and reasonable treatment by the Incometax department. High-pitched assessments, withholding of refunds, denial of exemptions/deductions, reopening of assessments without making base papers available to taxpayers, adjustment of refunds against unverified past demands, past incorrect demands reappearing time and again, and the absence of accountability on the part of tax officials remain painful experiences of taxpayers, even today. The levy of a high penalty (Rs. Ten Lakh) under the Black Money Act for mere failure to disclose (in respect of a legitimate transaction) a foreign asset or signatory of a foreign bank account, etc., by an Indian resident cannot be justified as fair and reasonable on any count. Some overzealous Assessing Officers want to tax anything and everything, as there is no accountability if they are found to have gone overboard.

The powers given by the recent insertions in section 245 of the Income-tax Act are prone to misuse and harmful to taxpayers. The amended provisions allow tax authorities to withhold refunds on the basis that they are anticipating some demand to arise in future upon the conclusion of pending assessment proceedings. In any case, refunds of higher amounts are invariably delayed or withheld without any valid reason; the amended provision will legitimatise the right of tax officials to delay refunds.

Backdoor assumption of powers by the CBDT?

Many sections, e.g., section 115BAB, sections 206C(1G/H), 194-O, 194Q, 194R, 194S, etc., are amended to assume powers by the CBDT to issue binding guidelines on the taxpayers and tax officials. So far, guidelines issued by the Income-tax department were biding only on the officers. However, under the new provisions, guidelines issued by the CBDT shall be binding on both taxpayers and IT officials. Even though these guidelines need to be approved by the Parliament, it hardly makes a difference. There is a fear that officials will assume powers to amend the law in the name of clarifications, etc. The glaring example is FAQ 4 of Circular 12/2022 issued in the context of S.194R, which states that the cost of a free medicine sample given by a pharma company to a doctor with the 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 section 194R. This interpretation of the tax department may not stand the test of judicial scrutiny. However, till such time, the taxpayer will be bound by it, as it is a part of the binding guideline. Such provisions are clearly against the spirit of the Taxpayers’ Charter, which aims to be people-centric and public-friendly.

Unfortunately, one can still see the grip of bureaucracy over law-making. The laws are framed for outliers/exceptions. In the name of plugging loopholes, court rulings in favour of taxpayers are nullified by legislative amendments, citing legislative intent, which may not be true. This calls for a complete change of mindset in policymaking and advising.

Two other important declarations in the Taxpayers’ Charter are (i) Providing a Just and Fair Tax System and (ii) Reducing the Cost of Compliance. When one looks at both of these declarations, one cannot help but feel that the ground-level reality is far from the promises in the Charters.

Let us hope that the Income-tax officials will implement the Taxpayers’ Charter in the spirit of “Transparent Taxation — Honouring the Honest”, the underlying theme announced by the PM while launching the structural reforms platform of Faceless Assessment, Faceless Appeal and Taxpayers’ Charter. Needless to add, every rule, law, and policy has to be people-centric and publicfriendly, rather than process and power-centric.

New Criminal Laws in the New Year

One major development on the judicial front is the enactment of three new criminal laws, to replace the colonial-era criminal laws. The focus of the earlier laws was to levy penalties, whereas the focus of the new laws is to give justice to the victim. The three New Laws are: (1) The Bharatiya Nyaya Sanhita, 2023 (replacing the “Indian Penal Code, 1860”) (2) The Bharatiya Nagarik Suraksha Sanhita, 2023 [ replacing The Code of Criminal Procedure, (CrPC) 1973] and (3) The Bharatiya Sakshya Adhiniyam, 2023 (replacing the “Indian Evidence Act, 1872”).

The laws are not only named in Bharatiya style but claimed to be Bharatiya in spirit to keep pace with the current times and get rid of the colonial mindset. The new laws provide penalties for crimes such as terrorism, mob lynching, and offences jeopardising national security. The new laws will have a far-reaching impact on internal security and law and order situation in India. However, to make these laws more effective, judicial reforms need to be undertaken at the earliest.

Let us hope that Bharat ushers in the New Year with a progressive, positive, and pragmatic mindset, leaving behind a colonial legacy!

Wish you a happy and prosperous 2024!