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Year: 2025

Letter To The Editor

To,

The Editorial Board,

BCAJ.

Subject: Article “परोपदेशेपांडित्यम्” in the March 2025 issue

Thank you for publishing C.N. Vaze’s deeply thought-provoking article “परोपदेशेपांडित्यम्” in the March 2025 issue. It struck a powerful chord. The observation that we are often eloquent in advising others yet lax in applying those very principles to our own lives is not only accurate but uncomfortably familiar.

Mr. Vaze has written with great clarity on professional ethics in the past, and this piece continues that important reflection. A typical case in this context is when a peer, who shares the same ethical vows, enables the filing of frivolous complaints—not out of a sense of duty, but from rivalry, resentment, or plain indifference. These aren’t just baseless grievances; they are missiles launched from the silos of personal angst, and once fired, they initiate a procedural chain reaction. Long-drawn ethical proceedings are set in motion. Time, energy, and resources are drained not in pursuit of justice, but in managing shadows. And while these cases often crumble under scrutiny, their residue lingers—on reputations, on mental health, on the very fabric of professional dignity.

Genuine breaches must be pursued with rigor—I fully support that. But unchecked misuse erodes trust. Ethics and values must be more than just talk; they should guide our choices, especially when faced with personal agendas.

The line चित्तेवाचिक्रियायांचसाधूनाम्एकरूपता encapsulates a rare ideal—that of harmony between thought, speech, and action. As professionals, that alignment should be our guiding star. And though we may falter, striving toward that integrity gives our journey its meaning.

Warm regards,

CA Rajeev Joshi

Mumbai

 

The Editor

BCAJ

Mumbai

Dear Sir,

I refer to Ms. Kunjal Parekh’s article “ A Chartered Accountant’s guide to writing…”. She has written like a veteran writer and not as some one who is writing her first article. With liberal doses of humour (self-deprecating at times), the article is a good read. Having made a start, hope Ms. Parekh writes more often. After all, writing, as the author says, is about starting.
Congratulations to the author for scoring a century on debut.

Warm regards.

S.Viswanathan

Bangalore

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

1- [2025] 171 taxmann.com 230 (SB)

Mashreq Bank Psc vs. DCIT

ITA No:1342 (MUM) of 2006

A.Y.:2002-03Dated: 6th February, 2025

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

FACTS

The Assessee, a tax resident of the UAE, was engaged in banking business in India through branches. The branch claimed deduction towards expenses incurred by HO without any restriction on the quantum of deduction. Further, it claimed certain expenses that were directly incurred outside India by HO as they were related to business operations of Indian branch.

Applying Section 44C, the AO restricted deduction of HO expenses to 5% of average adjusted total income. Further, the AO denied deduction for certain expenses (such as, SWIFT charges and global accounting software maintenance expenses) that were directly incurred by HO for branch operations.

CONSTITUTION OF SPECIAL BENCH

In Assessee’s case for AY 1996-97, ITAT held that Article 25(1) provided for computation of income and Article 7(3) of India-UAE DTAA should not be interpreted in a manner to restrict the application of domestic law. For AY 1998-99 and 2001-02, ITAT did not follow its earlier order and held that Article 7(3) did not restrict deduction of head office expenses. Therefore, provisions of DTAA should prevail over domestic law. ITAT further noted that amendment to Protocol to India-UAE DTAA with effect from 01 April 2008 restricted allowability of HO expenses.
Given the conflicting view in the Assesses’ own cases and other cases, a Special Bench was constituted at department’s request.

HELD

Head Office Expenses

Article 7(3) deals with determination of profits of PE. It provides for deducting all expenses incurred for PE business, including general and administrative expenses. Prior to amendment of India-UAE DTAA vide Protocol (Notification no. SO 2001(E) (NO) 282/2007, dated 28-11-2007), the Article did not restrict quantum of deduction or provide for reference to domestic law.

The first part of Article 25(1) provides that domestic law provisions deal with income and capital taxation arising in respective states. The later part provides that if any express provision under DTAA is contrary to domestic law, taxation shall be governed by DTAA and not by domestic law. This position aligns with interpretation of Section 90(2) namely, DTAA provisions shall override domestic law provisions to the extent beneficial to Assessee.

The scope of Article 25(1) as regards computation of business profits cannot be interpreted in a way that imposes restrictions on the manner of computing tax liability under Article 7(3), or to read restrictions under domestic law into DTAA. There was no need to introduce limitation via the Protocol if Article 25(1) was to be interpreted otherwise. Article 25(1) and Article 7(3) operate differently as the former deals with eliminating double taxes and later deals with determining business profits.

Provisions contained under DTAA must be interpreted in good faith in accordance with the terms employed by the contracting states. Prior to its amendment, Article 7(3) did not restrict allowability of expenses. This position was changed after re-negotiation of India-UAE DTAA. The amended Article 7(3) was intended to be applied w.e.f. 1st April, 2008. Hence, in absence of an express provision, it could not be applied retrospectively.

India has entered into certain DTAAs, such as those with UK and Germany, which impose restrictions on allowability of expenses, and certain DTAAs, such as those with France, Mauritius, and Japan, which do not impose any such restrictions. This indicates that conditions imposed under respective DTAAs are based on bilateral negotiations between the partners and consideration of economic and political factors.

Therefore, Article 7(3) is an express provision that overrides the provisions of Section 44C of the Act.

DIRECT EXPENSES BY THE HO FOR BRANCH OPERATIONS

Section 44C defines the term ‘head office expenditure’. These are common expenses incurred by HO for HO and various branches and are subsequently allocated to respective branches.

Circular No. 649 dated 31st February, 1993, provides that while computing business profits, the expenditure covered by Section 44C must be allowed without imposing any restriction.

Therefore, an expenditure exclusively incurred outside India for Indian branches must be allowed as a deduction without any limits.

Unravelling The Forensic Accounting And Investigation Standards

1. INTRODUCTION:

Investigations in the corporate landscape are referred to by a multitude of typologies, such as workplace, fraud, forensic or ethics investigations, to name a few and these typologies are representative of the myriad methods, techniques and processes deployed to achieve a singular objective i.e. discovery and determination of facts relating to an alleged violation. Given this context, the Forensic Accounting and Investigation Standards (“FAIS” or “Standards”)1 issued by the Institute of Chartered Accountants of India (“ICAI”) is a salient endeavor as it seeks to amalgamate a multitude of complex and divergent topics to provide a simple and unified framework for practitioners. However, applying a reductive approach to a complex matter can sometimes introduce unforeseen challenges. This note explores issues which stakeholders ought to consider apropos the services which fall within the ambit of FAIS.

1 Paragraph 1.2 of the Framework governing Forensic Accounting & Investigation 
(“FAIS Framework”) read with Paragraph 1.2 of FAIS 110 – Nature of Engagement

2. SCOPE:

The FAIS which took effect on 1st July, 2023, comprise of 20 standards addressing core topics such as fraud risk and fraud hypothesis, engagement acceptance, planning, and reporting and apply when a Professional renders services falling within the definition of Forensic Accounting, Investigation or Litigation Support services (“FAIS Services”). The definition of “Professional”2 encompasses not only members of ICAI but also other professionally qualified accountants engaged in forensic accounting and investigation. However, while compliance with the FAIS is mandatory for Chartered Accountants (“CA”), whether in practice or employment, it remains voluntary3 for qualified professionals who are not members of the ICAI.

2  Paragraph 3.1 of FAIS Framework
3  Paragraph 3.1.2. of the Implementation Guide on FAIS No 000


3. DEFINING & DISTINGUISHING FAI SERVICES: OVERLAPPING BOUNDARIES AND CONSEQUENCES

Formulating a precise definition can be especially challenging when a term aims to cover a wide range of scenarios or straddles multiple domains. This difficulty is apparent in the FAIS, which seeks to capture all possible subject matter and objectives of investigations, including investigations into financial, operational matters or in connection with litigation. As discussed further, while striving to remain sufficiently broad, these definitions run the risk of being so expansive that they become unwieldy.

3.1. FAIS DEFINITIONS

  •  Forensic Accounting4 :This term is defined as “gathering and evaluation of evidence by a professional to interpret and report findings before a Competent Authority5” and is further explained as “The overriding objective of Forensic Accounting is to gather facts and evidence, especially in the area of financial transactions and operational arrangements, to help the Professional6 report findings, to reach a conclusion (but not to express an opinion) and support legal proceedings”.
    4 Paragraph 3.2.1 of FAIS Framework read with Paragraph 3.3.1 of FAIS 
Framework
    5 Competent Authority is defined as “Competent Authority refers to a court of law 
(or their designated persons), an adjudicating authority or any other judicial 
or quasi-judicial regulatory body empowered under law to act as such” - 
Refer Page 155 of FAIS - Glossary of Terms
    6 Professional is defined as a professionally qualified accountant, 
carrying membership of a professional body, such as the ICAI, 
who undertakes forensic accounting and investigation assignments using accounting, 
auditing and investigative skills. Refer Paragraph 3.1 of the FAIS Framework.
  •  Investigation7: Investigation is defined as “the systematic and critical examination of facts, records and documents for a specific purpose” and is explained as “a critical examination of evidences, documents, facts and witness statements with respect to an alleged legal, ethical or contractual violation. The examination would involve an evaluation of the facts for alleged violation with an expectation that the matter might be brought before a Competent Authority or a Regulatory Body8”.
    7 Paragraph 3.2.2 of FAIS Framework read with Paragraph 3.3.2 of FAIS Framework.

8 Regulatory Body is defined as “Regulatory Bodies are established to govern 
and enforce rules and regulations for the benefit of public at large”.- 
Refer Page 160 of FAIS – Glossary of Terms
  •  Litigation Support9: While this term is undefined, it has been explained as “may include mediation, alternative dispute resolution mechanisms or the provision of testimony”10. Litigation is defined as “a process of handling or settling a dispute before a Competent Authority or before a Regulatory Body. Litigation could include mediation and alternative dispute resolution mechanism11”. Examples of Litigation Support include scenarios where a CA is asked to provide evidence in support of the observations made in a forensic report to an Investigation Agency or Competent Authority or a valuation exercise which may be used in settlement negotiations in context of a dispute12.
    9 Paragraph 3.2.3 of FAIS Framework – Page 17

    10  Paragraph 1.2.(c) of FAIS 110 – Nature of Engagement

    11  Paragraph 3.2.3 of FAIS Framework

    12 Paragraph 5.4 of the Implementation Guide on FAIS 110 –
      Nature of Engagement

While at first blush, Forensic Accounting and Investigation appear to be similar in coverage as they envisage evaluation of evidence in connection with reporting to a Competent Authority. However based on a conjunct reading of FAIS 11013 – Nature of Engagement read with the Implementation Guide on FAIS 11014 it appears that matters involving review of transactions and accounts with a definitive objective to report to a Competent Authority would be classified as Forensic Accounting. The clear implication here is that this exercise should be taken to gather evidence which is admissible in front of a Competent Authority. On the other hand, considering that Forensic Accounting presupposes reporting to a Competent Authority, it appears that any internally initiated exercise including review of financial transactions, would be classified as an Investigation, even though the underlying issue may be subject to the jurisdiction of a Competent Authority or Regulatory Body.

13  Paragraph 3.2, 3,3,4.2 & 4.3 of FAIS 110 – Nature of Engagement.

14  Paragraph 3.2, 3.3 and 3.4 of the Implementation Guide on FAIS 110 – 
Nature of Engagement

However, the examples cited in the FAIS15 do not appear to support the aforesaid reasoning. For instance, the estimation of loss of assets or profits for an insurance claim or the assessment of pilferage of inventory, which would not necessarily entail reporting to a Competent Authority are classified as Forensic Accounting, whereas alleged manipulation of stock prices or an exercise to identify misutilisation of funds consequent to loan defaults, are placed under the umbrella of Investigations. Furthermore, although the term Litigation Support suggests services where a CA represents a client in legal proceedings, its broad scope and varied applications, as can be inferred from the inclusive meaning and examples, can blur the lines between Litigation Support and Investigation.

15 Paragraph 5.2 and 5.3 of the Implementation Guide on FAIS 110 –
 Nature of Engagement

In conclusion, the imprecision and overlap in the definitions of Forensic Accounting, Investigation, and Litigation Support create an interpretational haze that is difficult to resolve.. Without more precise and harmonized guidelines, these definitions risk being stretched to a point where they offer little functional clarity, thereby leaving CA uncertain about the exact nature of their engagements and the requirements to be met before a Competent Authority or a Regulatory Body.

3.2. BROADENING THE SCOPE: BEYOND FRAUDULENT ACTS

Although fraud16 has been defined in the FAIS, the definitions of Forensic Accounting and Investigation (“Forensic Investigation”) do not explicitly reference it. The Implementation Guide on FAIS 110 – Nature of Engagement, which is advisory, notes that an Investigation aims to “uncover potential fraud…” and “check for fraudulent intent…”17, yet the definition of Investigation, which refers to “legal, ethical or contractual violation”, strongly suggests that fraud is not a predicate element. Collectively this implies that even matters where fraud, misrepresentation, or misappropriation (collectively “Fraudulent Acts”) is not suspected might fall under the FAIS.

16  Paragraph 3.2.4 of FAIS Framework

17  Paragraph 3.3 of Implementation Guide on FAIS 110 – Nature of Engagement

The Cambridge dictionary describes the term Forensic as “related to scientific methods of solving crimes”18. The American Institute of Certified Public Accountant’s Statement on Standards for Forensic Services (“AICPA FS”) specifies wrong doing 19 as predicate element of an investigation. On a similar note, SEBI’s LODR which mandate reporting of Forensic Audits by listed companies reference an element of wrongdoing by referring to “mis-statement in financials, mis-appropriation / siphoning or diversion of funds” as a prerequisite element20. Collectively, this implies that wrongdoing or misconduct ought to be an essential aspect of a Forensic Investigation.

18 Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/forensic?q=Forensic, 
Last accessed on March 25, 2025.

19  Para 1 of AICPA FS

20 “Frequently Asked Questions (FAQ) On Disclosure of Information Related 
to Forensic Audit of Listed Entities”, SEBI, https://www.sebi.gov.in/sebi_data/faqfiles/nov-2020/1606474249513.pdf, 
Last Accessed on March 25, 2025.

As such, it appears that FAIS diverges from the norm. To cite an example, the AICPA FS stipulate that valuation exercises not rendered in context of a litigation or investigation, would not be considered as a forensic service21. However, the examples cited in the FAIS22 suggest that exercises in nature of valuations and loss estimations are classified as Forensic Accounting, including even where litigation is not anticipated or wrongdoing is not suspected.

21 Para 2 of AICPA FS

22 Annexure 1 of FAIS 210 – Engagement Objectives read with Paragraph 5.2

 and 5.3 of the Implementation Guide on FAIS 110 – Nature of Engagement

By not requiring Fraudulent Acts as a starting point and by using undefined terms like “operational arrangements” or broad phrases such as “legal, ethical or contractual violations,” the FAIS potentially and may be inadvertently extend their scope to a wide array of fact-finding engagements. Even routine engagements can fall under the FAIS definition of an Investigation. For instance, if GST authorities flag discrepancies in sales data, hiring a CA to verify these discrepancies, even without any suspicion of wrongdoing could fall within the ambit of FAIS, as it involves a critical examination of records for a potential legal violation. Similarly, if a buyer alleges discrepancies in supply of goods, any assistance provided in evaluating the claims, may qualify as an Investigation, given the alleged breach of contract.

The decision not to explicitly require an allegation or indication of fraudulent activity in the definitions of Forensic Accounting and Investigation under the FAIS has significant practical implications. Although this breadth appears designed to accommodate a wide range of factual inquiries, it can lead to confusion and dissonance among both CAs and stakeholders as to whether a particular engagement would fall within the ambit of FAIS.

CAs are bound to assess whether an engagement falls within the FAIS and report compliance in their reports23. However, clients would be wary of labelling ordinary fact-finding exercises as a “forensic” exercise as this characterisation may lead to an inference of suspected misconduct triggering governance and reporting obligations as well as potential reputational risks. This approach may translate into more extensive documentation, enhanced reporting standards, and greater administrative overhead, placing a disproportionate burden on clients for lower-risk assignments. The same poses practical challenges which the CAs and client will have to proactively work together to address appropriately.

23  Paragraph 4.3 of FAIS 510 – Reporting Results

Furthermore, if Fraudulent Acts are not a predicate element, then the application of topical standards relating to fraud (such FAIS 120 – Fraud Risk) would be irrelevant. And since fraud is the predicate theme which binds the various FAIS, this incongruity may lead to potential complexities in the application of the FAIS leading to deficient outcomes.

3.3. DETERMINING FAIS APPLICABILITY

The FAIS ties its applicability to the purpose for which a service is rendered, yet its broad definitions may make it difficult to classify engagements. In particular, the terms “alleged legal, ethical or contractual violations” and “expectation” of litigation remain undefined, allowing multiple interpretations of whether an engagement qualifies as an Investigation or a general fact-finding exercise.

For instance, examining financial records for improper payments can serve markedly different objectives; from a straightforward risk assessment to probing suspected impropriety. If the client’s stated goal is merely to assess risk, the FAIS may not apply. However, if concerns of wrongdoing trigger the exercise, then FAIS could be applicable. In practice, determining which scenario applies can be challenging and, while dependent on the Client’s stated objectives, would also require a CA to assess the potential outcomes which would arise thereon.

Making a consistent and defensible classification often calls for legal expertise to interpret complex facts and predict potential outcomes; tasks that may extend beyond the CA’s traditional skill set. In high-stakes situations with uncertain or evolving circumstances, this lack of clarity poses a significant risk of non-compliance, underlying the need for more precise guidance in the FAIS.

4. INDEPENDENCE – UNREALISTIC PRESCRIPTIONS

The Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and should “be free from any undue influence which forces deviation from the truth or influences the outcome of the engagement”24 and that the CA “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”25. A CA who is unable to establish the scope or the way the work is conducted would be violating the principle of independence26, which in turn would necessitate a qualification in the CA’s report27 or withdrawal by the CA from the engagement. At the same time ‘FAIS 210 – Engagement Objectives’ indicates that scope should be agreed upon with the client. Based on a conjunct reading, it appears that a CA should primarily determine the scope but with the consent of the client.

This strict independence requirement would be reasonable where the mandate to investigate is derived under law, such as an investigation initiated by regulators like SEBI but would appear to be excessive in case of client-initiated mandates, such as internal investigations, where a CA is rendering a contractual service at the client’s request. It may be noted that he AICPA FS do not prescribe independence as a requisite standard for forensic service28.

24 Paragraph 3.1 of Basic Principles of Forensic Accounting
 and Investigation (“Basic Principles”)

25  Paragraph 3.1 of Basic Principles

26  Paragraph 3.1 of the Basic Principles

27Paragraph 5.3 of the Preface to the Forensic Accounting 
and Investigation Standards (“Preface”)

28  Paragraph 6 of AICPA FS

5. ADHERENCE TO FAIS BY IN-HOUSE CAs

As explained above, the Basic Principles of FAIS (“Principles”) mandate that a CA should be “independent” and “needs to resist any pressure or interference in establishing the scope of the engagement or the manner in which the work is conducted and reported”29. FAIS appear to be mandated for CAs in employment (“CA-E”) and it is obvious demonstrating this extent of independence in an employer-employee relationship is infeasible given the nature of the relationship.

29  Paragraph 3.1 of Basic Principles

CA-Es operate in a different work construct when compared to CAs in practice. In fact, independence standards stipulated in the Code of Ethics issued by the ICAI apply to CAs in practice only. If FAIS are considered to be applicable to CA-Es, the potential conflicts and issues which would arise, may discourage CA-Es in undertaking any task in the nature of a FAIS Service. To illustrate, FAIS presupposes that the lifecycle of a FAIS engagement would be structured starting with engagement acceptance and culminating with a report, a structure which may not be practical or realistic in certain respects in the context of Forensic Investigations performed by a CA-E. As such, FAIS Services rendered by CA-E may be challenged as being non-compliant with FAIS and this deficiency may be used to discredit the outcome or findings of FAIS Services.

6. ATTORNEY CLIENT PRIVILEGE – DISHARMONIOUS CONSTRUCTION

Attorney-client privilege, in the context of investigations, is a legal doctrine that protects communications, including the work product, between a client and their legal counsel from disclosure to third parties including regulators, ensuring that sensitive information exchanged for obtaining legal advice remains confidential. In many Forensic Investigations, a CA may be retained under the direction of legal counsel specifically to maintain this protective umbrella, thus preserving privileged communications and related work products from forced disclosure.

However, the FAIS presupposes that the CA independently determines the scope and procedures of the engagement, without explicitly acknowledging the role of legal counsel over the investigatory process. This oversight can create tension: on one hand, the CA must comply with the FAIS; on the other, she is expected to operate under legal counsel’s instructions to maintain privilege. The resulting ambiguity raises serious questions about whether adherence to FAIS could inadvertently undermine attorney-client privilege, potentially compelling a CA to disclose information that would otherwise remain protected.

While the FAIS provides that CAs should consider the applicability of privilege while sharing evidence, the application of independence standards prescribed under FAIS may mean that umbrella of privilege may not be available, even if the CA is working under the directions of legal counsel. It is suggested that the ICAI should provide clarification that in relation to all work products protected by privilege, CA engaged through legal counsel may heed to the advice of the legal counsel, especially considering the applicable law which confers privilege on persons engaged by advocates under Section 132 (3) of Bhartiya Sakshya Adhiniyam, 2023.

7. SHARING INFORMATION WITH GOVERNMENT AGENCIES: BALANCING OBLIGATIONS AND CONFIDENTIALITY

“FAIS 240 – Engaging with Agencies” (“FAIS 240”) prescribes the standards in connection with interactions with Law Enforcement Agencies30 and Regulatory Bodies31 (collectively referred to as “Agencies”) in connection with FAIS Services. FAIS 240 clarifies that testimony32 is a statement provided to a Competent Authority33 such as a court, and is not included in the scope of FAIS 240. As such, it appears that any interaction with Agencies such as CBI or the ED, which are distinct from a Competent Authority, would fall under the scope of FAIS 240.

FAIS 24034, when read with Implementation Guide on FAIS 24035, appears to stipulate that a CA should provide information and / or clarifications to Agencies in connection with FAIS Services when called upon do so. FAIS 240 also stipulates that CAs should, in their engagement letters36, include clauses relating to sharing of information with Agencies without prescribing any guardrails on the nature or extent of information which is to be shared or any due processes to be followed, such as approval of or communication to the client, before sharing such information.

30 Defined in Paragraph 1.3 of FAIS 240 – Engaging with Agencies as 

“typically Central or State agencies mandated to enforce a particular law with the power to prevent,

 detect and investigate non-compliances with those laws. Their powers may be restricted

 by jurisdiction or by the law they are entrusted to enforce.”
31 Defined in Paragraph 1.3 of FAIS 240 -- Engaging with Agencies as

 “established to govern and enforce rules, laws and regulations for the benefit of public at large”

32 Defined in Paragraph 1.3(b) of FAIS 360 – Testifying before a Competent Authority - 

 as “A statement of the Professional whether oral, written or contained in electronic form,

 testifying before the Competent Authority on the facts in relation to a subject matter.”

33 Defined in Paragraph 1.3(d) of FAIS 360 – Testifying before a Competent Authority as 

“Competent Authority refers to a court of law (or their designated persons), an adjudicating 

authority or any other judicial or quasi-judicial regulatory body empowered under law to act as such.”

34 Paragraph 1.4(b) FAIS 240-Engaging with Agencies

35 Paragraph 3.2 of Implementation Guide on FAIS 240

36 Paragraph 4.4 FAIS 240-Engaging with Agencies

It also appears that FAIS 240 conflicts with the Basic Principles which prohibit the sharing of confidential information without the approval of the client, unless there is a legal or professional responsibility to do so and it can be argued that FAIS 240, which is specific, would take precedence over the Basic Principles, which are generic. Agencies can potentially use this argument to seek information from CAs, including that protected by attorney-client privilege, as refusal to share may be construed as non-compliance with FAIS which would in turn may lead to grounds for initiating disciplinary action against the CA.

It would be beneficial for the FAIS to explicitly provide exemptions for CAs from disciplinary action in situations where they refrain from sharing information to uphold attorney-client privilege, as outlined in FAIS 240. This clarification would further reinforce the principle of client primacy established in the Basic Principles.

8. CONCLUSION

While the FAIS are a laudable initiative to standardize and elevate forensic engagements, certain ambiguities and unrealistic requirements risk creating confusion and compliance challenges. The likely outcome and forum of a FAIS Service is litigation where it would be subject to extensive rigor and scrutiny. However, as discussed, the inherent ambiguities and sometimes, incompatible standards may impact the defensibility of a FAIS Service in a legal setting. Greater precision in defining key terms, a more realistic approach to independence in client-engaged scenarios, explicit accommodation for attorney-client privilege, and clearer guidance for in-house CAs are needed. By addressing these issues, the ICAI can ensure that the FAIS supports effective and credible investigative work.

Sec. 48 r.w.s. 50A & 55A.: Assessing Officer has no right to replace Government approved valuer’s opinion with his own.

7 [2024] 116 ITR(T) 261 (Mumbai – Trib.)

Piramal Enterprises Ltd. vs. DCIT

ITA NO.:3706 & 5091(MUM.) OF 2010

AY.: 2005-06

Dated: 11th January, 2024

Sec. 48 r.w.s. 50A & 55A.: Assessing Officer has no right to replace Government approved valuer’s opinion with his own.

FACTS I

The assessee had sold a flat at Malabar Hills during the year under consideration and for computing the cost of Acquisition of the said flat the assessee adopted the fair market value as on 1-4-1981 based on valuation report of government valuer. The AO after rejecting the valuation made by the valuer, calculated the cost of acquisition by assessing the rate at ₹1480 per sq. ft. as compiled in the reference book and thereby made an addition of ₹2,98,680/-.

Aggrieved by the order, the assessee preferred an appeal before the CIT(A). The CIT(A) upheld the addition. Aggrieved by the CIT(A) order, the assessee preferred an appeal before ITAT.

HELD I

The ITAT observed that for the year under consideration, the AO had no power to refer the matter for valuation to the Department Valuation Officer (DVO) but rather had power under section 50A of the Act to refer the case to the valuation officer in case the valuation adopted by the assessee was lower than the fair market value. But at the same time section 50A of the Act inserted by Finance Act, 2012 is prospective in nature as has been held by Hon’ble Jurisdictional High Court in case of CIT vs. Puja Prints[2014] 43 taxmann.com 247/224 Taxman 22/360 ITR 697 (Bom.).

The ITAT held that when the assessee had calculated the cost of acquisition on the basis of fair market value determined by the government valuer the AO had no right to replace the government approved valuer’s opinion on his own.

Thus, the appeal of the assessee was allowed to the extent of this ground.

Sec. 24.: Where assessee continued to be owner of part premises of House, rental income should be assessed only under the head income from house property and assessee would be entitled for statutory deduction @30% under section 24(a) for same.

FACTS II

The AO had treated the rental income earned by the assessee during the year under consideration from the let out portion of the property named “RP house” as income from other sources instead of income from house property on the ground that the assessee was not the owner of the property. The CIT(A) had confirmed the action of AO.

Aggrieved by the CIT(A) Order, the assessee preferred an appeal before ITAT.

HELD II

The ITAT followed the order passed by the co-ordinate Bench of the Tribunal on the identical issue in its own case for A.Y. 2003-04 & 2004-05 wherein rental income earned by the assessee from let out portion of RP house was treated as income from house property and directed the AO to assess the rental income of let out portion of RP house as income from house property.

S. 115BBC – Where the tax department had recognized the assessee-trust as both charitable and religious in terms of approvals granted under section 80G and section 10(23C)(v) and therefore, its case was covered by exception under section 115BBC(2), it cannot be held that the Assessing Officer had formed a legally valid belief for the purpose of section 147 that the cash donations received by the assessee were taxable under section 115BBC. S. 11(1)(a) – Accumulation under section 11(1)(a) is allowable on the gross receipts of the assessee and not on net receipts. S. 11(2) – Any inaccuracy or deficiency in Form No. 10 would not be fatal to the claim of accumulation under section 11(2).

6 (2025) 171 taxmann.com 392 (Mum Trib)

Sai Baba Sansthan Trust vs. DCIT

ITA Nos.: 932 & 935(Mum) of 2023

A.Ys.: 2013-14

Dated: 17th January, 2025

S. 115BBC – Where the tax department had recognized the assessee-trust as both charitable and religious in terms of approvals granted under section 80G and section 10(23C)(v) and therefore, its case was covered by exception under section 115BBC(2), it cannot be held that the Assessing Officer had formed a legally valid belief for the purpose of section 147 that the cash donations received by the assessee were taxable under section 115BBC.

S. 11(1)(a) – Accumulation under section 11(1)(a) is allowable on the gross receipts of the assessee and not on net receipts.

S. 11(2) – Any inaccuracy or deficiency in Form No. 10 would not be fatal to the claim of accumulation under section 11(2).

FACTS – I

The assessee was a charitable organisation registered under section 12A, section 80G and section 10(23C)(v). It was having a temple complex in the town of Shirdi consisting of Samadhi of a popular Saint fondly called as “Shri Sai Baba” and also other deities. The assessee usually receives huge amount of cash donations by way of hundi collections / charity box collections from the followers/devotees of Shri Sai Baba where the name and address of the contributor is not maintained. The assessee filed its return of income for A.Y. 2013-14 declaring NIL income which was processed under section 143(1).

Taking note of the Annual Information Report (AIR) for A.Y. 2013-14 and based on the stand taken by him for A.Y. 2015-16, the AO sought to reopen the assessee’s assessment by issuing notice under section 148 dated 23.3.2018 on the basis that cash deposits of ₹257 crores received by the assessee were taxable as anonymous donations under section 115BBC.The writ petition filed by the assessee against the notice was rejected by the High Court. SLP against the said High Court judgment was also rejected by the Supreme Court. Accordingly, the AO proceeded to pass the reassessment order wherein he determined the total income of the assessee at ₹67.01 crores, besides bringing the anonymous donations of ₹175.53 crores to tax @ 30% under section 115BBC.

On appeal, CIT(A) held that the reopening of the assessment was valid. On merits, CIT(A) held that the assessee was both charitable and religious trust and hence it would fall within the exceptions provided under section 115BBC(2). Consequently, he held that the anonymous donations received by the assessee were not taxable in the hands of the assessee. However, on other issues, CIT(A) confirmed the additions.

Aggrieved, both the parties filed appeals before the Tribunal.

HELD – I

The Tribunal observed that-

(a) At the time of recording of reasons for reopening, the AO should have been aware of the approval granted to the assessee under section 10(23C)(v) which is granted to a trust existing wholly for public religious purposes or wholly for public religious and charitable purposes. If the approvals under section 80G and section 10(23C)(v) granted by the income tax authorities were read together, there should not have been any doubt that the tax department has recognized the assessee trust as existing “wholly for charitable and religious purposes” which was covered by the exception listed in section 115BBC(2). Accordingly, had the AO considered both these approvals, he would not have entertained the belief that the assessee would be covered by section 115BBC.

(b) The AO had relied upon the approval granted under section 80G only and had chosen a document which would suit his requirement and ignored another important document which went in favour of the assessee, which is not permitted in law.

(c) Even on merits, in the appeals for AY 2015-16 to 2018-19, the Tribunal had held that the assessee was a charitable and religious trust, which order was upheld by the Bombay High Court vide its order dated 8.10.2024 in (2024) 167 taxmann.com 304 (Bombay).

Thus, the Tribunal held that the belief entertained by the AO, without considering the record in totality, could not be considered as a legally valid belief under section 147 and accordingly, the reopening of assessment was not valid.

HELD – II

On the issue of accumulation under section 11(1)(a), following the decision of the Supreme Court in CIT vs. Programme for Community Organisation,(2001) 248 ITR 1 (SC), the Tribunal held that accumulation under section 11(1)(a) is to be allowed on the gross receipts and not on the net receipt.

FACTS – III

In the return of income, the assessee had claimed accumulation of income under section 11(2) to the tune of ₹183.26 crores. During the course of assessment proceedings, it came to light that the assessee had omitted to disclose receipts from educational and medical activities to the tune of ₹78.84 crores. The assessee agreed to the addition of said amount and prayed that the deduction under section 11(1)(a) @ 15% of the above receipts should be allowed and further claimed enhanced accumulation under section 11(2) for the balance amount of ₹67.01 crores.

The AO noticed that the Form No. 10 filed by the assessee during assessment proceedings had certain deficiencies such as (a) it did not mention the date;(b) it did not quantify the amount to be accumulated; (c) the Board resolution passed for accumulation mentioned all types of objects; and (d) the amount to be accumulated was incorrectly mentioned as ₹575 crores. Therefore, he rejected the claim for enhancement of accumulation under section 11(2). However, he allowed the claim of accumulation of ₹183.26 crores as was originally claimed in the return of income.

CIT(A) upheld the action of the AO.

HELD – III

The Tribunal observed that the AO, even after pointing out the deficiencies in Form No. 10, had allowed the claim of accumulation under section 11(2) as originally claimed in the return of income. Therefore, such deficiencies should not come in the way of allowing the enhanced accumulation claimed by the assessee during assessment proceedings. In any case, as held by Gujarat High Court in CIT (E) vs. Bochasanwasi Shri Akshar Purshottam Public Charitable Trust, (2019) 102 taxmann.com 122 (Gujarat), any inaccuracy or lack of full declaration in the prescribed format by itself would not be fatal to the claimant for the purpose of section 11(2). Accordingly, the Tribunal directed the AO to allow the enhanced amount of accumulation claimed under section 11(2).

In the result, the appeal filed by the assessee was allowed and the appeal of the Revenue was dismissed.

S. 270A – Where the Assessing Officer had not specified in the assessment order or in the notice issued under section 274 read with section 270A as to under which limb of section 270A(2) or section 270A(9) the case of the assessee fell, no penalty under section 270A was leviable. S. 270A – Where the profit of the assessee had been estimated by resorting to section 145(3), no penalty under section 270A was leviable

5 (2025) 171 taxmann.com 133(Pune Trib)

DCIT vs. Chakradhar Contractors and Engineers (P.) Ltd.

ITA No.:1939 & 1940(Pun) of 2024

A.Y.: 2020-21 & 2021-22.

Dated: 26th December, 2024

S. 270A – Where the Assessing Officer had not specified in the assessment order or in the notice issued under section 274 read with section 270A as to under which limb of section 270A(2) or section 270A(9) the case of the assessee fell, no penalty under section 270A was leviable.

S. 270A – Where the profit of the assessee had been estimated by resorting to section 145(3), no penalty under section 270A was leviable

FACTS

The assessee was a company engaged in the business of construction. It filed its return of income declaring total income by estimating the income from contract work at 7.37% of the turnover. The AO completed scrutiny assessment by estimating the income from contract work at 10 per cent of the turnover, which the assessee accepted and paid the due taxes thereon.

Subsequently, the AO initiated penalty proceedings under section 270A. Referring to section 270A(9), he levied penalty @ 200% of the tax payable on the under-reported income in consequence of misreporting.

On appeal, CIT(A) cancelled the penalty on the ground that the AO had not specified the sub-limb under section 270A(9)(a) to (g) and therefore, the penalty was not sustainable.

Aggrieved, the tax department filed appeals before ITAT.

HELD

The Tribunal held that where the Assessing Officer had not specified, either in the assessment order or in the notice issued under section 274 read with section 270A, as to under which limb of provisions of section 270A(2) or section 270A(9) the case of the assessee falls, no penalty under section 270A was leviable.

Further, applying the various decisions under erstwhile section 271(1)(c) that penalty was not leviable when the profit was estimated, the Tribunal held that since the profit of the assessee had also been estimated by resorting to the provisions of section 145(3), no penalty under section 270A was leviable.

Accordingly, the appeals of the tax department were dismissed.

S. 12AB – Absence of registration under Rajasthan Public Trusts Act, 1959 cannot be a ground to deny registration under section 12AB since such non-registration did not prohibit the assessee to carry out its objects.

4 (2025) 171 taxmann.com 569 (Jaipur Trib)

APJ Abdul Kalam Education and Welfare Trust vs. CIT(E)

ITA No. 567 (Jpr) of 2024

A.Y.: N.A.

Date of Order: 15th January, 2025

S. 12AB – Absence of registration under Rajasthan Public Trusts Act, 1959 cannot be a ground to deny registration under section 12AB since such non-registration did not prohibit the assessee to carry out its objects.

FACTS

The assessee was running a hostel. It obtained provisional registration under section 12A(1)(ac)(vi) on 3.8.2022. Thereafter, it applied for final registration on 30.9.2023.

CIT(E) rejected the application for final registration and cancelled the provisional registration on the grounds that (a) non-registration under the Rajasthan Public Trusts Act, 1959 (RPT) was in violation of section 12AB(1)(b)(ii)(B); (b) it was not specifically mentioned in the trust deed that foreign donations will be taken only after prior approval under Foreign Contribution (Regulation) Act, 2010 (FCRA); and (c) the assessee was not able to prove genuineness of its activities.

Aggrieved with the order of CIT(E), the assessee filed an appeal before ITAT..

HELD

Distinguishing Aurora Educational Society v. CCIT, (2011) 339 ITR 333 (Andhra Pradesh) and New Noble Educational Society vs. CCIT, (2022) 448 ITR 594 (SC) on the ground that the said cases applied to educational institutions only, the Tribunal observed that a plain reading of section 12AB (1) (b) (ii) (B) shows that compliance of requirement of any other law is required if compliance under such other law is material for achieving its objects. Section 17 of the RPT Act, 1959 requires that trustees of the trust have to apply for registration of a public trust. However, there is no section in the RPT Act, 1959 which prohibits a trust to carry out its objects if it is not registered under the RPT Act, 1959. Both the statutes, namely Income-tax Act and RPT Act, have their own provisions and implications and none of them have overriding effect. Even if the assessee trust was not registered with the RPT Act, 1959 and the concerned officials under the RPT Act, 1959 deemed it necessary to get the entity registered under section 17 of the RPT Act, 1959, appropriate action could be taken against the trustees of the trust. However, this issue cannot be a hurdle in getting registration under section 12AB of the Income-tax Act. Accordingly, the Tribunal directed the CIT(E) to not deny registration on this ground.

Considering the provisions of FCRA, the Tribunal directed the assessee trust to incorporate the relevant amendment in the trust deed mentioning that prior to receiving any foreign remittance whatever may be the form or nomenclature, prior approval will be taken from the Ministry of Home Affairs, Govt. of India, and produce the same for verification (in original) before CIT (E). Accordingly, the Tribunal restored the matter back to the file of CIT(E).

Since the assessee had furnished all the information and documents such as Income an Expenditure Account, note on activities etc. and the observations of the CIT(E) were either wrong or self-contradictory in nature, the Tribunal held that the CIT(E) was wrong in rejecting the registration on the ground of genuineness of activities and directed him to accept the reply of the assessee in toto.

Accordingly, the appeal of the assessee was allowed.

Reassessment Notice issued beyond the surviving time limit would be time-barred. Surviving time limit can be calculated by computing number of days between the date of issuance of deemed notice u/s 148A(b) of the Act and 30thJune, 2021. The clock of limitation which has stopped w.e.f. date of issuance of S. 148 notices under the old regime (which is also the date of issuance of deemed notices) would start running again when final to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO.

3 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3553/Mum./2024

A.Y.: 2014-15

Date of order: 28th February, 2025

Section: 149

Reassessment Notice issued beyond the surviving time limit would be time-barred. Surviving time limit can be calculated by computing number of days between the date of issuance of deemed notice u/s 148A(b) of the Act and 30th June, 2021. The clock of limitation which has stopped w.e.f. date of issuance of S. 148 notices under the old regime (which is also the date of issuance of deemed notices) would start running again when final to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO.

FACTS

For AY 2014-15, a notice u/s 148 of the Act (old regime) was issued to the Assessee on 07.06.2021 (i.e., after the expiry of 4 years but before the expiry of 6 years from the end of AY 2014-2015). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 25.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of Section 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The Assessing Officer (AO) also shared with the Assessee material / information on the basis of which he had formed a belief that income had escaped assessment.

The Assessee filed reply on 09.06.2022. Thereafter, order u/s 148A(d) of the Act was passed on 24.07.2022 after taking approval from the Principal Commissioner of Income Tax (PCIT), Mumbai. This was followed by issuance of notice on 24.07.2022 u/s 148 of the Act (new regime). The reassessment proceedings culminated into passing of the Assessment Order, dated 26.05.2023, passed u/s 147 r.w.s. 144B of the Act.

Aggrieved by the assessment, the Assessee preferred an appeal to CIT(A) who vide Order dated 16.05.2024 allowed the appeal.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee has filed cross-objection challenging the validity of the re-assessment proceedings.

The contention, on behalf of the Assessee was that the AO has passed order u/s 148A(d) of the Act and has issued notice u/s 148 of the Act (new regime) after the expiry of surviving period as computed according the judgment of the judgment of the Apex Court in the case UOI vs. Rajeev Bansal [(2024) 469 ITR 46]. Therefore, both, the order u/s 148A(d) of the Act and the notice u/s 148 of the Act (new regime) are barred by limitation.

HELD

The Tribunal observed that the issue which arises for consideration is whether the order, dated 24.07.2022, passed u/s 148A(d) of the Act and notice, dated 24.07.2022, issued u/s 148 of the Act (new regime) were passed / issued within the prescribed time. It noted that there is no dispute as to facts. It is admitted position that the notice issued u/s 148 of the Act (old regime) on 24.07.2022, was treated as notice issued u/s 148A(b) of the Act by the Assessing Officer (AO). Thereafter, order u/s 148A(d) of the Act, was passed on 24.07.2022, and the same was followed by issuance of notice dated 24.07.2022, u/s 148 of the Act (new regime). Thus, the notice u/s 148 of the Act (new regime) was issued after the expiry of 6 years from the end of the relevant assessment year.

The Tribunal noted the observations of Apex Court in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46] which have been made in relation to the interplay between the judgment of the SC in the case of UOI vs. Ashish Agarwal [444 ITR 1] and TOLA.

The Tribunal held that on perusal of the observations of the Apex Court it becomes clear that the assessing officer was required to complete the procedures within the ‘surviving time limit’ which can be calculated by computing the number of days between the date of issuance of the deemed notice u/s 148A(d) of the Act and 30th June 2021 (i.e. the extended time limit provided by TOLA for issuing reassessment notices u/s 148, which fell for completion from 20.03.2020 to 31.3.2021).

The clock of limitation which has stopped with effect from the date of issuance of S. 148 notices under the old regime (which is also the date of issuance of the deemed notices), would start running again when final reply to the notice deemed to have been issued u/s 148A(b) of the Act is received by the AO. It was clarified that a reassessment notice issued beyond the surviving time limit would be time-barred.

The Tribunal observed that, in the present case, notice u/s 148 of the Act (old regime) was issued on 07.06.2021 and was deemed to be notice issued u/s 148A(b) of the Act (new regime). Thus, the surviving time limit can be calculated by computing the number of days between the date of issuance of the deemed notice (i.e., 07.06.2021) and 30.06.2021, which comes to 23 days. The clock started ticking only after Revenue received the response of the Assesses to the show causes notices on 09.06.2022. Once the clock started ticking, the AO was required to complete these procedures within the surviving time limit of 23 days which expired on 02.07.2022. Since notice u/s 148 of the Act was issued on 24.07.2022 which fell beyond the surviving time limit that expired on 02.07.2022, the Tribunal held that the notice issued u/s 148 of the Act to be time-barred and therefore, bad in law.

The Tribunal quashed notice dated 24.7.2022 issued u/s 148 of the Act (new regime), the consequential reassessment proceedings and the Assessment Order, dated 26.5.2023, passed u/s 147 r.w.s. 144B of the Act.

Thus, Cross-Objection raised by the Assessee was allowed and accordingly, all the grounds raised by the Revenue in the departmental appeal in relation to the relief granted by the CIT(A) on merits were dismissed as having been rendered infructuous.

In view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

2 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3552/Mum./2024

A.Y.: 2015-16

Date of Order: 28th February, 2025

Section: 149

In view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of the relevant assessment year has expired at the time of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

FACTS

For AY 2015-16, notice u/s 148 of the Act was issued to the Assessee on 30.06.2021 (i.e., after the expiry of 4 years but before the expiry of 6 years from the end of the relevant AY). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 25.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of Section 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The Assessing Officer (AO) also shared with the Assessee material / information on the basis of which he had formed a belief that income had escaped assessment. Thereafter, order u/s 148A(d) of the Act was passed on 27.07.2022 which was followed by issuance of notice u/s 148 of the Act on 27.07.2022.

The reassessment proceedings culminated into passing of the Assessment Order, dated 29.05.2023, passed u/s 147 r.w.s. 144B of the Act.

Aggrieved by the assessment made, the assessee preferred an appeal to CIT(A) who allowed the appeal videhis Order dated 16.05.2024.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee filed cross-objection challenging the validity of the re-assessment proceedings.

HELD

The Tribunal, first dealt with the cross objections of the Assessee. It noted that the issue which arises for consideration is whether notice, dated 27.07.2022, issued u/s 148 of the Act (new regime) is barred by limitation specified in S. 149 of the Act as contended, on behalf of the Assessee.

The Tribunal observed that it is admitted position that the notice, dated 30.06.2021, issued u/s 148 of the Act (old regime) was treated as notice issued u/s 148A(b) of the Act by the AO. Thereafter, order u/s 148A(d) of the Act was passed on 27.07.2022, and the same was followed by issuance of notice, dated 27.07.2022, issued u/s 148 of the Act (new regime) (i.e. after the expiry of 6 years from the end of the Assessment Year 2015-2016).

The Tribunal noted the contention made on behalf of the Assessee that as per First Proviso to S. 149(1) of the Act, no notice u/s 148 of the Act (new regime) could have been issued after 31.03.2022.

The Tribunal noted the relevant portions of the decision of the SC, in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46], dealing with notice issued u/s 148 for AY 2015-16 and in relation to first proviso to section 149(1) of the Act (new regime). On perusal of the relevant extracts of the said decision of the SC, the Tribunal held that the SC has clarified as under –
(a) a notice could be issued u/s 148 of the new regime for AY 2021-2022 and assessment years prior thereto only if the time limit for issuance of such notice continued to exist u/s 149(1)(b) of the old regime;

(b) in view of the First Proviso to S. 149(1)(b) of the Act a notice u/s 148 of the Act (new regime) cannot be issued if the period of six years from the end of issuance of the notice. This also ensures that the new time limit of ten years prescribed u/s 149(1)(b) of the Act (new regime) applies prospectively. The said Proviso limits the retrospective operation of S. 149(1)(b) to protect the interests of the assesses.

Having noted that, in the present case, the time limit of 6 years from the end of AY 2015-2016 expired on 31.03.2022, the Tribunal held that, as per S. 149(1)(b) read with First Proviso to S. 149(1) of the Act (new regime), notice u/s 148 of the Act could not have been issued for the AY 2015-2016 after 31.03.2022. It held that notice, dated 27.07.2022, issued u/s 148 of the Act was barred by limitation.

The Tribunal also noted that before the Apex Court in the case of Rajeev Bansal [(2024) 469 ITR 46], the Revenue has conceded that for the AY 2015-16, notices issued on or after 01/04/2021, would have to be dropped and this has been recorded by the SC in para 19 of the decision of the Apex Court.

In view of the above, the Tribunal quashed the notice, dated 27.07.2022, issued u/s 148 of the Act and the consequent the Assessment Order, dated 29.05.2023, passed u/s 147 read with Section 144B of the Act as being bad in law.

Thus, Cross-Objection raised by the Assessee was allowed and accordingly, all the grounds raised by the Revenue in the departmental appeal in relation to the relief granted by the CIT(A) on merits were dismissed as having been rendered infructuous.

Non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Since the order u/s 148A(d) dated 30.7.2022 and also notice u/s 148 were issued with approval of Principal Commissioner of Income-tax instead of Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax, the consequential reassessment proceedings and also the order dated 25.5.2023 passed u/s 147 r.w.s. 144B of the Act were quashed as bad in law and were held to be violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

1 Addl CIT vs. Ramchand Thakurdas Jhamtani

ITA No. 3551/Mum./2024

A.Y.: 2017-18

Date of Order: 28th February, 2025

Sections: 148, 148A, 151

Non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Since the order u/s 148A(d) dated 30.7.2022 and also notice u/s 148 were issued with approval of Principal Commissioner of Income-tax instead of Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax, the consequential reassessment proceedings and also the order dated 25.5.2023 passed u/s 147 r.w.s. 144B of the Act were quashed as bad in law and were held to be violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

FACTS

A notice u/s 148 of the Act (old regime) was issued to the Assessee for the AY 2017-2018 on 28.06.2021 (i.e., after the expiry of 3 years but before 30.06.2021 — extended period time granted by TOLA1 ). Subsequently, in compliance with the judgment of the Apex Court, dated 4.5.2022, in the case of UOI vs. Ashish Agarwal [444 ITR 1 (SC)], communication, dated 27.05.2022, was sent to the Assessee intimating that the aforesaid notice issued u/s 148 of the Act (under old regime) would be treated as the show-cause notice issued in terms of S. 148A(b) of the Act (under new regime introduced by the Finance Act, 2021 w.e.f. 01.04.2021). The AO also shared with the Assessee material/information on the basis of which he had formed a belief that income had escaped assessment.

1 Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

Thereafter, order u/s 148A(d) of the Act was passed on 30.07.2022 after taking approval from the Principal Commissioner of Income Tax (PCIT), Mumbai. This was followed by issuance of notice on 30.07.2022 u/s 148 of the Act (new regime). The reassessment proceedings culminated into passing of the Assessment Order, dated 25.05.2023, passed u/s 147 r.w.s. 144B of the Act.

The appeal preferred by the Assessee against the aforesaid Assessment Order was allowed by the CIT(A) vide Order, dated 16.05.2024.

Aggrieved, the Revenue preferred the present appeal before the Tribunal challenging the relief granted by the CIT(A), while the Assessee filed cross-objection challenging the validity of the re-assessment proceedings.

HELD

The Tribunal, at the outset, observed that the issue which arises for consideration is whether the PCIT or the PCCIT was the Specified Authority for seeking approval for passing order u/s 148A(d) of the Act and issuance of notice u/s 148 of the Act (new regime) for the AY 2017-18.

The Tribunal having considered the decision of the Apex Court in the case of UOI vs. Rajeev Bansal [(2024) 469 ITR 46], to the extent it has dealt with issue of approval from Specified Authority in terms of section 151 of the Act, noted that the Supreme Court has clarified as under –

(a) under new regime introduced by the Finance Act, 2021 Assessing Officer was required to obtain prior approval or sanction of the ‘Specified Authority’ at four stages – at first stage under Section 148A(a), at second stage under Section 148A(b), at third stage under Section 148A(d), and at fourth stage under Section 148. In the case of Ashish Agarwal [444 ITR 1] the Apex Court waived off the requirement of obtaining prior approval u/s 148A(a) and u/s 148A(b) of the Act only. Therefore, the AO was required to obtain prior approval of the ‘Specified Authority’ according to Section 151 of the new regime before passing an order u/s 148A(d) or issuing a notice u/s 148;

(b) under new regime if income escaping assessment is more than ₹50 lakhs a reassessment notice could be issued after expiry of three years from the end of the relevant previous year only after obtaining the prior approval of the Principal Chief Commissioner(PCCIT) or Principal Director General (PDGIT) or Chief Commissioner (CCIT) or Director General (DGIT);

(c) the test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20th March, 2020 and 31st March, 2021, then the ‘Specified Authority’ under Section 151(i) has an extended time till 30th June 2021 to grant approval;

(d) S. 151(ii) of the new regime prescribes a higher level of authority if more than three years have elapsed from the end of the relevant assessment year. Thus, non-compliance by the AO with the strict time limits prescribed u/s 151 affects their jurisdiction to issue a notice under section 148;

(e) grant of sanction by the appropriate authority is a precondition for the assessing officer to assume jurisdiction under section 148 to issue a reassessment notice.

The Tribunal held that, in the present case, the period of 3 years from the end of the AY 2017-2018 fell for completion on 31.3.2021. The expiry date fell during the time period of 20.3.2020 and 31.3.2021, contemplated u/s 3(1) of TOLA. Resultantly, the authority specified u/s 151(i) of the new regime could have granted sanction till 30th June, 2021.

On perusal of the order, dated 30.07.2022, passed u/s 148A(d) of the Act the Tribunal found that the aforesaid order was passed after taking approval from PCIT. The Tribunal held that since the aforesaid order was passed after the expiry of 3 years from the end of the AY 2017-2018, as per the new regime, the authority specified under Section 151(ii) of the Act (i.e. PCCIT or CCIT) was required to grant approval. The Tribunal also noted that even the notice, dated 30.07.2022, was issued u/s 148 of the Act (new regime) after obtaining the prior approval of the PCIT.

The Tribunal concluded that, in the present case, the approval has been obtained by authority specified u/s 151(i) of the new regime instead of the authority specified u/s 151(ii) of the new regime.

The Tribunal held that non-compliance by the AO with the provisions contained in S. 148A(d) r.w.s. 151(ii) of the new regime affects the jurisdiction of the AO to issue a notice u/s 148 of the Act. Accordingly, the order, dated 30.07.2022 passed u/s 148A(d) of the Act, the consequential reassessment proceedings and the order, dated 25.05.2023, passed u/s 147 r.w.s. 144B of the Act were quashed as being bad in law as being violative of the provisions contained in Ss. 148A(d), 148 and 151(ii) of the Act.

The Tribunal allowed the cross objections filed by the assessee and dismissed, as infructuous, all the grounds raised by the Revenue in the appeal in relation to the relief granted by CIT(A) on merits.

The Judgement Of The Supreme Court In The Case Of Radhika Agarwal And Its Implication On Arrest Under The Goods And Service Act, 2017

1. INTRODUCTION

The laws regarding the prosecution of economic offences are evolving at a rapid pace. With the multitude of special acts governing commercial transactions growing and evolving over the years, it is but natural that even the enforcement of penal provisions would occur. The structure of taxation for indirect tax saw a marked change with the introduction of the Goods and Service Tax Act, 2017 (‘GST’) in all its various avatars. Almost a decade later, the field of direct taxation seems to be headed for a complete overhaul in the year 2026. These new laws, which have financial consequences and also impose criminality on certain transactions will interact with laws that were enacted prior in time to them and shall also try and find a place within the existing framework of criminal law jurisprudence. The subject of tracing the interplay between various acts has justifiably become a blockbuster headline for many articles and seminars. With a variety of laws being triggered by a singular transaction, the implication in the commercial world can be that of a complication. While it is true that ignorance of the law cannot be a defence against legal action, the plethora of laws that can potentially get triggered and the consequent multitude of proceedings (both civil and criminal) can weigh very heavily on the shoulders of a businessman or a professional. As if the interplay between various special laws by themselves was not complicated enough, the interplay of these special acts with traditional acts and codes has given rise to significant litigation in recent days.

The recent judgment of the Supreme Court in the case of Radhika Agarwal vs. UOI [2025] 171 taxmann.com 832 (SC) is a landmark judgment that sheds light on certain aspects of summons and arrest under the Customs Act, 1972, as well as the Goods and Service Tax Act, 2017. For the purposes of this discussion, we will explore the implications it has on proceedings under the latter.

A BRIEF INTRODUCTION TO PROSECUTION UNDER THE GST

Chapter XIX of the GST deals with offences and penalties under the central act and its counterpart in each State. The various offences under the act are contained primarily under section 132 of the GST. While Section 132(1) lists the various offences that are punishable under the act, all of them are not equal.

Section 132(4) states that “Notwithstanding anything contained in the Code of Criminal Procedure, 1973,  all offences under this Act, except the offences referred to in subsection (5), shall be non-cognizable and bailable.”

Section 132(5) states, “The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable.”

For the sake of convenience, let us call the non-cognizable and bailable offences minor offences and the cognizable and non-bailable offences major offences. The major offences are as follows:-

Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences

(a) supplies any goods or services or both without the issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;
(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

Only when they are punishable under sub-section (i) – which reads as follows –

“In cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine”.

The term five hundred lakh refers to a sum of ₹5,00,00,000/- (Rupees five crore only). Therefore, even if the above offences are committed, and the sum involved is ₹5,00,00,000/- or less, then the offence shall be non-cognizable and bailable. It is important to note that the monetary limit in this case, therefore, is an indicator not of the threshold for prosecution but more of the severity of the consequences that follow. There are three different monetary limits prescribed in Section 132, with the thumb rule being that the lower the threshold, the lesser the severity of the sentence. However, if the accusation is of the aforementioned offences for more than a sum of Rupees Five Hundred Lakh, then the GST department officers are clothed with significant powers of arresting without a warrant, and bail is not available as a matter of right.

WHAT IS THE DIFFERENCE BETWEEN A BAILABLE AND A NON-BAILABLE OFFENCE?

A bailable offence is one in which Bail is available as a matter of right. Section 436(1) of the Code of Criminal Procedure, 1973 (‘CRPC’) and Section 478(1) of the BharatiyaNagrik Suraksha Sanhita,2023 (‘BNSS’) are parimateria in as much they mandate that if a person other than one detained or arrested for the non-bailable offence without a warrant, then the officer in charge of the police station or the Court shall release such person on bail. The word shall signify that in the case of a bailable offence, bail is available as a matter of right.

For a non-bailable offence, bail is not available as a matter of right and is at the discretion of the Court as per Section 437 of the CRPC and Section 480 of the BNSS. The term non-bailable does not signify that there is an absolute bar on the grant of bail but signifies that the grant of bail will not be a matter of course or a matter of right.

WHAT EXACTLY IS A COGNIZABLE OFFENCE?

Section 2(c) of the CRPC defines a cognizable offence. In the BNSS, the same is defined in Section 2(1)(g). The words used in the definition are ‘parimateria’ to each other and read: “cognizable offence” means an offence for which, and “cognizable case” means a case in which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant”.

In short, for a cognizable offence, the police officer does not require a warrant to arrest an accused.

DO GST OFFICERS HAVE THE POWER TO ARREST?

The Supreme Court, in the case of Om Prakash v. Union of India (2011) 14 SCC 1, while examining the powers of officers of the Central Excise Department to effect arrest, had held that “In our view, the definition of “non-cognizable offence” in Section 2(l) of the Code makes it clear that a non-cognizable offence is an offence for which a police officer has no authority to arrest without warrant. As we have also noticed hereinbefore, the expression “cognizable offence” in Section 2(c) of the Code means an offence for which a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant. In other words, on a construction of the definitions of the different expressions used in the Code and also in connected enactments in respect of a non-cognizable offence, a police officer, and, in the instant case, an Excise Officer, will have no authority to make an arrest without obtaining a warrant for the said purpose. The same provision is contained in Section 41 of the Code which specifies when a police officer may arrest without order from a Magistrate or without warrant.” However, the statutory scheme under the GST is different from what the scheme under the Central Excise Act 1944 was at the time of ‘Om Prakash’.

In the case of GST, Section 69 explicitly deals with the power to arrest and vests the discretion to authorize an officer to effect arrest based on his ‘reasons to believe’ that a person has committed any offence specified in Section 132(1) a, b, c or d as read with Sub-section (1) or (2) thereof.

The power of the GST officers to arrest has been upheld by the Supreme Court in the case of Radhika Agarwal. This power had been challenged in the said Petition on the grounds of legislative competency. The position canvassed was that Article 246-A of the Constitution, while conferring legislative powers on Parliament and State Legislatures to levy and collect GST, does not explicitly authorize the violations thereof to be made criminal offences. The Court held that “The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies.. .. a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution, and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax.”

The Supreme Court has, therefore, upheld the power of GST officers to effect arrests as provided by the GST.

CAN ANTICIPATORY BAIL BE SOUGHT FOR OFFENCES UNDER THE GST?

The power of the Courts to grant anticipatory bail under Section 438 of the CRPC (predecessor to Section 482(1) of the BNSS) was not available in the cause of a person summoned under Section 69 of the GST Act.

In State of Gujarat vs. Choodamani Parmeshwaran Iyer, (2023) 115 GSTR 297, a two-judge Division Bench of the Supreme Court had held that “The position of law is that if any person is summoned under section 69 of the CGST Act, 2017 for the purpose of recording of his statement, the provisions of section 438 of the Criminal Procedure Code, 1973 cannot be invoked. We say so as no first information report gets registered before the power of arrest under section 69(1) of the CGST Act 2017 is invoked, and in such circumstances, the person summoned cannot invoke section 438 of the Code of Criminal Procedure for anticipatory bail. The only way a person summoned can seek protection against the pre-trial arrest is to invoke the jurisdiction of the High Court under article 226 of the Constitution of India.” The decision was then later followed in the case of Bharat Bhushan v. Director General of GST Intelligence, (2024) 129 GSTR 297 by another two-judge Division Bench of the Supreme Court.

However, Radhika Agarwal marks a departure from this line of Judgements in as much as the three-judge bench of the Supreme Court has held that the power to seek anticipatory bail shall be available to a person who is apprehensive of arrest under the GST. The Supreme Court held that

“The power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (1980) 2 SCC 565, this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application, when based upon facts which are not vague or general allegations should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others vs. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat vs. Choodamani Parmeshwaran Iyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.”

Therefore, anticipatory bail can be applied for and granted in the case of offences under the GST, where there is a reasonable basis for apprehending arrest.

ARE THERE SAFEGUARDS OF THE POWER TO ARREST?

Though the Supreme Court has upheld the power of GST officers to arrest, it has deemed fit to elucidate and clarify certain aspects of this power. Some key takeaways are listed below:-

(a) The GST Acts are not a complete code when it comes to the provisions of search and seizure and arrest, for the provisions of the CRPC (and now the BNSS) would equally apply when they are not expressly or impliedly excluded by provisions of the GST Acts.

(b) To pass an order of arrest in case of cognizable and non-cognizable offences, the Commissioner must satisfactorily show, vide the reasons to believe recorded by him, that the person to be arrested has committed a non-bailable offence and that the pre-conditions of sub-section (5) to Section 132 of the Act are satisfied. Failure to do so would result in an illegal arrest. On the extent of judicial review available with the court viz. “reasons to believe”, in Arvind Kejriwal vs. Directorate of Enforcement, (2025) 2 SCC 248, it was held that judicial review could not amount to a merits review.

(c) The exercise to pass an order of arrest should be undertaken in right earnest and objectively, and not on mere ipse dixit without foundational reasoning and material. The arrest must proceed on the belief supported by reasons relying on material that the conditions specified in sub-section (5) of Section 132 are satisfied and not on suspicion alone. Such “material” must be admissible before a court of law. An arrest cannot be made to merely investigate whether the conditions are being met. The arrest is to be made on the formulation of the opinion by the Commissioner, which is to be duly recorded in the reasons to believe. The reasons to believe must be based on the evidence establishing —to the satisfaction of the Commissioner — that the requirements of sub-section (5) to Section 132 of the GST Act are met. In Arvind Kejriwal it was held that “reasons to believe” are to be furnished to the arrestee such that they can challenge the legality of their arrest. Exceptions are available in one-off cases where appropriate redactions of “reasons to believe”
are permissible.

(d) The power of arrest should be used with great circumspection and not casually. The power of arrest is not to be used on mere suspicion or doubt or for even investigation when the conditions of subsection (5) to Section 132 of the GST Acts are not satisfied.

(e) The reasons to believe must be explicit and refer to the material and evidence underlying such opinion. There has to be a degree of certainty to establish that the offence is committed and that such offence is non-bailable. The principle of the benefit of the doubt would equally be applicable and should not be ignored either by the Commissioner or by the Magistrate when the accused is produced before the Magistrate.

(f) The Supreme Court reiterated certain principles laid down in Arvind Kejriwal with regard to arrest by the Directorate of Enforcement and held that they shall be applicable to arrest under GST as well. These safeguards include the requirement to have “material” in the possession of the Commissioner, and on the basis of such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PML Act. The “grounds of arrest” are also required to be informed forthwith to the person arrested.

(g) The Court reiterated that the courts can judicially review the legality of arrest. This power of judicial review is inherent in Section 19, as the legislature has prescribed safeguards to prevent misuse. After all, arrests cannot be made arbitrarily on the whims and fancies of the authorities. This judicial review is permissible both before and after criminal proceedings or prosecution complaints are filed. Courts may employ the four-part doctrinal test as observed in the case of Arvind Kejriwal with regard to the doctrine of proportionality in their examination of the legality of arrest, as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty.

(h) The investigating officer is also required to look at the whole material and cannot ignore material that exonerates the arrestee. A wrong application of law or arbitrary exercise of duty by the designated officer can lead to illegality in the process. The court can exercise judicial review to strike down such a decision.

(i) The authorities must exercise due care and caution as coercion and threat to arrest would amount to a violation of fundamental rights and the law of the land. It is desirable that the Central Board of Indirect Taxes and Customs promptly formulate clear guidelines to ensure that no taxpayer is threatened with the power of arrest for recovery of tax in the garb of self-payment.  In case there is a breach of law, and the Assessees are put under threat, force or coercion, the Assessees would be entitled to move the courts and seek a refund of tax deposited by them. The department would also take appropriate action against the officers in such cases.

(j) A person summoned under Section 70 of the GST Acts is not per se an accused protected under Article 20(3) of the Constitution.

(k) It is obvious that the investigation must be allowed to proceed in accordance with law and there should not be any attempt to dictate the investigator, and at the same time, there should not be any misuse of power and authority.

(l) Relying on Instruction No. 02/2022-23 [GST – Investigation] dated 17th August, 2022, the Court held that the procedure of arrest prescribed in the circular has to be adhered to and that the Principal Commissioner/Commissioner has to record on the file, after considering the nature of the offence, the role of the person involved, the evidence available and that he has reason to believe that the person has committed an offence as mentioned in Section 132 of the GST Act. The provisions of the Code, read with Section 69(3) of the GST Acts, relating to arrest and procedure thereof, must be adhered to.

(m) The arrest memo should indicate the relevant section(s) of the GST Act and other laws. In addition, the grounds of arrest must be explained to the arrested person and noted in the arrest memo as per Circular No. 128/47/2019-GST dated 23.12.2019 and the format prescribed by it.

(n) Instruction No. 01/2025-GST dated 13.01.2025 now mandates that the grounds of arrest must be explained to the arrested person and also be furnished to him in writing as an Annexure to the arrest memo.

(o) Instruction 02/2022-23 GST (Investigation) dated 17.08.2022 further lays down that a person nominated or authorised by the arrested person should be informed immediately, and this fact must be recorded in the arrest memo. The date and time of the arrest should also be mentioned in the arrest memo. Lastly, a copy of the arrest memo should be given to the person arrested under proper acknowledgement. The circular also makes other directions concerning medical examination, the duty to take reasonable care of the health and safety of the arrested person, and the procedure of arresting a woman, etc. It also lays down the post-arrest formalities which have to be complied with. It further states that efforts should be made to file a prosecution complaint under Section 132 of the GST Acts at the earliest and preferably within 60 days of arrest, where no bail is granted.

(p) The arresting officer shall follow the guidelines laid down in D.K. Basu vs. State of West Bengal. (1997) 1 SCC 416.

TO CONCLUDE

The Judgement of the Supreme Court in the case of Radhika Agarwal is a giant leap forward in the realm of GST prosecutions. While it does not divest the GST officers of their powers to effectively investigate and prosecute offences under the GST, it also clarifies and reiterates the important safeguards to be kept in place to ensure that these provisions are not abused.

However, in a separate and concurring Judgement Justice Bela Trivedi, while agreeing with the Judgement of Chief Justice Sanjeev Khanna and Justice M.M. Sunderesh, expressed that she thought it expedient to pen down her views on the jurisdictional powers of judicial review under Article 32 and Article 226 of the Constitution of India when the arrest of a person is challenged.

She held that “When the legality of such an arrest made under the Special Acts like PMLA, UAPA, Foreign Exchange, Customs Act, GST Acts, etc. is challenged, the Court should be extremely loath in exercising its power of judicial review. In such cases, the exercise of the power should be confined only to see whether the statutory and constitutional safeguards are properly complied with or not, namely to ascertain whether the officer was an authorized officer under the Act, whether the reason to believe that the person was guilty of the offence under the Act, was based on the “material” in possession of the authorized officer or not, and whether the arrestee was informed about the grounds of arrest as soon as may be after the arrest was made. Sufficiency or adequacy of material on the basis of which the belief is formed by the officer, or the correctness of the facts on the basis of which such belief is formed to arrest the person, could not be a matter of judicial review.” She further held that “Sufficiency or adequacy of the material on the basis of which such belief is formed by the authorized officer, would not be a matter of scrutiny by the Courts at such a nascent stage of inquiry or investigation.”

Reiterating the principle that was invoked in the case of Vijay Madanlal Choudhary and Others vs. Union of India and Others 2022 SCC OnLine SC 929 while weighingthe constitutional validity of certain provisions of the Prevention of Money Laundering Act, 2005 (‘PMLA’) that special Acts are enacted for special purposes and must be interpreted accordingly, it was held that:-

“Any liberal approach in construing the stringent provisions of the Special Acts may frustrate the very purpose and objective of the Acts. It hardly needs to be stated that the offences under the PMLA or the Customs Act or FERA are offences of a very serious nature affecting the financial systems and, in turn, the sovereignty and integrity of the nation. The provisions contained in the said Acts therefore must be construed in a manner which would enhance the objectives of the Acts and not frustrate the same. Frequent or casual interference of the courts in the functioning of the authorized officers who have been specially conferred with the powers to combat serious crimes may embolden the unscrupulous elements to commit such crimes and may not do justice to the victims, who in such cases would be the society at large and the nation itself. With the advancement in Technology, the very nature of crimes has become more and more intricate and complicated. Hence, minor procedural lapses on the part of authorized officers may not be seen with a magnifying glass by the courts in the exercise of the powers of judicial review, which may ultimately end up granting undue advantage or benefit to the person accused of very serious offences under the special Acts. Such offences are against the society and against the nation at large and cannot be compared with the ordinary offences committed against an individual, nor can the accused in such cases be compared with the accused of ordinary crimes. To sum up, the powers of judicial review may not be exercised unless there is manifest arbitrariness or gross violation or non-compliance of the statutory safeguards provided under the special Acts required to be followed by the authorized officers when an arrest is made of a person prima facie guilty of or having committed offence under the special Act.”

The last word on this subject may not yet have been spoken. The application of the law laid down in this judgement, as always, shall depend upon the facts and circumstances of each case. However, with this Judgement, an accused under the GST who is apprehensive of arrest is no longer without safeguards.

Learning Events at BCAS

1. Suburban Study Circle Meeting on “Navigating the New Income Tax Bill, TDS, Deductions & Critical Provisions” on Thursday, 13th March, 2025 and at C/o SHBA & Co. LLP, Andheri (E), Mumbai.

Suburban Study Circle Meeting on “Navigating the New Income Tax Bill, TDS, Deductions & Critical Provisions”, was led by CA Upamanyu Manjrekar & CA SnehalMayacharya, where they delved into critical amendments in the Income Tax framework, with a focus on TDS, deductions, and key provisions. The discussion highlighted changes in terminology, procedural updates, and practical implications for businesses and professionals.

Key changes discussed included:

  • Modifications in Income Tax Bill Wording – Minor yet impactful changes in phraseology, altering interpretation and compliance requirements.
  • TDS Revisions – Updates on applicability, rates, and compliance, including sector-specific changes.
  • Procedural & Compliance Changes – New filing requirements, reporting obligations, and penalty structures.
  • Impact on Business & Professionals – Discussion on how the amendments affect different taxpayer categories.
  • Group Interpretation & Case Studies – Open discussion on ambiguous provisions and their practical implementation.
  • Retrospective vs. Prospective Amendments – Debate on whether certain provisions apply retrospectively or prospectively.
  • Practical Challenges & Solutions – Addressing common compliance difficulties and suggested best practices.
    The session was highly interactive, with participants engaging in insightful discussions and real-world case studies. CA Upamanyu Manjrekar & CA SnehalMayacharya provided clear explanations, ensuring attendees left with a well-rounded understanding of the amendments and their implications.

2.  HRD Study Circle on The Secret Formula of Successful ENTREPRENEURS on Tuesday, 11th March, 2025 @ Virtual.

The Human Resources Development Committee Organised a Talk on Topic “The Secret Formula of Successful ENTREPRENEURS” on 11th March, 2025.
Faculty Mr. Walter Vieira

The takeaways from the workshop are briefly given below:

  1.  Comparing entrepreneur with a turtle he quoted James Byrant Conant who said – “Behold the turtle. He makes progress only when he sticks his neck out.”All cannot be entrepreneurs. Those who stick their neck out — take risk, have perseverance, conviction in their idea and believe in themselves could become excellent entrepreneurs
  2.  Entrepreneurship is a process of creating something new and needs deep study of business environment backed up by Fundable business plan.
  3.  There is a certain degree ofaptitude and attitude that is needed to do business and move further as Entrepreneur

They are

a) Creativity and flexibility
b) Resilience
c) Humility to accept success and failure
d) Perseverance
e) Spirit of adventure
f) People skills with a back-up technical knowledge in the subject

There were 167 participants who attended the meeting and good number of them asked questions which were well answered by the faculty.

3. Indirect Tax Laws Study Circle Meeting on Tuesday, 25th February, 2025, @ Virtual

The Group Leader & the Group Mentor introduced the participants to the topic and dealt with the relevant provisions & clarifications before proceeding to the case studies covering the following contentious & practical issues on the topic:

  1. Can an application be filed u/s 128A filed when there is a demand for only interest & penalty?
  2. Distinction between self-assessed liability and whether section 128A can be invoked if an Order is passed confirming demand for such self-assessed liability?
  3. Practical challenges in adjusting liability when payment is made in GSTR-3B / pre-deposit while filing an appeal / third party recovery against DRC-13.
  4. In case of appeal Order, section 128A application to be filed against the appeal Order or adjudication order?
  5. Is section 128A option available if the Appeal Authority remands the matter?
  6. Can application for rectification of order for demand confirmed for multiple points, including section 16 (4) be filed?
  7. Can the rectification order for demand confirmed u/s 16 (4) go beyond the scope of the original notice?
  8. Availability of refund of pre-deposit paid in case of successful appeal order for demand u/s 16 (4)

The meeting was attended by 50 members. The participants appreciated the efforts of the Group Leader and Group Mentors.

4. Tarang 2K25 – The 17th Jal ErachDastur CA Students’ Annual Day on Saturday, 22nd February, 2025 @ M M Pupils Own School — Khar.

The completion of the November 2024 CA exams commenced the preparations for the grand Tarang 2k25. The stage was set for the awe-inspiring event to happen, and it was when the Students’ Team and members of the Human Resource Development Committee (HRD) met to re-write the success story of the marvellous legacy of the past 16 years.

The 17th year of Jal ErachDastur CA Students’ Annual Day under the brand of ‘Tarang’ had to be engaging, enthralling, and magnificent. With this mission in mind, the Students’ Team started upon the journey for delightful Tarang 2k25 under the requisite guidance of CA MihirSheth, CA DnyaneshPatade, CA Jigar Shah, and CA Utsav Shah. MsPrachi Shah and Mr Paras Doshi were appointed as the student coordinators.

Tarang, when described, is an ecstatic annual CA students’ celebration mainly intended to provide a platform for CA students to unleash their talent and creativity in areas of public speaking, writing skills, performing arts, business, technical, and innovative skills. Additionally, the event also intends to act as an insight and potential gateway into the real world outside academic books by providing access and tutelage by skilled and experienced leaders in the form of participation in various fields with a view to building interpersonal and team-building skills with an opportunity to fraternize and network with hundreds of like-minded students.

The event was organized under the auspices of the HRD Committee of BCAS. All meetings were held in offline and online format. The event was supported by a total of 30 volunteers. Tarang 2k25 completely changed the dull and monotonous perception regarding CA students when they were witnessed as event managers, anchors, talented dancers, and photographers too!

As intended, it was truly an event ‘Of CA Students, By CA Students and For CA students.’

Tarang 2k25, to our surprise, saw a huge enrollment of around 350 students despite the pending due dates. There were an overall 165 participants in Tarang 2k25, along with the highest number of participants in the ‘Treasure Hunt’ too. The event became very popular, and we received huge enrollments along with amazing ideas that were pitched to the judges, which were worth the watch.

Also for the very first time Mock Stock exchange was organised specially for CA students where around 75 students participated.

The 17th Jal ErachDastur CA Students’ Annual Day – ‘Tarang 2K25’ elimination rounds were held at the BCAS Hall on the 15th and 16th of February 2025, To keep the fun going and the crowd engaged, the students’ team had organized various online games and networking sessions, This provided a unique opportunity for all the participants to build a productive and constructive network along with a lot of fun too.

The Grand Finale of Tarang 2k25 was held at MM Pupils School, Khar on the 22-2-25 from 3 pm onwards. We were delighted to have Bank of Baroda as the sole sponsor for the prizes of the winners of the various games and quizzes held offline. Arrangements for various exciting games were made to engage and build excitement among the audience before the event’s commencement.

The grand finale commenced at 3 pm with the lighting of the divine lamp by the HRD Committee with the Ganesh Vandana and Saraswati Vandana being played in the background to seek blessings and express gratitude to Lord Ganesh and Maa Saraswati.

The winners of the competition representing their firms were announced as follows:

Invest, Conquer, Compete (Mock Stock Exchange) – Winning Team – Dikshant Pandiyan, Jainil Sheth and Priyansh Jindal

Reel Making Competition ‘Shutter Stories’ – Sushil Khubchandani

Photography Competition ‘The Capture Challenge ’ – Anjali Vaishya

Antakshari Competition – ‘Suronke Maharathi’
Winning Team – NikunjPatel ,Harshita Dave and Rahul Jaiswar

Debate Competition – ‘The Battle Of Perspectives’ Winning Team – Sanjog Shah, Jainam Doshi, Vedant Agarwal and Madhur Bhartiya

Best Debater – Vedant Agarwal

The Rotating Trophy went to – Vedant Agarwal (SRBC and Co)

Talk Tastic – Winner – Piyush Gupta

2nd – Neha Agnihotri

3rd – Sejal Bagda

The Rotating Trophy went to – Piyush Gupta (DBS Bank)

Essay Writing Competition – ‘Pen- Power- Play’ 1st Prize Winner – Dhairya Thakkar

2nd Prize Winner – Neha Agnihotri

3rd Prize Winner – JesikaSahaya

The Rotating Trophy went to – Dhairya Thakkar (JHS Associates)

Talent Show ‘CA’s Got Talent’ Best Performer – Music Category – YashLadha

Best Performer – Instruments Category – Mithil Category

Best Performer – Dancing Category – The JDians

Best Performer – Other Performing Arts Category – Param Savijani and Rishit Raithatha

Pirates Plunder (Treasure Hunt) winners – Rushi Ghuge, Siddharth Gada and Yash Khalse

Hearty Congratulations to all the winners and their firms.

The euphoric evening was superbly anchored by the Master of Ceremony with their unmatched energy and mind-boggling acts to keep the audience engaged throughout the event.

With the 17th edition reaching new milestones and the scale increasing, all eyes are now set on what the anticipated 18th edition would have to offer. One thing is clear, the sky will not be the limit for the goals set to be achieved.

II. BCAS Quoted in News & Media

BCAS has been quoted in various esteemed news and media platforms, reflecting our thought leadership and commitment to the profession. For details

Link: https://bcasonline.org/bcas-in-news/

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Rights Issue Simplified (SEBI ICDR Amendments, 2025)

CONCEPTUAL FRAMEWORK FOR RIGHTS ISSUE

A Rights Issue is a well-established capital-raising mechanism that enables companies to generate additional funds while preserving the pre-emptive rights of existing shareholders. The legal foundation for Rights Issue in India is enshrined in section 62(1)(a) of the Companies Act, 2013 (“Companies Act”), which mandates that any further issuance of capital must initially be offered to existing shareholders.

Unlike preferential allotments or public offerings, Rights Issue confer a distinct advantage by allowing companies to raise capital swiftly without requiring shareholder approval in a general meeting. Instead, the Board of directors is vested with the authority to approve and execute the Rights Issue under Section 179(3) of the Companies Act, subject to compliance with the statutory offer period, which must range between 15 to 30 days as stated in Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

For listed companies, the regulatory landscape extends beyond the Companies Act, with additional oversight by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). In view of cumbersome procedure, companies usually do not consider Rights Issue as preferred mode. Following chart below depicts that in past Issuers have preferred QIP and Preferential Allotment over Rights Issue.

The other major factor was that of involvement of the timelines to complete the process of Rights Issue. The chart below shows the time taken for Rights Issue process for listed companies:

As shown above, issuers have preferred fund raising mode like preferential issues or QIP which usually takes lesser time vis-à-vis Rights Issue. It was also observed that even though the existing shareholders have the first right to participate in fund raising activity of the issuer, the listed entities have preferred to raise fund though preferential issue by offering it to select few investors including promoters’ reason being swift fundraising, attracting strategic investors and increase in promoter’s stake.

SEBI CONSULTATION PAPER DATED 20th AUGUST 2024

To enable faster Rights Issue and to simplify procedures, SEBI initiated a comprehensive review of the Rights Issue framework and released the consultation paper on 20th August, 2024. This consultation paper aimed to address key inefficiencies, including extended timelines, disproportionate compliance costs, and structural constraints, which made Rights issues less attractive compared to alternative fundraising methods.

Some of the key Issues which were needed attention were-

  •  Rights Issue below ₹50 crore were exempt from the ICDR Regulations, creating an uneven compliance burden across different categories of issuers.
  •  high cost associated with mandatory merchant banker engagement, which was often disproportionate to the size of the issue.
  •  inefficiencies stemmed from challenges in handling unsubscribed shares, which restricted issuers from effectively managing excess demand or reallocating unclaimed shares.

In addition to above, the proposed Rights Issue guidelines also addressed the other shortcoming associated with the prevalent Rights Issue process such as lengthy time-period, requirements of filing detailed Draft offer letter, appointment of intermediaries, etc.

Following extensive industry feedback on this consultation paper, SEBI made significant amendments to ICDR Regulations on 3rd March, 2025, effective from 4th April, 2025 designed to streamline processes, enhance transparency, and improve overall market efficiency. These changes aim to ensure that Rights Issue remain a viable and competitive method of capital raising while fostering greater investor participation.

KEY AMENDMENTS RESHAPING THE RIGHTS ISSUE FRAMEWORK & THEIR LIKELY IMPACT

  •  Application of ICDR Regulations to Rights Issue Below ₹50 Crore

Prior to the amendments, Rights Issue below R50 crore were exempt from ICDR Regulations, creating regulatory disparities between small and large issuers. SEBI has now mandated uniform compliance with ICDR Regulations for all Rights Issue, irrespective of size, ensuring transparency, investor protection, and a level playing field across the market.

This amendment brings additional compliance requirements, particularly in terms of enhanced disclosures, financial reporting, and regulatory approvals. While this may increase regulatory costs for smaller issues, it also enhances investor confidence and credibility, potentially improving subscription rates.

  •  Reduction of Rights Issue Timeline from 317 Days to 23 Working Days

Prior to the Recent ICDR Amendments, while a fast-track Rights Issue typically took 12-14 weeks, a non-fast-track Rights Issue used to take approximately 6-7 months from the date of the board meeting approving the Rights Issue until the date of closure of the Rights Issue leading to valuation mismatches, investor resistance, and a lack of responsiveness to market conditions. The Recent ICDR Amendments provide that the Rights Issue may be completed within 23 working days from the date of the board of directors of the issuer approving the Rights Issue (except in case of Rights Issue of convertible debt instruments which require prior shareholders’ approval).

Reduction in timeline for completing a Right Issue from 317 days to just 23 working days will enhance efficiency, predictability, and responsiveness to market conditions, allowing companies to raise capital in a shorter timeframe and minimizing exposure to price fluctuations and the Investor will also get benefit that it will counter the volatility and enhance liquidity in the secondary market.

  •  Elimination of Mandatory Merchant Banker Requirement

SEBI has done away with the requirement of compulsory merchant banker involvement in Rights Issue, allowing issuers to self-manage the process or engage advisors selectively.

This will result in reduction in compliance costs and timelines, particularly for mid-sized and smaller companies, which previously incurred substantial fees for engaging merchant bankers and taking time for completing the process. This amendment will grant companies with greater control over the Rights Issue process, enabling them to structure offerings in a cost-effective and efficient manner.

  •  Improved Treatment of Unsubscribed Shares

Historically, the inability to effectively manage unsubscribed shares has been a significant challenge for issuers. SEBI’s amendment now permits issuers to reallocate unsubscribed portions to specified investors, thereby increasing the likelihood of full subscription and reducing the risk of undercapitalization. This change introduces greater flexibility for companies, allowing them to strategically distribute shares based on market demand. This amendment enhances the overall attractiveness of Rights Issue, as companies are now better equipped to manage excess demand and prevent subscription shortfalls. The companies need to ensure efficient allocation of unsubscribed shares while complying with SEBI’s revised guidelines, its legal enforceability. Also, companies must exercise due diligence to ensure compliance with the evolving framework, failing which it can lead to regulatory scrutiny and potential legal ramifications.

For professionals, this regulatory shift present both Challenges and Opportunities. The opportunity for compliance and advisory services shall witness a rise, as the role of Merchant Banker has substantially reduced at one hand and on the other hand regulatory environment has become more complex. This change opens opportunities for legal, accounting, and regulatory advisory services which includes preparation of comprehensive offer documents, ensure regulatory compliance, and reviewing disclosures. The compressed timeline necessitates faster regulatory filings, due diligence, disclosures, etc. which will open new opportunities for Chartered accountants (CAs) and Auditors.

FUTURE OF RIGHTS ISSUE IN THE CONTEXT OF INDIA’S CAPITAL MARKET

SEBI has effectively streamlined the Rights Issue process, contributing to a more predictable and efficient capital-raising environment, making Rights Issue a more attractive option for corporate Issuers.

To further strengthen the Rights Issue framework, adopting of digital platforms to streamline the application process, reducing the paperwork, and integrating blockchain technology for real-time subscription tracking, can improve transparency and allow for more effective monitoring of fund utilization.

For companies which are fully compliant having strong financials and credibility, expedited regulatory approvals may be granted under the concept of Green Route Channel, which could further enhance market efficiency. This would encourage greater participation from a diverse range of companies, making the Rights Issue process more accessible and attractive. Further relaxation of disclosure requirements for smaller issues may be provided in case companies adhere to stringent investor protection policies.

As capital markets evolve, various developments will also unfold but continued vigilance and proactive adaptation will be crucial for maintaining a competitive and investor-friendly capital-raising mechanism and retaining the trust in the integrity of the capital market ecosystem. These amendments reinforce SEBI’s emphasis on transparency, particularly through stricter fund utilisation monitoring mechanisms and enhanced investor protection measures.

Report On BCAS 58th Members’ Residential Refresher Course

The flagship event of the Bombay Chartered Accountants’ Society (BCAS), the Members’ Residential Refresher Course (RRC), was held in the city of Nawabs, Lucknow between Wednesday, 26th February, 2025 and Saturday, 1st March, 2025.

Keeping pace with the theme “ReImagining the Profession” of the immensely successful three-day mega conference, held in January 2024, the theme of the 58th RRC was finalised as “Profession Today And Tomorrow”. The Committee was seized of the need to deliver an event that would be both contemporary and forward looking. The topics and speakers were carefully selected and fitted in the time-tested mix of panel discussion, paper presentations and group discussions.

The annual RRC is nothing short of a yearly pilgrimage for her die-hard bhakts (devotees), and the consecration ceremony of Shree Ram Mandir in January 2024 had triggered the desire to hold the next year’s RRC in Ayodhya. This would provide the members a chance to pay obeisance to Ram Lalla and seek His blessings. With no hotel in Ayodhya large enough to accommodate a contingent of 175+, the Seminar, Membership & Public Relations (SMPR) Committee of the BCAS and the Office Bearers zeroed in on Lucknow — less than 160 kms from Ayodhya and, more importantly, with hotels large enough to accommodate the mammoth RRC contingent. The recce in October 2024 helped decide the venue — the newly constructed hotel, The Centrum, Lucknow.

Respecting the natural desire to visit Shree Ram Mandir along with their significant other, for the second time in history, a decision was taken to permit member spouse and children to register for the RRC. The response was immediate — it was houseful by the time the Early Bird stage ended! A total of 187 participants, drawn from 14 states and 31 cities and towns, including 11 non-residential members registered for the event. A heartening realisation was that for 76 members, this would be their very first RRC! Participants also included 2 newly wed couples, 5 member couples including a couple who gifted the BCAS Life Membership to their recently qualified daughter and enrolled her for the RRC as well.

The excitement in the air on the afternoon of 26th February was there for all to see as delegates checked in from all corners of the country. Day 1 began with the group discussion on “Case Studies in Direct Taxes on Assessment, Reassessment, Reviews and Appeals” which saw the break-out groups discuss the challenging and compelling case studies threadbare. This was followed by the formal inaugural session, with CA Preeti Cherian, Convenor, SMPR Committee, extolling everyone with the city’s tagline, “Muskuraiye! Aap Lucknow Mein Hain!”.

The President, CA Anand Bathiya, in his address, thanked the Committee for delivering on its promise to make the dream of visiting Shree Ram Mandir into a reality. He spoke about how the “Members’ only” flagship event of BCAS, the RRC has stood the test of time and continues to have its devoted following; the RRC serves as a confluence of like-minded members, with each one bringing a certain uniqueness to the table. The Chairman of the Committee, CA Chirag Doshi elaborated on the relevance of the RRC, selection of the venue, detailed schedule and RRC statistics.

It was then the turn of the unbeaten RRC champion (with 38 RRCs Not Out), Past President, CA Uday Sathaye to take centre stage and to formally introduce the Chief Guest, Past President CA Govind G Goyal to the audience. Past Presidents of ICAI, CA Mukund Chitale and CA Ved Jain joined the Chief Guest, the President CA Anand Bathiya, the Vice President CA Zubin Billimoria, the Past Presidents CA Anil Sathe,CA Ashok Dhere, CA Pranay Marfatia, CA Rajesh Muni and CA Uday Sathaye, the Chairman CA Chirag Doshi and the Convenors of the Committee, CA Ashwini Chitale,CA Mrinal Mehta and CA Preeti Cherian in lighting the ceremonial lamp. The esteemed Chief Guest and Past President, CA Govind G Goyal spoke in chaste Hindi about his association with BCAS in general and with RRCs in particular.

 

 

The inaugural session was followed by the curtain raiser — the fireside chat on the contemporary topic “Journey of CA Firms (Investible Firms, Mergers and Alliance of Firms)” with CA Manish Modi and CA Vaibhav Manek. The chat was moderated by Managing Committee member, CA Samit Saraf. The panelists spoke frankly of the challenges and opportunities their individual journeys had posed / opened up for them.

 

Day 2 started with the participants experiencing the mehman-nawaazi (hospitality) of our local member, CA Pradeep Kumar who made special arrangements to make available a huge cauldron of the winter speciality Malai Makhan at the breakfast table.

Suitably satiated, the participants were greeted by Convenor, CA Rimple Dedhia as they sat down to listen to the Past President of ICAI, the erudite Adv. CA Ved Jain discuss in detail the intricacies of the case studies which had been deliberated upon a day prior by the groups. The session was chaired by CA Pankaj Agarwal.

The Presentation Paper I “Role of Chartered Accountants in IPO Process” by CA Sumith Kamath helped the audience realise the opportunities available to CAs in this otherwise less explored terrain. The session was chaired by Past President CA Rajesh Muni. The Presentation Paper II “Practical Use of Technology in Professional Firms” by CA Rahul Bajaj had the audience captivated as they experienced for themselves the power of AI through his live demonstrations. The session was chaired by Joint Secretary, CA Kinjal Shah. The fact that the participants were reluctant to allow the session to close for the lunch break (despite it being way past 2 pm!) speaks volumes.

Post a sumptuous meal, Convenor, CA Mrinal Mehta invited all gathered to the Multi-Disciplinary Brains Trust session on the topic “Interplay of Direct Tax, GST Law and Audit on issues relating to Real Estate and Health Care Industry”. The esteemed panel comprising the Past President of ICAI, CA Mukund Chitale, Past President CA Anil Sathe and Shri Vishal Agarwal presented their views on the case studies at hand. The session was ably moderated by Adv CA Kinjal Bhuta and CA Mandar Telang. The day had been long; however, given that the dawn held the promise of fulfilling their dream of a lifetime, the participants felt doubly energised as they retired for the night.

Day 3 found a super enthusiastic group of devotees dressed in traditional attire, gather in the hotel foyer, eagerly waiting for the buses to take them to Ayodhya. The Committee Organisers had pulled out all stops to ensure that all the logistic arrangements, permissions, etc to transport the 190+ devotees from Lucknow to Ayodhya and back, were in place. The recently concluded Maha Kumbh Mela had resulted in unprecedented crowds flooding Ayodhya after taking the holy dip. The strain on the infrastructure had been tremendous — and yet, despite all this, through divine intervention undoubtedly, the entire contingent travelled to Ayodhya in a seamless manner.

The Sugam Darshan of Ram Lalla organised by the Committee brought tears of joy to many an eye and the group returned to Lucknow late afternoon, suitably invigorated. After a refreshing coffee break, the break-out groups for the group discussion on “Case Studies on Practical Implementation of Auditing Standards” retired to their designated areas to discuss the interesting case studies.

Day 4 was kick-started by Convenor, CA Ashwini Chitale inviting Past President CA Ashok Dhere to chair the session by CA Himanshu Kishnadwala as he replied to the case studies debated a day prior by the groups. This was followed by a presentation on the New Income Tax Bill by CA Uttamchand Jain. The session was chaired by Past President CA Pranay Marfatia.

The presence of BCAS through its annual RRC in the city of Lucknow had not gone unnoticed by the powers-that-be. A special session with none other than the Deputy Chief Minister of Uttar Pradesh, Shri Brajesh Pathak ji formed part of the concluding session. In his address, the Deputy CM acknowledged the vital role played by Chartered Accountants in the nation building process and spoke at length about the various domestic and international industries that are now housed in Uttar Pradesh. Shri Mukesh Singh, Executive Council Member & Chairman UP Coordination Committee Indo American Chamber of Commerce then addressed the audience on the topic “Challenges & Opportunities for Business in UP”. The address by the Deputy CM was extensively covered in the news by the 10+ media channels who were in attendance.

In the concluding session, both the President CA Anand Bathiya and Chairman of SMPR Committee, CA Chirag Doshi acknowledged all those who had worked towards delivering a successful RRC, especially the support extended by the local members, CA Anshul Agarwal and CA Pankaj Agarwal. And as the curtains came down on yet another successful RRC – one which had the participants wear their thinking caps and deliberate on where the profession is today and what the future holds, one was reminded of the ghazal penned by shaayar Nida Fazli:

सफ़र में धूप तो होगी, जो चल सको तो चलो

सभी हैं भीड़ में, तुम भी निकल सको तो चलो

किसी के वास्ते, राहें कहाँ बदलती हैं

तुम अपने आप को,

ख़ुद ही बदल सको तो चलो…..

यही है ज़िंदगी, कुछ ख़्वाब, चंद उम्मीदें

इन्हीं खिलौनों से तुम भी बहल सको, तो चलो l

 

 

 

 

 

 

 

 

Regulatory Referencer

DIRECT TAX: SPOTLIGHT

  1.  Due date for filing of Form No. 56F required to be filed under section 10AA(8) for Assessment year 2024-25 extended to 31st March, 2025 — Circular No. 2/2025 dated 18th February, 2025
  2.  Income tax deduction from Salaries during the financial year 2024-25 under section 192 of the Act — Circular No. 3/2025 dated 20th February, 2025
  3.  Frequently Asked Questions (FAQs) on Guidelines issued for Compounding of Offences under the Income-Tax Act, 1961 dated 17th October, 2024 — Circular No. 4/2025 dated 17th March, 2025
  4.  Ten Year Zero-Coupon Bond of Power Finance Corporation Ltd. notified for the purpose of section 2(48) — Notification No. 19/2025 dated 11th March, 2025

FEMA:

1. IFSCA replaces Fund Management Regulations of 2022 with IFSCA (Fund Management) Regulations, 2025.

IFSCA, along with the Fund Management Advisory Committee (FMAC) of IFSCA, senior industry leaders and through public consultations, has reviewed and replaced Fund Management Regulations of 2022 in order to enhance the ease of doing business and to develop the GIFT IFSC as a hub for International financial activities. Key reforms have been made in following areas:

i. Non-Retail Schemes (Venture Capital Schemes and Restricted Schemes)

ii. Manpower requirements for FMEs

iii. Registered FME (Retail) and Retail Schemes

iv. Portfolio Management Services

v. Other Key matters

Significant relaxations have been made including by way of reduction in minimum corpus; carve-outs from the regulatory requirements for fund of funds schemes; dispensation of prior approval for appointment of KMPs; streamlining and broadening the requirements regarding educational qualification and work experience of the KMPs; clarifications on several requirements; and reduction in compliance burden among several other measures. It will be worthwhile to read the new Fund Management provisions in detail for those interested in Fund Management activities in IFSCA.

[International Financial Services Centres Authority (Fund Management) Regulations, 2025 Notification No. IFSCA/GN/2025/002 and Press Release dated 19th February, 2025]

2. IFSCA sets procedure for ‘Fund Management Entity’ (FME) to appoint or change KMPs post-registration

The IFSC Authority has prescribed the manner and procedure to be followed by a Fund Management Entity for effecting the appointment of or change to the Key Managerial Personnels (KMPs) subsequent to the grant of registration by the Authority to the FME. The FME shall file an intimation to the Authority regarding the proposal to appoint or change a KMP in the prescribed format. This circular shall come into force with immediate effect.

[International Financial Services Centres Authority (Fund Management) Regulations, 2025 Press Release No. IFSCA-IF-10PR/1/2023-Capital Markets/6, dated 20th February, 2025]

3. IFSCA amends Aircraft Lease (“AL”) framework — restricts IFSC Lessors from leasing solely to Indian residents

Clause O.2 of AL Framework is replaced with O.2

“Transactions with person(s) resident in India”. As per this circular, lessor shall not purchase, lease or otherwise acquire the assets covered under this framework, where post-acquisition the asset will be operated or used solely by persons resident in India or to provide services to persons resident in India. The amendments to AL Framework shall come into force with immediate effect.

[Circular No. F. No. 172/IFSCA/Finance Company Regulations/2024-25/02 dated 26-2-2025]

4. IFSCA issue guidelines on ‘Cyber Security and Cyber Resilience’ for Regulated Entities in IFSCs

IFSCA has issued guidelines on ‘Cyber Security and Cyber Resilience’ for Regulated Entities in IFSCs. The guidelines intend to lay down IFSCA’s broad expectations from its Regulated Entities (REs). For these guidelines, REs must include any entity which is licensed, recognised, registered or authorised by IFSCA. The key components of the guidelines are categorised into (a) Governance, (b) Cyber security and cyber resilience framework, (c) Third party risk management, (d) Communication and (e) Audit.

[International Financial Services Centres Authority Circular No. IFSCA-CSDOMSC/13/2025-DCS, dated 10th March, 2025]

5. RBI permits settlement of Indo-Maldives trade in INR and MVR, alongside the existing ACU mechanism

In the wake of signing of Memorandum of Understanding (MoU) between RBI and Maldives Monetary Authority in November 2024, the Reserve Bank of India (RBI) has now allowed bilateral trade transactions between India and Maldives to be settled in Indian Rupees (INR) and Maldivian Rufiyaa (MVR) in addition to the existing Asian Clearing Union (ACU) mechanism. These instructions shall come into force with immediate effect.

[Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 A.P. (DIR Series) Circular No. 22 under FEMA, 1999, dated 17th March, 2025]

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.10/2025-Central Tax dated 13th March, 2025

Above notification seeks to amend Notification  No. 2/2017-Central Tax dated 19th June, 2017  which is regarding revision of the Territorial  Jurisdiction of Principal Commissioner/Commissioner of Central Tax, etc.

B. CIRCULARS

(i) Clarification on Rate of tax and Classification of various items under GST – Circular no.247/04/2025-GST dated 14th February, 2025.

By above circular, the clarifications are given about GST Rates and Classification for various products including SUVs, Popcorn, Raisins, Pepper, and AAC Blocks based on the recommendations of the GST Council in its 55th meeting.

C. ADVISORY

i) Vide GSTN Advisory dated 12th February, 2025, information is given regarding guidelines on GST registration under Rule 8 of the CGST Rules, 2017.

ii) Vide GSTN Advisory dated 15th February, 2025, information about introduction of Form ENR-03, allowing unregistered dealers to generate E-Way Bills using unique Enrolment ID, effective 11th February, 2025, is given.

D. ADVANCE RULINGS

Lease of land vis-à-vis Exemption Anmol Industries Ltd. (AAR Order No. 03/WBAAAR/2024 Dated: 30th August, 2024 DT. 26th November, 2024 (WB AAAR)

Earlier there was AR order no.24/WBAAR/2023-24 dated 20th December, 2023 passed by WBAAR, holding that long-term lease transaction effected by Shyama Prasad Mukherjee Port, Kolkata (SMPK) is not exempted from GST.

The ld. WBAAAR set aside said order and remanded matter back to AAR vide appeal order dated 18th April, 2024. Thereafter, fresh AR passed by AAR.

This appeal was against fresh AR No. 06/WBAAR/2024-25 dated 29th July, 2024-2024-VIL-143-AAR. By the said order, the ld. WBAAR ruled that Services by way of grant of long-term lease of land by SMPK to the appellant for the purpose of “setting up commercial office complex’ is not to be covered under entry 41 of Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017 and, therefore, cannot be treated as an exempt supply.

The facts are that the appellant entered into a leasing agreement with SMPK to take on lease a plot of land at Taratala Road for thirty (30) years for the purposes of setting up a commercial office complex. The appellant was to pay upfront lease premium along with GST @ 18% on consideration of `30,90,11,000/-. The question before AAAR was:

“Whether the upfront premium payable by the appellant towards the services of by way of granting of long-term lease of thirty years, or more of industrial plots or plots for development of infrastructure for financial business by SMPK is exempted under entry 41 of Notification No. 12/2017-CGST (Rate) dated 28th June, 2017?”

Based on use for infrastructure for financial business, the crux of the contention of the appellant was that the appellant being an industrial unit has fulfilled all the conditions as specified in entry number 41 of Notification No. 12/2017- Central Tax (Rate) dated 28th June, 2017 from the end of the recipient and hence SMPK should take exemption and should not charge any GST.

The conditions of aforesaid entry 41 are reproduced as under:

“I. The lease period should be of thirty years or more;

II. The property leased should be industrial plots or plots for development of infrastructure for financial business;

III. Service provider must be a State Government Industrial Development Corporations or Undertakings or by any other entity having 20 per cent. or more ownership of Central Government, State Government, Union territory (either directly or through an entity wholly controlled by the Central Government, State Government, Union territory);

IV. Service recipient must be an Industrial Unit.”

The ld. AAAR held that AAR has not discussed the condition mentioned in the first proviso in entry 41 i.e. whether the lease plot is being used for industrial or financial activity in an industrial or financial business area, which is substantial condition for grant of exemption.

The ld. AAAR examined the said issue in detail and found that the appellant is going to set up Commercial Office by setting up such commercial office complex and all the corporate activities including accounting and financial activities will be undertaken there and that such office will be planned to maintain and monitor all the financial records and transactions of the appellant company. The ld. AAAR found that the appellant is contemplating use of plot for financial business based on use of plot for such financial activity. Though finding on above aspect was not there in AR, the ld. AAAR held that under power u/s.101(1), the AAAR can modify AR order and accordingly considered itself as competent to go into above aspect of use for financial business.

In this respect, the ld. AAAR referred to Notice Inviting Tender, NIT No. SMP/KDS/LND/03-2022 dated 15th March, 2022, in which in para 8.7 the definition of setting up of a Commercial office complex is given as under:

“Setting up of a commercial office complex in a particular plot may be allowed where the listed purposes in the tender include Assembly, Business and Mercantile Buildings and the said land shall be used by the original lessee for own Corporate use and excess vacant space of the said office complex to be let out on lease to other corporate entities who will use the complex for setting up of Business Centre, Business Chambers, Conference Rooms, Office Infrastructure, Cafeteria, Restaurant, Gymnasium, Guest House, hotel accommodation, recreation facilities, pharmacies, diagnostic clinics, retail outlets etc. In other words, the original lessee will be a business integrator where various other stake holders /investors /retailers /service providers will operate under the business integrator (original lessee) as sub-lessees.”

As per clause 8.8 in NIT, it was also found that the plot is not allowable for Industrial building defined as “Any building or structure or part thereof used principally for fabrication, assembly and or processing of goods and materials of different kinds. Such building shall include laboratories, power plants, smoke houses, refineries, gas plants, mills, dairies, factories and workshops”.

Based on above facts, the ld. AAAR observed that when Industrial building itself is not allowed, no stretch of imagination can conclude that industrial activity is allowed under the instant tender. Accordingly, the ld. AAAR held that setting up of commercial office complex has a specific purpose and the same cannot be equated to industrial activity.

Regarding use for “financial activity”, the ld. AAAR observed that “Financial activity” is not defined in the GST Laws and hence meaning to be seen as per common business parlance. The ld. AAAR held that mere maintenance and monitoring of all the required financial records and transactions of a company does not mean financial activity. The ld. AAAR held that every business aims to achieve a profit which occurs because of increase in income and decrease in expenses and for this purpose obviously every business entity undertakes activities which have financial implications. The ld. AAAR held that it is a normal activity for a business and cannot be considered as financial activity implied in NIT. Elaborating this aspect, the ld. AAAR referred to meaning of Financial Service in IBC which indicates financial activity as services like acceptation of deposits and other such independent financial activities. SAC Code 9971 specifying financial services also referred to gather meaning of ‘financial activity’.

Noting above, the ld. AAAR came to the conclusion that the appellant is not providing any of the above Finance Services and hence cannot be considered as carrying out financial activity in a financial business area.

In respect of SMPK being Government Undertaking the ld. AAAR held that though SMPK is audited by the office of the Comptroller and Auditor General of India, it cannot be conclusively regarded as an entity having 20% or more ownership of Central Government.

Accordingly, the ld. AAAR confirmed AR of the AAR and rejected the appeal.

GST on Canteen Facility for Contractual Workers Troikaa Pharmaceuticals Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/07 (in Appl. No. Advance Ruling/SGST & CGST/2022/AR/09) dt.28th February, 2025)(Guj)

The present appeal was filed against the Advance Ruling No. GUJ/GAAAR/R/2022/38 dated 10th August, 2022 – 2022-VIL-231-AAR.

The facts are as under:

♦ “the appellant is engaged in the manufacture, sale & distribution of pharma products and is registered with the department;

♦ the appellant has appointed a CSP [Canteen Service Provider];

♦ the appellant provides subsidized canteen facilities to its employees & contractual workers;

♦ the appellant recovers 50% of the amount from the employees;

♦ that as far as security service contract workers is concerned, the canteen service provider raises bill for only 50% of the amount as the rest of the amount is being directly paid by the individual workers to the service provider.”

Based on above facts, the appellant had sought Advance Ruling on the following questions:

  1. “ Whether GST shall be applicable on the amount recovered by the company,Troikaa Pharmaceuticals Limited, from employees or contractual workers,when provision of third-party canteen service is obligatory under section 46 of the Factories Act, 1948?
  2.  Whether input tax credit of GST paid on food bill of the Canteen Service Provider shall be available, since providing this canteen facility is mandatory as per the Section 46 of the Factories Act, 1948?”

The ld. AAR gave following ruling:

  1. “ GST, at the hands of M/s Troikaa, is not leviable on the amount representing the employees portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  2.  GST, at the hands of M/s Troikaa, is leviable on the amount representing the contractual worker portion of canteen charges, which is collected by M/s Troikaa and paid to the Canteen service provider.
  3.  ITC on GST paid on canteen facility is admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to employees of the
    company subject to the condition that burden of GST have not been passed on to the employees of the company.
  4.  ITC on GST paid on canteen facility is not admissible to M/s Troikaa under Section 17(5)(b) of CGST Act on the food supplied to contractual worker supplied by labour contractor.”

This appeal was filed in respect of denial of ITC on canteen services provided by the appellant to contractual workers and levy of GST on food charges recovered from contractual workers.

To decide the issue, the ld. AAAR referred to provision of Section 17(5) about blocking of ITC and also Circular No.172/04/2022-GST-dated 6th July, 2022 in which clarifications are given about various issues of section 17(5) of the CGST Act.

Regarding question about levy of GST on receipts for Contractual Workers, the ld. AAAR referred to provisions of Factories Act, 1948 as well as sections 20 and 21 of CTRA,1970.

The appellant was canvassing that statutorily it is the contractor who is required to provide the amenity to the contractual workers in terms of section 16 and the onus shifts on the principal employer i.e. the appellant in case the contractor is not providing the same. The ld. AAAR concurred with above situation that though statutorily it is the contractor on whom the CLRA Act has entrusted the task of providing the amenity and the responsibility shifts on the principal employer i.e. appellant in case the contractor is not providing the same. However, the ld. AAAR observed that section of CLRA provides also that all expenses incurred by the principal employer in providing such amenity may be recovered from the contractor either by deduction from any amount payable under any contract or as a debt payable by the contractor.

From documents submitted the ld. AAAR found that the contractor has been paid the gross amount which includes salary, allowances such as canteen facility, provident fund, etc. The ld. AAAR also did not found averment by the appellant that the contractor has failed to fulfil his statutory obligation so as to shift primary requirement for providing facility on appellant.

The ld. AAAR also noted terms in agreement with Labour Contractor which explicitly states that no relationship of employer-employee is created between the appellant and the workers engaged by the contractor. The ld. AAAR, therefore, held that the clarification at serial no.5, vide circular no. 172/4/2022-GST dated 6th July, 2022 relied upon by the appellant to aver that no GST amount is leviable on the amount recovered from contractual workers for canteen services is incorrect since the clarification states that GST will not apply when perquisites are provided by the employer to its employees and not in other cases. The ld. AAAR also held that clarification at serial no. 3 of the said circular dated 6th July, 2022, regarding availment of ITC, would also not be applicable since it is available only in respect of the goods supplied to the employees of the appellant in terms of section 46 of the Factories Act, 1948, which mandates provision of canteen facilities to the employees.

In view of the above, the appeal was rejected, confirming the AR given by AAR.

Classification – Treated Water

Palsana Enviro Protection Ltd. (AAR (Appeal) Order No. GUJ/GAAAR/APPEAL/2025/08 (in Appl. No. Advance Ruling/ SGST & CGST/2023/AR/04) dt.28th February, 2025)(Guj)

The present appeal was against the Advance Ruling No. GUJ/GAAR/R/2022/47 dated 30th December, 2022 – 2023-VIL-09-AAR.

The facts are that the appellant, who has been promoted by a cluster of textile processing industries, has set up a CETP [Common Effluent Treatment Plant]. In the said CETP, the appellant recycles & thereafter supplies treated water to its member units for use in their activities. This treated water can be used in non-potable activity. Though the CETP treated water is made free from various impurities, however, even after carrying out the said physical and biological processes the said water is not pure water& cannot be termed as purified water.

The further fact is that CETP treated water is supplied to industries through pipelines. The appellant further claimed that their activity falls within the ambit of Sr. No. 99 of notification No. 2/2017-CT (R), as amended vide notification No. 7/2022-CT (Rate) dtd 13th July, 2022, as the water obtained from CETP is not ‘purified water’. To substantiate this claim, they have also relied on circulars No. 52/26/2018 dated 9th August, 2018 & 179/11/2022-GST dated 3rd August, 2022.

With above background appellant posed following questions before the ld. AAR.

  1. “ Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) will be eligible for exemption from GST by virtue of Sl. No. 99 of the Exemption Notification No. 02/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Water (other than aerated, mineral, purified, distilled, medical, ionic, battery, demineralized and water sold in sealed container)’? or
  2.  Whether ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18 per cent b virtue of Sl. No. 24 of Schedule – III of notification No. 01/2017- Integrated Tax (Rate), dated 28-6-2017 (as amended) as ‘Waters, including natural or artificial mineral waters, and aerated waters, not containing added sugar or other sweetening matter nor flavoured (other than Drinking water packed in 20 liters bottles).”

The ld. AAR ruled as under:

  1. “ ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is not eligible for exemption from payment of Tax by virtue of Sl. No. 99 of the exemption notification No. 02/2017-CT (Rate) dated 28th June, 2017 (as amended) and Sl. No. 99 of the exemption notification No. 02/2017- Integrated Tax (Rate), dated 28th June, 2017 (as amended).
  2.  ‘Treated Water’ obtained from CETP (classifiable under Chapter 2201) is taxable at 18% by virtue of Sl. No.24 of schedule – III of notification No.01/2017- CT (Rate) (as amended) and Sl. No. 24 of schedule – III of notification No. 01/2017-Integrated Tax (Rate), dated 28th June, 2017 (as amended).”

In essence, the AAR held that CETP water as ‘de-mineralized water’, excluded from exemption.

The appeal was against the above ruling.

In appeal, the appellant has reiterated its stand.

The ld. AAAR referred to relevant entries and averment. The appellant has produced laboratory certificate in course of appeal.

Based on sample water of appellant, in certificate it was stated that the water does not meet parameters of demineralized water.

The ld. AAAR declined to accept the said certificate produced by the appellant because, [a] the same was produced at an appellate stage; [b] the certificate nowhere states that the laboratory is an accredited laboratory and [c] there is no mention about the way the sample was drawn.

The appellant had relied upon certain rulings.

The ld. AAAR did not agree with rulings cited before it on ground that rulings by the Authority for Advance Ruling would be binding only on the applicant who sought it, the concerned officer or the jurisdictional officer in respect of the applicant. The ld. AAAR further observed that the Tamilnadu Authority for Advance Ruling has held that treated water obtained from CETP is de-mineralized water and will
therefore not be eligible for the benefit of the notification Nos. No. 2/2017-CT(R) dated 28th June, 2017 as amended.

In view of above findings, the appeal was rejected confirming the AR passed by GAAR.

Supply of Transportation Service vis-à-vis School Students

Batcha Noorjahan (AAR Order No. 06/ARA/2025 dt.13th February, 2025)(TN)

The applicant is engaged in the business of plying school buses and providing transportation services to the school students in commuting to their school and back home.

Applicant put up following questions to AAR.

  1. “ Whether the services provided by the applicant to the school students by way of transportation of students and staff, shall be considered as the services provided to the school (Educational Institute).
  2.  Whether the services provided by the applicant as mentioned above, shall be considered as exempted from GST as per the Serial No. 66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017 or any other applicable provision of the Act.”

The applicant has submitted following aspects of the transaction:

“i) The fees for the transportation of school students are being collected from the students directly as per the agreement with the schools.

ii) There could be a view that since the fees are directly collected from the students, the service recipient is not the school or the Educational Institution.”

As per the provisions of the Act, the services provided to the Educational Institution by way of transportation of students and staff is exempted from GST (Notification No.12/2017). It was further submitted that the applicant is providing services by way of transportation of students and staff though the bus fee is received from the students directly. It was interpretated by applicant that the schools are the service recipients though the consideration is not directly paid by them.

The ld. AAR referred to facts like the applicant has entered into a lease agreement with Alphabet International School vide agreement dated 30.09.2022 for a period of 5 years for the purpose of transporting students and staff of the school only in connection with school activity as provided under clause (8) of Rule 2 of the Tamil Nadu Motor Vehicles Regulations and Control of school buses special rules, 2012.

It was seen from agreement that there was no mention of the consideration part payable by the school to the applicant for providing the vehicle and the services related thereto. There was also no mention in the lease agreement as to how the transportation fees are to be collected, whether by the applicant or by the school.

From the copies of the receipts furnished by the applicant, it was seen that the applicant has directly raised receipt on the student concerned, towards ‘Student Transport Fees’.

The ld. AAR also observed that the applicant is not receiving any payment from the school administration and therefore, no services are rendered to the school by the applicant. The ld. AAR held that the services provided by the applicant to the school students by way of transportation and accordingly, the first question is answered in negative.

Regarding second question the ld. AAR held that the school has outsourced the transport serviceto the applicant and the applicant is directly in receipt of the consideration from the students and accordingly, the service rendered by the applicant to the students is to be considered as ‘Transport of passenger by any motor vehicle’, meriting classification under SAC 9964, attracting GST at 5% without ITC as per Sl.No.8(vi) of Notification No. 11/2017, dated 28th June, 2017, as amended vide Notification No. 31/2017-Central Tax (Rate) dated 13th October, 2017.

Since the transportation services are not suppliedto Educational Institutions as provided under Sl. No.66 of Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017, it is not applicable to the applicant. The ld. AAR decided the AR accordingly.

Composite Supply vis-à-vis Mixed Supply

Doms Industries Pvt. Ltd. (AAR (App) Order No. GUJ/GAAAR/APPEAL/ 2025/05 (In Appl. No. Advance Ruling/SGST&CGST/2023/AR/03) dt. 22nd January, 2025) (Guj)

This appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/52 dt.30.12.2022-2023-VIL-03-AAR.

The appellant supplies the goods in a combination with other products viz.

[a] DOMS A1 pencil. This consist of 10 pencils along with a sharpener & eraser.

[b] DOMS Smart Kit. This is a gift pack which consists of a colouring book, two pack of pencils,
one pack of colour pencil, one pack of oil pastels, one pack of plastic crayons, one pack of wax crayons, one eraser, one scale and one sharpener.

[c] DOMS my first pencil kit. It consists of a pencil, eraser, scale and a sharpener.

The applicant held view that he satisfies the four conditions to term the aforesaid supply as ‘composite supply’.

With above background, ruling was sought on following questions:

“(i) Whether the supply of pencils sharpener along with pencils being principal supply will be considered as the composite supply or mixed supply?

(ii) What will be the HSN code to be used by us in the above case.

(iii) Whether supply of sharpener along with the kit having a nominal value will have an impact on rate of tax.

If yes, what will be the rate of tax & HSN code to be used by use.”

The ruling of ld. GAAR dated 18th October, 2021 held as under:

“(i) the supply of pencils sharpener along with pencils is covered under the category of ‘mixed supply’;

(ii) as discussed in para 21.1 of the impugned ruling.

(iii) yes, the supply of sharpener along with the kit having a nominal value will have an impact on rate of tax. As discussed in para 21.2 and 21.3 of the impugned ruling.”

The appeal was filed against the above ruling.

Appellant made various submission as well as cited case laws.

In appeal, the ld. AAAR observed that the appellant is aggrieved only in respect of their product ‘DOMS A1 pencil’ which consists of 10 pcs of pencil, one eraser and one sharpener and accordingly AAAR restricted scope of appeal to the ruling on above product only.

The ld. AAAR referred to Guidance in Service Tax Education Guide issued by CBIC.

The ld. AAAR also referred to definition of term ‘composite supply’ and ‘mixed supply’ given in Sections 2(30) and 2(74) of CGST Act respectively.

The ld. AAAR concluded its finding in following terms:

“We find that the CGST Act, defines a composite /mixed supply. Additionally, CGST Act, 2017, thereafter, specifies the tax liability in such case wherein a supply falls within the ambit of either a composite /mixed supply. We have already held that the product ‘DOMS A1 pencil’, is a mixed supply, the product not being naturally bundled, not having a principal supply and not supplied in conjunction with each other in the ordinary course of business. Now, for the sake of argument, even if we were to examine the claim of the appellant, we find that the product of the applicant, in question, would not fall either within Rule 3(a) or 3(b) of the GIR, leaving us with the only alternative of resorting to Rule 3(c). The question then which would arise is whether Rule 3(c) of the GRI or Section 8(b), of the CGST Act, 2017, would prevail. It is a trite law that when the section is unambiguous, the averment of the appellant to take the assistance GRI for deciding the nature of supply, classification and rate of tax, is not legally tenable. We therefore, reject this submission of the appellant.”

Accordingly, the ld. AAAR rejected the appeal and confirmed AR given by AAR.

Goods And Services Tax

HIGH COURT

1. [2025] 172 Taxmann.com 66 (Madras) Madhesh @ Madesan Vs. State Tax Officer Dated 21st December, 2024

Once the goods are detained under section 129, detention order passed beyond the period of seven days from the date of show cause notice is liable to be set aside and detention of goods based on such time-barred order is illegal.

FACTS

In this case, the goods were detained on 29th October, 2024 and notice under section 129(3) of the Act, 2017 in Form GST MOV-07 was also issued on 29th October, 2024. However, no order of detention made in Form GST MOV-09 till date of filing writ, thereby violating the time-line stipulated under section 129(3) of the Act. The short question was whether the proceedings under section 129(3) can be sustained in the absence of complying with the time-line mandated under section 129(3).

HELD

The Hon’ble Court noted that under section 129(3) of the Act, the order ought to have been passed within a period of seven days from the date of service of such notice and hence held that the impugned proceedings are beyond the timelines stipulated under section 129(3) of the Act. Consequently, the impugned proceedings are set aside and the vehicles / goods in question were directed to be released forthwith.

2. [2025] 172 taxmann.com 100 (Allahabad) Kei Industries Ltd vs. State of U.P dated 4th February, 2025

Where goods not covered under the requirements of an E-way bill were transported, they could not be seized under section 129 for not being accompanied with an E-way bill.

FACTS

The petitioner was aggrieved by an order directing a seizure of the vehicle and the goods on the ground that the E-way Bill was not present with the goods. The department admitted in the Court that during the period under consideration, the goods that were being transported by the petitioner were not covered by the requirement of the E-way bill.

HELD

Based on the admission of the department that during the period under consideration, goods which were being transported by assessee, were not covered by the requirement of the E-way bill and relying on the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. State of U.P. — [2018] 97 taxmann.com 552 (Allahabad), the Hon’ble Court held that the impugned order was bad and is therefore, liable to be set aside.

3. [2025] 172 taxmann.com 133 (Gujarat) Patanjali Foods Ltd. vs. Union of India dated 12th February, 2025

Notification No. 9/2022, effective from 18th July, 2022, has a prospective effect and did not apply to refund claims of prior period, even if the claim of refund is made after 18th July, 2022. Further, once the refund application filed by the assessee is adjudicated and order is passed sanctioning the same, it is not open for the department to recover the said refund by issuing another SCN and passing different order and not by challenging the earlier order which has become final.

FACTS

The petitioner is inter-alia, engaged in the manufacture and sale of edible oil. According to the petitioner, the rate of tax applicable to input supplies of the petitioner exceeded the rate of tax on output supplies. Therefore, the petitioner qualified for a refund under the inverted duty structure scheme as per section 54(3) of the Central / Gujarat Goods and Services Tax Act, 2017. Notification No.9/2022-Central Tax dated 13th July, 2022, was issued by the Central Government, notifying certain goods, including edible oil, as ineligible for a refund under the inverted duty structure. The said Notification was made effective from 18th July, 2022. The petitioner submitted a refund application dated 5th December, 2023 for the period from February 2021 to March 2021 under section 54(3) of the GST Act.

The petitioner received a show cause notice proposing to reject the refund application on the ground that there was an existing demand against the petitioner on the GST portal. The petitioner replied to the said show cause notice, pointing out that the demands had been withdrawn pursuant to the direction of the NCLT. Thereafter, the respondent accepted the petitioner’s explanation and granted the refund after passing a sanction order.

However, subsequently, the respondent issued a notice under section 73 of the Act in Form GST-DRC-01, claiming that the earlier refund was erroneously granted in terms of application of the aforesaid notification read with Circular No.181/13/2022-GST dated 10th November, 2022 wherein it was clarified that said restriction shall apply in respect of all refund applications filed on or after 18th July, 2022.

HELD

The Hon’ble Court relied upon the decision in the case of Ascent MeditechLtd. vs. Union of India, wherein the Court struck down para 2(1) of the same Circular dated 10th November, 2022 on the ground that an artificial class of assessees cannot be created on the basis of date of filing of refund application. By that exact logic, the Hon’ble Court held that Para 2(2) of the impugned Circular dated 10th November, 2022 insofar as it provides that the restriction contained in notification no. 13th July, 2022 will apply to all the refund applications filed after 13th July, 2022, even though they are pertaining to a period prior to the date of notification, is wholly arbitrary, discriminatory and ultra-vires Article 14 as well as section 54 of the CGST Act. The Court held that as the notification is prospective in nature, the refund pertaining to period prior to 13th July, 2022 cannot be affected by such notification.

The High Court also noted that against the petitioner’s refund application dated 5th December, 2023, there has been an adjudication by the order dated 12th January, 2024, by which the petitioner’s refund application was accepted and the refund was granted. No appeal under section 107 or revision under section 108 of the CGST Act, 2017 was preferred by the department, challenging the adjudication of the petitioner’s refund application and the consequent order sanctioning the refund. Therefore, the Hon’ble Court, opined that the grant of refund to the petitioner by order dated 12th January, 2024 had become final and no show cause notice could be issued by the respondents to take away the benefits of a quasi-judicial order in the petitioner’s favour. Thus, the subsequent Order-in-Original dated 10th September, 2024, by which the show cause notice dated 2ndMay, 2024 was adjudicated, was held to be illegal and unsustainable and was quashed and set aside.

4. [2025] 172 taxmann.com 105 (Jharkhand) Steel Authority of India Ltd vs. State of Jharkhand dated 30th January, 2025.

Inadmissible ITC of VAT regime cannot be disallowed in the GST regime which is carried forward through TRAN-1 and must be adjudicated under the pre-GST law.

FACTS

Petitioner, a Public Sector Undertaking is engaged in the manufacture of various steel products. Under the VAT regime, as on 30th June, 2017, Petitioner Company had un-availed input tax credit which was transitioned by it under the GST regime in terms of section 140(1) of JGST Act. However, the petitioner received a show cause notice on the following grounds, namely;

Petitioner availed input tax credit on the purchase of consumables which it was not entitled to avail in terms of section 18(8)(viii) of JVAT Act and accordingly, the transition of said credit under the GST Act was impermissible.

(ii) Petitioner availed input tax credit on capital goods which was also not available to them in terms of provisions of section 18(5) of JVAT Act and thus, transitioning of the same under the GST Act was illegal.

Petitioner filed a detailed reply, however order was passed denying the transitional credit in GST regime on the ground that transitioning of inadmissible input tax credit under the GST Act was illegal. Against the aforesaid order, the petitioner preferred an appeal before the Appellate Authority, but the Appellate Authority, rejected the appeal and confirmed the adjudication order.

HELD

Eligibility of input tax credit under erstwhile VAT Act to be adjudicated under provisions of repealed Act. Proceedings for alleged inadmissible credit under the GST Act is improper and without jurisdiction. Impugned adjudication order and appellate order quashed. Amount recovered to be restored with interest, however, Respondent authorities were allowed to initiate proceedings under repealed VAT Act if so advised.

5. [2025] 172 taxmann.com 129 (Madras) KesarJewellers vs. Additional Director General dated 7th February, 2025

There must be tangible material on record suggesting that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the revenue.

FACTS

The petitioner is registered as a taxable person under the GST Act engaged in the trading of Gold Bullion and Gold Jewellery. The Senior Intelligence Officer, Directorate General of Goods and Service Tax, Intelligence (DGGI), issued a summons to the petitioner under section 70 of the CGST Act, calling upon the petitioner to be present at their office in connection with an investigation. Thereafter, the petitioner’s place of business was searched and certain documents such as purchase / sale invoices, mobile phone, pen drive along with files containing certain papers were seized. Thereafter there was another search of the petitioner’s place of business, during which, gold bars along with computer, mobile phones, loose cash, documents were seized and duly recorded in the Mahazar. Yet another summon came to be issued under section 70 of the CGST Act, calling upon the petitioner to appear for an enquiry. Thereafter, an arrest memo with grounds for arrest was issued. The petitioner was arrested and remanded to judicial custody. The impugned order in Form DRC-22 came to be issued i.e. on the very day when the petitioner was granted bail, thereby attaching provisionally the petitioner’s bank accounts.

Petitioner submitted that the impugned attachment proceeding is bad for want of jurisdiction inasmuch as it did not disclose any tangible material leading to the formation of the opinion, that it is necessary to provisionally attach the property of the petitioner, for the purpose of protecting the interest of the Government warranting exercise of power under section 83 of the Act and that in the absence of tangible material which indicates a live link to the necessity to order a provisional attachment to protect the interest of the Revenue, the exercise of power under section 83 of the Act is without jurisdiction.

HELD

The Hon’ble Court held that the provisional attachment is an extreme measure that must be based on tangible material and must be necessary to protect revenue. The Court held that the attachment order in the present case was mechanical and failed to disclose any specific tangible material or justification for attachment. Since, the pendency of proceedings under Chapter XII, XIV or XV was not sufficient to justify provisional attachment and revenue did not establish that revenue could not be protected without attachment, the impugned order of provisionally attaching multiple bank accounts was to be set aside.

Non-Repatriable Investment by NRIs/OCIs under FEMA: An Analysis – Part 2

NON-REPATRIABLE INVESTMENTS: EASY ENTRY, TRICKY EXIT!

In Part I, we explored how NRIs and OCIs can invest in India under Schedule IV, enjoying the perks of domestic investment while sidestepping FDI restrictions. We saw how this route offers flexibility in entry—with no foreign investment caps, no strict pricing rules, and freedom to invest in LLPs, AIFs, and even real estate (as long as it’s not a farmhouse!). But, much like a long-term relationship, once you commit, FEMA expects you to stay for the long haul.

Now, in Part II, we address the big question: Can you transfer, sell, or gift these investments? Will FEMA allow you a graceful exit? We’ll dive into the rules governing transfers, repatriation limits, downstream investments, and more—so buckle up, because while the non-repatriable entry was smooth, the exit is where the real thrill begins!

TRANSFER OF SHARES/INVESTMENTS HELD ON NON-REPATRIATION BASIS

Just as important as the entry is the ability to transfer or exit the investment. FEMA provides certain pathways for transferring shares or other securities that were held on a non-repatriation basis:

  •  Transfer to a Resident: An NRI/OCI can sell or gift the securities to an Indian resident freely. Since the resident will hold them as domestic holdings, this is straightforward. No RBI permission, pricing guideline, or reporting form is required. For instance, if an NRI uncle wants to gift his shares (held on a non-repat basis) in an Indian company to his resident Indian nephew, it’s permitted and no specific FEMA filing is triggered (aside from perhaps a local gift deed for records). Similarly, suppose an NRI non-repat investor wants to sell his stake to an Indian co-promoter. In that case, he can transact at any price mutually agreed upon (pricing restrictions don’t apply as this is essentially a resident-to-resident transfer in FEMA’s eyes), and no FC-TRS form is required.
  • Transfer to another NRI / OCI on Non-Repat basis: NRIs / OCIs can also transfer such investments amongst themselves, provided the investment remains on non-repatriation. For example, one OCI can gift shares held under Schedule IV to another OCI or NRI (maybe a relative) who will also hold them under Schedule IV. This is allowed without RBI approval, and again, no pricing or reporting requirements apply. The only caveat is that the transferee must be eligible to hold on a non-repat basis (which generally means they are NRI / OCI or their entity). Gifting among NRIs / OCIs on the non-repat route is quite common within families. Note: If it’s a gift, one should ensure it meets any conditions under the Companies Act or other laws (for instance, if the donor and donee are “relatives” under Section 2(77) Companies Act, as required by FEMA for certain cross-border gifts – more on that below).
  •  Transfer to an NRI / OCI on a repatriation basis (i.e., converting it to FDI): This scenario is effectively an exit from the non-repatriable pool into the repatriable pool. For instance, an NRI with non-repat shares might find a foreign investor or another NRI who wants those shares but with repatriation rights. FEMA permits the sale, but since the buyer will hold on a repatriation basis (Schedule I or III), it must conform to FDI rules. That means sectoral caps and entry routes must be respected, and pricing guidelines apply to the transaction. If it’s a gift (without consideration) from an NRI (non-repat holder) to an NRI / OCI (who will hold as repatriable), prior RBI approval is required and certain conditions must be met. These conditions (laid out in NDI Rules and earlier in TISPRO) include: (a) the donee must be eligible to hold the investment under the relevant repatriable schedule (meaning the sector is open for FDI for that person); (b) the gift amount is within 5% of the company’s paid-up capital (or each series of debentures / MF scheme) cumulatively; (c) sectoral cap is not breached by the donee’s holdings; (d) donor and donee are relatives as defined in Companies Act, 2013; and (e) the value of securities gifted by the donor in a year does not exceed USD 50,000. These are designed to prevent the abuse of gifting as a loophole to transfer large foreign investments without consideration. If all conditions are met, RBI may approve the gift. If it’s a sale (for consideration) by NRI non-repat to NRI/OCI repatriable, no prior approval is needed (sale is under automatic route) but pricing must be at or higher than fair value (since NR to NR transfer with one side repatriable is treated like an FDI entry for the buyer). Form FC-TRS must be filed to report this transfer, and in such a case, since the seller was holding non-repat, the onus is on the seller (who is the one changing their holding status) to file the FC-TRS within 60 days. Our earlier table from the draft summarizes: Seller NRI-non-repat -> Buyer NRI-repat: pricing applicable, FC-TRS by seller, auto route subject to caps.
  •  Transfer from a foreign investor (repatriable) to an NRI/OCI (non-repatriable): This is the reverse scenario – a person who holds shares as foreign investment sells or gifts to an NRI / OCI who will hold as domestic. For example, a foreign venture fund wants to exit and an OCI investor is willing to buy but keep the investment in India. FEMA allows this as well. Since the new holder is non-repatriable, the sectoral caps don’t matter post-transfer (the investment leaves the FDI ambit). However, up to the point of transfer, compliance should be there. In a sale by a foreign investor to an NRI on a non-repat basis, pricing guidelines again apply (the NRI shouldn’t pay more than fair value, because a foreigner is exiting and taking money out – RBI ensures they don’t take out more than fair value). FC-TRS reporting is required, and typically, the buyer (NRI / OCI) would report it because the buyer is the one now holding the securities (the authorized dealer often guides who should file; it has to be a person resident in India and as non-repat investment is treated as domestic investment, it has to be filed by NRI / OCI acquiring it on non-repat basis). If it’s a gift from a foreign investor to an NRI / OCI relative, RBI approval would similarly be needed with analogous conditions (the NDI Rules conditions on gift apply to any resident outside to resident outside transfer, repatriable to non-repat likely treated similarly requiring approval unless specified otherwise). The draft table indicated: Buyer NRI-non-repat from Seller foreign (repat) – gift allowed with approval, pricing applicable, FC-TRS by buyer, and subject to FDI sectoral limits at the time of transfer.

In all the above cases of change of mode (repatriable vs non-repatriable), one can see FEMA tries to ensure that whenever money is leaving India (repatriable side), fair value is respected and RBI is informed. But when the money remains in India (purely domestic or non-repat transfers), the regulations are hands-off.

Downstream Investment Impact: A critical implication of holding investments on non-repatriation basis is how the investing company is classified. FEMA and India’s FDI policy have the concept of indirect foreign investment – if Company A is foreign-owned or controlled, and it invests in Company B, then Company B is considered to have foreign investment to that extent. However, Schedule IV investments are excluded from this calculation. The rules (as clarified in DPIIT’s policy) state that if an Indian company is owned and controlled by NRIs / OCIs on a non-repatriation basis, any downstream investment by that company will not be considered foreign investment. In other words, an Indian company that has only NRI / OCI non-repat capital is treated as an Indian-owned company. So if it later invests in another Indian company, that target company doesn’t need to worry about foreign equity caps because the investment is coming from an Indian source (deemed). This is a major benefit – it effectively ring-fences NRI domestic investment from contaminating downstream entities with foreign status. This clarification was issued to remove ambiguity, especially in cases where OCIs set up investment vehicles. Now, an NRI / OCI-owned investment fund (registered as an Indian company or LLP) can invest freely in downstream companies without subjecting them to FDI compliance, provided the fund’s own capital is non-repatriable.

From a practical standpoint, when structuring private equity deals, if one of the investors is an NRI / OCI willing to designate their contribution as non-repatriable, the company can be treated as fully Indian-owned, allowing it to invest into subsidiaries or other companies in restricted sectors without ceilings. This has to be balanced with the investor’s interest (since that NRI loses repatriation right). Often, OCIs with a long-term commitment to India might be agreeable to this to enable, say, a group structure that avoids FDI limits.

Summary of Transfer Scenarios: For quick reference:

  •  NRI / OCI (Non-repat)-> Resident: Allowed, gift allowed, no pricing rule, no reporting.
  •  Resident -> NRI / OCI (Non-repat): Allowed, gift allowed, no pricing rule, no reporting (essentially the mirror of above, turning domestic holding into NRI non-repat).
  •  NRI / OCI (Non-repat) -> NRI / OCI (Non-repat): Allowed, gift allowed, no pricing, no reporting.
  •  NRI / OCI (Non-repat) -> Foreigner / NRI (Repat): Allowed, the gift needs RBI approval (with conditions), if sale then pricing applies; report FC-TRS.
  •  Foreigner / NRI (Repat) -> NRI / OCI (Non-repat): Allowed, gift possibly with approval; sale at pricing; report FC-TRS.

The key is whether the status of the investment (domestic vs foreign) changes as a result of transfer, and ensuring the appropriate regulatory steps in those cases.

Comparative Interplay Between Schedules I, III, IV, and VI

To fully understand Schedule IV in context, one must compare it with other relevant schedules under FEMA NDI Rules:

Schedule I (FDI route) vs Schedule IV (NRI non-repat route)

  •  Nature of Investment: Schedule I covers FDI by any person resident outside India (including NRIs) on a repatriation basis. Schedule IV covers investments by NRIs / OCIs (and their entities) on a non-repatriation basis. Schedule I investments count as foreign investment; Schedule IV do not.
  •  Sectoral Caps and Conditions: Schedule I investments are subject to sectoral caps (% limits in various sectors) and sector-specific conditions (like minimum capitalization, lock-ins, etc., in sectors like retail, construction, etc.). By contrast, Schedule IV investments are generally not subject to those caps/conditions because they are treated as domestic. For example, multi-brand retail trading has a 51% cap under FDI with many conditions – an OCI could invest 100% in a retail company under Schedule IV with none of those conditions, as long as it’s on a non-repatriation basis. Similarly, real estate development has minimum area and lock-in requirements under FDI, but an NRI could invest non-repat without those (provided it’s not pure trading of real estate).
  •  Prohibited Sectors: Schedule I explicitly prohibits foreign investment in sectors like lottery, gambling, chit funds, Nidhi, real estate business, and also limits in print media, etc. Schedule IV has its own (smaller) prohibited list (Nidhi, agriculture, plantation, real estate business, farmhouses, TDR) but notably does not mention lottery, gambling, etc. Thus, some sectors closed in Schedule I are open in Schedule IV, and vice versa (as discussed earlier).
  •  Valuation / Optionality: Under Schedule I, any equity instruments issued to foreign investors can have an optionality clause only with a minimum lock-in of 1 year and no assured return; effectively, foreign investors cannot be guaranteed an exit price. Under Schedule IV, these restrictions do not apply – one can issue shares or other instruments to NRIs/OCIs with an assured buyback or fixed return arrangement since it’s like a domestic deal. Likewise, provisions like deferred consideration (permitted for FDI up to 25% for 18 months) need not be adhered to strictly for non-repat investments – an NRI investor and company can agree on different terms as it’s a private domestic contract in FEMA’s eyes.
  •  Reporting: FDI (Sch. I) transactions must be reported (FC-GPR, FC-TRS, etc.), whereas Sch. IV initial investments are not reported to RBI as noted.
  •  Exit / Repatriation: Schedule I investors can repatriate everything freely (that’s the point of FDI), whereas Schedule IV investors are bound by the NRO / $1M rule for exits.

Bottom line: Schedule IV is far more liberal on entry (no caps, any price) but restrictive on exit, whereas Schedule I is vice versa. A legal advisor will often weigh these options for an NRI client: if the priority is to eventually take money abroad or bring in a foreign partner, Schedule I might be preferable; if the priority is flexibility in investing and less regulatory hassle, Schedule IV is attractive.

Schedule III (NRI Portfolio Investment) vs Schedule IV (NRI Non-Repatriation)

Schedule III deals with the Portfolio Investment Scheme (PIS) for NRIs / OCIs on a repatriation basis, primarily buying/selling shares of listed companies through stock exchanges.

  •  Listed Shares via Stock Exchange: Under Schedule III (PIS), an NRI / OCI can purchase shares of listed Indian companies only through a recognized stock broker on the stock exchange and is subject to the rule that no individual NRI / OCI can hold more than 5% of the paid-up capital of the company. All NRIs / OCIs taken together cannot exceed 10% of the capital unless the company passes a resolution to increase this aggregate limit to 24%. These limits are to ensure NRI portfolio investments remain “portfolio” in nature and do not take over the company. In contrast, under Schedule IV, NRIs / OCIs can acquire shares of listed companies without regard to the 5% or 10% limits because those limits apply only to repatriable holdings. An NRI could, for instance, accumulate a larger stake by buying shares off-market or via private placements under Schedule IV.
  •  Other Securities: Schedule III also allows NRIs to purchase on a repatriation basis certain government securities, treasury bills, PSU bonds, etc., up to specified limits, and units of equity mutual funds (no limit). On this front, both Schedule III and Schedule IV allow NRIs to invest in domestic mutual fund units freely if the fund is equity-oriented. So whether repatriable or not, an NRI can buy any number of units of, say, an index fund or equity ETF.
  •  Nature of Investor: Schedule III is meant for NRIs investing as portfolio investors (often through NRE PIS bank accounts), whereas Schedule IV is not limited to portfolio activity – it can be FDI-like strategic investments too.
  •  Trading vs Investment: Under PIS (Sch. III), NRIs are typically not allowed to make the stock trading their full-time business (they cannot do intraday trading or short-selling under PIS; it’s for investment, not speculation). Schedule IV has no such restriction explicitly; however, if an NRI were actively trading frequently under non-repatriation, it might raise questions – usually, serious traders stick to the PIS route for liquidity.

In summary, Schedule III is a subset route for market investments with tight limits, whereas Schedule IV offers NRIs a way to invest in listed companies beyond those limits (albeit off-market and non-repatriable). As a strategy, an NRI who sees a long-term value in a listed company and wants significant ownership may choose to buy some under PIS (repatriable) but anything beyond the threshold under the non-repat route, combining both to achieve a
larger stake.

SCHEDULE VI (FDI IN LLPs) Vs SCHEDULE IV (NRI INVESTMENT IN LLPs)

Schedule VI allows foreign investment in Limited Liability Partnerships (LLPs) on a repatriation basis. It stipulates that FDI in LLP is allowed only in sectors where 100% FDI is permitted under automatic route and there are no FDI-linked performance conditions (like minimum capital, etc.). This effectively bars FDI in LLPs in sectors like real estate, retail trading, etc., because those sectors either have caps or conditions. For example, multi-brand retail is 51% with conditions – so a foreign investor cannot invest in an LLP doing retail. Real estate business is prohibited entirely for FDI – so no LLP can be structured. Even an LLP in construction development is problematic under FDI if conditions (like a lock-in) are considered performance conditions.

However, Schedule IV imposes no such sectoral conditionality for LLPs (apart from the same prohibited list). Therefore, NRIs / OCIs can invest in the capital of an LLP on a non-repatriation basis even if that LLP is engaged in a sector where FDI in LLP is not allowed. For instance, an LLP engaged in the business of building residential housing (construction development) — FDI in such an LLP would not be allowed repatriably because construction development, while 100% automatic, had certain conditions under the FDI policy. Under Schedule IV, an NRI could contribute capital to this LLP freely as domestic investment. Another concrete example: LLP engaged in single-brand or multi-brand retail – FDI in LLP is not permitted because retail has conditions, but NRI non-repat funds could still be infused into an LLP doing retail trade. The only caveat is if the LLP’s activity falls under the explicit prohibitions of Schedule IV (agriculture, plantation, real estate trading, farmhouses, etc., which we already know). As long as the LLP’s business is not in that small prohibited list, NRI / OCI money can be invested on non-repatriable basis.

Thus, Schedule IV significantly expands NRIs’ ability to invest in LLPs vis-à-vis Schedule VI. It allows the Indian-origin diaspora to use LLP structures (which are popular for smaller businesses and real estate projects), which are otherwise off-limits to foreign investors. The outcome is that an LLP which cannot get FDI can still get funds from NRI partners, treated as local funds, potentially giving it a competitive edge or needed capital infusion. As noted earlier, an LLP receiving NRI non-repat investment remains an “Indian” entity for downstream investment purposes as well, so it could even invest in other companies without being tagged as foreign-owned.

SCHEDULE IV Vs SCHEDULE IV (FIRM/PROPRIETARY CONCERNS)

There is also a provision (in Part B of Schedule IV) for investment in partnership firms or sole proprietorship concerns on a non-repatriation basis. There is no equivalent provision under repatriation routes – meaning NRIs cannot invest in a partnership or proprietorship on a repatriable basis at all under NDI rules. Under Schedule IV, an NRI/OCI can contribute capital to any proprietorship or partnership firm in India provided the firm is not engaged in agriculture, plantation, real estate business, or print media. These mirror the older provisions from prior regulations. The exclusion of print media here is interesting, as discussed: an NRI cannot invest in a newspaper partnership but could invest in a newspaper company. This is likely a policy decision to keep sensitive sectors like news media more closely regulated (partnerships are unregulated entities compared to companies which have shareholding disclosures, etc.).

For completeness, Schedule V under NDI Rules is for investment by other specific non-resident entities like Sovereign Wealth Funds in certain circumstances, and Schedule VII, VIII, IX cover foreign venture capital, investment vehicles, and depository receipts respectively.

PRACTICAL CHALLENGES AND LEGAL IMPLICATIONS

While the non-repatriation route offers flexibility, it also presents some practical challenges and considerations for legal practitioners advising clients:

  1.  Exit Strategy and Liquidity: Perhaps the biggest issue is planning how the NRI/OCI will exit or monetize the investment if needed. Since direct repatriation of capital is capped at USD 1 million per year, clients who invest large sums must understand that they can’t easily pull out their entire investment quickly. Case in point: if an OCI invests $5 million in a startup via Schedule IV and after a few years the startup is sold for $20 million, the OCI cannot take $20 million out in one go. They would either have to flip the investment to a repatriable mode before exit (e.g. sell their stake to a foreign investor prior to the main sale, thereby converting to FDI at fair value and then repatriating through that foreign investor’s sale) or accept a long repatriation timeline using the $1M per year route, or approach RBI (which historically is reluctant to approve a big one-shot remittance). This illiquidity needs to be clearly explained to clients
  2.  Mixing Repatriable and Non-Repatriable Funds: Often, companies have a mix of foreign investment – say, a venture capital fund (FDI) and an NRI relative (non-repat). In such cases, accounting properly for the two classes is key. From a corporate law perspective, both hold equity, but from an exchange control perspective, one part of equity is foreign, and one part is domestic. The company’s compliance team must carefully track these when reporting foreign investment percentages to any authority or while calculating downstream foreign investment. Misclassification can lead to errors – e.g., a company might erroneously count the NRI’s holding as part of FDI and think it breached a cap, or conversely ignore a foreign holding, thinking it was NRI domestic. It’s advisable in company records and even on share certificates to mark non-repatriable holdings distinctly. Some companies create separate folios in their register for clarity..
  3.  Corporate Governance and Control: Because Schedule IV allows NRIs to invest beyond usual foreign limits, we see scenarios of foreign control via NRI routes. For example, foreign parents could nominate OCI individuals to hold a majority in an Indian company so that it is “Indian owned” but effectively under foreign control through OCI proxies. Regulators are aware of this risk. The law currently hinges on “owned and controlled by NRIs / OCIs” as the test for deeming it domestic. If an OCI is truly acting at the behest of a non-OCI foreigner, that could be viewed as a circumvention. In diligence, one should ensure OCI investors are bona fide and making decisions independently, or at least within what law permits. If an Indian company with large NRI non-repat investment is making downstream investments in a sensitive sector, one must document that control remains with OCI and not via any agreement handing powers to someone else, lest the structure be challenged as a sham.
  4.  Changing Residential Status: An interesting practical point – if an NRI who made a non-repat investment later moves back to India and becomes a resident, their holding simply becomes a resident holding (no issue there). But if they then move abroad again and become NRI once more, by default, that holding would become an NRI holding on a non-repat basis (since it was never designated repatriable). That person might now wish it were repatriable. There isn’t a straightforward mechanism to “retroactively designate” an investment as repatriable; typically, the person would have to do a transfer (e.g., transfer to self through a structure, which is not really possible) or approach RBI. It’s a corner case, but it shows that once an investment is made under a particular schedule, toggling its status is not simple unless a third-party transfer is involved.
  5.  Evidence of Investment Route: Down the line, when an NRI / OCI wants to remit out the sale proceeds under the $1M facility, banks often ask for proof that the investment was made on a non-repatriation basis (because if it was repatriable, the sale proceeds would be in an NRE account and could go out without using the $1M quota). Thus, maintaining paperwork – such as the board resolution or offer letter mentioning the shares are under Schedule IV, or a copy of the share certificate with a “non-repatriable” stamp, or the letter to AD bank at the time of issue – becomes useful to avoid confusion. If records are lost or unclear, the bank might fear to allow remittance or might treat it as some foreign investment needing RBI permission. So, documentation is a practical must.
  6.  Taxation Aspect: Though not directly a FEMA issue, note that dividends repatriated to NRIs will be after TDS, and any gift of shares etc. might have tax implications (gift to a relative is not taxable in India, but to a non-relative, it could trigger tax for the recipient if over ₹50,000). Also, the favourable FEMA treatment doesn’t automatically confer any tax residency benefit – e.g., just because OCI investment is deemed domestic doesn’t make the OCI an Indian resident for tax

BEFORE WE ALL NEED A REPATRIATION ROUTE, LET’S WRAP THIS UP!

Before we exhaust ourselves—or our dear readers start considering their own non-repatriable exit strategies—let’s conclude. The non-repatriation route under FEMA is like a VIP pass for NRIs and OCIs to invest in India while enjoying the perks of domestic investors. It’s a fine balancing act by policymakers: welcoming diaspora investments with open arms but keeping foreign exchange reserves snugly in place.

For legal practitioners, Schedule IV is both a playground and a puzzle—offering creative structuring opportunities while demanding meticulous planning for exits and compliance. Done right, it’s a win-win for investors and Indian businesses alike, seamlessly blending “foreign” and “domestic” investment. So, whether you’re an NRI looking for investment options or a lawyer navigating these rules—remember, patience, planning, and a strong cup of chai go a long way!

Miscellanea

1. TECHNOLOGY AND AI

# Italian newspaper says it has published world’s first AI-generated edition

An Italian newspaper has said it is the first in the world to publish an edition entirely produced by artificial intelligence. The initiative by Foglio, a conservative liberal daily, is part of a month-long journalistic experiment aimed at showing the impact AI technology has “on our way of working and our days”, the newspaper’s editor, Claudio Cerasa, said.

“It will be the first daily newspaper in the world on newsstands created entirely using artificial intelligence,” said Cerasa. “For everything. For the writing, the headlines, the quotes, the summaries. And, sometimes, even for the irony.” He added that journalists’ roles would be limited to “asking questions and reading the answers”.

The experiment comes as news organisations around the world grapple with how AI should be deployed. Earlier this month, the Guardian reported that BBC News was to use AI to give the public more personalised content. The front page of the first edition of Foglio AI carries a story referring to the US president, Donald Trump, describing the “paradox of Italian Trumpians” and how they rail against “cancel culture” yet either turn a blind eye, or worse, “celebrate” when “their idol in the US behaves like the despot of a banana republic”.

The front page also features a column headlined “Putin, the 10 betrayals”, with the article highlighting “20 years of broken promises, torn-up agreements and words betrayed” by Vladimir Putin, the Russian president.

The final page runs AI-generated letters from readers to the editor, with one asking whether AI will render humans “useless” in the future. “AI is a great innovation, but it doesn’t yet know how to order a coffee without getting the sugar wrong,” reads the AI-generated response.

Cerasa said Il Foglio AI reflected “a real newspaper” and was the product of “news, debate and provocations”. But it was also a testing ground to show how AI could work “in practice”, he said, while seeing what the impact would be on producing a daily newspaper with the technology and the questions “we are forced to ask ourselves, not only from a journalistic nature”.

(Source: www.theguardian.com dated 18th March, 2025)

2 STARTUPS

# Nandan Nilekani predicts that India will have one million startups by 2035

Infosys cofounder Nandan Nilekani predicts that India will have one million startups by 2035. He said that there are 150,000 startups today growing at a compound annual growth rate of 20%. He also noted that among 2000 funded startups, 100 unicorns have been created. He outlined a strategic roadmap for India to achieve an 8% annual growth rate and become an $8 trillion economy by 2035.

He stressed that while a 6% growth rate is commendable, a focused effort is needed to elevate living standards and accelerate progress. He noted that 50% of India’s wealth is in land.

He cautioned that significant headwinds, including income disparity, regional imbalances, and low productivity, threaten to impede progress. Nilekani revealed that only 13 districts contribute to half of India’s GDP, underscoring the stark spatial disparities. He also noted the vast income gap and the challenges posed by a largely informal economy.

Nilekani emphasised the need to leverage AI to bridge the digital divide and reach a billion Indians. He advocated for the development of low-cost, population-scale AI solutions, particularly in regional languages.

Nilekani predicted that India will have one million startups by 2035, driven by a thriving entrepreneurial ecosystem. He highlighted the “binary fission” effect, where successful startups spawn new ventures, creating a ripple effect of innovation.

His key recommendations for an $8 trillion economy included AI for a billion Indians: focus on last mile consumers and MSMEs, and emphasis on health, education and agriculture. His second recommendation was to accelerate capital investments, maximise AA penetration, and land monetisation via tokenisation.

Nilekani also suggested “unshackling” entrepreneurs and MSMEs by funding entrepreneurs outside the eight metros, and enabling credit and market access for 10 million MSMEs. He also recommended “turbocharging” formalisation, via portable credentials and benefits, and suggested deregulation for ease of business.

(Source: www.economictimes.com dated 12th March, 2025)

3. ENVIRONMENT

# ‘Unexpected’ rate of sea level rise in 2024: NASA

Sea levels rose faster than expected around the world in 2024 — the Earth’s hottest year on record, according to new findings from the United States’ NASA space agency, which attributed the rise to warming oceans and melting glaciers.

“With 2024 as the warmest year on record, Earth’s expanding oceans are following suit, reaching their highest levels in three decades,” NASA’s Nadya Vinogradova Shiffer, head of physical oceanography programmes said.

Josh Willis, a sea level researcher at NASA, said the rise in the world’s oceans last year was “higher than expected”, and while changes take place each year, what has become clear is that the “rate of rise is getting faster and faster”.

According to the NASA-led study of the information sourced via the Sentinel-6 Michael Freilich satellite, the rate of sea level rise last year was 0.59cm (0.23 inches) per year — higher than an initial expected estimate of 0.43cm (0.17 inches) per year.

Satellite recordings of ocean height started in 1993, and in the three decades up to 2023, the rate of sea level rise has more than doubled, with average sea levels around the globe rising by 10cm (3.93 inches) in total, according to NASA.

Rising sea levels are among the consequences of human-induced climate change, and oceans have risen in line with the increase in the Earth’s average surface temperature — a change which itself is caused by greenhouse gas emissions.

NASA said trends from recent years showed additional water from land due to melting ice sheets and glaciers to be the biggest contributor, accounting for two-thirds of sea level rise.

In 2024, however, the increased rise in sea levels was largely driven by the thermal expansion of water – when ocean water expands as it warms — which accounts for about two-thirds of the increase.

The UN has warned of threats to vast numbers of people living on islands or along coastlines due to rising sea levels, with low-lying coastal areas of India, Bangladesh, China and the Netherlands flagged as areas of particular concern, as well as island nations in the Pacific and Indian Oceans.

(Source: www.aljazeera.com dated 14th March, 2025)

# Purpose defeated: Brazil cuts thousands of trees to make way for climate summit

Brazil is facing growing criticism after clearing large sections of the Amazon rainforest to build a highway for the upcoming COP30 climate summit, set to take place in Belém, a northern city in Brazil, this November.

The four-lane highway, designed to accommodate tens of thousands of delegates, including world leaders, has sparked concerns about the environmental impact in one of the world’s most biodiverse regions.

The highway project, which was proposed by the state government of Pará over a decade ago, was delayed several times due to concerns about its environmental impact. However, with the summit approaching, the project has moved forward as part of a broader plan to prepare Belém for the influx of visitors. The state is also undertaking other major infrastructure projects, such as expanding the airport, redeveloping the port for cruise ships, and constructing new hotels.

The state government defends the highway, claiming it will be sustainable. They point to features like cycle lanes and wildlife crossings designed to help animals move through the area safely. Adler Silveira, the state’s infrastructure secretary, also highlighted that the road would use solar-powered lighting, further emphasizing its environmental credentials.

Despite these claims, many locals and environmental groups are outraged. Residents like Claudio Verequete, who lives about 200 meters from the new road, argue that the construction is devastating their livelihoods. Verequete, who once made his living harvesting açaí berries, shared his frustration with the BBC, saying, “Everything was destroyed. Our harvest has already been cut down. We no longer have that income to support our family.”

Conservationists have also raised alarms, warning that the deforestation could harm wildlife and disrupt the delicate balance of the Amazon ecosystem. The region is crucial for absorbing carbon dioxide and preserving global biodiversity, and many critics argue that the destruction of the forest for a highway goes against the very purpose of hosting a climate summit in the area.

As the summit draws closer, the debate over the highway and its environmental impact is intensifying, with critics questioning whether the destruction of part of the Amazon can be justified in the name of hosting a global climate event.

(Source: www.timesofindia.com dated 13th March, 2025)

Determination of ALP for Related Party Transactions

INTRODUCTION

“Everything is worth what its purchaser will pay for it”
– Publilus Syrus’ Maxim No. 847

One of the most important roles of the Board of Directors of a listed company and its Audit Committee is the review and approval of Related Party Transactions (RPTs). Related Party Transactions are prescribed under s.188 of the Companies Act, 2013 (“Act”) as well as the SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015 (“SEBI LODR”). The most crucial element in approving an RPT is determining whether the transaction is on an arms’ length pricing (ALP)? Let us examine some key facets in this respect.

STATUTORY FRAMEWORK

Regulation 2(zc) of the SEBI LODR defines a related party transaction to mean a transaction involving a transfer of resources, services or obligations between a listed entity on one hand and a related party of the listed entity on the other hand, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Under Regulation 23(2) of the SEBI LODR, all related party transactions and subsequent material modifications, shall require prior approval of the Audit Committee of the listed entity.

S.188 of the Companies Act, 2013 provides that all related party transactions require the approval of the Board of Directors if they are not on an arms’ length basis. The expression “arm’s length transaction” has been defined to mean a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

The Act / SEBI LODR does not provide any further guidance on this expression. Hence, one may refer to other statutes.

DICTIONARY DEFINITIONS

Various Dictionaries have defined the term arm’s length transaction as follows:

(a) The Black’s Law Dictionary, 6th Edition, defines it to mean a transaction negotiated by unrelated parties, each acting in its own self-interest; the basis for a fair market value determination.

(b) The Shorter Oxford English Dictionary, 5th Edition defines it as dealings between two parties where neither party is controlled by the other.

(c) Merriam-Webster’s 11th Collegiate Dictionary states that arm’s length is the condition or fact that the parties to a transaction are independent and on an equal footing.

(d) The Judicial Dictionary by KJ Aiyar, 13th Edition, states that arm’s length transaction is a transaction between unrelated persons in which there is no improper influence exercisable by one party over another and no conflict of interests.

ALP UNDER INCOME-TAX ACT, 1961

The expression “arm’s length price” features prominently in sections 92-92F of the Income-tax Act, 1961 in relation to transfer pricing provisions.

S.92C of this Act deals with the computation of an arm’s length price. It states that the arm’s length price in relation to a transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors.

The methods prescribed under this section to determine ALP are: —
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;

The Chennai ITAT in the case of Iljin Automotive Private Ltd vs. ACIT, (2011) 16 taxmann.com 225 has defined ALP as “What would have been the price if the transactions were between two unrelated parties, similarly placed as the related parties in so far as nature of product, conditions and terms and conditions of the transactions are concerned?”

In Arvind Mills Ltd. vs. ACIT [2011] 11 taxmann.com 67 (Ahd. – ITAT), it was held that the arm’s length principle is based on:

(i) a comparison of the conditions in a controlled transaction with the conditions in transaction between two independent enterprises i.e. uncontrolled transaction,

(ii) subject to adjustments to the price of uncontrolled transaction to carve out differences between these two type of transactions.

Hence, locating proper comparables i.e. comparable uncontrolled transactions is at the heart of an ALP.

Paragraph 1 of Article 9 of the OECD’s Model Tax Convention (which is the basis of bilateral tax treaties) provides as follows:

“(where) conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”

In Dy. CIT vs. Smt. Baljinder Kaur [2009] 29 SOT 9 (URO), the Chandigarh ITAT held that it was a well settled proposition that the concept of ‘fair market value’ envisaged under the Income-tax Act existence of a hypothetical seller and a hypothetical buyer, in a hypothetical market.

CUP METHOD

The Comparable Uncontrolled Price Method (“CUP method”) is the most direct assessment of whether the arm’s length principle is complied with as it compares the price or value of the transactions. As it is the most direct method, it should, be preferred to the other methods. Under the CUP method, the arm’s length price of an RPT is equal to the price paid in comparable uncontrolled sales including adjustments, if any.

In the case of M/s. Schutz Dishman Biotech Pvt. Ltd., Ahmedabad, ITA 554 / AHD / 2006, the Ahmedabad ITAT held that the CUP method is the most suitable method for determining ALP if market conditions in the territory of sale are the same.

Rule 10B of the Income-tax Rules, 1962 states that in determining the ALP, the comparable uncontrolled price method is a method, by which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Thus, the steps for determining ALP are as follows:

(i) Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions.

(ii) Adjust such price for differences, if any, between the RPT and the comparable uncontrollable transactions. Adjustments required only if these could materially affect the price in open market.

The adjusted price arrived at in (ii) above is to be taken as the arm’s length price.

According to Rule 10A(ab), “uncontrolled transaction” means a transaction between enterprises other than associated enterprises or related parties. For instance, A and B are related parties. C and D are independent parties (non-related). A transaction between C and D is an uncontrolled transaction as both A and B are concerned. A transaction between A and C/A and D is an uncontrolled transaction as far as B is concerned. A transaction between B and C/B and D is an uncontrolled transaction as far as A is concerned.

The Rule further states that the comparability of a transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

An uncontrolled transaction shall be comparable to an RPT if —

(i) none of the differences, if any, between the transactions being compared are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

In this respect, the United Nations Transfer Pricing Manual defines ‘comparable’ as under:

  •  To be comparable does not mean that the two transactions are necessarily identical.
  •  Instead it means that either none of the differences between them could materially affect the arm’s length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect.
  •  Thus, in determining a reasonable degree of comparability, adjustments may need to be made to account for certain material differences between the controlled and uncontrolled transactions.
  •  These adjustments (which are referred to as “comparability adjustments”) are to be made only if the effect of the material differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results.

The UN TP Manual also recognises that perfect comparables are often not available in an imperfect world. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions.

Comparable uncontrollable transactions are of two types:

♦ Internalcomparables – transactions entered into by related parties with unrelated parties. To be considered as an internal CUP also, a transaction has to be an independent transaction, i.e., between two entities, which are independent of each other – Skoda Auto India (P.) Ltd. vs. Asst. CIT [2009] 30 SOT 319 (Pune – Trib.)

♦ External comparables – transactions between third parties (i.e. transactions not involving any related party).

According to the OECD Guidelines, internal comparables would provide more reliable and accurate data than external comparables. This is because external comparables are difficult to obtain, incomplete and difficult to interpret. Hence, internal comparables are to be preferred over external comparables.

VALUATION UNDER THE CENTRAL EXCISE LAW

The concept of valuation in case of a related person also finds mention under the Central Excise Act. In this respect, the decision of the Supreme Court in the case of CCE vs. Detergents India P Ltd, (2015) AIR SCW 3304 is relevant:

“……transactions at arm’s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as the “normal price” of the goods………………”

Thus, as long as an unrelated price is comparable to a related party price, the related party price has been treated as a normal sale price.

VALUATION UNDER GST LAWS

The GST Laws also provide for determination of open market value in certain cases. For levying GST only that value should be used which is that of an unrelated buyer and supplier. The Central Goods and Services Tax (CGST) Rules, 2017 specify that the value of the supply of goods or services or both between related parties shall be the open market value of such supply.

The term “open market value” of a supply of goods or services or both has been defined to mean the full value in money, excluding GST payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

ICSI’S GUIDANCE NOTE

In this respect, the Guidance Note on Related Party Transactions issued by the Institute of Company Secretaries of India (ICSI) in March 2019 is relevant.

One of the Issues raised by the Guidance Note is “How do you satisfy the criteria of arm’s length pricing?” The Guidance Note replies as follows:

“One may check if there are comparable products in the market. If yes, check the terms of sale/purchase, etc. of similar transactions and try obtaining quotes from other sources. Price in isolation cannot be the only criteria. Terms of sale such as credit terms should also be considered”

The RPT as a whole and the entire bundle of the terms and conditions needs to be considered for determining whether the transaction is on an arm’s length basis. It further states that a simple way to prove that there is no conflict of interest in the RPT is to prove that existence of special relationship between contracting parties has not affected the transaction and its critical terms, including price, quantity, quality and other terms and conditions governing the transaction, by following industry benchmarks, past transactions entered by the company, etc.

Another issue raised by the Guidance Note is “What are the parameters to be considered by the Audit Committee while considering whether a transaction is on arm’s length basis? How should the Audit Committee decide such an issue?” The Guidance Note replies as follows:

“The Act does not prescribe methodologies and approaches which may be used to determine whether a transaction has been entered into on an arm’s length basis. Audit Committee may consider the parameters given in the company’s policy on transactions with related parties. Transfer pricing guidelines given under the Income-tax Act, 1961 may also be used. Depending on the nature of individual transaction, any appropriate method may be used by the Audit Committee”

Thus, the ICSI recommends obtaining quotations from unrelated parties as a basis for ascertaining the ALP and also using the methods under the Income-tax Act for determining the ALP.

SA 550 ON RELATED PARTIES

SA 550 is a Standard on Auditing issued by the ICAI on Related Parties. This Standard also provides guidance to the Auditor on how to verify whether the pricing for an RPT is indeed at an arm’s length:

  •  Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated parties.
  •  Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.
  •  Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.

RELIANCE ON QUOTATIONS – VALID

In Toll Global Forwarding India (P.) Ltd. vs. Dy. CIT [2014] 51 taxmann.com 342 (Delhi – Trib.) the validity of bona fide quotations as a means of ascertaining ALP was upheld:

“As long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. The price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression “price which….would have been charged or paid” is used in rule 10AB, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bona fide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price”

Accordingly, quotations from unrelated parties could serve as a valid basis for determining the arm’s length pricing. However, the terms of the quotes should be similar. For instance, the wife of the company’s Managing Director is selling a key raw material to the company. She runs her own business. The rate charged to the company is on the same basis as that charged by her to other unrelated customers. However, in the case of the company, the entire payment is received by her upfront whereas she provides a 6 months’ credit period to all other buyers. This would not be an arm’s length price.

SEBI’S NEW MINIMUM STANDARDS

Regulation 23(2), (3)and (4) of SEBI LODR requires RPTs to be approved by the audit committee and by the shareholders, if material. Part A and Part B of Section III-B of SEBI Master Circular dated November 11, 20241 (“Master Circular”) specify the minimum information to be placed before the audit committee and shareholders, respectively,for consideration of RPTs. In order to facilitate a uniform approach and assist listed entities in complying with the above mentioned requirements, the IndustryStandardsForum (“ISF”) comprising of the representatives from three industry associations, viz. ASSOCHAM, CII and FICCI, under the aegis of the Stock Exchanges, has formulated industry standards, in consultation with SEBI,for minimum information to be provided for review of the Audit Committee and shareholders for approval of RPTs. This has been mandated by SEBI’s Circular dated 14th February, 2025.

This SEBI Circular requires that if a valuation or other report of external party has been obtained for an RPT then the same shall be placed before the Audit Committee. If any such report has been considered, it shall also be stated whether the Audit Committee has reviewed the basis for valuation contained in the report and found it to be satisfactory based on their independent evaluation.

Further, in the case of the payment of royalty, information on Industry Peers shall be given as follows:

(i) The Listed Entity will strive to compare the royalty payment with a minimum of three Industry Peers, where feasible. The selection shall follow the following hierarchy:

A. Preference will be given to Indian listed Industry Peers.

B. If Indian listed Industry Peers are not available, a comparison may be made with listed global Industry Peers, if available.

(ii) If no suitable Indian listed/ global Industry Peers are available, the Listed Entity may refer to the peer group considered by SEBI-registered research analysts in their publicly available research reports (“Research Analyst Peer Set”). If theListed Entity’s business model differs from such Research Analyst Peer Set, it may provide an explanation to clarify the distinction.

(iii) In cases where fewer than three Industry Peers are available, the listed entity will disclose, that only one or two peers are available for comparison.

Additional details need to be provided for RPTs relating to sale, purchase or supply of goods or services or any other similar business transaction:

(a) Number of bidders / suppliers / vendors / traders / distributors / service providers from whom bids / quotations were received with respect to the proposed transactionalong with details of process followed to obtain bids – the Circular states that if the number of bids / quotations is less than 3, Audit Committee must comment upon whether the number of bids / quotations received are sufficient.

(b) Best bid / quotation received. If comparable bids are available, disclose the price and terms offered -the Circular states that Audit committee must provide a justification for rejecting the best bid /quotation and for selecting the related party for the transaction.

(c) Additional cost / potential loss to the listed entity or the subsidiary in transacting with the related party compared to the best bid / quotation received – the Audit Committee must justify the additional cost to the listed entity or the subsidiary.

(d) Where bids were not invited, the fact shall be disclosed along with the justification for the same.

(e) Wherever comparable bids are not available, the Company must state what is the basis to recommend to the Audit Committee that the terms of proposed RPT are beneficial to the shareholders.

Similar details are also required for proposed RPTs relating to sale, lease or disposal of assets of the subsidiary or of a unit, division or undertaking of the listed entity, or disposal of shares of the subsidiary or associate.

For proposed RPTs relating to any loans, inter-corporate deposits or advances given by the listed entity or its subsidiary – Comparable interest rates shall be provided for similar nature of transactions. If the interest rate charged to the related party is less than the average rate paid by the related party, then the Audit Committee must provide a justification for the low interest rate charged.

WHAT MUST THE AUDIT COMMITTEE DO?

Considering the above, Audit Committee of a listed entity must carry out the following process when concluding whether or not an RPT is on an arm’s length basis:

(a) Follow the SEBI prescribed industry standards on minimum information to be placed before the Audit Committee.

(b) Ask for independent quotes / bids / tender from non-related parties for the same transaction. The terms and conditions of the transaction must be the same for the related and the non-related parties.

(c) In some cases, such as, rental RPTs, a broker’s opinion on comparable rent instances could also be relied upon.

(d) Sometimes, it may not be feasible or practical to obtain independent quotes / bids either due to the specialised nature of the transaction or limited number of entities offering that service/ goods. In such cases, the Audit Committee could rely upon an expert’s opinion as to the ALP determination. While relying on this opinion, it should verify that the expert has considered relevant factors and has given a speaking, well-reasoned opinion. For instance, in one case, a listed company acquired a very large piece of land from a promoter company. The management furnished two expert opinions, one from an international property consultant and the other from a chartered valuer. Based on various market studies, sale instances, registration details, etc., both of them concluded that the price paid by the listed company was on an arm’s length basis.

(e) If appropriate, reliance may also be placed on statutory valuations, such as, stamp duty ready reckoner rates, customs’ valuation assessment, etc.

(f) In case of acquisition of shares, an expert’s valuation report may be relied upon.

(g) Ask the Internal Auditor to verify RPTs and give a certification that they are on an arm’s length basis. The Auditor should examine the process for determining ALP in the RPTs.

EXAMPLES FROM LISTED COMPANIES

The RPT Policies of listed companies throw some light on how the Boards should determine ALP. A few such policies are discussed below:

(a) Infosys Technologies Ltd – the Board will inter alia consider factors such as, nature of the transaction, material terms, the manner of determining the pricing and the business rationale for entering into such transaction and any other information the Board may deem fit.

(b) Wipro Ltd – All RPTs are at arm’s length and are undertaken in the ordinary course of business, i.e., the relationship with the transacting party should not confer on the Company or the transacting party any undue benefit / advantage or undue disadvantage / onerous obligations, that will be unacceptable if such transacting party was not a related party and / or the Company will not enter into a transaction which it will ordinarily not undertake. It also states that there must be no “conflict of interest” while negotiating and arriving at terms of such Related Party Transactions. For this purpose, “Terms” will not be merely confined to ‘price’ or ‘consideration’ but also other terms such as payment terms, credit period, sale whether ex-factory, FOB, CIF etc.

If in doubt, management shall seek advice on “arm’s length” from the Chief Financial Officer, General Counsel, of the Company and / or the Audit Committee, as appropriate. The Audit Committee’s decision on these aspects shall be final. Audit Committee could seek external advice to assist in decision making on these aspects or for that matter in dealing with any issues connected with RPTs.

(c) Grasim Industries Ltd – Terms will be treated as on ‘Arm’s Length Basis’ if the commercial and key terms are comparable and are not materially different with similar transactions with non-related parties considering all the aspects of the transactions such as quality, realizations, other terms of the contract, etc. In case of contracts with related parties for specified period / quantity / services, it is possible that the terms of one-off comparable transaction with an unrelated party are at variance, during the validity of contract with related party. In case the Company is not doing similar transactions with any other non-related party, terms for similar transactions between other non-related parties of similar standing can be considered to establish ‘arm’s length basis’. Other methods prescribed for this purpose under any law can also be considered for establishing this principle.

(d) Tata Steel Ltd – While assessing a proposal put up before the Audit Committee / Board for approval, the Audit Committee / Board may review the following documents / seek the following information from the management in order to determine if the transaction is at an arm’s length or not:

  •  Nature/type of the transaction i.e. details of goods or property to be acquired / transferred or services to be rendered / availed (including transfer of resources) – including description of functions to be performed, risks to be assumed and assets to be employed under the proposed transaction;
  •  Material terms (such as price and other commercial terms contemplated under the arrangement) of the proposed transaction, including value and quantum;
  •  Benchmarking information that may have a bearing on the arm’s length basis analysis, such as:
  •  market analysis, research report, industry trends, business strategies, financial forecasts, etc.;
  •  third party comparable, valuation reports, price publications including stock exchange and commodity market quotations;
  •  management assessment of pricing terms and business justification for the proposed transaction as to why the RPT is in the interest of the Company;
  •  comparative analysis, if any, of other such transaction entered into by the Company.

It also states that for this purpose, the Company will seek external expert opinion, if necessary.

CONCLUSION

Valuation is a very subjective exercise based on highly objective data! Hence, it is often remarked that “value lies in the eyes of the beholder!” This subjectivity takes a more dramatic turn when faced with a transaction which is between parties who are associated or related. In the famous English case of R vs. Sussex Justices, ex parte McCarthy, [1923] All ER Rep 233, Lord Hewart CJ laid down the principle ~ “Not only must Justice be done; it must also be seen to be done”. Similarly, when determining the ALP in case of related transactions,

“Not only must the value be fair; it must also be seen to be fair!”

This is where the Board’s expertise and experience would come in handy. They would need to examine the facts of the RPT and remember Grabel’s Law in each ALP determination:

“Two is Not Equal To Three, Even for Very Large Values of Two!”

Issues Relating To ‘May Be Taxed’ In Tax Treaties

The term ‘may be taxed’ has been commonly used in tax treaties since before the OECD  Model Tax Convention was first published in 1963. In India, there has been significant litigation on whether the term indicates an exclusive right of taxation. While the CBDT vide Notification in  2008 has clarified the issue, certain ambiguities still exist.

In this article, the authors seek to analyse the said issue on whether the term ‘may be taxed’ in tax treaties refers to an exclusive right of taxation to any Contracting State.

BACKGROUND

The allocation of taxing rights in respect of various streams of income in DTAAs can generally be bifurcated into 3 categories:

a. Category I – May also be taxed:

Some articles provide that the particular income may be taxed in a particular jurisdiction (typically the country of residence) and also states that the income ‘may also be taxed’ in the other Contracting State, typically with some restrictions in terms of tax rates, etc. The articles on dividend, interest, royalty / fees for technical services, generally provide for such type of allocation of taxing right.

For example, Article 10(1) of the India – Singapore DTAA, dealing with dividends provides as follows,

“1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if….” (emphasis supplied);

b. Category II – Shall be taxable only:

Some articles provide that the particular income ‘shall be taxable only’ in a particular Contracting State indicating an exclusive right of taxation to the particular Contracting State (typically the country of residence). Generally, this type of allocation of taxing right is found in the article of business profits (where there is no permanent establishment) or capital gains (in respect of assets other than those specified).

For example, Article 13(5) of the India – Singapore DTAA provides as under,

“Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident.” (emphasis supplied);

c. Category III – May be taxed:

Some articles simply state that the particular income ‘may be taxed’ in a particular Contracting State (in most cases, the source State) without referring to the taxation right of the other Contracting State.

An example of such taxing right is in Article 6 of the India – Singapore DTAA which provides as under,

“Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.” (emphasis supplied)

In the above Article, the right of the source State is provided but no reference is made whether the State of residence can tax the said income or not.

While the allocation of taxing right in the first two categories is fairly clear, there is ambiguity in the third category i.e. whether in such a scenario, the country of residence has a right to tax in case the DTAA is silent in this regard.

Given the language in the DTAA, the question which arises is whether the income from rental of an immovable property situated in Singapore by an Indian resident can be taxed in India or would such income be taxed exclusively in Singapore under the India – Singapore DTAA.

DECISIONS OF THE COURTS

While some courts held that the term ‘may be taxed’ in a Contracting State, not followed by the term ‘may also be taxed’ in the other Contracting State meant that exclusive right of taxation was granted to the first-mentioned Contracting State, some courts held that ‘may be taxed’ is to be interpreted differently from ‘shall be taxed only’ and therefore, does not infer exclusive right of taxation. One of the most notable decision which provided the former view i.e. ‘may be taxed’ is equated to ‘shall be taxed only’, is the Karnataka High Court in the case of CIT vs. RM Muthaiah (1993) (202 ITR 508).

The issue before the Hon’ble Karnataka High Court in the above case was whether income earned from an immovable property situated in Malaysia was taxable in India in the hands of an Indian resident under the India – Malaysia DTAA. Article 6(1) of the earlier India – Malaysia DTAA provided,

“Income from immovable property may be taxed in the Contracting State in which such property is situated.”

In the said case, the Revenue argued that the DTAA did not provide for an exclusive right of taxation to Malaysia and India had a right to tax the income. The High Court, while not analysing the specific language of the DTAA, held as under,

“The effect of an ‘agreement’ entered into by virtue of section 90 would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the Court.”

The High Court, therefore, held that as the DTAA did not specifically provide for India, being the country of residence, to tax the said income, it would be taxable only in Malaysia.

The Mumbai Bench of the Tribunal in the case of Ms. Pooja Bhatt vs. DCIT (2009) (123 TTJ 404) held that,

“Wherever the parties intended that income is to be taxed in both the countries, they have specifically provided in clear terms. Consequently, it cannot be said that the expression “may be taxed” used by the contracting parties gave option to the other Contracting States to tax such income. In our view, the contextual meaning has to be given to such expression. If the contention of the Revenue is to be accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. The conjoint reading of all the provisions of articles in Chapter III of Indo-Canada treaty, in our humble view, leads to only one conclusion that by using the expression “may be taxed in the other State”, the contracting parties permitted only the other State, i.e., State of income source and by implication, the State of residence was precluded from taxing such income. Wherever the contracting parties intended that income may be taxed in both the countries, they have specifically so provided. Hence, the contention of the Revenue that the expression “may be taxed in other State” gives the option to the other State and the State of residence is not precluded from taxing such income cannot be accepted.”

Similarly, the Madras High Court in the case of CIT vs. SRM Firm & Others (1994) (208 ITR 400) also held on similar lines. The above Madras High Court decision was affirmed by the Apex Court in the case of CIT vs. PVAL KulandaganChettiar (2004)(267 ITR 654), albeit without analyzing the controversy of ‘may be taxed’ vs ‘shall be taxed only’. The Supreme Court held that,

“13. We need not to enter into an exercise in semantics as to whether the expression “may be” will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.”

This view was further upheld by the Supreme Court in the cases of DCIT vs. Torqouise Investment & Finance Ltd. (2008) (300 ITR 1) and DCIT vs. Tripti Trading & Investment Ltd (2017) (247 Taxman 108). In both the above cases, it was held that dividend received by an Indian assessee from Malaysia was exempt from
tax in India by virtue of the India – Malaysia DTAA following the earlier decision of Kulandagan Chettiar (supra).

NOTIFICATION OF 2008 AND SUBSEQUENT DECISIONS

Section 90(3) of the ITA, inserted by the Finance Act 2003 with effect from Assessment Year 2004-05, provides that any term not defined in the DTAA can be defined through a notification published in the Gazette. Subsequently, the CBDT Notification No. 91 of 2008 dated 28th August, 2008 under section 90(3) was issued, which states as under,

“In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

Therefore, the CBDT, vide its above notification, provided that the term ‘may be taxed’ is not required to be equated to ‘shall be taxable only’ and India would still have the right of taxation, unless the tax treaty specifically provides that the income ‘shall be taxed only’ in the other State.

There are two possible views regarding implications of the aforesaid Notification issued by the CBDT.

View 1: The Notification clarifies the right of taxation in respect of ‘may be taxed’

The view is that the Notification now changes the position of taxability and that income of a resident of India shall be taxable in India unless the income is taxable only in the country of source as per the respective DTAA, has been upheld by the Mumbai ITAT in the cases of Essar Oil Ltd. vs. ACIT (2014) 42 taxmann.com 21 and Shah Rukh Khan vs. ACIT (2017) 79 taxmann.com 227, the Delhi ITAT in the case of Daler Singh Mehndi vs. DCIT (2018) 91 taxmann.com 178 and the Jaipur ITAT in the case of Smt. IrvindGujral vs. ITO (2023) 157 taxmann.com 639.

View 2: The Notification does not clarify all situations involving ‘may be taxed’

The alternative view is that Notification No. 91 of 2008 will have application only in a case where the primary right to tax has been given to the state of residence and such state has allowed the source State also to charge such income to tax at a concessional rate.

The relevant provisions in a DTAA could be divided into three broad categories:

i) where the right to tax is given to the State of source (e.g. Article 6 dealing with income derived from immovable property);

ii) where such right to tax is given to the State of residence (e.g. Article 8 dealing with income derived from International Shipping and Air Transport); and

iii) where the primary right to tax is with the State of residence. However, such State has ceded and allowed the State of source also to charge such income to tax, but, at a concessional rate (e.g. Article 7 dealing with business profits, Article 10 dealing with dividends, Article 11 dealing with interest and Article 12 dealing with royalties and fees for technical services).

Under this view, one may argue that the said notification has been issued to clarify the position of the Government of India only with respect to the category (iii) of income as it does not refer to a situation where the right of State of Residence to tax the said income, is silent. The said clarifications should not apply to incomes referred to in category (i) and category (ii) above. This is because, with respect to category (iii) income as explained above, the primary right to tax is with the state of Residence which has partially ceded such right in favour of the State of source by enabling such State to tax the income at a concessional rate of tax. If one reads the said notification in the above context, one may conclude that the Notification only covers income covered in category (iii) above.

Another aspect one may consider is that section 90(3) of the Act, itself provides that the meaning to be assigned to a term in the notification issued by the Central Government shall apply unless the context otherwise requires and such meaning is consistent with the provisions of the Act or the DTAA.

Further, interestingly, readers may refer to the January 2021 edition of this Journal1 wherein the authors of the said article have analysed that while section 90(3) of the ITA empowers the Government to define an undefined term, the above Notification goes beyond the scope of the section as it does not define any term but only clarifies the stand of the Government on the said issue without actually defining the term.

The authors of the said article have also questioned whether ‘may be taxed’ is a term or a phrase.

In this regard, one may also refer to the Mumbai ITAT in the case of Essar Oil (supra), wherein the issue of whether it is a term or a phrase was analysed and concluded as under,

“The phrases “may be taxed”, “shall be taxed only” and “may also be taxed” have a definite purpose and a definite meaning which is conveyed. Whether it is a term, phrase or expression does not make any significant difference because the contracting parties have given a definite meaning to such a phrase and once the Government of India have clarified such an expression, then it cannot be held that it does not fall within the realm of the word “term” as given in section 90(3). Thus, we do not feel persuaded by the argument taken by the learned Sr. Counsel.”

UNILATERAL AMENDMENTS

The India – Malaysia DTAA which was the subject matter of litigation in the matter before the High Courts and Supreme Courts for the meaning of the term, was amended in 2012. Interestingly, the new DTAA now specifically provides the following in the Protocol,

“It is understood that the term “may be taxed in the other State” wherever appearing in the Agreement should not be construed as preventing the country of residence from taxing the income.”

Therefore, in respect of the India – Malaysia DTAA now, there is no ambiguity about the interpretation of the phrase. However, the question does arise as to whether, the fact that this similar language is not provided in any other DTAA (in the main text or in the Protocol), another meaning has to be ascribed to the term in the other DTAAs.

Though the Notification is part and parcel of the Act, a DTAA is a thoughtfully negotiated economic bargain between two sovereign States and any unilateral amendment cannot be read into the DTAA such that the economic bargain is annulled, until and unless the DTAA itself is amended.

As mentioned above, the authorities being aware of the aforesaid fact, amended the India-Malaysia DTAA on 09-05-2012 to incorporate the unilateral amendment put forth by the aforesaid Notification into the DTAA by way of inserting paragraph 3 to the Protocol of the India-Malaysia DTAA. Similarly, paragraph 2 to the Protocol dated 30-01-2014 of the India-Fiji DTAA states that the term “may be taxed in the other State” wherever appearing in the Agreement should not be construed as preventing the country of residence from taxing the income. Paragraph 1 of India-South Africa DTAA provides that ‘With reference to any provision of the Agreement in terms of which income derived by a resident of a Contracting State may be taxed in the other Contracting State, it is understood that such income may, subject to the provisions of Article 22, also be taxed in the first-mentioned Contracting State.

In the earlier India-Malaysia DTAA (Notification No. GSR 667(E), dated 12th October, 2004), Clause 4 of the Protocol was agreed on between the two contracting States with reference to paragraph 1 of Article 6 to the effect that the said paragraph should not be construed as preventing the Country of Residence to also tax the income under the said Article.

It would be relevant to note that Article 6 of the India-Malaysia DTAA and that of other DTAAs on taxation of income from immovable property are worded alike. However, the aforesaid Protocol agreed between India and Malaysia in the India-Malaysia DTAA is not found for example, in the India-UK or India-France DTAA. It becomes all the more conspicuous when protocols under other DTAAs have been signed after the Notification No. 91/2008 issued under Section 90(3). An example can be considered of the India – UK DTAA wherein the Protocol is signed on 30th October, 2012 but there is no agreement with regard to interpretation of the expression “may be taxed”, which is used inter alia in Articles 6, 7, 11, 12 and 13. Thus, one may argue that the expression “may be taxed” required an understanding under the India-Malaysia DTAA that varied with the earlier judicial understanding of the said expression in other DTAAs.

In certain DTAAs where expression ‘may be taxed’ has been used in Article 6 or Article 13, it has been clarified through Protocols that income and capital gains relating to immovable properties may be taxed in both the contracting states. Some of these DTAAs with India are: Hungary, Serbia, Montenegro and Slovenia.

However, in certain other DTAAs where expression ‘may be taxed’ has been used in Article 6 or Article 13, it has been clarified through Protocols that income and / or capital gains relating to immovable properties may be taxed in the Contracting State where the immovable property is situated. For example, India’s DTAAs with Estonia and Lithuania.

A DTAA is a product of bilateral negotiation of the terms between two sovereign States which are expected to fulfill their obligations under a DTAA in good faith. This includes the obligation for not defeating the purpose and object of the DTAA. Therefore, while the amendment to the India-Malaysia DTAA was consciously made on the lines of the Notification, it is apparent that the same was deliberately not extended to other DTAAs in probable consideration of larger macro issues which could have had a bearing upon the bilateral trade relations.

It is to be noted that in the case of Essar Oil Limited (supra), the ITAT was interpreting Article 7 of the India-Oman DTAA and India-Qatar DTAA dealing with business profits. Article 7(1) clearly provides that the profits of an enterprise of a contracting State shall be taxable only in that State. The exception carved out is only to enable the “PE country” to tax the profits attributable to the PE. Profits attributable to a PE may be larger than the profits sourced within the PE State, which is not the case for Article 6 dealing with income from immovable properties, where the source is undisputedly within the State in which the immovable property is located. Contextually, the expression “may be taxed” lends itself to different meanings under Article 7 and Article 6. This distinction has not been brought to the attention of the Hon’ble Tribunal. Clarifications, if any, would serve the intended purpose only when incorporated in the respective DTAA. The same was done through a Protocol entered under the India-Malaysia DTAA in the context of the expression “may be taxed”.

Therefore, one may be able to argue that Notification No. 91/2008 should have no application in respect of cases covered under category I i.e. similar to Article 6.

INTERPLAY WITH ARTICLE ON TAX CREDIT

Another aspect which also needs to be considered is the language of Article 25 of the India – Singapore DTAA, dealing with Elimination of Double Taxation (foreign tax credit or relief). It provides as under,

“2. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction.”

In the present case, if one argues that income from immovable property situated in Singapore shall be taxable only in Singapore as the Article states that such income ‘may be taxed’ in Singapore, the question of tax credit does not arise. However, Article 25(2), as discussed above, specifically provides that when the DTAA states that income may be taxed in Singapore, India should grant foreign tax credit to eliminate double taxation. The said credit can be provided only after India has taxed the income in the first place.

It may, however, be highlighted that the Mumbai ITAT in the case of Pooja Bhatt vs. DCIT (2009) 123 TTJ 404 did not accept this argument and held as under,

“8. The reliance of the Revenue on Article 23 is also misplaced. It has been contented that Article 23 gives credit of tax paid in the other State to avoid double taxation in cases like the present one. In our opinion, such provisions have been made in the treaty to cover the cases falling under the third category mentioned in the preceding para i.e., the cases where the income may be taxed in both the countries. Hence, the cases falling under the first or second categories would be outside the scope of Article 23 since income is to be taxed only in one State.”

ROLE OF OECD MODEL COMMENTARY

The OECD Model Commentary has explained the various types of allocation of taxing rights used in a DTAA. The OECD Model Commentary 2017 on Article 23A dealing with Elimination of Double Taxation provides as under,

“6. For some items of income or capital, an exclusive right to tax is given to one of the Contracting States, and the relevant Article states that the income or capital in question “shall be taxable only” in a Contracting State. The words “shall be taxable only” in a Contracting State preclude the other Contracting State from taxing, thus double taxation is avoided. The State to which the exclusive right to tax is given is normally the State of which the taxpayer is a resident within the meaning of Article 4, that is State R, but in Article 19 the exclusive right may be given to the other Contracting State (S) of which the taxpayer is not a resident within the meaning of Article 4.

7. For other items of income or capital, the attribution of the right to tax is not exclusive, and the relevant Article then states that the income or capital in question “may be taxed” in the Contracting State (S or E) of which the taxpayer is not a resident within the meaning of Article 4. In such case the State of residence (R) must give relief so as to avoid the double taxation. Paragraphs 1 and 2 of Article 23 A and paragraph 1 of Article 23 B are designed to give the necessary relief.”

The above Commentary makes it clear that where the Model wanted to provide an exclusive right of taxation to a particular country, it has provided that with the words “shall be taxable only”. In other scenarios both the countries shall have the right to tax the income.

It may be noted that the Hon’ble Supreme Court in the case Kulandagan Chettiar (supra) did not consider the validity of the OECD Model Commentary on the basis of which the DTAAs are entered into. In the said case, the Supreme Court held as under,

“16. Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements.”

However, subsequent decisions of the Supreme Court including that of Engineering Analysis Centre of Excellence (P) Ltd vs. CIT (2021) 432 ITR 471 have held that the OECD Model Commentary shall have persuasive value as the DTAAs are based on the OECD Model.

Impact of Multilateral Convention to Implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting [MLI]

India is a signatory to MLI. The DTAAs have to be read along with the MLI. Article 11 of the MLI deals with Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents. Article 11(1)(j) provides that a Covered Tax Agreement (CTA) shall not affect the taxation by a Contracting Jurisdiction of its residents, except with respect to the benefits granted under provisions of the CTA which otherwise expressly limit a Contracting Jurisdiction’s right to tax its own residents or provide expressly that the Contracting Jurisdiction in which an item of income arises has the exclusive right to tax that item of income.

India has not reserved Article 11 of the MLI. The following countries have chosen Article 11(1) with India: Australia, Belgium, Colombia, Denmark, Croatia, Fiji, Indonesia, Kenia, Mexico, Mongolia, Namibia, New Zealand, Norway, Poland, Portugal, Russia, Slovak Republic, South Africa and UK. In respect of these countries, in absence of an express provision, the right of the resident country to tax its residents cannot be taken away under the DTAA. However, the same cannot be applied to countries which have not chosen Article 11(1) or which have not signed the MLI.

CONCLUSION

Even after the 2008 Notification under section 90(3), two strong views still exist as to whether the term ‘may be taxed’ grants exclusive right of taxation to the source State particularly in the case of the Article 6 where, unless otherwise expressly stated in the DTAA, it is clearly intended to allocate right of taxation exclusively to the source state where the immovable property is situated. This view would depend on the role of the tax treaties read with MLI in taxation – that is whether one considers that the country of residence always has the right to tax all income unless specifically restricted by the tax treaty or does the right of taxation of the country of residence need to be specifically provided in the tax treaty.

Disclosure of Climate Related Uncertainties

There was a strong concern from multiple stakeholders regarding information about the effects of climate-related risks in the financial statements, which either were insufficient or appeared to be inconsistent with information entities provide outside the financial statements, particularly information reported in other general purpose financial reports.

To address these concerns, the International Accounting Standards Board (IASB) collaborated with the International Sustainability Standards Board, and issued an Exposure Draft (ED) proposing eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The examples mostly focus on climate-related uncertainties, but the principles and requirements illustrated apply equally to other types of uncertainties.

The IASB expects that these illustrative examples will help to improve the reporting of the effects of climate-related and other uncertainties in the financial statements, including by helping to strengthen connections between an entity’s general purpose financial reports.

The IASB decided to focus the examples on requirements: (a) that are among the most relevant for reporting the effects of climate-related and other uncertainties in the financial statements; and (b) that are likely to address the concerns that information about the effects of climate-related risks in the financial statements is insufficient or appears to be inconsistent with information provided in general purpose financial reports outside the financial statements.

The eight examples, illustrate the application of various IFRS standards, to the extent they are related to climate related disclosures.

Paragraph 31 of IAS 1 Presentation of Financial Statements states “An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.”

Consider the example below.

The entity is a manufacturer that operates in a capital-intensive industry and is exposed to climate-related transition risks. To manage these risks, the entity has developed a climate-related transition plan. The entity discloses information about the plan in a general-purpose financial report outside the financial statements, including detailed information about how it plans to reduce greenhouse gas emissions over the next 10 years. The entity explains that it plans to reduce these emissions by making future investments in more energy-efficient technology and changing its raw materials and manufacturing methods. The entity discloses no other information about climate-related transition risks in its general-purpose financial reports.

In preparing its financial statements, the entity assesses the effect of its climate-related transition plan on its financial position and financial performance. The entity concludes that its transition plan has no effect on the recognition or measurement of its assets and liabilities and related income and expenses because: (a) the affected manufacturing facilities are nearly fully depreciated; (b) the recoverable amounts of the affected cash-generating units significantly exceed their respective carrying amounts; and (c) the entity has no asset retirement obligations.

The entity also assesses whether specific requirements in IFRS Accounting Standards—such as in IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets or IAS 37 Provisions, Contingent Liabilities and Contingent Assets—require it to disclose information about the effect (or lack of effect) of its transition plan on its financial position and financial performance. The entity concludes that they do not.

In applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity determines that additional disclosures to enable users of financial statements to understand the effect (or lack of effect) of its transition plan on its financial position and financial performance would provide material information. That is, omitting this information could reasonably be expected to influence decisions primary users of the entity’s financial statements make on the basis of those financial statements.

Without that additional information, the decisions users of the entity’s financial statements make could reasonably be expected to be influenced by a lack of understanding of how the entity’s transition plan has affected the entity’s financial position and financial performance. For example, users of the entity’s financial statements might expect that some of its assets might be impaired because of its plans to change manufacturing methods and invest in more energy-efficient technology.

The entity reaches this conclusion having considered qualitative factors that make the information more likely to influence users’ decision-making, including: (a) the disclosures in its general-purpose financial report outside the financial statements (entity-specific qualitative factor); and (b) the industry in which it operates, which is known to be exposed to climate-related transition risks (external qualitative factor).

Therefore, applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity discloses that its transition plan has no effect on its financial position and financial performance and explains why.

Other examples, include, the applicability of materiality judgements on disclosures, the disclosure of assumptions on impairment of assets, under different standards, such as IAS 36, Impairment of Assets, IAS 1, and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, disclosure about decommission and  restoration provisions, under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and disclosure of disaggregated information under IFRS 18 Presentation and Disclosure in Financial Statements.

There is also an interesting requirement relating to disclosure of credit risks under IFRS 7 Financial Instruments: Disclosures. Entities are exposed to significant credit risks arising from climate change. For e.g., a financial institution may be exposed to significant credit risks from its agriculture focussed lending, because of drought or flood. An entity might disclose: (a) information about the effects of particular risks on its credit risk exposures and credit risk management practices; and (b) information about how these practices relate to the recognition and measurement of expected credit losses.

In determining whether the disclosures are required, and the extent of such disclosures, an entity considers(a) the size of the portfolios affected by climate-related risks relative to the entity’s overall lending portfolio. (b) the significance of the effects of climate-related risks on the entity’s exposure to credit risk compared to other factors affecting that exposure. The effects depend on factors such as loan maturities and the nature, likelihood and magnitude of the climate-related risks. (c) external climate-related qualitative factors—such as climate-related market, economic, regulatory and legal developments—that make the information more likely to influence decisions primary users of the entity’s financial statements make on the basis of the financial statements.

The entity considers what information to provide about the effects of climate-related risks on its exposure to credit risk. This information might include, for example: (a) an explanation of the entity’s credit risk management practices related to climate-related risks and how those practices relate to the recognition and measurement of expected credit losses. The information the entity discloses might include, for example, how climate-related risks affect: (i) the determination of whether the credit risk on these financial instruments has increased significantly since initial recognition; and (ii) the grouping of instruments if expected credit losses are measured on a collective basis.

(b) an explanation of how climate-related risks were incorporated in the inputs, assumptions and estimation techniques used to apply the requirements in Section 5.5 of IFRS 9 Financial Instruments. The information the entity discloses might include: (i) how climate-related risks were incorporated in the inputs used to measure expected credit losses, such as probabilities of default and loss given default; (ii) how forward-looking information about climate-related risks was incorporated into the determination of expected credit losses; and (iii) any changes the entity made during the reporting period to estimation techniques or significant assumptions to reflect climate-related risks and the reasons for those changes.

(c) information about collateral held as security and other credit enhancements, including information about properties held as collateral that are subject to flood risk and whether that risk is insured.

(d) information about concentrations of climate-related risk if this information is not apparent from other disclosures the entity makes.

CONCLUSION

Many entities do not disclose sufficient and relevant information relating to climate related risks and the impact on its financial statements. Mostly, the disclosures if made are boiler plated or are outside the financial statements, which are not subject to any scrutiny. The IASB’s ED is a step in the right direction for ensuring better compliance relating to the disclosure of climate related risks. The ED will be followed by similar requirements in India as well. Hopefully, what will follow is better disclosures and effective compliance. Entities in the meanwhile, should consider the above disclosures, on a voluntary basis, without waiting for the ED to become a standard.

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16th November, 2022

2. M/s. L. T. Stock Brokers Pvt. Ltd. vs. The Chief Commissioner of Income

[W.P. (L) 21032/2024,

Dated: 4th March, 2025 (Bom) (HC)]

Section: 279(2) :Prosecution — Compounding of offence – compounding application could not have been rejected on delay alone — Limitation — CBDT guidelines dated 16th November, 2022

The Petitioner challenged the Chief Commissioner’s order dated 17 January 2024, made under Section 279(2) of the Act, dismissing the Petitioner’s application for compounding the offence.

The Chief Commissioner has dismissed this application on the sole ground that it was filed beyond 36 months from the date of filing of the complaint against the petitioners. The Chief Commissioner has relied upon paragraph 9.1 of CBDT guidelines dated 16 November 2022 for compounding offences under the Income-tax Act 1961.

The Hon. Court referred to the Co-ordinate bench decision of this Court vide order dated 18th July, 2023 disposing of the Writ Petition (L) No.14574 of 2023 (Sofitel Realty LLP and Ors vs. Income-tax Officer (TDS) and Ors) wherein the Hon. Court considered similar CBDT guidelines dated 23 December 2014. In the context of such guidelines and clauses like Clause 9 of the 2022 guidelines, the Court held that since the Income-tax Act, 1961 had provided for no period of limitation to apply for compounding, such period could not have been introduced through guidelines. In any event, no rigid timeline could have been introduced through such guidelines. This Court held that the compounding application could not have been rejected on delay alone.

The court further referred to the Madras High Court decision in the case of Kabir Ahmed Shakir vs. The Chief Commissioner of Income Tax & Ors Writ Petition No.17388 of 2024 dated 30/08/2024 which was rendered in the context of the 2022 CBDT guidelines.

The counsel for the revenue, however, submitted that even where no limitation is prescribed by the State, the application has to be filed within a reasonable period. Further, she referred to the decision of the Hon’ble Supreme Court in the case of Vinubhai Mohanlal Dobaria vs. Chief Commissioner of Income Tax & Anr. [2025] 171 taxmann.com 268 (SC) and submitted that the CBDT guidelines of 2014 were upheld by the Hon’ble Supreme court, including, the paragraph which has prescribed limitation period to file application for compounding.

The Hon. Court observed that the above paragraph states that para 8 of the 2014 guidelines [which had referred to the period of limitation] does not exclude the possibility that in the peculiar case where the facts and circumstances so required, the competent authority should consider the explanation and allow the compounding application. This means that notwithstanding the so-called limitation period in a given case, the competent authority can exercise discretion and allow compounding application.

The Hon. Court observed that the competent authority has treated the guidelines as a binding statute. On the sole ground that the application was made beyond 36 months, the same has been rejected. The competent authority has exercised no discretion as such. The rejection is entirely premised on the notion that the competent authority had no jurisdiction to entertain a compounding application because it was made beyond 36 months. Such an approach was inconsistent with the rulings of this Court, Madras High Court and the Hon’ble Supreme Court decision relied upon by the learned counsel for the revenue.

The impugned order dated 17th January, 2024 was set aside and the Chief Commissioner was directed to reconsider the petitioner’s application for compounding.

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

1. Vijay Shrinivasrao Kulkarni vs. Income Tax Appellate Tribunal & Ors.

[WP (C) No. 17572 OF 2024]

AY 2019-20

Dated: 4th February, 2025 (Bom) (HC)]

Arising from ITAT Pune ITA No.1159/Pun/2023 order dated 12th March 2024

Section: 254 (1): Principles of natural justice violated — impugned order passed without hearing the petitioner and / or his representative and without considering the written submissions:

The petitioner assessee in the present case is a 64 year old retired serviceman, who earned income primarily from salary for the Assessment Year 2019-20. He was then an employee of M/s. Pfizer Healthcare India Pvt. Ltd. posted at Aurangabad, from where he derived his salary income.

The petitioner filed his original income tax return for the A.Y. 2019-20 on 1 August 2019 declaring a total income of ₹57,84,740/- The petitioner had claimed relief under section 89(1) of the Act for an amount of ₹ 13,22,187/-. Subsequently, the petitioner’s case was selected for scrutiny. In response to notices, the petitioner submitted copies of computation of income, Form 26AS, Form 16, Form 10E along with other supporting documents.

The AO issued a show cause notice-cum-draft assessment order dated 16 September 2021 to the petitioner directing him to furnish his reply on or before 19 September, 2021. The petitioner filed his submissions / reply dated 16 September 2021 to the show cause notice-cum-draft assessment order issued by AO. The petitioner also requested for the grant of a personal hearing through video conferencing, which was so granted on 23 September 2021.

According to the petitioner, the relief claimed by him under section 89(1) of the Act warranted consideration, as such amount was a salary advance, justifying such relief. However, the petitioner during assessment proceedings withdrew such relief as claimed under section 89(1) and alternatively claimed receipts of Ex-Gratia and other incentives as capital receipts. This was with reference to the amounts received from his employer, i.e., Pfizer Healthcare on account of closure of its plant at Aurangabad and in terms of the settlement to all permanent employees under the financial scheme for employees of Aurangabad 2019, dated 9 January 2019.

The AO proceeded to pass the assessment order dated 29 September 2021. While passing such order, the petitioner’s submissions were rejected on the ground that the amount received by the Petitioner on termination of employment cannot be treated as salary in advance, as claimed by the Petitioner. Thus, the relief claimed by the petitioner under section 89(1) of the Act for an amount of R13,22,187/- was rejected by the assessment order.

The Petitioner being aggrieved by the said assessment order, approached the National Faceless Appeal Centre by filing an appeal. It was during the proceedings initiated by the petitioner before the NFAC that various notices under section 250 of the Act were issued to the petitioner. However, the petitioner’s Chartered Accountant could not respond to the above notices, and sought adjournments, mainly on the ground that a senior CA was intended to be engaged to defend the petitioner in the said proceedings.

The NFAC proceeded to pass an ex-parte order dated 8 September 2023, rejecting the petitioner’s appeal filed before it, thereby confirming the assessment order passed by AO.

The Petitioner, approached ITAT, Pune, by filing an appeal. The appeal filed by the Petitioner was listed for hearing on 11 March 2024 before the Division Bench of ITAT, Pune. The petitioner’s advocate submitted that the matter was required to be remanded to the NFAC, on the ground that the order of the NFAC was an ex-parte order, as it was passed in absence of a hearing being granted to the petitioner / his representative. The Petitioner’s CA also filed an affidavit in this regard. The ITAT rejected the petitioner’s prayer to remand the matter to NFAC and insisted on hearing the appeal on merits. The Petitioner’s advocate then requested for a short adjournment, so that a paper book could be submitted. However, such request was denied. The Petitioner’s advocate then requested to the ITAT to grant one day’s time to submit such paper book and to take up appeal for hearing on merits on the next date. Such request was also rejected by the ITAT. The Petitioner’s advocate was directed to submit written submissions and paper book on the basis of which, the ITAT would pass appropriate orders. The Petitioner through his legal representative accordingly submitted written submissions, along with the paper book and case laws on 12 March 2024, before the ITAT.

It was in the above backdrop that the ITAT proceeded to pass the impugned order dated 12 March, 2024, the Petitioner being aggrieved by such order approached this court by filing a writ petition.

The learned counsel for the Petitioner submitted that the Petitioner is seriously prejudiced by the actions of the ITAT in passing the impugned order dated 12th March, 2024. He further referred to the following orders passed by the ITAT on the same day, i.e., 12th March, 2024, which are summarized below:-

The ITAT had in similar facts and circumstances remanded the matter to the JCIT-A/the NFAC for further consideration on merits. However, ITAT did not adopt the same approach in the present case. According to him, a fair approach ought to have been adopted by the ITAT considering the facts of the case, as no prejudice would have been caused to the Dept.

The Dept contended that the ITAT was justified in concluding, that there was no need to remand the proceedings to AO as such remand would be an exercise in futility. Accordingly, the ITAT was justified in dismissing the appeal of the petitioner.

The Hon. Court observed that this is a case where the violation of the settled principles of natural justice is not just apparent but real, palpable and clearly visible. The Petitioner is deprived of an opportunity to present its case not only before the NFAC but also subsequently before the ITAT. Not affording a reasonable opportunity to the Petitioner to present its case had perpetuated from the ex-parte order passed by NFAC which was not noticed by the ITAT in passing the impugned order.

It was not disputed that the NFAC under the faceless regime passed an ex-parte appeal order, without affording an opportunity to the petitioner of being heard. Thus, evaluation of assessment of the petitioner’s income and rejecting the submissions of the petitioner was undertaken also ought to have been appropriately undertaken by following the natural rules of fairness adhering to the principles of natural justice and such infirmity at least should have been addressed by the ITAT in passing the impugned order.

The Court further observed that on a perusal of the impugned order of the ITAT makes it clear that it proceeded to deal with the case of the petitioner on merits as is evident from the order. The Petitioner submitted that considering the fact that the order impugned before the ITAT itself was passed by NFAC was passed ex-parte, it would be just and proper for the ITAT to remand the matter to NFAC for passing orders on merits, after considering submissions of the petitioner. Also, the written submissions being tendered on behalf of the petitioner before the ITAT on 12th March, 2024 have not being considered in the impugned order being passed by the Tribunal. The Court referred judgment of the Supreme Court in the case of Delhi Transport Corporation vs. DTC Mazdoor Union._AIR 1999 SC 564 wherein it was held that Article 14 guarantees a right of hearing to a person who is adversely affected by an administrative order. The principle of audi alteram partem is a part of Article 14 of the Constitution of India. In light of such decision, the petitioner ought to have been granted an opportunity of being heard which, partakes the characteristic of the fundamental right under Article 14 of the Constitution of India.

The Hon. Court further referred to a decision of the Supreme Court in the case of Commissioner of Income Tax Madras vs. Chenniyappa Mudiliar (1969) 1 SCC 591 wherein the Supreme Court in interpreting the section 33(4) of the Income Tax Act, 1922 has held that the Appellate Tribunal was bound to give a proper decision on question of fact as well as law, which can only be done if the appeal is disposed-off on merits and not dismissed owing to the absence of the appellant. There is no escape from the conclusion that under the said provision, the Appellate Tribunal had to dispose-off the appeal on merits which could not have been done by dismissing the appeal summarily for default of appearance. The Court observed that the principles laid down in the said decision would squarely apply to the facts and circumstances of the present case, in as much as the Petitioner was neither heard nor were his written submissions placed before the ITAT, considered.

The Hon. Court set aside the impugned order of the ITAT dated 12th March, 2024. Accordingly, the proceedings were remanded to the ITAT, for de novo hearing of the appeal filed before it.

Revision — Non-resident — Application by assessee for revision — Provisions of section 155(14) — Claim for tax deducted at source on amount not taxable in India — Credit not reflected in Form 26AS at time when return originally filed for relevant assessment year but reflected in subsequent assessment year — Commissioner cannot reject application on ground revised return not filed — Department to refund tax deducted at source with statutory interest: A.Y. 2015-16

6. Munchener Ruckversicherungs Gesellshaft Aktiengesellschaft In Munchen vs. CIT (International Taxation)

[2025] 473 ITR 53 (Del.):

A. Y. 2015-16

Date of order: 3rd September, 2024

S. 155(14) and 264 of ITA 1961

Revision — Non-resident — Application by assessee for revision — Provisions of section 155(14) — Claim for tax deducted at source on amount not taxable in India — Credit not reflected in Form 26AS at time when return originally filed for relevant assessment year but reflected in subsequent assessment year — Commissioner cannot reject application on ground revised return not filed — Department to refund tax deducted at source with statutory interest:

The assessee was a non-resident. For the A.Y. 2015-16, the assessee declared nil income asserting that its receipt of an amount would not be subject to tax in India in terms of the provisions u/s. 90 of the Income-tax Act, 1961 and claimed refund of tax deducted at source on the basis the tax credit statement being form 26AS, which included the tax deducted by an entity BALIC. The assessee submitted that the tax deducted at source pertaining to the last quarter of F. Y. 2014-15 was credited by BALIC on 21st January, 2016, that consequently, the original tax deducted at source stood increased. In the return for the A. Y. 2016-17 wherein the claim for tax deducted at source credit stood embedded on account of such amount having by then being captured in form 26AS and which amount had remained unclaimed in A. Y. 2015-16.

The Commissioner (International Taxation) was of the view that since the income received from BALIC was offered to tax, the assessee would not be entitled to the grant of tax deducted at source credit. He held that the assessee had failed to file revised return of income and rejected the assessee’s application u/s. 264.

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

“i) Section 155 of the Income-tax Act, 1961 prescribes that where credit for tax has not been given on the ground of either a certificate having not been furnished or filed, but which is subsequently presented before the Assessing Officer, it would be sufficient for the assessment order being amended. Section 155(14) places the Assessing Officer under a statutory obligation to amend the order of assessment once it is established that the contingencies stated in that provision are duly established. Sub-section (14) neither contemplates nor mandates the original return being amended or revised and takes care of contingencies where tax deducted at source is either subsequently credited or is reflected in form 26AS after a time lag. An assessee may face such a spectre on account of a variety of unforeseeable reasons.

ii) Since the tax which was deducted at source by BALIC stood duly embedded in form 26AS which was produced by the assessee and the income earned from that entity had never been held to be subject to tax under the Act, the refusal on the part of the Department to refund that amount was illegal and arbitrary. The factum of tax having been deducted at source by BALIC and pertaining to income transmitted in the A. Y. 2015-16 was not disputed and stood duly fortified from the disclosures which appeared in form 26AS pertaining to that assessment year. It was also not disputed that BALIC had credited the tax deducted at source on 21st January, 2016 and as a consequence of which, the credit was not reflected at the time when the return had been originally filed for the assessment year 2015-16.

iii) The order passed u/s. 264 rejecting the assessee’s application was quashed. The Department was directed to refund the amount of tax deducted at source along with statutory interest.”

Revision — Revision order — Validity — Non-resident — Claim for benefits under DTAA — Opinion of Commissioner that assessee conduit company used for treaty shopping not stated in notice — Assessee not given an opportunity to satisfy Commissioner regarding his view — Order of Tribunal setting side revision order not erroneous: A.Y. 2017-18

5. CIT (International Taxation) vs. Zebra Technologies Asia Pacific Pte. Ltd.

[2025] 472 ITR 745 (Del.):

A. Ys. 2017-18

Date of order: 23rd October, 2024

S. 263 of ITA 1961

Revision — Revision order — Validity — Non-resident — Claim for benefits under DTAA — Opinion of Commissioner that assessee conduit company used for treaty shopping not stated in notice — Assessee not given an opportunity to satisfy Commissioner regarding his view — Order of Tribunal setting side revision order not erroneous:

The assessee was a non-resident and distributed electronic products and services related to after sales, repairs, and technical support services to the customers across the globe. It held tax residency certificate of Singapore and sought to avail of the benefit of India-Singapore Double Taxation Avoidance Agreement ([1982] 134 ITR (St.) 6). In the A. Y. 2017-18, the assessee received a sum for rendition of technical support, repairs and maintenance services under an agreement with an Indian entity and also an amount in USD from offshore sale of products. According to the assessee, since it did not have a permanent establishment in India and also did not make available technical know-how, knowledge, and skill to the Indian entity under the agreement, the receipts were not chargeable to tax in India under the Act by virtue of the Double Taxation Avoidance Agreement. The Assessing Officer accepted the assessee’s explanation in response to the notices u/ss. 142(1) and 143(2) of the Income-tax Act, 1961 during the assessment proceedings which culminated in an assessment order.

The Commissioner was of the view that the Assessing Officer did not conduct the necessary inquiries and verified the facts for accepting the assessee’s claim that its income was not chargeable to tax under the Act by virtue of India-Singapore Double Taxation Avoidance Agreement, that he did not call for the relevant details or verified whether the assessee had a permanent establishment in India during the relevant period, that he did not carry out any inquiry to ascertain whether any commercial substance existed in Singapore and whether the assessee was merely a conduit company and used with an object to obtain the tax benefit under the Double Taxation Avoidance Agreement. Accordingly, he invoked his power u/s. 263.

The Tribunal faulted the Commissioner for not affording the assessee an opportunity to rebut the allegations that it was merely a conduit without any substance and had entered into an agreement for the purposes of taking an advantage of the Double Taxation Avoidance Agreement and allowed the appeal filed by the assessee.

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

“i) There was no fault with the order of the Tribunal in setting aside the revision order passed by the Commissioner u/s. 263 on the ground that the assessee was not afforded an opportunity to counter the allegation that it was a conduit company without any substance.

ii) In the show-cause notice the Commissioner had faulted the Assessing Officer for not undertaking certain enquiries including verifying whether, (i) the assessee had a permanent establishment in India, (ii) in terms of section 9(1)(vii) of the Act, the income was chargeable as fees for technical services, (iii) tax at source at the rate of 10 per cent. on all the remittances made to the assessee were deducted, (iv) the condition as set out in article 12 of the India-Singapore Double Taxation Avoidance Agreement in regard to taxation of fees for technical services were satisfied, (v) regarding the commercial substance of the assessee in Singapore and (vi) it was a conduit company formed for obtaining the tax benefits under the Double Taxation Avoidance Agreement.

iii) These observations were made only for the purposes of calling upon the assessee to show cause why the proceedings not be initiated u/s. 263 of the Act but, thereafter, the Commissioner had not put the issue regarding treaty shopping to the assessee. The tentative opinion formed by the Commissioner that the assessee was a conduit company for the reasons as articulated in the revision order was not put to the assessee. Hence, the assessee had not been given an opportunity to satisfy the Commissioner regarding such view for the A. Y. 2017-18.”

Recovery of tax — Grant of stay of demand — Stay of recovery pending appeals before Commissioner (Appeals) — Effect of office memorandum issued by CBDT — Rejection of stay of demand for non-deposit of 20% of disputed demand — Application to the Principal Commissioner — Direction to deposit 40% — Authorities failed to consider prima facie merits of the case — Financial hardship and likelihood of success — Orders rejecting stay of demand unsustainable — Matter remanded to the AO with directions to consider in light of earlier decision: A.Ys. 2010-11 to 2020-21

4. Sushen Mohan Gupta vs. Principle CIT

[2025] 473 ITR 173 (Del.)

A. Y. 2010-11 to 2020-21

Date of order: 22nd March, 2024

Ss. 156, 220(1), 220(6) and 246A of ITA 1961

Recovery of tax — Grant of stay of demand — Stay of recovery pending appeals before Commissioner (Appeals) — Effect of office memorandum issued by CBDT — Rejection of stay of demand for non-deposit of 20% of disputed demand — Application to the Principal Commissioner — Direction to deposit 40% — Authorities failed to consider prima facie merits of the case — Financial hardship and likelihood of success — Orders rejecting stay of demand unsustainable — Matter remanded to the AO with directions to consider in light of earlier decision:

A search and seizure action was conducted and subsequently notices u/s. 153A of the Act for the A.Ys. 2010-11 to 2019-20 were issued and on culmination of proceedings so drawn, the assessment orders came to be framed on 30th September, 2021 raising a cumulative demand of ₹ 1,85,62,19,390 for the A.Ys. 2010-11 to 2020-21.

The Assessee filed appeals before the CIT(A) which are pending. Against the enforcement of demand, the Assessee filed application for stay of demand before the Assessing Officer which came to be rejected on the ground that the Assessee had not deposited 20% of the outstanding demand and therefore the application could not be entertained. In rejecting the assessee’s application for stay of demand, the Assessing Officer relied upon the Office Memorandums of the CBDT dated 29-02-2016 and 31-07-2017.

Thereafter, the Assessee filed application for rectification of mistakes which was disposed and the revised demand recoverable from the Assessee was computed at ₹1,81,37,14,107. The Assessee thereafter filed another stay application before the Assessing Officer for the A.Ys. 2010-11 to 2020-21. During the pendency of the said stay application, the Assessee was served with a letter seeking payment of the outstanding demand followed by a demand notice issued u/s. 220(1) of the Act. In response to the aforesaid, the Assessee filed a detailed response stating that the original assessment was wholly arbitrary and rendered unsustainable in the light of the judgment of the Supreme Court in the case of Pr.CIT vs. Abhisar Buildwell Pvt. Ltd. The Assessee also offered to pledge properties owned by an entity in which the Assessee’s family members were directors / shareholders to secure the outstanding demand to the extent of 20%. The Assessee’s prayer was rejected.

Aggrieved, the Assessee approached the Principal Commissioner for grant of interim protection against the outstanding demands. The Principal Commissioner disposed the application by observing that during search operations, various incriminating documents were found and seized and credible evidence were collected. He, thus, disposed of the applications of stay of demand and directed the assessee to deposit demand which was 40 per cent of total outstanding demand within 15 days of receipt of his order.

The Assessee filed a writ petition before the High Court. The Delhi High Court allowed the writ petition and held as follows:

“i) The Central Board of Direct Taxes’ Office Memorandum [F. No. 404/72/93-ITCC], dated 29th February, 2016 could not be read as mandating a pre-deposit of 20 per cent. of the outstanding demand, without reference to the prima facie merits of a challenge that may be raised by an assessee in respect of an assessment order.

ii) The assessee had approached the Principal Commissioner in terms of the provisions made in the Office Memorandum dated 29th February, 2016. The view taken by the second respondent, that applications for stay could neither be countenanced nor entertained till the assessee deposited 20 per cent. of the pending demand was untenable and erroneous. The Principal Commissioner had proceeded to cause even greater prejudice to the assessee by requiring him to deposit 40 per cent. of the outstanding demand.

iii) According to para 4(C) of the Office Memorandum [F. No. 404/72/93-ITCC], dated February 29, 2016 stated to the effect that where stay of demand was granted by the Assessing Officer on payment of 15 per cent. of the disputed demand and the assessee was still aggrieved, he could approach the jurisdictional administrative Principal Commissioner or the Commissioner for a review of the decision of the Assessing Officer. The Principal Commissioner could not be recognised to stand empowered to subject the assessee to more onerous conditions. Rather than examining the challenge raised by the assessee to the assessment orders and evaluating the prima facie merits of the challenge had in one sense placed him under a harsher burden of depositing 40 per cent. of the outstanding demand as opposed to the direction of 20 per cent. deposit by the second respondent as a pre-condition for the consideration of application for stay under section 220(6) .

iv) Both the authorities had failed to consider the aspect of prima facie merits, likelihood of success and undue hardship. Therefore, their orders were unsustainable and hence quashed and set aside. The matter was remitted to the Assessing Officer to examine the applications for stay afresh considering the legal position.”

Reassessment — Exemption u/s. 10B — Newly established hundred per cent. export oriented establishments — Reassessment — Notice — Survey — Denial of claim for deduction u/s. 10B in original assessment — Grant of deduction by Tribunal — Fresh survey during pendency of revenue’s appeal before court — Reassessment on ground of availability of new material would tantamount to getting over anomalous situation — Reassessment proceedings to disallow claim for deduction once again impermissible — Notice and order rejecting assessee’s objections quashed and set aside: A.Y. 2009-10

3. Sesa Sterlite Ltd. vs. ACIT

[2025] 472 ITR 591 (Bom.)

A. Y. 2009-10

Date of order: 4th September, 2024

Ss.10B, 133A, 147 and 148 of ITA 1961

Reassessment — Exemption u/s. 10B — Newly established hundred per cent. export oriented establishments — Reassessment — Notice — Survey — Denial of claim for deduction u/s. 10B in original assessment — Grant of deduction by Tribunal — Fresh survey during pendency of revenue’s appeal before court — Reassessment on ground of availability of new material would tantamount to getting over anomalous situation — Reassessment proceedings to disallow claim for deduction once again impermissible — Notice and order rejecting assessee’s objections quashed and set aside:

The assessee was in the business of manufacturing and production of iron ore and had three units situated at Amona, Chitradurga and at Codli. These units are export-oriented undertakings and for the assessment year 2009-10, the assessee claimed deduction u/s. 10B. A survey u/s. 133A was carried out at the assessee’s premises wherein the authorities sought to ascertain the relevant facts in connection with the claim for deduction u/s. 10B. The Assessing Officer issued a notice dated July 16, 2014 u/s. 148 to reopen the assessment u/s. 147. The Assessees objections were rejected.

The Assessee filed a writ petition and challenged the notice and the order rejecting the objection. The Bombay High Court allowed the writ petition and held as under:

“i) Section 10B(2) provided that section 10B applied to any undertaking which fulfilled all the conditions therein. The assessee had claimed deduction u/s. 10B in respect of the three export-oriented units for the A. Y. 2009-10 and a survey u/a. 133A had been carried out at its premises in connection with the claim for deduction u/s. 10B. The assessment order u/s. 143(3) was passed by the Assessing Officer whereunder the claim for deduction u/s. 10B was disallowed in its entirety for the reasons given by the Assessing Officer. He had held that the assessee’s units were not engaged in the business of manufacture and production of any article or thing, that the assessee had not produced satisfactory evidence with regard to the date of commencement of production, that the approval granted by the Development Commissioner for one unit was not ratified by the Board and that the profits of the units was determined without taking into consideration the cost of the wastage from other units which was utilised in the alleged production that was carried out in the unit under reference, and the units were not new units and the setting up of the units in the old mines which were operated by the assessee could not be regarded as new units and that the assessee had not maintained separate books of account for the export oriented units. The Commissioner (Appeals) had upheld the denial of the claim of deduction under section 10B by the Assessing Officer. The Tribunal had dealt with all the reasons given by the Assessing Officer and had upheld the claim for deduction u/s. 10B. Therefore, entitlement to deduction u/s. 10B had been the subject matter of appeal before the appellate authorities. During the pendency of the tax appeal before this court, a fresh survey was conducted u/s. 133A and on the basis of the materials which were found during the survey in 2014, reassessment u/s. 147 was sought to be justified for the purpose of denying the claim for deduction u/s. 10B. Thus, the reasons of the Assessing Officer in support of his finding could be several but what was relevant was the subject matter of the tax appeal. The third proviso to section 147, which provided that the Assessing Officer could assess or reassess such income, other than the income involving matters which were the subject matters of any appeal, reference or revision, which was chargeable to tax and had escaped assessment, would come into effect.

ii) When the fresh survey u/s. 133A was conducted in the year 2014 during the pendency of the tax appeal before this court, the new materials found by the Assessing Officer were sought to be placed before the Tribunal and this court and the issue under consideration was whether the assessee was entitled to claim deduction u/s. 10B. Assuming that the reassessment proceedings u/s. 147 was allowed to continue on the basis of the new materials a situation could arise to be held that the assessee was entitled to claim deduction u/s. 10B, whereas in the reassessment proceedings, the Assessing Officer on the basis of the new materials could conclude that the assessee was not entitled to claim deduction u/s. 10B.

iii) Reassessment proceedings were obviously to get over such an anomalous situation that the third proviso to section 147 was meant to cover. If the reassessment proceedings were allowed to continue, it would virtually amount to having an effect of sitting in appeal over the orders passed by this court and the Tribunal which could not be countenanced. Though it was the allegation that fresh evidence was unearthed during the course of fresh survey in March 2014, which indicated that the units considered as new units were not new units but an amalgamation of the existing units. The exercise really was to rely on these materials in support of the findings earlier recorded by the Assessing Officer which was already subject matter of challenge before the competent forum. Assumption of jurisdiction to reopen the assessment was without jurisdiction to once again disallow a claim for deduction u/s. 10B. The notice dated 16th July, 2014 issued u/s. 148 to reopen the assessment u/s. 147 for the A. Y. 2009-10 and the order rejecting the assessee’s objections were quashed and set aside.”

Public Interest Litigation — Return of Income — Filing of return in electronic form — Modification of online filing system —Jurisdiction of revenue authorities — Utility not providing for making claim for rebate under section 87A read with proviso to section after 5-7-2024 — Attempt to restrict or prohibit assessee from making particular claim at threshold itself in return of income unconstitutional — No provision under Act which debars assessee to make claim under section 87A qua tax computed at rates specified in provisions of chapter XII other than section 115BAC — Statutory safeguards and remedies in provisions of Act for consequences if claim made in self assessment found to be incorrect or not bona fide — Allowance or disallowance of claim to be deduced by interpretative and adjudicating process — Assessee cannot be debarred from making claim in return of income whether online or manual — Directions issued to modify utility to enable assessees file returns or revised returns of income — NFAC cannot continue assessment proceedings in concluded assessment — Assessment order passed by NFAC set-aside: A.Y. 2024-25

2. Chamber of Tax Consultants & Ors vs. DGIT (Systems)

[2025] 473 ITR 85 (Bom.)

A. Y. . 2024-25

Date of order: 24th January, 2025

Ss. 87A, 115BAC, 139, 139(5) and 139D of  ITA 1961

Public Interest Litigation — Return of Income — Filing of return in electronic form — Modification of online filing system —Jurisdiction of revenue authorities — Utility not providing for making claim for rebate under section 87A read with proviso to section after 5-7-2024 — Attempt to restrict or prohibit assessee from making particular claim at threshold itself in return of income unconstitutional — No provision under Act which debars assessee to make claim under section 87A qua tax computed at rates specified in provisions of chapter XII other than section 115BAC — Statutory safeguards and remedies in provisions of Act for consequences if claim made in self assessment found to be incorrect or not bona fide — Allowance or disallowance of claim to be deduced by interpretative and adjudicating process — Assessee cannot be debarred from making claim in return of income whether online or manual — Directions issued to modify utility to enable assessees file returns or revised returns of income — NFAC cannot continue assessment proceedings in concluded assessment — Assessment order passed by NFAC set-aside:

The Department releases utility for filing income tax returns online every year. The Department published a change in utility with effect from 05-07-2024. The said change unilaterally disabled the assessees from claiming rebate u/s. 87A. As a result, taxpayers, despite being statutorily eligible, were effectively deprived of their entitlements solely due to technical modifications introduced by the revenue.

The Chamber of Tax Consultants filed a petition seeking direction to modify the system and put in place by the Department for filing income tax returns for AY 2024-25 so as to allow the assessees at large to take benefit of rebate available u/s. 87A. It was contended that this unilateral modification is arbitrary, lacks justification, and deprives eligible taxpayers of statutory benefits. The Respondents’ actions violate the principles of fairness and transparency expected from public authorities and seek judicial intervention to ensure compliance with statutory provisions.

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

“i) The Department could not restrain or prohibit an assessee from claiming section 87A rebate by modifying their utility by which an assessee was forbidden at the threshold itself from making such a claim in the return of income. The provisions of the Act were not so clear as to arrive at a definite conclusion that a rebate under section 87A could not be granted from the tax computed under the other provisions of Chapter XII. Certainly, such a claim whether eligible or not could be examined in the proceedings under section 143(1) or section 143(3). Merely because few selected cases were picked up for scrutiny would not mean and would not authorise any authority under the Act to prevent an assessee from making the claim on which more than one view was possible. Merely because many returns of income were required to be processed and only a few of them were selected for scrutiny assessment under section 143(3) could not be a ground to tweak the utility to prevent at the very threshold, an opportunity to raise a claim on a debatable issue based upon the interpretation of the provisions in sections 87A and 115BAC. Considering the mandates of articles 265 and 300A, ends, howsoever laudable, cannot justify means.

ii) Assuming that the legal provisions were ambiguous, the Department cannot resolve such ambiguity by adopting an interpretation favouring itself through the device of simply tweaking the utility and preventing the assessee from even raising a claim. Therefore, the main question is not whether the interpretation proposed by the learned counsel for the petitioners or that proposed by the learned Additional Solicitor General is correct, but the main question is whether the Department can insist that its interpretation prevails or triumphs because it has the capacity to and has exercised this capacity to tweak the utility and prevent an assessee to even raise a debatable claim. The provisions of the Income-tax Act do not permit the Department to do this without transgressing the constitutional boundaries

iii) The issue raised on the claim u/s. 87A was, at best, highly debatable and contentious. Therefore, the Department would not be justified in assuming that its interpretation was open and shut, and based upon such a conclusion, shut out bona fide claims for rebate under section 87A and could not be done by exercising administrative powers instead of quasi-judicial powers. Disputed claims, except to the limited extent explicitly permitted by the law, could not ordinarily be disposed of by the executive acting in its executive capacity. This is more so when the executive is itself a party to the lis. One of the foundations of our Constitution is the rule of law. This posits that all three organs of governance, the Legislature, the Executive, and the Judiciary function under and in accordance with the law as enshrined in our Constitution.

iv) The Department did not show any provision under the Act which expressly debarred an assessee to raise or make the claim u/s. 87A qua the tax computed at the rates specified in the provisions of Chapter XII other than section 115BAC. There was no rebuttal to the petitioner’s contention that a provision like section 112A(6) had been expressly enacted wherever the Legislature intended to deny such a benefit. Therefore, in so far as the prayers of the petitioners were concerned that the utility should permit an assessee to at least make a claim under section 87A, it could not be rejected at the threshold.

v) Whether rebate u/s. 87A was to be allowed only on the tax calculated in accordance with the provisions of section 115BAC or also on taxes calculated under other provisions of Chapter XII would require interpretation of the interplay of section 87A and section 115BAC To what extent the overriding provisions contained in section 115BAC(1A) would result in allowability or denial of rebate under section 87A would have to be examined by interpretative process. The impact of the phrase “subject to the provisions of this Chapter” would also have to be examined along with other provisions for adjudicating the claim under section 87A. What was the purport of the proviso to section 87A on the claim proposed to be made would have to be interpreted in conjunction with the provisions of section 115BAC(1A) and other connected sections. How the phrase “total income” should be construed for section 87A and section 115BAC along with the definition sections, charging sections and scope of total income and the scheme of the Act, would have to be examined. Whether the provisions of section 115BAC restricted itself only to tax rates or computation of total income would also have to be examined. If such exercise was required to be undertaken before coming to a definite conclusion as to whether the rebate under section 87A was to be granted or denied on the tax computed under the provisions of Chapter XII other than section 115BAC, had to be deduced by interpretative and adjudicating process. Therefore, the Department was not justified in modifying the utility from 5th July, 2024, by which an assessee was debarred at the threshold from making the claim, which claim was contentious or debatable.

vi) A combined reading of section 87 and section 87A would mean an assessee has to make a claim, the entitlement of which is to be examined by processing the return under section 143(1) or section 143(3) and the same should be allowed as a deduction. Section 87 which provides for rebate under section 87A uses the phrase “there shall be allowed from the amount of income tax . . .”. The proviso to section 87A uses the phrase “. assessee shall be entitled to a deduction . . .”. If a claim was not made, the Department could contend that the claim could not be allowed.

vii) In the absence of any concrete case, the petitioner’s prayer to direct the Department to make the utilities for filing the return of income online flexible so as to allow an assessee to self compute the income and there should not be any restriction on making of any claim whatsoever and to not release any utilities or make any changes in the utilities for filing of the return of income under section 139 which would not allow any assessee to raise any claim, could not be granted unless there was a demand for justice which had been rejected or a failure on the part of the Department to exercise its duty under the Act. The court should grant no relief in such broad and general terms because the ramifications would be unclear.

viii) The Department was directed to modify the utilities for filing of the return of income u/s. 139 of the Act immediately, thereby allowing the assessees to make a claim of rebate under section 87A of the Act read with the proviso to section 87A , in their return of income for the assessment year 2024-25 and subsequent years including revised returns to be filed u/s. 139(5).”

Exemption u/s. 10(38) — Long-term capital gains — Book profits — Minimum alternate tax — Amendments in provisions of sections 10 and 115JB — Commissioner (Appeals) and Tribunal not erroneous in allowing exemption u/s. 10(38) on long-term capital gains from sale of shares of amalgamating companies with assessee: A.Y. 2015-16

1. Principle CIT vs. Hespera Reality Pvt. Ltd

[2025] 472 ITR 630 (Del.)

A. Y. 2015-16

Date of order: 24th December

Ss.10(38) and 115JB of ITA 1961

Exemption u/s. 10(38) — Long-term capital gains — Book profits — Minimum alternate tax — Amendments in provisions of sections 10 and 115JB — Commissioner (Appeals) and Tribunal not erroneous in allowing exemption u/s. 10(38) on long-term capital gains from sale of shares of amalgamating companies with assessee:

During the F.Y. 2014-15 relevant to the A.Y. 2015-16, five companies which held shares of the entity IBHFL merged with the assessee and three of these companies sold their shares. Since the said amalgamating companies were merged with the assessee with effect from August 1, 2014, the income earned from the transaction of sale of IBHFL shares were assessed in the hands of the assessee. The Assessing Officer was of the view that the amount of long-term capital gains was required to be added to the book profits u/s. 115JB and that the amount was not entitled to exemption u/s. 10(38).

The Commissioner (Appeals) held that the entire amount of long-term capital gains was not liable to be included as income chargeable to tax u/s. 10(38) and accordingly, deleted the disallowance but upheld the Assessing Officer’s decision regarding the computation of book profits for the purpose of determination of minimum alternate tax u/s. 115JB. On the question, whether the long-term capital gains that arose from the sale of investments were exempted u/s. 10(38), the Tribunal concurred with the decision of the Commissioner (Appeals) and rejected the appeal of the Department.

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

“i) The proviso to section 10(38) of the Income-tax Act, 1961 was introduced by virtue of the Finance Act, 2006 ([2006] 282 ITR (St.) 14). The inclusion of the proviso was corresponding to the amendments to Explanation 1 of section 115JB. By virtue of the Finance Act, 2006, the Explanation to section 115JB was amended and expenditure incurred in respect of the income exempt u/s. 10, with the exceptions of section 10(38) was excluded for the purposes of calculation of book profits and minimum alternate tax under section 115JB. In other words, the expenditure incurred for earning such income as was exempt from taxation by virtue of section 10(38) was required to be accounted for as expenditure for determining the book profits. Correspondingly, income u/s. 10(38) was also included as a part of the book profits but other incomes covered u/s. 10 were excluded.

ii) The proviso to section 10(38) was added by virtue of the Finance Act, 2006 to abundantly clarify that the income from capital gains on certain assets, which are excluded from the income u/s. 10(38) would be included in computing book profits u/s. 115JB. The proviso to section 10(38) cannot be read in the reverse to mean that if the gains are not included as book profits u/s. 115JB they are liable to be included as income for the purposes of assessment to tax under the normal provisions, notwithstanding that the gains are required to be excluded from income chargeable to tax u/s. 10(38).

iii) There was no fault with the decision of the Commissioner (Appeals) and the Tribunal, in rejecting the Department’s contention and holding that the assessee was entitled to exemption u/s. 10(38) of the long-term capital gains on account of sale of shares by the amalgamating companies, which was denied by the Assessing Officer.”

Impact Of The Projects Of BCAS Foundation

We are pleased to inform you that the BCAS Foundation set up a Science Laboratory, a Modern Library and four Smart Classes at M. M. High School, Umbergaon, which is a 125-year-old School, run professionally. These projects will benefit more than 2300 students every year. These projects were inaugurated on 9thAugust 2024 at a grand function organized by the School. Interestingly, that day was an “Adivasi Divas” and also a “Book Lovers Day”. Guests present at the function also planted a tree in their mother’s name and became part of the movement called “Ek Ped MaaKeNaam”, ‘एकपेड़माँकेनाम’.

We are happy to share the impact of the Science Lab in just a few months of its inauguration in the following letter from the M. M. High School addressed to the BCAS Foundation.

TO BCAS FOUNDATION,

“DEEP GRATITUDE FOR THE SCIENCE LABORATORY! IT’S BEEN INVALUABLE TO US.”

We utilized the Science Lab to create outstanding science fair projects, resulting in unprecedented success:- 4 projects selected for district level (A first-time achievement for our school )

The hands-on experience provided by the laboratory has sparked curiosity and enthusiasm among students. Practical learning has made science more engaging and accessible.

Thank you for empowering our students with cutting-edge facilities and fostering a love for science.

OUR SELECTED PROJECTS:-

1. ELECTRICITY GENERATED BY ROTTEN VEGETABLES (INNOVATIVE ENERGY HARVESTING):

Quality food is essential for our health. When vegetables are stored for a long time, their taste changes, and their nutritional value decreases. Such vegetables can lead to stomach aches, vomiting, and other illnesses. Due to the reduction in nutrients in these vegetables, immunity also decreases. The gases emitted from rotten vegetables can cause environmental pollution, and the flies and mosquitoes that gather on them can spread diseases. Therefore, an excellent way to manage stale and rotten vegetables is to generate electricity from them and then produce fertilizer.

2. FLOAT FARMING (SUSTAINABLE AGRICULTURE SOLUTION ):

Because of urbanization and industrialization, agricultural land is decreasing day by day. FLOAT FARMING is one baby step to solve this problem.

This system uses floating beds, which are made from water hyacinths, aquatic algae, water-borne creepers, herbs, plant residues, coconut husk and bamboo.

The system uses a floating bed of rotting vegetation that acts as compost for crop growth. There is no need for artificial fertilizer. We can develop Fish farms in that water, too, which will benefit farmers.

Float farming creates agricultural land areas in a wet area.

3. NIGHT SOLAR CAR (RENEWABLE ENERGY APPLICATION):

Purpose of the Project:-Everyone knows that solar vehicles only run during the day, but there is no option of energy harvesting for the vehicle during the night, so this is the purpose of our project that solar vehicles will harvest solar energy during the day and use the same energy at night using Thermoelectric Principle.

How it works:- The Night Solar Vehicle utilizes a Peltier module charged by hot sand during the day, converting heat into electricity. This energy is then stored in a battery, powering the vehicle at night. Additionally, a carbon solar panel generates electricity, supplementing the Peltier module’s energy.

4. EARTH AIR TUNNEL (ENVIRONMENTAL INNOVATION):

The temperature below the surface of the Earth (at a depth of 6 to 8 meters) remains stable throughout the year, with a variation of around 6°C to 10°C. This project works on that principle.

One end of the pipe is placed above the ground, and then the pipe is taken underground to a depth of 6 to 8 meters and passed through the earth, with the other end entering inside the house. During summer, the hot air from outside enters the pipe, and as it passes through the tunnel, the lower temperature beneath the earth causes a heat exchange, cooling the air. This cool air then enters the house, providing natural cooling. The same system is also useful in winter.

With Deep Gratitude,

M. M. High School, Umbargaon

(Alpesh Patel – Principal) (Jesal Shah – Vice Principal)

Glimpses of Supreme Court Rulings

1. K. Krishnamurthy vs. The Deputy Commissioner of Income Tax

(2025) 171 taxmann.com 413 (SC)

Penalty under section 271AAA — The imposition of penalty is not mandatory – Penalty may be levied if there is undisclosed income in the specified previous year — It is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search – Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of  ₹2,27,65,580 — Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy — Appellant offered ₹2,49,90,000/- under the head “Income From Other Sources” on account of these land transactions during the course of assessment proceedings only and not at any time during the search — Penalty under Section 271AAA(1) of the Income-tax Act 1961 was therefore leviable on the said amount.

A Memorandum of Understanding (‘MOU’) dated 19th January, 2009 was entered into between Mr. Hashim Moosa on the one hand and the Appellant as well as Mr. Surendra Reddy on the other, for procuring lands at a certain price from the land procurers, i.e. the Appellant and Mr. Surendra Reddy. As per Clause 10 of this MOU, ₹10,00,000/- (Rupees Ten lakhs only) was paid to the procurers for arranging facilitation of transfer of land from the landowners to Mr. Hashim Moosa / his nominees. No other payment, except a reimbursement under Clause 11, was contemplated under this MOU.

A transaction was entered into between Mr. Hashim Moosa and the Space Employees’ Co-operative Society Ltd. (in short ‘Society’) on 26th September, 2009. It was in order to facilitate purchase of land for this transaction that the MOU dated 19th January, 2009 was entered into by the Appellant with Mr. Hashim Moosa.

A search and seizure operation was carried out at the Appellant’s premises on 25th November, 2010, under section 132 of the Act. The Appellant disclosed an income of ₹2,27,65,580/- as a consequence of the search and seizure.

A notice dated 21st August, 2012 under Section 142(1) of the Act was issued to the Appellant calling for return of income for Assessment Year (‘AY’) 2011-2012. The Appellant filed his return of income on 05th November, 2012. The Appellant returned a total income of ₹4,77,11,330/- for Previous Year (‘PY’) 2010-2011, relevant to AY 2011-2012.

The Respondent issued the Assessment Order dated 15th March, 2013 for PY 2010-2011 relevant to AY 2011-2012, in respect of the Appellant. The total income assessed was ₹4,78,02,616/-.

The Assessing Officer noted that Space Employees’s Co-operative Housing Society Limited entered into an MOU on 26-09-2009 with Mr. HashimMoosa for acquiring 120 acres (which was further extended to 150 acres) of lands in Hoskote Taluk for a consideration of ₹74,26,980/- per acre. The Society will pay Mr. Moosa ₹73,26,980/- per acre of registered land to and the balance ₹1 lakh per acre shall be deposited in a Joint Escrow Account till the entire 120 acres of land is registered in favour of the Society.

To procure lands for the Society, Mr. HashimMoosa had entered into an MOU on 19-01-2009 with Mr. K. Krishna Murthy (Appellant) and P. Surendra Reddy for procuring lands @ ₹70,00,000/- per acre.

Mr. Krishnamurthy (Appellant) and Mr. Ananda Reddy had transferred 16.25 acres of lands which are in the names Mr. NHR Prasada Reddy and Mr. Sharab Reddy in favour of the Society.

On the basis of the copies of sale deeds collected from the Society, it was seen that Mr. N.H.R. Prasad Reddy sold 7 acres and 36 guntas of land to the Society and received total sale consideration of ₹4,34,50,000/-. Similarly, his brother Mr. N.H. Sharaba Reddy sold 10 acres and 33 guntas of lands to the Society and received sale consideration of ₹5,95,37,500/-. Overall they had sold 18 acres and 29 guntas of land and received total sale consideration of ₹10,29,87,500/. The consideration received by them works out to ₹55,00,000/- per acre.

Though, the Assessee had admitted that he had undertaken transaction and had promised to get alternative lands to Mr. NHR Prasad Reddy & Sharab Reddy, he had not offered any income on this count before the DDIT (Inv.). The Assessee offered an amount of ₹2,49,90,000/- during the course of assessment proceedings under the head income from other sources (income from assignment of rights) being the difference between the cost of lands which he has acquired on behalf of the brothers and cost of lands at which it is transferred to society.

On 30th September, 2013, an order imposing penalty under section 271AAA of the Act was passed against the Appellant for AY 2011-2012. The Respondent imposed penalty on the Appellant solely on the ground that the Appellant did not make payment of tax and penalty in terms of section 271AAA(2) of the Act after receipt of Show Cause Notice and considering the entire received income as the undisclosed income.

On the same day, another order imposing penalty under Section 271AAA of the Act was passed in respect of AY 2010-2011. Penalty at the rate of 10% (Ten per cent) was imposed on the entire returned income i.e. ₹4,78,02,616/- amounting to ₹47,80,261/-.

The CIT (Appeals), Bangalore allowed the appeal preferred against the Penalty Order dated 30th September, 2013 in respect of AY 2010-2011 accepting the submission of the Appellant that 2009-10 cannot be the ‘specified previous year’ for the purpose of Section 271AAA of the Income-tax Act, 1961.

Appeal preferred against the Penalty Order dated 30th September, 2013 in respect of AY 2011-2012 was however rejected solely relying on Section 271AAA(2) of the Income-tax Act, 1961 holding that the basic condition existing in the section has not been fulfilled.

The Income Tax Appellate Tribunal (‘ITAT’) vide order dated 17th October, 2016 rejected the Appellant’s appeal against the CIT(A) order again on the ground of non-compliance with Section 271AAA(2) of the Income-tax Act, 1961.

The Appellant preferred an appeal under section 260A of the Act.

Before the High Court, it was contended by the Assessee that it had admitted an undisclosed income of ₹2,27,65,580/- and filed returns showing income of ₹4,78,02,616/-. Nothing was found during the course of search. Assessee had voluntarily filed return of income more than what he had admitted before the DDIT. The machinery section had thus failed and therefore, penalty could not have been imposed.

According to the High Court compliance of all three conditions in sub-clause (2) of Section 271AAA of the Act were mandatory and the third condition namely, the payment of tax, together with interest, if any, had not been fulfilled by the Assessee.

On the question as to whether penalty prescribed @10% of undisclosed Income under section 271AAA of the Act can be reduced, if the tax together with interest on the undisclosed income as declared by the Assessee in the course of search in a statement under Section 132(4) is partly complied with, the High Court held that admittedly, the Appellant had not disclosed the income at all. But for search, the same could not have been unearthed. Having filed the returns, the Assessee did not comply with the third condition of sub-section (2). The assessee was therefore not entitled to any relief.

The High Court dismissed the appeal of the Appellant vide the judgment dated 2nd August, 2022.

On 6th January, 2023, the Supreme Court was pleased to issue notice confined to the second question urged before the High Court.

The Supreme Court noted that Section 271AAA(1) of the Income-tax Act 1961 stipulates that the Assessing Officer may, notwithstanding anything contained in any other provisions of the Act, direct the Assessee, in a case where search has been carried out to pay by way of a penalty, in addition to the tax, a sum computed at the rate of 10% (Ten per cent) of the undisclosed income of the specified previous year. The Supreme Court was of the view that the imposition of penalty therefore is not mandatory. Consequently, penalty under this Section may be levied if there is undisclosed income in the specified previous year.

According to the Supreme Court, though under Section 271AAA(1) of the Income-tax Act 1961, the Assessing Officer has the discretion to levy penalty, yet this discretionary power is not unfettered, unbridled and uncanalised. Discretion means sound discretion guided by law. It must be governed by rule, not by humour, it must not be arbitrary, vague and fanciful. [See: Som Raj and Ors. vs. State of Haryana and Ors. 1990:INSC:53 : (1990) 2 SCC 653].

The Supreme Court noted that Section 271AAA(2) of the Act stipulates that Section 271AAA(1) shall not be applicable if the Assessee — (i) in a statement under sub-section (4) of Section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income.

Consequently, if the aforesaid conditions (i) and (ii) are satisfied and the tax together with interest on the undisclosed income is paid up to the date of payment, even with delay, in the absence of specific period of compliance, then penalty at the rate of 10% (Ten per cent) under section 271AAA of the Act 1961 is normally not leviable.

The Supreme Court further noted that the expression ‘Undisclosed Income’ has been defined in Explanation (a) appended to Section 271AAA of the Act. According to the Supreme Court, as Section 271AAA is a penalty provision, it has to be strictly construed. The fact that the Assessee had surrendered some undisclosed income during the course of search or that the surrender was emerging out of the statements recorded during the course of search was not sufficient to fasten the levy of penalty. The onus was on the Assessing Officer to satisfy the condition precedent stipulated in the said Explanation, before the charge for levy of penalty is fastened on the Assessee.

Consequently, it is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search.

The Supreme Court further noted that the expression ‘specified previous year’ has been defined in Explanation (b) appended to Section 271AAA of the Act 1961. Since in the present case, the search was conducted on 25th November, 2010 and as the year for filing returns under Section 139(1) of the Act 1961 which ended prior to that date had expired on 31st July, 2010, Explanation b(i) was not applicable so as to make AY 2010-11 the specified previous year. Consequently, by virtue of Explanation b(ii), AY 2011-12 (the year in which the search was conducted) was the specified previous year in the present case for the purpose of Section 271AAA(1) of the Income-tax Act, 1961.

The Supreme Court further held that in the present case, the Appellant admitted ₹2,27,65,580/- as income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly.

Consequently, all the conditions precedent mentioned in Section 271AAA(2) stood satisfied and, therefore, penalty under Section 271AAA(1) was not attracted on the said amount of ₹2,27,65,580/-.

However, in the assessment order dated 15th March, 2013 passed under Section 143(3) of the Act, which has attained finality, it was an admitted position that the Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy. From the assessment order dated 15th March, 2013, it was apparent that the Appellant offered ₹2,49,90,000/- under the head income from other sources on account of these land transactions during the course of assessment proceedings only and not at any time during the search.

The argument that the said transactions had not been found in the search at the Appellant’s premises but had been found due to ‘copies of sale deeds collected from the society’ had no merits as the sale deeds had been collected as a result of the search and in continuation of the search. The Supreme Court was of the view that as the causation for collecting the sale deeds from the Society was the search at the Appellant’s premises, it cannot be said that the said documents were not found in the course of the search.

The Supreme Court further held that the expression ‘found in the course of search’ is of a wide amplitude. It does not mean documents found in the Assessee’s premises alone during the search. At times, search of an Assessee leads to a search of another individual and / or further investigation / interrogation of third parties. All these steps and recoveries therein would fall within the expression ‘found in the course of search’.

The Supreme Court reiterated that since income of `2,49,90,000/- constituted undisclosed income found during the search, penalty under Section 271AAA(1) of the Income-tax Act, 1961 was leviable on the said amount. Also, as the said amount was not admitted in the declaration before the DDIT(Inv.) during the course of search but was disclosed by the Appellant only during the assessment proceedings, and that too, after the Assessing Officer had asked for copies of the sale deeds from the Society, the exception carved out in Section 271AAA(2) was not attracted to the said portion of the income.

The Supreme Court disposed the appeal with a direction to the Appellant to pay penalty at the rate of 10% (Ten per cent) on ₹2,49,90,000/- and not on ₹4,78,02,616.

From Published Accounts

COMPILER’S NOTE

National Financial Reporting Authority (NFRA) had case issued an order in 2023 against a company wherein it had questioned accounting policies followed for Revenue Recognition and disclosure of Operating Segments. Given below are the disclosures in the financial statements of the company for the same.

Mahindra Holidays & Resorts India Ltd (31st March, 2024)

From Boards’ Report

Significant and Material Orders passed by the Regulators or Courts

There were no significant and material orders passed by the Regulators / Courts / Tribunals which would impact the going concern status of the Company and its operations in the future. The Company received an order from National Financial Reporting Authority (“NFRA”) (“the Order”) on 29th March, 2023, wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with the requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight line basis over the membership period under IND AS 115. In terms of the Order, the Company completed the review of its accounting policies and practices with respect to disclosure of operating segments and timing of recognition of revenue from customers and has taken necessary measures to address the observations made in the Order. Basis the said review, the existing accounting policies, practices and disclosures by the Company are in compliance with the respective Ind AS. Accordingly, the same have been applied by the Company in the preparation of financial results and a report to that effect has been submitted to NFRA.

As at 31st March, 2024, the Management assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date, the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly, have been applied by the Company in the preparation of the financial statements for the year ended 31st March, 2024.

From Independent Auditors’ Report on Standalone Financial Statements

From Key Audit Matters

Directions by the Regulator (See Note 56 to standalone financial statements)

The key audit matter

Pursuant to a complaint made by a customer against the Company, National Financial Reporting Authority (‘NFRA’) passed an order dated 29th March, 2023 (‘the Order’) providing directions to the Company. As per the order, NFRA has made certain observations in respect of:

  •  the identification and disclosure of segments by the Company; and
  •  Company’s accounting policy for recognition of revenue on a straight-line basis over the period of the membership fees and annual subscription fees. As per the Order, the Company has carried out review of policies and practices in areas of operating segments and timing of recognition of revenue from customers and submitted its response to NFRA.

Given the significance of the findings of NFRA on the policies and practices adopted by the Company, this has been considered as a key audit matter.

How the matter was addressed in our audit

Our procedures included the following:

  •  Reading the Order received by the Company and us from NFRA;
  •  Evaluating the findings in the Order with reference to segment reporting under Ind AS 108 and revenue recognition under Ind AS 115;
  •  Communicating the findings of the Order with those charged with governance;
  •  Inquiring and assessing the Company’s existing practices and policies followed by the Company in respect of the findings made by NFRA;
  •  Reviewing Company’s response to NFRA as required by the Order;
  •  Submitting our report to NFRA, based on our review of Company’s aforesaid response.

Segment Reporting

  •  Inquiring with the Chief Operating Decision Maker (CODM) on the current process of identification of segments;
  •  Obtaining and inspecting the operating results regularly reviewed by Company’s CODM.
  •  Assessing the adequacy of disclosures of operating segments in accordance with Ind AS 108.

Revenue Recognition

  •  Evaluating the accounting policy for recognition of revenue for contracts entered with members against requirements of Ind AS 115 with reference to fulfillment of performance obligations by the Company;
  •  Inspecting and testing, on sample basis, relevant customer contracts and assessing revenue is recognised on satisfaction of performance obligation;
  •  Assessing the adequacy of disclosures in accordance with Ind AS 115.

From Notes to Financial Statements

Note No.56

NFRA order The Company received an order (‘the Order’) from National Financial Reporting Authority (‘NFRA’) on 29th March, 2023 wherein NFRA had made certain observations on identification of operating segments by the Company in compliance with requirements of Ind AS 108 and the Company’s existing accounting policy for recognition of revenue on a straight-line basis over the membership period. As per the order received from NFRA, the Company was required to complete its review of accounting policies and practices in respect of disclosure of operating segments and timing of recognition of revenue from customers and take necessary measures to address the observations made in the Order. The Company had submitted its assessment to NFRA and will consider further course of action, if any, basis directions from NFRA. As at 31st March, 2024, the management has assessed the application of its accounting policies relating to segment disclosures and revenue recognition. Basis the current assessment by the Company after considering the information available as on date; the existing accounting policies, practices and disclosures are in compliance with the respective Ind AS and accordingly have been applied by the Company in the preparation of these financial statements.

Study Circles

Shrikrishna: Arey Arjun, yesterday I called you many times; but you didn’t pick up the phone.

Arjun: Bhagwan, I was attending a lecture in our study circle meeting.

Shrikrishna: Oh! What was the topic?

Arjun: yehi – apna Ethics! Bhagwan, I tell you, the future of the profession seems to be very bleak. Everybody was crying.

Shrikrishna: I am aware. There are many risks and threats. Too many regulations, harassment by Regulators, excessive expectations of clients, no reward ………Right?

Arjun: You said it. On many occasions, I have shared my worries with you. No good staff, no good articles. Can’t really cope up with the work. So many compliances!

Arjun: There is no unity amongst us. We cannot afford to say ‘No’ to any client. Whatever he wants we have to bow down. I am told, even well-established firms also have not much choice

Shrikrishna: True. I wonder whether real independence was ever there in your profession. That way, in all professions, the situation is more or less the same.

Arjun: Clients literally dictate us and take advantage of our lack of unity and solidarity.

Shrikrishna: Therefore, you can never demonstrate your collective strength.

Arjun: Our study circles are also focussing more on academic topics. Yesterday, the speaker suggested that we should have separate informal meetings for brain storming on our professional anxieties and to discuss the future of profession.

Shrikrishna: You can share your peculiar experiences and try to seek solutions. Even you can improve your communication skills to avoid many problems. By timely and effective communication, you can avoid embarrassing situations.

Arjun: The speaker also suggested that we should proactively discuss exposure drafts of Regulations and Standards and send our views. There is no point in shouting after it is passed.

Shrikrishna: So also, there can be many standardised letters that can be used by your members. All of you may not have good drafting skills. But wherever there are recurring compliances, you can use such ready made drafts which you can suitably modify.

Arjun: We can even take expert advice for getting such drafts.

Shrikrishna: Moreover, all firms may not have a ‘knowledge manager’. You can hire expert services to vet your audit reports or submissions. A studycircle can retain such expert for all members so that the cost is shared.

Arjun: That’s a good idea. We are not often updated, we need to depend on our juniors, we don’t get time to check everything as there is always a fire-fighting exercise.

Shrikrishna: Then your study circles can organise workshops for compact groups – not lengthy lectures. Each firm may not be in a position to organise training programmes for its staff. But 5 to 6 firms collectively can arrange trainings in a workshop. Study circles can do it more effectively.

Arjun: Lord, I find growing frustration amongst CAs at all levels. Even the partners of large firms are not happy. They are stressed. Most of them are trying to keep away from audit signing.

Shrikrishna: It’s a tragedy. People want to run away from the core function of the profession.

Arjun: Audit signing is now always very risky. No one is sure what he has seen and not seen! A lot of fear and discomfort, despite such a high academic qualification.

Shrikrishna: And your knowledge becomes outdated so fast! You should collectively keep on expressing your concerns and making representations to the authorities, to the Council, write articles in the press and social media airing your difficulties. Make your voice heard! Groups like study circles can do that.

Arjun: I think, one more thing the study circles can do. Today, there are many management-sponsored frauds rampantly happening. CAs are being held responsible for not detecting those frauds. They are also made co-accused!

Shrikrishna: Yes, the dividing line between the principles of watchdog vs bloodhound is getting blurred. People and Regulators want you to be fraud detectors. And if you apply a few important SAs strictly, frauds can easily come to light, especially, third-party evidence.

Arjun: So, there could be discussions or presentations on frauds, forensic audit and the like. This could be for CAs as well as for audit staff. That will arouse interest in the minds of staff and articles.

Shrikrishna: Actually, there are many more things that can be done. We will discuss them some other time.

Arjun: I agree. I will tell our convener to act on this.

“OM Shanti”

This dialogue is a general discussion on how study circles can add value for the members instead of arranging only academic lectures.

Essay

Editor’s Note : Tarang 2K25 – the 17th Jal ErachDastur CA Students’ Annual Day was held on 22nd February, 2025. The said event included an essay competition and the winning essay titled “The psychology of money: How financial decision shapes our lives” was penned by Dhairya M. Thakkar. Below is the verbatim print of the said essay

It is rightly said that, “Money is just a paper, but is never found in dustbin.” In simple words, from a popper to a multi-billionaire, everyone needs money to fulfill their needs, followed by comforts & desires.

Let us assume that there are 2 friends, Alex & Brian, who both earn Rs 1 Lakh per month. However, inspite of the assumption that everything between the 2 friends is same, the only difference is their choice of to spend money they earn. Alex chooses to purchase a few gifts for his family, uses money with a free-hand, shops a lot & hardly saves. On the other hand, Brian uses a simple yet effective rule which he names as “40-30-20 Rule”, i.e.-

40% of his income – For all the necessities, accommodation, etc.

30% of his income – Investing in stock markets, SIPs, Bonds, etc.

20% of his income – For all the additional luxuries, comforts, etc.

And lastly, he keeps his 10% of his income in form of cash at home or bank so that it can be enchased in case of any emergency.

Now, who do think, 20 years down the line, will be better with finances, money management & financially sound. Of course, it has to be the man who since Day 1 had that discipline to keep his savings aside & invest it constantly (So, in our example, it’s Brian).

It is rightly said by Mr. Robert T. Kiyosaki (who is the author of one of the most famous self-help book Rich Dad, Poor Dad) that: “It is more important how much you save & not how much you earn, So, spend after you save & never save after you spend.”

So, now let us connect the dots of psychological decision & money. In one of the books, which is also called as, ‘Bible for Investors’ – The Intelligent Investor,it’s author Benjamin Graham wrote that money has more to do with discipline while saving or investing.

Thus, if a man is disciplined enough to manage to save a decided component of his income, then he will surely be in a position to invest it & garner money in forms of dividend, capital appreciation, interest, etc. whereas on the other hand, if a man fails to save money, then there would be negligible chances of him earning any returns because he could not accumulate capital in the first place.

In the very famous Marshmallow experiment, two kids were asked to sit alone in a room with one marshmallow in front of them. However, the challenge was that if a kid chooses to not eat it, then he will get 2 marshmallows, instead of 1. One of the kids chose to eat it right away whereas the other kid chose the path of delayed gratification & he got twice the returns.

After decades, it was evident that the kid who chose instant gratification, was suffering in his financial life, social life & had issues in almost all areas of life, whereas the kid who chose delayed gratification was financially independent, successful, had good social status & was respected in the society.

This simple experiment proved that life has pretty less to do with grades, percentages, etc. and has majorly to do with discipline & money is not an exception to it. As correctly said by Mr. Warren Buffet, “Making money multiply is like watching grass grow on field … It requires patience to be rich.”

So, towards the conclusion, financial decision is like sowing a bamboo tree, it will grow just 2 feet in first 5 years but once it shoots up, it results into growing 100 feet in next 2 years. So, money grows at its own pace & person who keeps on investing, gets rich, a bit later but at a larger scale.

Punishable Offenses & Arrests under GST

INTRODUCTION

Since the implementation of the Goods and Services Tax (GST) in India in July 2017, enforcement actions have led to numerous arrests for offenses such as significant tax evasion, fraudulent input tax credit claims, and issuance of fake invoices. Data submitted to the Supreme Court indicates that from July 2017 to March 2024, the number of arrests under the GST framework varied annually, with 3 arrests in 2017-18 and peaking at 460 in 2020-21. In Gujarat alone, central tax officers booked 12,803 GST evasion cases between 2021 and 2024, resulting in 101 arrests. While these enforcement measures aim to deter large-scale fraud, concerns are often raised about potential coercion, especially when recoveries are significantly lower than the detected amounts, highlighting the need for a balanced approach between strict enforcement and maintaining a business-friendly compliance environment. Businesses and impacted individuals are often forced to knock the judicial forums to seek redressal in such situations. In a recent decision (Radhika Agarwal vs. UOI [(2025) 27 Centax 425 (S.C.)]), the Supreme Court has elaborately dealt with the constitutional validity of the provisions concerning power to arrest under the Customs and Goods and Services Tax (GST) law. This article analyses the provisions of arrest under the GST Law and the observations of the Supreme Court in this regard.

CONSTITUTIONAL VALIDITY

The Supreme Court has upheld the constitutional validity of the arrest provisions in Radhika Agarwal on the premise that the parliament, having  powers to make laws relating to levy & collection of GST, as a necessary corollary, has powers to  enact provisions for tax evasion in the form of  powers to summon, arrest and prosecute, which are ancillary and incidental to the power to levy and collect GST.

STATUTORY PROVISIONS RELATING TO ARRESTS

Section 69 of the CGST Act, 2017 deals with the powers to arrest. The relevant provisions are reproduced below:

(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

A plain reading of the above provisions shows that the provisions of arrest can be invoked only in the following cases:

a) The authorization to arrest must be granted by the Commissioner.

b) There must be reasons to believe that an offense is committed.

c) The offense must be a specified offense for which the powers to arrest can be invoked

REASONS TO BELIEVE

The essential condition for invoking the arrest provisions, as seen above, is that the Commissioner should have reasons to believe that an offense is committed. The phrase “reasons to believe” was recently analyzed by the Hon’ble Supreme Court in the case of Arvind Kejriwal vs. Directorate of Enforcement [(2025) 2 SCC 248] in the context of PMLA and applied on all fours to customs / GST matters in Radhika Agarwal’s case.

In Arvind Kejriwal’s case, the Hon’ble Supreme Court observes that the powers to arrest without a warrant is a drastic & extreme power. Therefore, the legislature had prescribed safeguards in the language of Section 19 (of PMLA) itself which act as exacting conditions as to how and when the power is exercisable. These safeguards include the requirement to have “material” in the possession of DoE, and based on such “material”, the authorised officer must form an opinion and record in writing their “reasons to believe” that the person arrested was “guilty” of an offence punishable under the PMLA. More importantly, the Supreme Court has held that not only the “grounds of arrest”, but the “reasons to believe” must also be furnished to the arrested persons. In simple words, the “reasons to believe” cannot be some concocted grounds at the whims and fancies of the authorities. It must be based on credible evidence admissible before the Court of law.

The court has held the above principles equally applicable to customs / GST matters. More leverage has been accorded to existence of evidence to form a reason to believe for the simple reason that the Commissioner is not only required to establish whether an offense is committed or not, he also needs to classify the offense as cognizable or non-cognizable. In fact, to do so, there must be a computation or explanation, based on various factors, such as goods seized. Such a level of detail is critical during judicial review of the exercise. This requirement is also laid down by the Board vide Instruction 2/2022-23 dated 17th August, 2022 based on the decision in Siddharth vs. State of UP [(2022) 1 SCC 676] wherein para 3 lays down the specific parameters for its’ Officers:

3.2 Since arrest impinges on the personal liberty of an individual, the power to arrest must be exercised carefully. The arrest should not be made in routine and mechanical manner. Even if all the legal conditions precedent to arrest mentioned in Section 132 of the CGST Act, 2017 are fulfilled, that will not, ipso facto, mean that an arrest must be made. Once the legal ingredients of the offence are made out, the Commissioner or the competent authority must then determine if the answer to any or some of the following questions is in the affirmative:

3.2.1 Whether the person was concerned in the non-bailable offence or credible information has been received, or a reasonable suspicion exists, of his having been so concerned?

3.2.2 Whether arrest is necessary to ensure proper investigation of the offence?
3.2.3 Whether the person, if not restricted, is likely to tamper the course of further investigation or is likely to tamper with evidence or intimidate or influence witnesses?

3.2.4 Whether person is mastermind or key operator effecting proxy / benami transaction in the name of dummy GSTIN or non-existent persons, etc. for passing fraudulent input tax credit etc.?

3.2.5 Unless such person is arrested, his presence before investigating officer cannot be ensured.

3.3 Approval to arrest should be granted only where the intent to evade tax or commit acts leading to availment or utilization of wrongful Input Tax Credit or fraudulent refund of tax or failure to pay amount collected as tax as specified in sub-section (1) of Section 132 of the CGST Act 2017, is evident and element of mens rea / guilty mind is palpable.

3.4 Thus, the relevant factors before deciding to arrest a person, apart from fulfillment of the legal requirements, must be that the need to ensure proper investigation and prevent the possibility of tampering with evidence or intimidating or influencing witnesses exists.

3.5 Arrest should, however, not be resorted to in cases of technical nature i.e. where the demand of tax is based on a difference of opinion regarding interpretation of Law. The prevalent practice of assessment could also be one of the determining factors while ascribing intention to evade tax to the alleged offender. Other factors influencing the decision to arrest could be if the alleged offender is co-operating in the investigation, viz. compliance to summons, furnishing of documents called for, not giving evasive replies, voluntary payment of tax etc.

The Supreme Court in Radhika Agarwal’s case reiterates the above requirements and holds that department’s authority to arrest hinges on satisfying these statutory thresholds (para 44). Infact, it is held that the “reasons to believe” can be subject to judicial review as arrest often involves contestation between the fundamental right to life and liberty of individuals against the public purpose of punishing the guilty. However, it has held that it cannot amount to a review on merits. Such an exercise, in all cases, shall be restricted to the review of material in possession that forms the basis for reasons to believe.

In Dharmendra Agarwal vs. UOI [[2025] 170 taxmann.com 558 (Gauhati)], the non-determination of liability by the respondent authorities before executing the arrest was one of the reasons for the grant of bail. In KshitijGhildiyal vs. DGGI [[2024] 169 taxmann.com 446 (Delhi)], bail was granted since the grounds for arrest were not provided while making the arrest. Post the decision in Kshitij Ghildiyal, the CBIC issued instruction 1/2025-GST dated 13th January, 2025 making it mandatory for the arresting officer to provide the grounds of arrest.

PUNISHABLE OFFENSES

Section 69 requires that the Commissioner must have reasons to believe that an offense is committed. While the statute does not define the term “offense”, section 3(38) of the General Clauses Act, 1897 defines it to mean any act or omission made punishable by any law for the time being in force. Such acts, which amount to an offense are covered u/s 132 of the CGST Act, 2017.

A perusal of the first limb of section 132 (1) brings out an important distinction when compared with section 69. It reads as follows:

(1) [Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely:—

The distinction is vis-à-vis the applicability of the section. Section 69 applies to an offense committed by a person, while section 132 applies to a person committing, or causing to commit and retain the benefits arising out of the listed offenses. In other words, only a person who commits an offense can be arrested u/s 69 and not the person causing the offense to be committed, i.e., an auxiliary to a crime.

The next question that arises is the interpretation of applicability of section 132(1). The above extracts of section 132(1) can be interpreted in two different ways:

While the first interpretation substantially restricts the applicability of section 132, it may not stand judicial scrutiny. The importance of punctuation marks in interpreting statutes was recently examined by the Hon’ble Supreme Court in ShapoorjiPallonji& Company Private Limited [(2023) 11 Centax 180 (S.C.)] as follows:

27. In the present case, the use of a semicolon is not a trivial matter but a deliberate inclusion with a clear intention to differentiate it from sub-clause (ii). Further, it can be observed upon a plain and literal reading of clause 2(s) that while there is a semicolon after sub-clause (i), sub-clause (ii) closes with a comma. This essentially supports the only possible construction that the use of a comma after sub-clause (ii) relates it with the long line provided after that and, by no stretch of imagination, the application of the long line can be extended to sub-clause (i), the scope of which ends with the semicolon. We are, therefore, of the opinion that the long line of clause 2(s) governs only sub-clause (ii) and not sub-clause (i) because of the simple reason that the introduction of semicolon after sub-clause (i), followed by the word “or”, has established it as an independent category, thereby making it distinct from sub-clause (ii). If the author wanted both these parts to be read together, there is no plausible reason as to why it did not use the word “and” and without the punctuation semicolon. While the Clarification Notification introduced an amended version of clause 2(s), the whole canvas was open for the author to define “governmental authority” whichever way it wished; however, “governmental authority” was re-defined with a purpose to make the clause workable in contra-distinction to the earlier definition. Therefore, we cannot overstep and interpret “or” as “and” so as to allow the alternative outlined in clause 2(s) to vanish.

Therefore, the second interpretation seems more plausible. This takes us to the question of the difference between “commit” & “causes to commit”. The term “commit” refers to the person who has committed the offense while “causes to commit” refers to the person who influences or motivates the person committing the offense. As such, a person who supports / sponsors such offenses though does not commit them, will be equally liable. However, the onus to prove that the offense was caused by such a person will be with the Department. It would also be necessary for the Department to demonstrate that the person causing the offense also retains the benefits derived from the offense so caused.

Section 132 lists the following acts as punishable offenses, providing for arrest and imposition of fines.

  •  Supplying any goods or services without the issuance of any invoice, with an intention to evade tax [132(1)(a)]

– The phrase is self-explanatory and is intended to cover situations of clandestine removal of goods, under-reporting of services, etc. it may be noted that the situation covered here deals with supply of goods without issuance of invoice and is not intended to cover situations of interpretation relating to classification, valuation, applicability of tax rate or exemption notification, etc.

– Further, for this clause to trigger, the Commissioner must establish “intent to evade tax”. The ‘intention to evade’ assumes some positive act on the part of the alleged person. It is a settled law that the burden to prove the allegation shall be on the accuser, i.e., the Department.

  •  Issuing any invoice or bill without supply of goods or services or both leading to wrongful availment or utilization of ITC or refund of tax [132(1)(b)]

– This clause refers to a situation where a supplier issues any invoice or bill without the supply of any goods or services, resulting in the wrong availment / utilization of ITC or refund. What is essential for this clause to trigger is that the invoice issued without any underlying supply shall lead to a wrong availment / utilisation of ITC or refund of the tax. If the recipient has not availed / utilized ITC or claimed a refund of such tax, the offense may not arise. Therefore, for the Commissioner to have a reason to believe such an offense is committed, there must exist evidence to that effect. In the absence of such evidence, an allegation under this clause may not survive. It may be noted that intention to evade tax is not a pre-condition for offense under this clause.

  •  Avails ITC using the invoice or bill referred to above or fraudulently avails ITC without any invoice or bill [132(1)(c)]

– This clause is linked with clause (b). While clause (b) is from the supplier’s perspective, this clause is from the recipient’s perspective and provides that when a person avails ITC on an invoice issued by the supplier without any underlying supply or avails ITC without any invoice or bill.

– Let us first look at an offense where ITC is claimed on the strength of an invoice without any underlying supply being received by the recipient. Generally, such offenses are detected based on the investigation undertaken at the suppliers’ end and notices are sent to all recipients of such supplier based on supplier’s statement. In such cases, based on such a statement, the Department proceeds with a preconceived notion that all supplies made by such suppliers are fake and therefore, the recipients have claimed wrong ITC. It is therefore imperative that in such cases, when the investigation starts, the recipient should make available all the evidence to justify the genuineness of the transactions, such as invoices, payment proofs, delivery challans, EWB, etc., The recipient should also invoke his right to cross-examine all such persons, whose statements are relied upon in such proceedings.

– The next situation covered under this clause is one where ITC is claimed without any invoice / bill. One of the conditions for claiming the ITC u/s 16 is that the recipient should have the tax invoice or prescribed document in his possession, which can be either the original copy or in the forms prescribed u/s 145 of the CGST Act, 2017. However, if any person claims ITC in contravention of this provision, an offense under this clause gets committed. The situation might change if the ITC claimed is already reversed, as the reversal of ITC amounts to non-taking of ITC in the first place, as held in Commissioner vs. Bombay Dyeing & Mfg. Co. Ltd. [2007 (215) E.L.T. 3 (S.C.)]

  •  Fails to pay the tax collected within three months from the date on which such payment becomes due [132(1)(d)]

– This clause refers to cases where a supplier collects GST but fails to deposit it with the Government. This can be either self-assessed liability (i.e., liability declared in GSTR-1 but not discharged) or liability not disclosed / discharged in return.

  •  Evades tax / fraudulently obtains refund by committing an offense not covered under (a) to (d) [132(1)(e)]

– This clause refers to a situation of tax evasion / fraudulent refunds (other than cases covered in (a) to (d)). Any instance of non-payment of tax/ fraudulent refund, which is not covered under clauses (a) to (d) may be covered under this clause. However, not all cases of non-payment/ erroneous refunds can be treated as tax evasion / fraudulent. In case of interpretation issues, bona-fide beliefs, etc. where there is no intention to evade / fraud the Government, the said sub-clause may not apply.

  •  Falsifies or substitutes financial records / produces fake accounts or documents or furnishes false information with an intention to evade tax [132(1)(f)]

– This clause specifically covers cases where a person falsifies / substitutes financial records / produces fake accounts or documents or false information with an intention to evade tax. The documentary evidence to support an allegation that a person has committed this act with an intention to evade tax must exist beforehand.

  •  Obstructs or prevents any officer in the discharge of his duties under this Act [132(1) (g)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023.

  •  Acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation [132(1)(h)]

– This clause refers to cases where goods are liable to be confiscated u/s 130 of the CGST Act, 2017 which is generally triggered in the following cases:

(i) Supply or receipt of any goods in contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(ii) Non-accounting of any goods on which he is liable to pay tax under this Act; or

(iii) Supply of goods liable to tax under this Act without having applied for registration; or

(iv) Contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of tax; or

(v) Use of any conveyance as a means of transport for carriage of goods in contravention of the provisions of this Act or the rules made thereunder unless the owner of the conveyance proves that it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance.

– In addition to the above, this clause shall also apply to service providers providing warehousing services if it is found that they are storing goods that are liable to confiscation.

  •  Receives or is in any way concerned with the supply of, or in any other manner deals with, any services which he knows or has reasons to believe are in contravention of any provisions of this Act or rules made thereunder. [132(1)(i)]

– This clause refers to cases where a person either receives or supplies any service in contravention of any provisions of this Act or rules. An example of contravention would be when a person, though liable to register under GST, does not register and continues to supply service. Such a supply would be in contravention of the provisions of section 22.

  •  Tampers with or destroys any material evidence or documents [132(1)(j)] – omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Failure to supply any information which he is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information [132 (1)(k)]– omitted w.e.f 1st October, 2023

– As a trade-friendly measure, the above offense has been decriminalized w.e.f 1st October, 2023

  •  Attempts to commit, or abet the commission of any of the offenses mentioned above [[132 (1)(l)].

– This clause covers cases where a person aids or abets in the commission of any offense specified in section 132. In one of the cases, a tax practitioner was arrested alleging he had facilitated registration based on fake & vague documents for evading GST, thus abetting the commission of an offense. (Satya Prakash Singh vs. State of Jharkhand [2025] 170 taxmann.com 684 (Jharkhand)].

A perusal of section 132 makes it clear that all cases of non-payment of tax / short-payment of tax/ wrong availment or utilization of ITC do not trigger the arrest provisions. Only when an offense specified under specific clauses and exceeding specified monetary limit is committed can a person be arrested. Therefore, genuine cases involving interpretation issues, such as rate classification, valuation, exemption eligibility, ITC eligibility, etc. cannot be covered under the offenses prescribed u/s 132 & in such cases, arrest provisions cannot be invoked. This shows that cases involving interpretation issues are given more flexibility and such cases cannot be treated as a punishable offense. This has also been clarified by instruction 2/2022-23-GST dated 17th August, 2022.

PUNISHMENTS

The punishment for the above offenses, based on the tax quantum involved, is prescribed u/s 132(1), as follows:

Section 132(2) further provides that a repeat offender shall be liable to imprisonment for a term that may extend up to 5 years with a fine for each subsequent offense. However, no person shall be prosecuted without the previous sanction of the Commissioner [section 132 (6)].

It is interesting to note that the punishment is prescribed only for offenses specified in clauses (b), (c), (e), and (f). Before 1st October, 2023, sub clause (iii) referred to any other offense, which has been now substituted with an offense under clause (b). Therefore, while the prescribed acts are offenses, no punishment is prescribed for them. Therefore, to that extent, even if the person commits the said acts, he cannot be punished, since no such punishment is prescribed under the law. In this regard, one may refer to Vijay Singh vs. State of UP [2012 (5) SCC 242]:

16. Undoubtedly, in a civilized society governed by rule of law, the punishment not prescribed under the statutory rules cannot be imposed. Principle enshrined in Criminal Jurisprudence to this effect is prescribed in legal maxim nullapoena sine lege which means that a person should not be made to suffer penalty except for a clear breach of existing law. In S. Khushboo v. Kanniammal&Anr., AIR 2010 SC 3196, this Court has held that a person cannot be tried for an alleged offence unless the Legislature has made it punishable by law and it falls within the offence as defined under Sections 40, 41 and 42 of the Indian Penal Code, 1860, Section 2(n) of Code of Criminal Procedure 1973, or Section 3(38) of the General Clauses Act, 1897. The same analogy can be drawn in the instant case though the matter is not criminal in nature.

OFFENSES – COGNIZABLE & NON-COGNIZABLE

In general, all the offenses are declared as non-cognizable &bailable offenses [section 132 (4)] except for the offenses covered under clause (a) to (d) which are punishable under (i) above [section 132(5)].

The Code of Criminal Procedure, 1973 classifies an offense as either “cognizable” or “non-cognizable”. The distinction between cognizable and non-cognizable offenses is in the manner of arrest. An arrest for a cognizable offense can be made without an arrest, i.e., a person can be arrested without a warrant. In contrast, the arrest in case of a non-cognizable offense can be made only based on an arrest warrant. The classification of an offense into cognizable & non-cognizable depends on the gravity of the offense and is provided u/s 132.

SPECIFIED OFFENSES – WHERE A PERSON CAN BE ARRESTED U/S 69

The third limb of section 69, to invoke the arrest provisions, is that the Commissioner should have reasons to believe that a specified offense is committed. While section 132 provides a list of acts as offenses, the arrest provisions can be invoked only in case of specified offenses, as follows:

a) An offense under clauses (a) to (d) of section 132(1) should have been committed.

b) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹5 crores, making the offense cognizable & non-bailable.
c) The offense must be punishable under sub-clause (i) section 132, i.e., the tax amount involved exceeds ₹2.50 crores but is less than ₹5 crores, making the offense non-cognizable &bailable.

In other words, the powers to arrest by the Commissioner can be exercised in cases of specified cognizable & non-cognizable offenses. However, when a person is authorized for a non-cognizable and therefore, a bailable offense based on the authorization issued by the Commissioner, such person arrested shall be admitted in bail, or in the default of bail, forwarded to the custody of the Magistrate until such time that a bail is furnished.

EXECUTING THE ARREST

Section 4(2) of the IPC, 1860 provides that the offenses covered under laws other than IPC, 1860 shall be investigated, inquired, tried, or otherwise dealt with under the CrPC, 1973 (“code”). Section 5 carves out a savings clause to clarify that the Code shall not affect any special / local law, or any special jurisdiction or powers conferred or special procedure prescribed unless there is a specific provision prescribed. In other words, the provisions of the Code would apply to the extent that there is no contrary provision in the special act or any special provision excluding the jurisdiction and applicability of the Code. In the context of GST, in Radhika Agarwal, it has been held that the provisions of the Code shall equally apply to customs’ offense and by extension, to GST as well.

As stated above, section 69 provides for cases where the Commissioner may authorize any officer of central tax to arrest a person. However, for other offenses, the GST law is silent. Hence, in such cases, the procedure prescribed under the Code shall apply. This takes us to the Code. Chapter V thereof deals with the arrest of persons. A perusal of Chapter V provides for arrest by a police officer. The question that arises is whether the GST officer is a police officer. This issue has been examined by Courts on multiple occasions1 and recently summarised in Radhika Agarwal wherein it has been held that GST officers are not police officers.

1 State of Punjab vs. Barkat Ram, (1962) 3 SCR 338, Ramesh Chandra Mehta vs.
 State of West Bengal, 
(1969) 2 SCR 461, Illias v. Collector of Customs (1969) 2 SCR 613, 
Tofan Singh vs. State of Tamil Nadu [(2s021) 4 SCC 1]

Therefore, while in cases covered u/s 69, the GST officers can execute the arrest, for all other offenses, the arrest can be executed only by a police officer. In such cases, the arrest can be executed by a police officer based on a complaint filed by the GST Officer (section 41 (b) of the code). However, as provided in section 132 (6), no person shall be prosecuted without the prior sanction of the Commissioner. Therefore, even for prosecution in other offenses, a prior sanction of the Commissioner is mandatory.

Once a person is arrested, either u/s 69 by a GST officer or a police officer, the arrested person shall be presented before a Magistrate within 24 hours of the arrest, excluding the traveling time between the place of arrest & the Magistrate’s Court. Even in case of arrests u/s 69, it is incumbent upon the arresting officer to admit the arrested person to bail, or in default of bail, forward it to the custody of the magistrate.

When a person is presented before the Magistrates’ Court, the Magistrate shall, if the investigation is not completed within 24 hours of the arrest and feels that further investigation is required, order that such arrested person must remain in police custody for not more than 15 days. However, in case of GST offenses, custody may be granted to the GST officers, as held in Directorate of Enforcement vs. Deepak Mahajan [(1994) 3 SCC 440].

A person arrested for offenses u/s 132 shall have all the rights, whether arrested u/s 69 by a GST officer / by a police office under Chapter V of the Code, such as:

a) The right to meet an advocate of his choice during the investigation, but not throughout the investigation and have such advocate present within a visual distance but not audible distance during the investigation (section 41D of the code).

b) The right to give information regarding such arrest and place where the arrested person is being held to any of his friends, relatives, or other person as may be disclosed or nominated by the arrested person (section 50A of the code)

c) The guidelines laid down in D K Basu vs. State of West Bengal [(1997) 1 SCC 416] must be stringently followed.

Similarly, the duties and obligations cast on a police officer under the Code shall equally apply to the GST officers. This includes the obligation to maintain a diary of investigation proceedings, taking reasonable care of the arrested persons’ health and safety, etc.,

Double jeopardy – can a person be subjected to simultaneous proceedings u/s 73/74 as well as section 69?

As stated above, there can be instances where proceedings u/s 73 or 74 have already been initiated. The question that arises is whether in such cases, proceedings u/s 69 alleging offenses u/s 132 can be initiated. In other words, can there be simultaneous civil & criminal proceedings for the same offense or not?

This issue has been dealt with in the case of Maqbool Hussain vs. State of Bombay [1983 (13) E.L.T. 1284 (S.C.)] wherein the Constitutional Bench held that sea customs authorities are not judicial tribunals. Therefore, proceedings by sea customs authorities do not constitute prosecution and the Orders passed by them did not constitute punishment. Therefore, separate criminal proceedings can be initiated against the accused for such offense and the same would not be hit by double jeopardy. This view was also followed by the Hon’ble Supreme Court in Leo Roy Frey vs. Superintendent [1983 (13) E.L.T. 1302 (S.C.)] and RadheshyamKejriwal [[2011 (266) ELT 294 (SC)]]. One may also refer to instruction 4/2022-23 dated 1st September, 2022 which deals with this aspect of parallel criminal & adjudication proceedings.

In fact, relying on Makemytrip (India) Private Limited vs. UOI [2016 SCC OnLine Del 4951], one of the arguments raised in Radhika Agarwal was that prosecution can be done only after adjudication proceedings are completed. However, this argument has been rejected and it has been held that there could be cases where even without a formal order of assessment, the department / Revenue is certain that it is a case of offense under clauses (a) to (d) to sub-section (1) of Section 132 and the amount of tax evaded, etc. falls within clause (i) of sub-section (1) to Section 132 of the GST Acts with sufficient degree of certainty. In such cases, the Commissioner may authorise arrest when he is able to ascertain and record reasons to believe. This reiterates that there is no relationship between the adjudication proceedings or prosecution for offenses.

PRE-ARREST PROTECTION

Any person apprehending prosecution and arrest has a right to apply for anticipatory bail. In Radhika Agarwal’s case, it has been held as follows:

70. We also wish to clarify that the power to grant anticipatory bail arises when there is apprehension of arrest. This power, vested in the courts under the Code, affirms the right to life and liberty under Article 21 of the Constitution to protect persons from being arrested. Thus, in Gurbaksh Singh Sibbia (supra), this Court had held that when a person complains of apprehension of arrest and approaches for an order of protection, such application when based upon facts which are not vague or general allegations, should be considered by the court to evaluate the threat of apprehension and its gravity or seriousness. In appropriate cases, application for anticipatory bail can be allowed, which may also be conditional. It is not essential that the application for anticipatory bail should be moved only after an FIR is filed, as long as facts are clear and there is a reasonable basis for apprehending arrest. This principle was confirmed recently by a Constitution Bench of Five Judges of this Court in Sushila Aggarwal and others v. State (NCT of Delhi) and Another (2020) 5 SCC 1. Some decisions State of Gujarat v. ChoodamaniParmeshwaranIyer and Another, 2023 SCC OnLine SC 1043; Bharat Bhushan v. Director General of GST Intelligence, Nagpur Zonal Unit Through Its Investigating officer, SLP (Crl.) No. 8525/2024 of this Court in the context of GST Acts which are contrary to the aforesaid ratio should not be treated as binding.

POST-ARREST STEPS

Once a person is arrested, pending trial, he shall remain in custody unless granted bail. Chapter XXXIII of the Code deals with provisions relating to bail.

Section 436 of the code provides that a person arrested for a bailable offense shall be released on bail. Similarly, for non-bailable offenses, section 437 of the code provides that the bail may be granted subject to the exceptions provided therein (such as cases where the punishment for the alleged offense is death or life imprisonment, or a repeat offender). However, in any case, when a person undergoes detention for more than one-half of the maximum period of imprisonment specified for that offense, he shall be released by the Court on his bond with or without sureties (section 436A of the code).

In addition, there is a settled principle of law that bail is the norm, jail is an exception, which has been upheld for economic offenses (see Prem Prakash vs. UOI).

There are many reported cases where bail has been granted for non-bailable offenses also:

  •  In Ashutosh Garg vs. UOI [[2024] 164 taxmann.com 767 (SC)], the bail has been granted upon having served a substantial time in detention, pending trial.
  •  In yet another case2, the bail was granted since the co-accused was granted bail.
  •  In DGGI vs. Harsh Vinodbhai Patel [Director General of Goods and Service Tax Intelligence, Ahmedabad vs. Harsh Vinodbhai Patel [2024] 164 taxmann.com 410 (SC)], bail was granted since all documentary evidences and other material were seized by the investigation agency, the presence of accused was not necessary for the investigation and trial was unlikely to commence and conclude in near future. Similar view was followed in the case of Ratnambar Kaushik vs. UOI [[2022] 145 taxmann.com 296 (SC)].
  •  In Natwar Kumar Jalan vs. UOI [[2025] 171 taxmann.com 112 (Gauhati)], one of the reasons for a grant of bail was that the accused was not a flight risk.
2 Ronaldo Earnest Ignatio vs. State of Odisha [[2024] 167 taxmann.com 418 (Orissa)]

CONCLUSIONS

The Supreme Court, while upholding the legislative competence of the Parliament to incorporate criminal provisions under GST law, has delivered a balanced judgment reinforcing constitutional safeguards to protect personal liberty. The decision in Radhika Agarwal also imposes a glaring requirement on the tax officers to invoke the arrest provisions only based on substantial evidence, which can be subjected to judicial review and reiterates the rights of the arrested persons, by following the guidelines laid down in D K Basu, Deepak Mahajan, etc, This shows that Courts shall, as they always have, continue to maintain the balance between the curtailment of tax evasion and the liberty of the individual. On the other hand, taxpayers will have to be equivalently vigilant with their tax practices, i.e., filing of returns, responding to department notices and submissions before the department, and so on, and in case of impending prosecution and / or arrests, proactively take preventive steps.

Part A | Company Law

1. SMD STRATEGIC REAL ESTATE LIMITED & ORS.

Before the Regional Director, Western Region

Appeal Order No 454(5)/SMD Strategic/92/AB2222617/2024-25/962

Date of Order: 20th February, 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 92 of CA 2013

FACTS

The Registrar of Companies, Mumbai (ROC Mumbai) vide adjudication order dated 26th December, 2023 held the Company and its Officers / Directors, have defaulted and liable for penalty under Section 92(5) of the Act. The said default pertained to the period from 30th November, 2019 to 29th December, 2019 for not filing Annual Return for the Financial Year 2018-19 within sixty days from the date of Annual General Meeting. Adjudicating officer accordingly imposed a penalty of ₹53,000/- each on company and defaulting officer aggregating to ₹1,06,000/.

The Appellants filed appeal against the said order on 20th December, 2024. As per the provisions of Section 454(6) of CA 2013, every appeal u/s 454(5) is required to be filed within 60 days from the date of the receipt of the order. Thus, it was noticed that appeal was not filed within 60 days from the date of receipt of the order.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF

Section 454(6):

Every appeal under sub section (5) shall be fled to within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person and shall be in such form, manner and be accompanied by such fees as may be prescribed.

Rule 4(1) of the Companies (Adjudication of Penalties) Rules, 2014:

Every appeal against the order of the adjudicating officer shall be filed in writing with the Regional Director having jurisdiction in the matter within a period of sixty days from the date of receipt of the order of adjudicating officer by the aggrieved party, in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of the order against which the appeal is sought:

FINDINGS AND ORDER

At the time of personal hearing, with regard to the delay in filing appeal, authorised representative stated that the said Adjudication Order was not received by the appellant.

Taking into consideration, submissions made by the Appellants in their application as well as oral submissions of authorized representative during the hearing, the Regional Director held as under;

“I am of the considered view that the appeal is barred by limitation and hence, is rejected without going in the merit of the matter as the appeal was filed beyond 60 days after the receipt of Adjudication Order dated 26th December, 2023. Accordingly, the Adjudication Order dated 26th December, 2023 passed by ROC, Mumbai is ‘CONFIRMED’ under Section 454(7) of the Act.

Note:We have been covering the orders of the Adjudicating Officers in the past. We thought it appropriate to cover the Appellate orders too. Sections 454(5) and 454(6) of CA 2013, provide that appeal against the order may be filed with Regional Director within a period of 60 days from the date of the receipt of the order setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.

The purpose of such coverage is to have a 360-degree view of the approach of the MCA in handling defaults which are occasionally very trivial in nature too.

2. Tejas Cargo India Limited

Registrar of Companies, Delhi

Adjudication Order ID PO/ADJ/01-2025/DL/00052

Date of Order: 15th January, 2025

Adjudication order for violation of section 56(4) of the Companies Act 2013 (CA 2013): Failure to issue share certificates to subscribers to the memorandum within 2 months of incorporation

FACTS

  •  The company had submitted an application in Form GNL – 1 for adjudication of violation of the provisions of section 56(4)(a) of CA 2013.
  •  As per the said application, company was incorporated on 26th March, 2021 and as per the provisions of Section 56(4)(a) of CA 2013, the company was required to issue share certificates to the subscribers of memorandum within 2 months from the date of incorporation i.e. on or before 25th May, 2021.

The company in its application had further stated that the share certificates were issued on 7th August, 2021 and hence there was a delay of 74 days in issuance of share certificates to the subscribers of the memorandum of association (MoA). The company had further stated that delay occurred since there was a delay in receipt of share application money.

  •  A show cause was issued to the company and company in reply prayed adjudication of the matter on compassionate ground as the default occurred due to an oversight in procedural compliance.

EXTRACT OF THE RELATED PROVISIONS OF THE ACT IN BRIEF

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that the company failed to issue share certificate/s to both the subscribers to the MoA within 2 months of incorporation which was not in compliance with the provisions of section 56(4)(a) of CA 2013. The submission of the company for remission in the penalty cannot be considered as the relevant provisions of the act provides for a fixed penalty. The subject company is not a small company as defined u/s 2(85) of CA 2013.

Hence, adjudication officer imposed a penalty of ₹50,000 each on the defaulting company and subscribers to the MoA.

3. In the Matter of ANHEUSER BUSCH INVBEV INDIA LIMITED

Registrar of Companies, Mumbai

Adjudication Order No: ROC (M)/Sec 118/Anneuser/ADJ-ORDER2023-24/2965 to 2974.

Date of Order: 24th December, 2024

Adjudication Order passed imposing penalty under Section 454(3) for not complying with all the provisions of “Secretarial Standards” specified by the Institute of Company Secretaries of India with respect to General and Board Meetings which amount to violation of provisions of Section 118(10) of the Companies Act, 2013

FACTS

M/s ABNIIL filed suo-moto application dated 24.08.2024 for adjudication of offence before the Office of Registrar of Companies, Mumbai i.e. Adjudication officer (AO) under section 454 of the Companies Act, 2013 towards violation of Section 118(10) of the Companies Act, 2013.

M/s ABNIIL in its application stated that the provision of Sec 118(10) of the Companies Act,2013 which states that ” Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

However, M/s ABNIIL could not comply with all the provisions of Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India (ICSI) with respect to Board meetings for financial years 2020-21, 2021-22 and 2022-23.

Further, it was stated that non-compliance with respect to the Secretarial Standards mainly pertains to failure to furnish the following:-

i. Proof of sending of Notice and Agenda for the Board Meetings.

ii. Proof of sending of Draft Minutes and Copy of signed and certified minutes.

iii. Proof of circulation of some Board Resolutions passed by circulation along with their approval.

iv. Proof of sending Notice of General Meeting to the Directors and Auditors of the Company.

Thus, M/s ABNIIL had admitted that it was not in proper compliance with provisions of Section 118(10) of the Act and Secretarial Standards specified by (ICSI) and therefore, M/s ABNIIL and its officers in default are liable for penal action under Section 118 (11) of the Companies Act, 2013.

PROVISIONS

Section 118

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot

(1) Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

…

(11) if any default is made in complying total the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

ORDER

AO, after considering the facts and circumstances of the case and after taking into account the factors above, and submissions made by M/s ABNIIL in its application, imposed a penalty of ₹25,000/- (Rupees Twenty-Five Thousand only) on the Company for each financial year and a penalty of ₹5,000/- (Rupees Five Thousand only) each on officer in default for respective financial year for failure towards compliance with the provisions of Sec. 118(10) and Secretarial standards specified by the (ICSI) with respect to Board meetings for FY2020-21, 2021-22, 2022-23.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s ABNIIL and its officers in default.

Do Provisions Of S.68 Of Income-Tax Act, 1961 Apply To Donations Received By A Charitable Trust?

ISSUE FOR CONSIDERATION

Charitable or religious trusts are generally funded by donations (voluntary contributions) received from donors. Such donations are taxable as income (subject to exemption in respect of application and accumulation), as they fall within the definition of income under s.2(24)(iia) of the Income Tax Act, 1961 (“the Act”), which reads as under:

“voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.”

Such donations are also regarded as income from property held for charitable or religious purposes by virtue of the provisions of section 12(1). Section 12(1) reads as under:

“Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.”

A charitable or religious trust registered under section 12A of the Act is entitled to exemption under section 11 in respect of its income from property held for charitable or religious purposes, which would include such donations, to the extent of such income applied, accumulated, etc. as provided in section 11. Therefore, such donations are income in the first place, and are thereafter entitled to exemption to the extent permitted by section 11.

Section 68 of the Act provides for taxation of unexplained cash credits. Section 68 provides as under:

“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”

Such unexplained cash credits are taxable at the rate of 60%, plus surcharge at the rate of 25% of such tax, plus education cess of 4% on the tax plus surcharge, i.e. at an effective tax rate of 78%.

An issue has arisen before the High Courts as to whether the provisions of section 68 apply to donations received by charitable trusts; in other words, whether donations received by a charitable trust, which may otherwise qualify for exemption, can be taxed as unexplained cash credits. While the Delhi, Allahabad and Karnataka High Courts have held that such donations received by a charitable trust cannot be brought to tax under section 68, the Punjab & Haryana High Court has held that such donations can be taxed under section 68.

KESHAV SOCIAL & CHARITABLE FOUNDATION’S CASE

The issue first came before the Delhi High Court in the case of DIT(E) vs. Keshav Social & Charitable Foundation 278 ITR 152.

In this case, during the relevant year, the assessee was a charitable trust registered under section 12A. It received donations amounting to ₹18,24,200. The assessee had spent more than 75% of the donations for charitable purposes.

During the course of assessment proceedings, the assessee was asked to furnish details of the donations, i.e. the names and addresses of the donors and the mode of receipt of donations. The assessee was unable to satisfactorily explain the donations. The assessing officer (AO) was of the view that the donations were perhaps fictitious donations, and that the assessee had tried to introduce unaccounted money into its books by way of donations. Therefore, the amount of ₹18,24,200 was treated as cash credit under section 68, and the benefit of exemption under section 11 was denied in respect of such donations.

In first appeal, the Commissioner (Appeals) was of the view that the AO was not justified in treating the donations received as income under section 68. He noted that the assessee had disclosed the donations as its income, and had spent 75% of the amount for charitable purposes. Therefore, in his view, the assessee had not committed any default. The Commissioner (Appeals) therefore directed the AO to allow exemption to the assessee under section 11, holding that the treatment of the donations of ₹18,24,200 as income under section 68 was incorrect.

In second appeal, the Tribunal was of the view that since more than 75% of the donations received by the assessee was spent on charitable purposes, the addition of ₹18,24,200 was not correct. The Tribunal accepted the argument of counsel for the assessee that once a donation was received, it was deemed to be received for a charitable purpose unless the donation was received towards the corpus of the trust.

Before the Delhi High Court, on behalf of the revenue, it was submitted that essentially what the assessee was trying to do was to launder its black money or unaccounted income by converting it into donations, and it should not be permitted to do so.

Referring to the decision of the Supreme Court in the case of S Rm M Ct M Tiruppani Trust 230 ITR 636, the High Court observed that every charitable or religious trust was entitled to exemption for income applied to its charitable or religious purposes in India. It noted that on the facts of the case before it, more than 75% of the donations for charitable purposes had been applied for its objects.

The Delhi High Court observed that to obtain the benefit of the exemption under section 11, the assessee was required to show that the donations were voluntary. The High Court further observed that the assessee had not only disclosed its donations, but had submitted a list of donors. According to the High Court, the fact that the complete list of donors was not filed or that the donors are not produced, did not necessarily lead to the inference that the assessee was trying to introduce unaccounted money by way of donation receipts. This was more particularly so in the facts of the case, where admittedly more than 75% of the donations were applied for charitable purposes.

The High Court held that section 68 had no application to the facts of the case, because the assessee had in fact disclosed the donations of ₹18,24,200 as its income. The High Court observed that it could not be disputed that all receipts, other than corpus donations, would be income in the hands of the assessee. Accordingly, there was full disclosure of income by the assessee, and also application of the donations for charitable purposes.

The High Court therefore upheld the decision of the Tribunal, holding that the provisions of section 68 would not apply to the donations received by the assessee trust.

This decision of the Delhi High Court was followed by the Delhi High Court in DIT v Hans Raja Samarak Society217 Taxman 114 (Del)(Mag), by the Allahabad High Court in the case of CIT v Uttaranchal Welfare Society 364 ITR 398, and by the Karnataka High Court in the cases of DIT(E) v. Sri BelimathaMahasamsthana Socio Cultural & Education Trust 336 ITR 694 and CIT v MBA Nahata Charitable Trust 364 ITR 693.

MAYOR FOUNDATION’S CASE

The issue came up again recently before the Punjab & Haryana High Court in the case of Mayor Foundation v CIT 170 taxmann.com 749.

In this case, the assessee was a company registered under section 25 of the Companies Act, 1956. It was also registered under section 12A and section 80G of the Act. It was running one educational institution, Mayor World School, at Jalandhar. The assessee had filed its income tax return, disclosing Nil income. During the year, it received corpus donations of ₹1,43,40,039.

During the course of assessment proceedings, the AO sought to verify the names and addresses of the donors. Notices were issued u/s 133(6) to some donors. 14 donors could be verified, and 7 were found not genuine as the donors’ identity was doubtful. A show cause notice was issued as to why such doubtful donations amounting to `53 lakh should not be taxed as anonymous donations under section 115BBC.

The assessee responded seeking more time to establish contact with such donors and obtain their due replies. None of the donors were produced before the AO. It was pointed out that such donations were received through bank accounts, and certain confirmations were received from 3 company donors.

The AO noticed the following in respect of these 3 companies:

  1.  In the case of all 3, first notices were first returned unserved. Responses were received to the second notices.
  2.  2 of the companies were located in West Bengal, and the replies were sent by post from Mumbai General Post Office.
  3.  2 of the companies were shown as struck-off in the ROC records, and 1 was reflected as dormant.
  4.  There seemed to be no working directors in all 3 companies.
  5.  The assessee had failed to produce any director or shareholder of all the 3 companies.

The AO therefore concluded that the assessee had received huge donations, the sources of income were not genuine, the companies were not working, and the genuineness, identity, sources and credit worthiness of these companies had not been proved. Besides addition of donations of ₹8,00,000,other donations of ₹40 lakh and ₹8 lakh were added as undisclosed cash credit under section 68, and tax was levied under section 115BBC and 115BBE.

In first appeal, the assessee submitted copies of income tax returns and proved the credit worthiness of 2 donees, who were NRIs, and who had given the rupee donations of ₹48 lakh. These additions of ₹48 lakh were deleted. The addition of donations of ₹8 lakh from the 3 corporate entities under section 68 was sustained in first and second appeals, on account of inability to prove any relationship between the donors and the donee, their whereabouts not being produced in the form of documents, and the companies having been struck off or being defunct.

The reasoning which prevailed with the Tribunal was that these companies had been struck-off the record of the Registrar of Companies, and therefore had to be treated as shell companies. Therefore, their identity was in question, the existence of the corporate body having been duly rejected by the Registrar of Companies. The existence of the donors itself was questioned, and the assessee was unable to produce any document in support of their action to restore the company before a judicial authority.

The questions of law raised before the High Court were:

“a. Whether the Income Tax Appellate Tribunal is justified in concurring with the findings of CIT(A) and in confirming the impugned income of ₹8,00,000 under the provisions of section 115BBC, section 68 read with section 115BBE of the Income Tax Act, 1961 being perverse and against the statutory provisions and as upheld in catena of judgments?

b. Whether the orders of the authorities below are illegal, erroneous, without jurisdiction and thus perverse?”

Before the Punjab & Haryana High Court, on behalf of the assessee, it was argued that there was sufficient material produced on record to show that the three companies existed and had been filing returns at the time of the corpus donations. Reliance was placed upon the documents in support of the publication that the amounts had been received by way of cheque. It was submitted that the companies were incorporated in 1992, and even if they were no longer registered at the time when the matter was inquired, there was no such reason why addition could have been made. It was submitted that the requisite communication had been made by the companies with the tax authorities, Ledger copy of the accounts and the income tax returns for the year and bank statements had been sent to the assessing officer. The three companies had acknowledged the donations that they had given.

The High Court observed that the companies at West Bengal had sought to give the details of the donations from Mumbai, and it was in such circumstances, that the AO came to the conclusion that the expression given was not bona fide. Opportunity was given to produce the directors, which was not done. It was due to this that the tax authorities had taken the view that the companies were no longer functional and not functioning and struck off by the Registrar of Companies. The High Court observed that nothing had been brought on record that these companies were actually functioning at the time of donations, and when they were struck off.

Under such circumstances, the High Court was of the opinion that the genuineness, identity and credit worthiness of these companies was rightly doubted by the AO, and under such circumstances, the additions had been made.

The High Court was therefore of the view that the question of law raised before it did not arise, keeping in view the facts and circumstances, as the appellant could not produce sufficient material before the authorities to dispel the suspicion which had been raised about the donations received from the companies which were not even based geographically close to the educational institution, and the reason to grant the donations were never properly explained.

OBSERVATIONS

It may be noted that in Mayor Foundation’s case (supra), neither before the Tribunal nor before the High Court were the decisions of other High Courts on the issue cited. Therefore, the Tribunal and the High Court merely decided the matter in that case on the basis of the facts before them, without really examining the legal issues involved in respect of the very applicability of section 68. Further, it seems that in that case, both section 115BBC as well as section 68 were invoked, which was patently incorrect, as the same income cannot be subjected to tax twice.

Section 68 seeks to bring to tax receipts which are not offered to tax as income, such as capital or loans received by a taxpayer. When the charitable trust has already included donations received as income in the first place, the question of applicability of section 68 should not arise.

Section 115BBC is a special provision introduced by the Finance Act 2006 with effect from AY 2007-08, to tax anonymous donations received by charitable trusts at the flat rate of 30%. The CBDT, vide Circular No. 14 of 2006 dated 28th December, 2006,has clarified that section 115BBC has been introduced” to prevent channelisation of unaccounted money to these institutions by way of anonymous donations”. An anonymous donation has been defined as a voluntary contribution where the recipient does not maintain details of the identity, indicating name and address of the donor. This is therefore a specific provision to tax donations received by charitable trusts where the donors are bogus entities. As opposed to this, the provisions of section 68 are general provisions to tax all types of cash credits which are unexplained, and apply to all types of assessees.

Section 115BBC is therefore a specific provision, while section 68 is a general provision. It is well-settled law that the specific provision of law would prevail over a general provision. Therefore, section 115BBC would prevail over the provisions of section 68 in the case of donations received by a charitable trust.

The Bombay High Court, in the recent case of Everest Education Society v ACIT 164 taxmann.com 744, while deciding a review petition against its order upholding treatment of donations as anonymous donations under section 115BBC, observed in paragraph 7 of the judgment that:

“Section 68 of the Act was not applicable since the applicant had disclosed the income from donation.”

Further, the Delhi High Court decision in Keshav Social and Charitable Foundation’s case (supra) has been upheld by the Supreme Court in a short decision disposing of the appeal, in the case reported as DIT(E) v Keshav Social and Charitable Foundation 394 ITR 496.

One aspect of the matter which also needs to be considered is that in Keshav Social & Charitable Foundation’s case, the donations were general donations, while in Mayor Foundation’s case, the donations were corpus donations. Would this make any difference to the aspect of applicability of the provisions of section 68?

This should really not make any difference on account of the following:

a. The provisions of section 115BBC apply equally to corpus donations as they do to general donations.

b. In the view of tax authorities, corpus donations are also income as defined in section 2(24)(iia) in the first place, and are thereafter exempt under section 11(1)(d) if the conditions specified therein are fulfilled.

c. In Uttaranchal Welfare Society’s case before the Allahabad High Court, the question before the High Court was in relation to taxability of corpus donations received under section 68. There also, the Allahabad High Court held that section 68 could not be applied to such corpus donations.

Therefore, the provisions of section 68 should not apply to donations received by registered charitable trusts (whether corpus or otherwise), and if at all, the provisions of section 115BBC may apply in such cases where details of the donor are lacking.

There Is Always A Door …

CA Girish Agrawal, a first-time author, embodies versatility. Besides being a Chartered Accountant, he was an avid footballer in his younger days, followed by being the President of the Leo Club in the mid-twenties and studying law in the mid-forties. He has handled the finance functions in an MNC and is currently an Income Tax Appellate Tribunal Member. I had the privilege of interacting twice with him, once professionally and secondly during the launch of the book.

The author initially indicates that the trigger for writing this book is to express his gratitude through leveraging his “word power” since his life has been extremely rewarding from his childhood in spite of experiencing three major near-death experiences (NDEs), which have made him cherish every moment of his life till date. The book goes on to reveal various facets of his personality in diverse roles ranging from academics, sports, leadership, social welfare and public events, professional pursuits, etc., with several achievements and failures on the way, including the NDEs indicated above; each of which has made him a complete person. He also expresses his gratitude to several persons starting with “My Master” my beloved Maharita, who he considers his biggest source of faith and strength, followed by “my Lord Krishna“, whose practised principles like unconditional love, joy, detached engagement, beauty, energy and enthusiasm, amongst others reverberating through Krishna consciousness intrinsically weaves through his life’s journey lived  so far with all its complexities. He goes on to add  that the book has also been motivated by his completing fifty years since his master says that “fifty is the new zero”.

The first and the longest chapter, titled “In Spite of…” narrates the first and by far the closest of NDEs in the form of a horrific road accident which resulted in severe damage to his spine and several other injuries. He then narrates his feelings and experiences, which transcended him from a chaotic state from the outside into an absolutely blissful, sacred and divine state from the inside for the next 60 hours till the successful completion of the surgery, which he refers to as the “point of reference” for the rest of his life. He goes on to compare time to a stationery rail track. In spite of the severe trauma involved, the author conveys that he has reached the most relaxed state with a feeling of freshness since his intentions were very clear to bounce back since he had to add much to life. The chapter is a lesson for all of us to always adopt a positive and never-say-die attitude, howsoever daunting the situation which ultimately helps one to come out as a winner. Another regular feature of the book is the poetic references, which describe various situations. He concludes the chapter with a very profound quote which reads as under to signify his transformation in life:

“Just when the caterpillar thought the world was over, it became a butterfly”

The remaining part of the book is weaved into a series of compact chapters which describe the various stages of his life and the lessons which he has learnt therefrom.

The next chapter, titled “The Inception”, covers his early school days and goes on to narrate his first NDE when he was hospitalised for kidney surgery, which resulted in life-threatening complications during recovery, which helped him very early in life to develop an understanding of the existential state of living in the form of being alone(where one dissolves into one’s self and goes inside) and being lonely (a feeling of lacking something). He goes on to state the various struggles encountered and how they were conquered through persistence and also several learnings.

The remaining part of the book narrates his life’s journey through various chapters (referred to in bold and italics), which touch upon the early influences and values which his paternal grandfather instilled, the spiritual discipline which kept on miraculously working in his life followed by his varied experiences through meeting various people from different walks and in different stages of life. He goes on to narrate how each of these helped “sowing the early seeds in life”, “exploring unchartered territories”, and “doing everything with devotion”. In the midst of various challenges and struggles, he does not forget to mention that he did “experience happiness” in several things like eating “Mishti Doi”, travelling for sports tournaments and studying with a group of friends for his exams, which helped him advance in his career and resulted in “unleashing his true potential“. In the midst of all this, he touches upon the last NDE during the second wave of COVID-19 19 which hit so hard that he had to be in the ICU, where he witnessed seven deaths around him and how he navigated the subsequent recovery phase with fortitude due to his experiences from the earlier NDEs which he refers to as ” I am having an affair with my life”. He wraps up his experiences by stating the effect of “music in his life” in the form of not only his love for music and his encounter with various legends and the immense source of inspiration it has been but also how it shaped his parenting abilities followed by the mantra of “giving and getting” which he refers to as a “win-win “solution wherein the act of giving is done without the willingness of the giver which can at best be termed as fulfilling his obligatory duty without expecting anything in return. The book concludes with a poem titled “Flowing like a Rive, Mantra of My Life…” which was penned by him during a flight from as indicated to me during the launching of his book.

Each of the chapters and sections provides the reader with a solid perspective on life in the form of perseverance, patience and positive thinking which can overcome even the mightiest of challenges and that one should never give up, which aptly sums up the title of the book.

It is interesting to note the author’s analysis and interpretation of each of the words of the title in a tabular form, which provides deep insights into his thinking process.

To conclude, the book sums up a basic philosophy that life needs to be lived to the fullest in the present, and every moment thereof needs to be cherished without carrying any baggage from the past nor thinking and worrying about the future.

Allied Laws

1. Sachin Jaiswal v. Hotel Alka Raje and Ors.

Special Leave Petition (Civil) No. 18717 of 2022

27 February, 2025

Partnership Firm — Contribution – Introduction of property into the firm – Stock/Asset of the firm – Perpetual Property of the firm – Transfer of property in the name of the Partnership Firm by way of a relinquishment deed is valid transfer. [S. 14, Partnership Act, 1932; Transfer of Property Act, 1882].

FACTS

One Mr. Bhairo Jaiswal (deceased) had purchased one plot in 1965. Thereafter, in 1971, the deceased entered into an oral partnership agreement with his brother Hanuman Jaiswal. The same was reduced to writing and ‘M/s. Hotel Alka Raje’ (Respondent No. 1/Partnership Firm) was formed in 1972 wherein, the deceased introduced the plot as part of the firm’s assets. The Partnership Firm subsequently constructed a building on the plot and began operating a hotel business. Due to old age, Mr. Bhairo Jaiswal decided to retire from the firm and, on 9th March, 1983, executed a relinquishment deed stating that the said plot was relinquished in favour of Respondent No. 1 (Partnership Firm) and that his legal heirs shall have no right, title and interest in the said plot. Mr Bhairo Jaiswal died on May 30, 2005. Thereafter, the Appellant (legal heir of Mr. Bhairo Jaiswal) filed a suit for declaration of title over the said plot. It was contended by the Appellant that the plot was purchased in the name of Bhairo Jaiswal. Further, a property cannot be transferred in the name of the Partnership Firm by way of a relinquishment deed. This was for the reason that as per the Transfer of Property Act, 1882, sale, mortgage, gift, and exchange are the only recognised modes of transfer. However, both the learned Trial Court and Hon’ble Allahabad High Court dismissed the suit of the Appellant.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the plot was introduced as the property of the Partnership Firm by Mr. Bhairo Jaiswal as his contribution to the Partnership Firm. Consequently, the plot became the property of the Partnership Firm and ceased to be the exclusive asset of Mr. Bhairo Jaiswal. Relying on its earlier order in the case of Addanki Narayanappa v. Bhaskara Krishnappa (1966 SCC OnLine SC 6) and Section 14 of the Partnership Act, 1932, the Hon’ble Court reiterated that any property introduced into the Partnership Firm as an asset or stock shall become a perpetual property of the Firm.

The petition was therefore, disallowed and the Order of the Hon’ble High Court was upheld.

2. S. Sasikala vs. The State of Tamil Nadu and Ors.

AIR 2025 (NOC) 154 (Mad)

23 May, 2024

Guardianship – Appointment – Unwell husband – Family unable to sustain – Only option to relive properties of the husband – Wife appointed legal guardian of the husband. [Art. 226, Constitution of India; S. 7, Guardian and Wards Act, 1890].

FACTS

A Writ Petition was filed before the Hon’ble Madras High Court (Single Judge Bench) by one Mrs. S. Sasikala seeking appointment as the guardian of her husband who was unwell and in a vegetative / comatose state. The Petitioner argued that the family was facing financial problems as hospital bills had escalated to several lakhs of rupees, leaving them with no option but to liquidate properties registered in her husband’s name. Therefore, she sought guardianship to facilitate the necessary sale and manage his assets in his best interest. The Hon’ble Court, however, dismissed the said appeal and asked the Petitioner to approach the civil court.

Aggrieved, an appeal was filed before the Division Bench of the Hon’ble Madras High Court.

HELD

The Hon’ble Division Bench, relying on the decision of the Hon’ble Kerala High Court in Shobha Balakrishnan & Anr. vs. State of Kerala [W.P. (C) No. 37278 of 2018], held that although Section 7 of the Guardian and Wards Act, 1890, only allows for the appointment of a legal guardian for minors, the High Court, under its powers conferred by Article 226 of the Constitution, can appoint a guardian in exceptional cases for an unwell person or someone in a comatose state.

The Petition was therefore allowed.

3. Trident Estate Private Limited v. The Office of Joint District Register and Ors.

AIR 2025 Bombay 59

23 October, 2024

Auction – Property – Sold to the highest bidder – Fair Market Value for determination stamp duty payable – Auction conducted and approved by the Hon’ble Supreme Court – Stamp duty authority cannot determine the value of the property – Bound to accept FMV at the price sold to the highest bidder by the Hon’ble Supreme Court. [S. 32A, 33, Maharashtra Stamps Act, 1958; Registration Act, 1908].

FACTS

The Petitioner had purchased a property through auction under the sale-cum-Monitoring Committee constituted by the Hon’ble Supreme Court for liquidation of assets of one Citrus Check Inn Limited and Royal Twinkle Star Club Limited. The Petitioner had emerged as the highest bidder for the said property at ₹ 2,51,00,000/-Accordingly, a sale certificate was issued to the Petitioner. Thereafter, the Petitioner approached the office of Joint District Registrar (Respondent No.1) for registration of the said property under the provisions of the Registration Act, 1908. The Petitioner paid five per cent stamp duty on the consideration price. Respondent No. 1, however, refused to register the property on the ground that the fair market value of the property was at Rs. 16,72,11,000/- and therefore, stamp duty was payable at the rate of five per cent on the fair market value and not consideration price. Accordingly, a demand of ₹83,60,550/- (on account of stamp duty deficit) and ₹23,41,000/- (towards penalty) was raised on the Petitioner.

Aggrieved, a Writ Petition was filed before the Hon’ble Bombay High Court.

HELD

The Hon’ble Bombay High Court observed that the auction was carried out by the Hon’ble Supreme Court (or at least under the aegis of the Hon’ble Court). Further, it was observed that the method followed by the Hon’ble Supreme Court is one of the most open and transparent forms of sale. Further, the auction-based sale involves careful deliberation and multiple steps, including the fixation of a minimum price, assessment of the property’s present value, and ensuring a transparent bidding process. Even then, the Hon’ble Supreme Court also have a right to cancel the entire bid if it is in their opinion, the process was tainted or the property was sold at a very low price. In the present case, the sale was approved by the Hon’ble Supreme Court. Therefore, when a sale is conducted by the Hon’ble Supreme Court, the stamp authority cannot sit on an appeal and proceed to determine the true market value of the property. Therefore, the demand and penalty were deleted.

The Petition was allowed.

4. Balakrishna G. and Ors v. Sub Registrar Jayanagar District (Kengeri), Bangalore and Ors.

AIR 2025 Karnataka 43

19 July, 2024

Auction of property – Sold to the highest bidder – Registration denied by Stamp Authority – Reason – ED directed Stamp Office not to register any sale without its permission – No authority with the ED to give direction to the Stamp authority office [S. 89(4), Registration Act, 1908; Prevention of Money Laundering Act, 2002; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002].

FACTS

The Petitioner had purchased a property through a public auction conducted by the Bank (Respondent No. 3) under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for liquidation of debt owed by one Acropetal Technologies Limited. Thereafter, the Petitioner approached the office of the Sub-Registrar (Respondent No. 1) for registration of the property on the strength of the sale certificate issued by the Bank (Respondent No. 3). However, Respondent No. 1 refused to register the said property on the ground that they had received one letter by the Enforcement Directorate (ED) (Respondent No. 2) directing the Sub-Registrar office not to register the said property without their permission.

Aggrieved, a Petition was filed before the Hon’ble Karnataka High Court (Bengaluru).

HELD

The Hon’ble Karnataka High Court after relying on a series of decisions held that the ED have no power under the provision of the Prevention of Money Laundering Act, 2002 (PMLA) to direct Respondent No. 1 to stop the registration of any property. Further, the Hon’ble Court also noted that the rights of a secured creditor under SARFAESI shall always prevail over the claim of ED under the PMLA Act. Further, the Hon’ble Court also observed that as per Section 89(4) of the Registration Act, 1908, it was incumbent upon Respondent No. 1 to register the property upon receipt of the sale certificate. Therefore, the Hon’ble Court directed Respondent No. 1 to register the said property in the name of the Petitioner.
The Petition was therefore allowed.

5. Palaniammal v. Thasi alias Sukkadan

AIR 2025 MADRAS 44

22 November, 2024

Settlement deed – Transfer of title and possession – Unilateral Cancellation deed executed – Challenged validity of Cancellation deed – Maintainability of suit – Suit did not seek declaration of title based on Settlement deed – Not required – Suit maintainable. [S. 31, 34, Specific Relief Act, 1963].

FACTS

A suit was filed for declaration of a ‘cancellation deed’ as null and void. A settlement deed was executed between the Plaintiffs (Appellants) and Defendants (Respondents) wherein, the title of the suit property was transferred over to the Plaintiff along with possession of the land. Thereafter, the Defendants cancelled the ‘settlement deed’ and unilaterally executed a ‘cancellation deed’ on various grounds. Therefore, a suit was filed for declaration of the ‘cancellation deed’ as null and void. However, it was contested by the Respondents, inter alia, that the suit was not maintainable since the Plaintiff had challenged only for declaration of the ‘cancellation deed’ as invalid without seeking any relief for declaration title based on the ‘settlement deed’..

HELD

The Hon’ble Madras High Court observed that the ‘settlement deed’ was mutually executed between the parties. Further, possession and title were given to the Plaintiff. The Hon’ble Court further noted that even after the execution of the unilateral ‘cancellation deed’, the Plaintiff were still in possession of the property. Therefore, the Hon’ble Court held that there was no need for the Plaintiff to seek relief for declaration of title based on the ‘settlement deed’. Therefore, the suit was maintainable.

The suit was therefore allowed.

From The President

Dear Members,

Here comes April! The Romans gave this month the Latin name Aprilis, but the derivation from traditional etymology is from the verb aperire, meaning ‘to open’, in allusion to its being the season when trees and flowers begin to ‘open’, the season of Spring in the northern hemisphere.

Closer home at Bharat, April also coincides with the pious month of Chaitra, signalling the start of the harvesting season as well as a new calendar year, i.e. Shak Samvat 1947.

Even closer in the financial sector, April marks the beginning of a new fiscal year for commercial entities. As the largest economy begins its financial year in April, entities in our nation use April to assess their performance from the previous fiscal year with the objective to establish performance metrics for the new fiscal year.

For Chartered Accountants, April signifies the commencement of the busier period of the year as we undertake our professional duties for the companies and clients we serve. As your partner in learning and professional development, your Society has been organizing numerous learning and development events and will continue to do so, aiming to enhance our members’ capabilities in managing their professional responsibilities.

In addition to organizing learning events, BCAS consistently publishes the BCA journal, self-paced e-courses, books, and thought mailers to enhance professional skills further. In April, 4 (four) publications are being released by your Society:

  1.  The BCA Referencer: As a leader in the Referencer format, the BCA Referencer, now in its 63rd year of continuous publication, is renowned for being a high-quality, practical professional resource that assists chartered accountants in improving their effectiveness with ease. The BCA Referencer, featuring three updated modules on Direct Tax, Indirect Tax, and the latest amendments, is now available for booking through the Society’s website. This comprehensive referencer for Chartered Accountants is the result of extensive efforts by over 20 compilers, 5 senior members, and 3 editors, and it deserves significant recognition for their dedication and hard work.
  2.  A Compilation of Thought Mailers: Over the years, BCAS members have consistently shared their insights on topics related to personal and emotional development with our community. We are pleased to announce that a valuable compilation of these thought mailers is now available for purchase as a hard-bound book. Secure your copy today to experience the enriching perspectives presented by multiple contributors in this unique collection. We extend our gratitude to all the authors who have contributed to these Thought Mailers over the years.
  3.  Laws & Business: The much-awaited 6th edition of the publication on “Laws & Business” is being released by your Society this month. This comprehensive work, authored by Dr. (CA) Anup P. Shah, spans nearly 1500 pages across 2 (two) volumes and demonstrates the author’s dedication and expertise. Dr. (CA) Anup P. Shah’s commitment to distilling complex information into accessible content will undoubtedly benefit professionals navigating these critical areas of law. The Society remains grateful for the author’s contribution to our profession. Through this publication, BCAS reaffirms its mission to equip readers with the knowledge required to stay compliant, make informed decisions, and navigate India’s legal landscape effectively.
  4.  Gita for Professionals: The 7th edition of Gita for Professionals, authored by CA Chetan Dalal, is one of the most widely distributed publications from BCAS. In an era of constant change and evolving professional demands, the timeless wisdom of the Bhagavad Gita provides invaluable guidance for navigating modern complexities. This book, now in its 7th edition, highlights the enduring significance of ancient knowledge in today’s world. Since its initial publication, it has successfully bridged profound spiritual teachings with the practical challenges of professional life. The Society extends its gratitude to CA Chetan Dalal for his dedication to sharing the timeless wisdom of the Gita through his insightful writing.

Over the years, the Society has expanded in size and reach, now addressing the needs of various constituents within the community. To remain relevant and provide value to all stakeholders, three distinct cohorts are taking shape at BCAS:

  1.  BCAS Youth: This cohort is designed for newly qualified Chartered Accountants. The objective of the BCAS Youth cohort is to organize events and initiatives that meet the needs of young Chartered Accountants. One such initiative of CAMBA: A certified Management Program for CAs, is being held on the 11th, 12th, and 13th April, 2025 in three different batches to help Chartered Accountants enhance their management skills.
  2. Women @ BCAS: The progress of our profession and nation relies significantly on the support and strength of our women members. We are fortunate to be in a profession where the representation of women is increasing, and at BCAS, we are committed to advancing this cause. On 24th March, 2025, BCAS commemorated International Women’s Day by celebrating strength, success, and empowerment through an event that showcased the life stories of 3 (three) accomplished women role models.
  3. BCAS Nxt: The BCAS Nxt cohort is an ‘of-for-by’ student collective incubated within the Human Resources Development committee towards learning, networking and growth of budding students of Chartered Accountancy. Fresh on the heels of a remarkably successful ‘Tarang 2025’, these young Turks have now progressed to hosting Bootcamps on topics of importance and learning for CA students. A power-packed session on Bank Branch Audit Bootcamp from an article’s perspective was held on 22nd March, 2025, led by student volunteers.

These dedicated cohorts will continue to strengthen their influence in the coming years, addressing the specific needs of their respective constituencies more effectively.

Separately, your Society had the pleasure of hosting and felicitating President CA Charanjot Singh Nanda, President of The Institute of Chartered Accountants of India (‘ICAI’), Prasanna Kumar D, Vice President of ICAI and members of the central council of ICAI for an interactive meeting with the BCAS Core Group. Year-after-year the BCAS Core Group interactive meeting with the ICAI torchbearers has been a platform for sharing thoughts, suggestions and exchange of ideas for the betterment of our profession. The BCAS community engages closely with and complements the activities and initiatives of ICAI, as both institutions relentlessly work towards the professional development of Chartered Accountants.

Back to April, don’t forget to renew your BCAS memberships for this new financial year as we plan for a professionally enriching new financial year ahead. April is also a month wherein our beautiful nation celebrates diversity through our diverse festivals. Let us celebrate diversity and amplify this unique strength of our nation, leading our countrymen to better, happier and purposeful lives. Festive greetings for Baishakhi, Cheti Chand, Chaitra Navratri, Easter, Eid-ul-Fitr, GudiPadwa, Hanuman Jayanti, Mahavir Jayanti, Ram Navami, and Ugadi, amongst many others.

Warm Regards,

 

CA Anand Bathiya

President

Kalachakra (Impacting People, Peace And Planet)

The tenth Raisina Dialogues 2025, from 17th to 19th March, 2025, organised by the Observer Research Foundation and the Ministry of External Affairs (MEA), was held in New Delhi. It is one of India’s most prestigious conferences, where, every year, many interesting geo-political and geo-economic developments are discussed.

The theme for this year’s conference was “Kālachakra: People, Peace and Planet”. One of the important discussions was on Tariffs and Sanctions, where the Minister of External Affairs of India, Dr S. Jaishankar, informed that India is engaged in three big trade negotiations with the EU, the UK and the USA. These negotiations will have a significant impact on India’s trade and commerce, as these countries are growth markets for India and are strategic partners of India with a large Indian diaspora. It would, therefore, be interesting to track developments in these cross-border trade negotiations. Companies in India will have to gear up for fresh competition, both in India and in these markets, with realignment of tariffs.

Let’s look at the Kalachakra affecting People, Place and Planet in different contexts.

PEOPLE

With an estimated 1.46 billion people1, India is not only the most populous country, but is also the largest democracy in the world. India accounts for 17.78% (2025) of the world population, but its share of the world GDP2 is 9.7% (2024). However, India has a demographic advantage, with the median age of its population at 28.8 years. It is also considered one of the fastest-growing economies in the world, with an estimated 6.5% growth in FY 2025. It is likely to become the 4th largest economy, surpassing Japan, in 2025.

1 https://www.worldometers.info/world-population/india-population/
2 https://www.worldeconomics.com/Share-of-Global-GDP/India.aspx

However, India’s GDP per capita (i.e., GDP/Population) puts it 140th in the world ranking. Even considering Purchasing Power Parity, India ranks 119th in the world ranking.3  Within the growth figures, we also need to address the inequality of income and regional disparities.

3 https://www.businesstoday.in

Thankfully, macro-economic data are favourable, and huge capital spending by the government on infrastructure will give a fillip to industrial and economic growth. However, we need to invest a lot in terms of time and effort in skill building, increasing the employability of youth, education and health care. This was also echoed in the Raisina Dialogues. Coming to the contribution of people to India’s growth, some structural changes are required to arrest the brain drain.

The recent survey by Kotak Private Banking of 150 wealthy individuals across India revealed a startling fact that “1 in 5 Ultra-HNIs surveyed are currently in the process of or plan to migrate, most of whom intend to reside in their chosen host country permanently while retaining their Indian citizenship. Professionals show a higher propensity to migrate than entrepreneurs or inheritors. Among those considering global migration, 69% cited smoothening of business operations as the key driver.”4

4 https://www.kotak.com/content/dam/Kotak/about-us/media-press-releases/2025/media-release-kotak-private-top-of-the-pyramid-report-2024.pdf

This emphasises the need to provide a conducive environment for ease of doing business for entrepreneurs to grow and excel. We need large industries for manufacturing and generating employment.

PEACE

With wars in various parts of the world, peace is elusive. Various kinds of wars are being fought today: physical (political), technological, ideological, economic (through currencies, tariffs, etc.) and so on. One would not be surprised to see the borders of many nations changing in years to come. In any case, borders are losing significance with technological and ideological wars. Social media is enough to create a desired narrative which can topple governments. Data and cyber security assume a lot of significance in this new world order. The use of AI may expedite the work, processes, etc., but may pose a big threat to National Security. Guarding invisible technological and financial borders is, perhaps, more important now than ever before. That’s where we have a positive role to play.

The Prime Minister of India categorically stated that India is not neutral in the Ukraine war, but is on the side of Peace. We have seen the devastating impact on the lives of people in war-torn countries. Only Peace can bring prosperity to the world.

PLANET

India believes in Vasudhaiva Kutumbakam (वसुधैवकुटुम्बकम्), meaning the whole Earth is a Family. During the G20 Presidency of India, it was translated to “One Earth, One Family, One Future” and was chosen as the Motto.

Planet Earth is facing many challenges, the primary of them being climate change. The recent earthquake in Myanmar and Thailand has proven the fragility of human edifices. Frequent changes in climate have impacted human and animal lives. Rising temperatures and melting glaciers are matters of concern. The use of warheads, burning forests, and rampant use of fossil fuels have worsened the situation.

In such a situation, reporting for ESG (Environmental, Social and Governance) assumes significance. “Environmental criteria examine how a company performs as a steward of the planet. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance defines a set of rules and best practices, along with a series of processes that determine how an organisation is managed and controlled.”5

5 https://www.thecorporategovernanceinstitute.com/

In India, from FY 2023-2024, SEBI has mandated disclosures as per the updated Business Responsibility and Sustainability Reporting (BRSR) format for the top 1000 listed companies (by market capitalisation).6

6 Circular No.: SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 dated Jul 12, 2023

It would be necessary for companies to become more responsible and responsive to the environment in which they are operating. It would be interesting to see the impact these new regulations will generate in times to come. Practitioners of the ESG assurance and auditors of the concerned companies will need to keep track of developments in this field and equip themselves for conducting necessary enquiries, reporting and disclosures.

PROFESSIONAL DEVELOPMENTS

The Finance Act 2025 has introduced a new section 194T applicable w.e.f. 1st April, 2025, which mandates TDS on Payments of any sum (in excess of ₹20,000/- during the financial year) in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm. It will create difficulties for those firms which decide remuneration based on profitability at the year-end, as TDS will be applicable even on ad-hoc withdrawal towards remuneration. Such far-reaching amendments resulting in increased compliance should have been discussed with stakeholders before being enacted.

Recently, the Supreme Court dismissed the SLP filed by the Central Board of Indirect Taxes and Customs against the judgment of the Bombay High Court in the case of Aberdare Technologies Private Limited &Ors. wherein the Hon. High Court had allowed manual or electronic corrections in claiming the input tax credit. The Apex Court held that “Human errors and mistakes are normal, and errors are also made by the Revenue. Right to correct mistakes in the nature of clerical or arithmetical error is a right that flows from right to do business and should not be denied unless there is a good justification and reason to deny benefit of correction. Software limitation itself cannot be a good justification, as software are meant to ease compliance and can be configured. Therefore, we exercise our discretion and dismiss the special leave petition.”

This is a welcome decision giving relief to taxpayers for genuine mistakes and errors. In yet another decision in the case of Radhika Agarwal, the Apex Court clarified and reiterated the important safeguards to be kept in place to ensure that provisions of arrest under the GST laws are not abused. Readers can refer to the detailed Article, as well as in-depth discussion in the “Decoding GST” column on this case, in the subsequent pages of this Journal.

In conclusion, we are living in an exciting time with Kalachakra moving rapidly impacting our profession, businesses, lives and Planet. We shall see many unprecedented developments in times to come, but who knows what is in store for us in the Kalachakra? Let’s hope that whatever comes is best for the People, Peace and Planet.

Best wishes to our readers for the New Financial Year and Festivals.

Best Regards,

 

Dr CA MayurNayak, Editor

GudiPadwa, VikramSamvat 2082: 30th March, 2025

पय:पानं भुजङ्गानां केवलं विषवर्धनम्

This proverbial line describes a very commonly experienced fact of life, especially in the modern times. Although it is an age old reality, it is more prominently observed in last few decades. With the advancement of technology, degeneration of values and pollution of culture, its gravity is increasing day-by-day.

The stanza reads as follows:-

उपदेशो हि मूर्खाणाम्    Advice rendered to a stupid or undeserving person.

प्रकोपाय न शान्तये  results in his anger. (resistance) and not in peace.

पय:पानं भुजङ्गानां  If you feed milk to a snake,

केवलं विषवर्धनम्  It only adds to its poison.

This is from Panchtantra (1.420) and Hitopadesh 3.4

There is another version of this shloka –

उपकारोSपि नीचानाम्  Help offered to a bad person,

अपकारो हि जायते  Is taken otherwise by him (he treats it as a trouble with bad motive.

पय:पानं भुजङ्गानां केवलं विषवर्धनम् !

If any of the readers has not experienced this, please do try it!

Addicted people, drunkards, gamblers, gundas, hooligans, uneducated (uncivilised) people, will never listen to your sound advice. If you advise corrupt people to give up bad practices, they will either ridicule you or frown upon you. If people are unnecessarily quarrelling or fighting on the streets or even in a crowded compartment of a local train and if you request them to stop quarrelling and to ‘forget it’, they will first ask you not to interfere. They may even try to drag you into the dispute or react violently against you. Members in a co-operative housing society are behaving with complete non-co-operation. A trouble making member will raise disputes and will never mend his ways. No consultant can improvethis situation. If you ask naughty or mischievous children to behave themselves, they will react the opposite way.

If anyone advises our neighbouring countries to focus on their own development rather than causing destruction to India or promoting terrorism, they will on the contrary, increase their attempts to cause harm to India. Even if they are in utter poverty, they will import weapons to wage a war against us!

In our epics, Ravana, Duryodhana, other demons/villains are a classic example of this truth. Ravana did not listen to the advice of Bibheeshana to give Seeta back to Ram. Ravana drove him away from his kingdom. Duryodhana did not heed to the advice of Vidura and other elderly persons. Such good advice hardens their ego.

Today’s youth is more obsessed with social media, drugs, movies and many bad things. Our family system is cracking today. Husband wife relations are getting destroyed. The bonding between all relations is breaking. Break-ups and divorces are very common. The couple does not realise the importance of togetherness. They are often short sighted or excessively career oriented, materialistic, ambitious, egoistic, selfish and uncompromising. They cannot digest ‘adjustment’. The counselling has not much impact. If you try to advise them, they will ask you to mind your own business, saying that it is their personal matter. They don’t realise that when such things become rampant, it is no longer a personal matter but a great social menace!

The only solution is the strong moral culture ‘sanskaras’. In today’s rat race, the sanskaaras of parents and teachers are losing efficacy. A narrow minded, individualistic and self-centred approach is developing and people are immune to any words of wisdom. Thus the bhujangas (snakes) in the guise of ‘qualified’ money making machines are increasing. They will improve when they themselves realise it; but not on anyone’s advice!

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

15. [2025] 170 taxmann.com 475 (Delhi – Trib.)

SC Lowy P.I. (LUX) S.A.R.L. vs. ACIT

ITA No: 3568 (Delhi) of 2023

A.Y.: 2021-22

Dated: 30th December, 2024

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

FACTS

Assessee is a Limited Liability Company and a tax resident of Luxembourg. The Assessee is a subsidiary of a Cayman Island entity and a step-down subsidiary of an offshore fund located in the Cayman Islands. The Assessee is registered as a Category II – Foreign Portfolio Investor registered with SEBI, who has invested in corporate bonds and pass-through certificates of securitization trust.

It offered the interest income from bonds at 10% under Article 11 and claimed treaty benefits with respect to business income and capital gains under Article 7 and Article 13(6) of DTAA, respectively.

The AO verified the financial statements, SEBI registration, and Articles of Association to conclude that the real owner of the income is the ultimate Parent located in the Cayman Islands, with whom India does not have DTAA. The entire holding structure involves treaty shopping, and a TRC is insufficient to claim treaty benefits and beneficial ownership of income. Therefore, the AO denied the tax benefits under DTAA and taxed the interest income from bonds and securitization trusts at 40% and short-term gains at 30%.

The DRP upheld the action of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The Assessee has provided a valid TRC and satisfied the conditions prescribed under Article 29 dealing with the limitation of benefits. Having not raised any red flags on the TRC, the revenue cannot overlook the TRC without bringing any evidence to prove that the entity exists as a conduit. The Delhi High Court, in Tiger Global International III Holdings [2024] 165 taxmann.com 850 (Delhi), has held that revenue can look beyond TRC only in case of tax fraud, sham transactions or illegal activities.
  •  The Assessee was incorporated as an investment holding company in Luxembourg, and it has been in existence since 2015 and invested in distressed assets. As a Category – II FPI, it invested in securitization trust/corporate bonds in FY 2018-19. Its geographical concentration shows that it had only 14% investment in India, and the remaining investments were spread across jurisdictions.
  •  The Assessee had paid taxes and filed returns in Luxembourg with respect to income earned from Indiaand other jurisdictions. Substantial operational costs, includes consulting fees, litigation fees, professional charges, and administrative expenses, are incurred in Luxembourg.
  •  The Assessee is in existence to date and continues to hold the investments. This substantiates that they control the assets and the income thereon for their own account; hence, they cannot be regarded as a conduit entity. The AO did not bring any evidence to support his views and presumptions.
  •  The genuineness of the entity is substantiated through various activities, and it operated as a stand-alone entity without depending on its holding company.

The limitation of benefits under Article 29 as amended by Multilateral Instruments (Article 7) requires bringing on record the relevant facts andcircumstances to prove that the principal purpose of arrangements and transactions is only for the purpose of taking treaty benefit. The Revenue, without any cogent materials, failed to establish that the assessee is a conduit entity. Therefore, the benefits of the treaty cannot be denied.

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

14. [2024] 169 taxmann.com 8 (Mumbai – Trib.)

Delta Air Lines, Inc. vs. ACIT (International Taxation)

ITA No: 235 (Mum.) of 2022

A.Y.: 2018-19

Dated: 7th November 2024

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

FACTS

The Assessee, a tax resident of the USA, was engaged in the business of aircraft operations in international traffic. It had established a branch office in India, a permanent establishment that was admitted to facilitate the booking of air passenger tickets and freights. The Assessee had three streams of international journey income, namely (i) transportation using their own aircraft, (ii) transportation with a combination of own aircraft and third-party carriers vide code sharing arrangements for one or more parts of the journey, and (iii) entire transportation using third party carriers under code-sharing arrangements.

The Assessee filed NIL return of income claiming benefits under Article 8 of the DTAA. The AO denied the Article 8 benefit w.r.t second and third stream of income, stating income under code sharing cannot be regarded as derived from the operation of aircraft in international traffic. Further, AO was of the view that code sharing arrangements cannot be regarded as a space or a slot charter.

The Ld. DRP and Ld. AO followed the order of the coordinate bench in Assesse’s own case for AY 2010-11 [2015] 57 taxmann.com 1 (Mumbai) to uphold the denial of the treaty benefit qua code-share revenue. The reasoning that was adopted in earlier ITAT ruling, as also by DRP, was as under:

  •  The taxpayer must derive profit from the operation of an aircraft in international traffic as an owner/charter/lessor of the aircraft.
  •  In the case of a code-sharing arrangement, the taxpayer’s activities were only the booking of tickets, and the actual transport of passengers was carried out by a third-party airline. The same cannot hence be regarded as profits derived from international traffic carried out by the assessee.
  • Activities directly linked to the transport of passengers by the Assessee would only fall under the ambit of Article 8(2)(b). Since the transportation is carried on by other airlines, and it cannot be regarded as having direct nexus with activities carried on by the Assessee; hence, the activity relating to transportation by other airlines cannot fall under Article 8(2)(b).
  •  The ruling of the coordinate bench of the tribunal in the case of MISC Berhard [2014] 47 taxmann.com 50 (Mumbai) is not applicable to the case on hand. The MISC (supra) case dealt with revenue earned from feeder vessels, which was used to transport cargo from the Indian Port to the Hub Port and for further transportation by the third party than to mother vessels for the final destination. In the case of Assessee, there are no such instances of transporting to the hub port and then to the final destination. Since the ruling was rendered in the context of India-UK DTAA, the same cannot be applied to India-US DTAA.
  •  The code-sharing arrangement cannot be regarded as slot/space charter for qualifying under Article 8(2) as the assessee does not have exclusivity over space or flights booked.

HELD

On further appeal, the co-ordinate bench dissented with their earlier ruling on account of subsequent judicial developments and ruled in favour of the taxpayer basis the following:

  • The Bombay High Court in Balaji Shipping [2012] 24 taxmann.com 229 (Bombay) held that slot chartering by shipping companies for transportation by third-party shippers could fall under the scope of Article 9 of India-UK DTAA. The High Court held that both the following scenarios were covered under Article 9 i.e., (i) use of a third-party ship for movement between a port in India to the hub port and then for the final destination and (ii) use of a third-party ship for transport from the port in India to the final destination.
  • The Bombay High Court in APL Co. Pte. Ltd [2016] 75 taxmann.com 32 (Bombay) has applied the ruling of Balaji Shipping (supra) while interpreting the India-Singapore DTAA since both treaties’ wordings are parimateria. Therefore, this will have a binding effect when the wording of various treaties is similar. Although the passengers are transported through other airlines, the Assessee issues the tickets up to the final destination. The code-sharing arrangements facilitate the Assessee in providing services to specific destinations where they do not operate. Therefore, applying the Balaji Shipping (supra) ratio rendered in the context of shipping income receipts from code-sharing arrangements is entitled to benefit under Article 8 of DTAA.
  • When the assessee books a seat on a third-party airline through a code-sharing arrangement, it could be regarded as a charter of space in the aircraft, and the entire aircraft need not be chartered.
  • The codes used by the Assessee for booking tickets in third-party airlines are unique to them and are used for partial or complete journeys. This establishes the link between transportation by a third party and the operations of the Assessee, and they transport the passenger on behalf of the Assessee.

Sec. 28: Where during search at residential premises of director of assessee-company, AO found that assessee had made out of books sales and added entire undisclosed sales to income of assessee, however, Commissioner (Appeals) restricted same to profit element embedded therein estimated at rate of 8 per cent of sales, since revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent instead of 8 per cent, addition restricted by Commissioner (Appeals) to 8 per cent of sales was to be upheld. Also, Commissioner (Appeals) failed to give benefit of income surrendered by assessee voluntarily against addition confirmed by him on account of unaccounted sales, Assessing Officer was to be directed to grant assessee benefit of income surrendered by assessee against addition confirmed by Commissioner (Appeals).

84. ACIT vs. Conor Granito (P.) Ltd

[2024] 116 ITR(T) 479 (Rajkot – Trib.)

ITA NO.: 143 (RJT) OF 2021

CO NO.: 01 (RJT) OF 2022

A.Y.: 2019-20

Dated: 12th January, 2024

Sec. 28: Where during search at residential premises of director of assessee-company, AO found that assessee had made out of books sales and added entire undisclosed sales to income of assessee, however, Commissioner (Appeals) restricted same to profit element embedded therein estimated at rate of 8 per cent of sales, since revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent instead of 8 per cent, addition restricted by Commissioner (Appeals) to 8 per cent of sales was to be upheld. Also, Commissioner (Appeals) failed to give benefit of income surrendered by assessee voluntarily against addition confirmed by him on account of unaccounted sales, Assessing Officer was to be directed to grant assessee benefit of income surrendered by assessee against addition confirmed by Commissioner (Appeals).

FACTS

During search at the residential premises of the director of the assessee-company, various incriminating material by way of WhatsApp message / images were discovered and on analysis of the same, it was discovered that the assessee had made out of books sales which during the impugned year amounted to ₹2,35,42,980/-. The Assessing Officer added entire undisclosed sales to the income of the assessee. The ld.CIT(A), however, restricted the same to the profit element embedded therein estimated at the rate of @ 8 per cent of the sales.

Aggrieved, the revenue filed an appeal and assessee filed cross objections before the Tribunal –

HELD

ITAT observed that the contention of the Revenue was that the ld.CIT(A) ought to have applied 12.5 per cent net profit rate instead of 8 per cent. However, the Revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent.

ITAT held that net profit to be applied was to be at justifiable rate depending upon nature of the business and other facts. It should not be an ad hoc rate and there has to be a reasonable basis for applying a particular net profit rate in each case. The DR had not supported his contention of applying 12.5 per cent GP rate with any reasonable basis. ITAT held that profit rate specified in the decision of Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, [2013] 356 ITR 451 as cited by DR could not be justifiable rate in assessee’s case as the nature of activities of both the assessees were not identical.

Therefore, ITAT did not find any merit in the contentions of the DR that the ld.CIT(A) ought to have applied a net profit of 12.5 per cent in the present case. The ground raised by the Revenue was accordingly rejected.

Thus, the appeal of the Revenue was dismissed.

With respect to Cross Objections filed by the assessee, the ld.CIT(A) had failed to give benefit of the income surrendered by the assessee voluntarily against addition confirmed by him on account of unaccounted sales.

In the light of the same, ITAT directed the assessing officer to grant assessee the benefit of the income surrendered of ₹15 lakhs against the addition confirmed by the ld.CIT(A).

The Cross Objection was accordingly allowed.

Sec. 69A: Assessee deposited cash during demonetisation period of `10.75 lakhs which was recorded in his books of account and source of cash deposits was also maintained by assessee. However, Assessing Officer made addition as unexplained money under section 69A and taxed same under section 115BBE. ITAT held that Assessing Officer was not correct in invoking provisions of section 69A and charging tax under section 115BBE as assessee had recorded in his books of accounts and also explained source of such cash deposits.

83. Dipak Balubhai Patel (HUF) vs. ITO

[2024] 115ITR(T) 624 (Ahmedabad- Trib.)

ITA NO.:942(AHD) OF 2023

AY.: 2017-18

Dated: 22nd August, 2024

Sec. 69A: Assessee deposited cash during demonetisation period of `10.75 lakhs which was recorded in his books of account and source of cash deposits was also maintained by assessee. However, Assessing Officer made addition as unexplained money under section 69A and taxed same under section 115BBE. ITAT held that Assessing Officer was not correct in invoking provisions of section 69A and charging tax under section 115BBE as assessee had recorded in his books of accounts and also explained source of such cash deposits.

FACTS

The assessee was a HUF who derived income from House Property and Income from Other Sources. The case was selected for scrutiny assessment and the Assessing Officer found that assessee deposited a sum of ₹10,75,000/- during demonetisation period and issued show cause notice to explain the source of cash deposit.

The assessee explained the source of cash deposit as withdrawal from four other banks accounts of the assesse and the said deposits were duly reflected in his Return of Income. Further since assessee did not have any business income, therefore he had not filed the Profit and Loss Account and Balance Sheet along with Return of Income. However, the assessee filed the same before the
Assessing Officer along with cash book, wherein cash on hand as on 1st April, 2016 as opening balance was ₹10,09,933/-, which was deposited during demonetisation period.

However, Assessing Officer rejected the Books of Accounts by stating that assessee had shown Closing Cash on hand as zero in return of income filed for the A.Y. 2016-17, and in the Cash Book of F.Y. 2016-17 i.e. A.Y. 2017-18, assessee has shown Opening Balance to the tune of ₹10,09,933/- which was not justifiable and therefore made addition as unexplained money u/s. 69A of the Act.

Aggrieved against the addition, the assessee filed an appeal before CIT(A) who confirmed the additions by observing that during the previous 3 years, except 2 or 3 instances, all withdrawals were less than ₹10,000 and the appellant claimed that the withdrawals were preserved during last 3 years in his hand and were deposited in the year under consideration.

Since 95 per cent of the withdrawals were less than ₹10,000, CIT(A) observed that as per common sense these cash withdrawals were for day to day expenses and if the appellant had so much of cash with him then what was the need for frequent withdrawals of ₹5,000 and ₹10,000. The CIT(A) relied on decisions of CIT vs. Durga Prasad More [1971] 82 ITR 540 (SC) and Sumati Dayal vs. CIT [1995] 214 ITR 801 (SC) where the Supreme Court has laid down Human Probability test as one of the important test in order to check genuineness of the transactions entered into the books of account of the assesses. Hence it was held by CIT(A) that the appellant failed to satisfactorily explain the source of ₹10,75,000 cash deposited in the bank account and the assessing officer was correct in treating this amount as unexplained cash under section 69A.

The appellant being aggrieved with the order of the CIT(Appeals) filed an appeal before the ITAT.

HELD

The ITAT observed that during the assessment proceedings, the Assessing Officer had rejected the explanation offered by the assessee as the assesse had showed closing cash on hand as Nil in the Return of Income but in the cash book showed the opening balance for A.Y. 2017-18 to the tune of ₹10,09,933/-.

The ITAT further observed that the assessee had filed copies of previous three years Form 26AS, ITR, Statement of Income, Profit and Loss account and Balance Sheet before CIT(A)and further explained that rental income was offered to tax with appropriate TDS u/s. 194I of the Act which was reflecting in Form 26AS records. Since the assessee was a Senior Citizen, he withdrew and kept substantial balance in his bank accounts for emergency medical needs. However, after declaration of the demonetization period, the assessee deposited the withdrawal amounts from his other bank accounts.

The ITAT observed that Assessing Officer erroneously treated cash deposits as unexplained cash and also invoked Section 115BBE of the Act and charged at 60 per cent rate which was not applicable to the present case since the cash deposits were reflected in the books of accounts maintained by the assessee. The ITAT relied on decision in case of Balwinder Kumar ([2023] 151 taxmann.com 338 (Amritsar – Trib.)) and Sri Sriram Manchukonda (2021 TaxCorp (AT.) 91806 Visakhapatnam ITAT) wherein co-ordinate Bench of the Tribunal held in favour of the assessee.

Respectfully following the above judicial precedents, ITAT observed that the addition made by AO u/s. 69A will be applicable only when the assessee is found to be the owner of any money etc. which is not recorded in the books of accounts maintained by him and any explanation offered by the assessee is not satisfactory in the opinion of the Assessing Officer.

ITAT observed that in the present case, the assessee had recorded the cash deposits in his books of accounts and source of cash deposits during demonetization period were also been maintained by the assessee. Therefore, ITAT held that the A.O. was not correct in invoking provisions of Section 69A of the Act and charging tax u/s. 115BBE of the Act. Thus the addition made by the Assessing Officer were deleted.

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

S. 127–Where the case of the assesse was transferred from one AO to another AO in a different city / locality / place, PCIT was under a statutory obligation to give an opportunity of being heard to the assessee.

82. Amit Kumar Gupta vs. ITO

(2025) 171 taxmann.com 16 (Raipur Trib)

ITA Nos.: 404 & 405 (Rpr) of 2024

A.Ys.: 2011-12 & 2012-13

Dated: 13th January, 2025

S. 127–Where the case of the assesse was transferred from one AO to another AO in a different city / locality / place, PCIT was under a statutory obligation to give an opportunity of being heard to the assessee.

FACTS

During the relevant year, the assessee had made cash deposits amounting to ₹17,05,824 into his bank account but did not file his income tax return. Based on the information gathered from NMS / ITS module, the AO (ITO-1, Ambikapur) initiated proceedings under section 147 by issuing notice under section 148 dated 23rd March, 2018. Thereafter, pursuant to an order under section 127 dated 7.9.2018 passed by PCIT-1, Bilaspur, the assessee’s case was transferred from ITO-1 Ambikapur to ITO-3, Korba. Since the assessee did not come forth with any explanation in response to notice under section 142(1), the AO taxed the entire cash deposit as unexplained money under section 69A vide his order under section 144 read with section 147 dated 16th December, 2018.

The assessee challenged the assessment order before CIT(A), inter alia, on the ground that PCIT had transferred his case from one ITO to another ITO without affording any opportunity of being heard as required under section 127. CIT(A) dismissed the appeal, inter alia, holding that he was not the appropriate forum to challenge the order under section 127 passed by PCIT.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that-

(a) As can be gathered from section 127(3), in a case where the PCIT transfers the case of as assessee from any AO to any other AO and the offices of all such officers are not situated in the same city, locality or place, then he remains under a statutory obligation to give an opportunity of being heard to the assessee and only after recording his reasons for doing so,
transfer such case. In the assessee’s facts, the case had been transferred pursuant to the order of PCIT, Bilaspur dated 7th September, 2018 from ITO-1, Ambikapur to ITO-3, Korba, that is, offices of said officers were not situated in the same city, locality or place, and therefore, on a conjoint reading of section 127(1) / (3), he was obligated to have given an opportunity to the assessee prior to transfer of his case.

(b) CIT(A) was not right in holding that he was not vested with any jurisdiction to deal with the specific challenge raised by the assessee as regards the validity of the assessment order that was framed by the A.Ode-hors a valid assumption of jurisdiction on his part in absence of an order of transfer under section 127 as required per the mandate of law.

Accordingly, the Tribunal restored the matter back to the file of CIT(A) with a direction to adjudicate the challenge of the assessee as regards the validity of the jurisdiction that was assumed by the A.O for framing of the assessment order passed under section 144 read with section. 147 dated 16th December, 2018 de-hors an order of transfer under section 127 as per the mandate of law.

S. 80G – Where the application for final approval under section 80G was rejected due to incorrect section code in the application, the issue was remanded back to the file of CIT(E) to grant final approval under correct provision if assessee-trust was otherwise eligible.

81. Rotary Charity Trust vs. CIT(E)

(2025)170 taxmann.com 797(Mum Trib)

ITA No.: 6133(Mum) of 2024

A.Y.: 2024-25

Dated: 9th January, 2025

S. 80G – Where the application for final approval under section 80G was rejected due to incorrect section code in the application, the issue was remanded back to the file of CIT(E) to grant final approval under correct provision if assessee-trust was otherwise eligible.

FACTS

Assessee was a registered charitable trust incorporated on 25th September, 1996, engaged in promoting various public charitable activities especially providing education to weaker section of the society and to specially-abled children. It made an application for provisional registration under section 80G of the Act, which was granted under clause (iv) of first proviso to section 80G(5) on 4th April, 2022 which was valid for the period starting 4th April, 2022 to AY 2024-25. Subsequently, the assessee filed application in Form 10AB for final registration; in this Form, instead of selecting section code “clause (iii) of first proviso to section 80G(5)”, the assessee inadvertently once again selected “sub-clause (B)of clause (iv) of first proviso to section 80G (5)”.

CIT(E) rejected the application on the ground that the assessee was not fulfilling the stipulated conditions prescribed undersection 80G(5)(iv)(B).

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal noted that there was merit in the claim of the assessee that it had selected the wrong section code inadvertently while filing the application for final approval in Form 10AB and it was not given the opportunity of being heard by CIT which otherwise would have allowed the assessee to explain the facts to avoid the rejection.

Following the decision in North Eastern Social Research Centre vs. CIT(E), (2024) 165taxmann.com 12 (Kolkata – Trib.), the Tribunal remitted the issue back to the CIT(E) with a direction to grant final approval under clause (iii) to first proviso to section 80G(5) if the assessee was otherwise found eligible.

S.12AB, 13 — Where the applicant trust was a charitable cum religious trust and its objects were for the benefit of a particular religious community or caste, that is, Jains, it was not entitled to registration under section 12AB.

80. Soudharma Brihad Tapogachchiya Tristutik Jain Sangha Samarpanam vs. CIT(E)

(2025)170 taxmann.com 590 (AhdTrib)

ITA No.:1571 (Ahd) of 2024

A.Y.: N.A.

Dated: 3rd January, 2025

S.12AB, 13 — Where the applicant trust was a charitable cum religious trust and its objects were for the benefit of a particular religious community or caste, that is, Jains, it was not entitled to registration under section 12AB.

The assessee-trust was settled on 5th January, 2023 with objects which required it to follow the principles of Jainism, etc. and was registered with the Assistant / Deputy Charity Commissioner, Ahmedabad. It filed application for registration under section 12AB in Form 10AB on 13th January, 2024 before CIT(E). In this application, the applicant mentioned that it had charitable objects in addition to religious objects.

CIT(E) denied registration under section 12AB on the ground that the assessee was a composite trust and its object was restricted to benefit of a particular religious community or caste, that is, Jains, which was a “specified violation” under clause (d) of Explanation below section 12AB(4) read with section 13(1)(b).

Aggrieved with the order of CIT(E), the assessee filed an appeal before ITAT.

FACTS

The Tribunal observed that-

(a) A perusal of the main objects of the trust made it abundantly clear that all the objects were related to religious activities, more particularly relating to “Jain Community” and to propagate “Jainism”, that is, charitable cum religious in nature and was for the benefit of “Jains” which was a specific violation under clauses (c)/ (d) to Explanation to section12AB(4).

(b) In CIT vs. Dawoodi Bohara Jamat, (2014) 364 ITR 31 (SC), the Supreme Court held that section 13(1)(b)(which prescribed the circumstances wherein the exemption would not be available to a religious or charitable trust)was applicable even to a composite trust / institution having both religious and charitable objects. Section 13(1)(b)was required to be read in conjunction with the provisions of sections 11 and 12 towards determination of eligibility of a trust to claim exemption under the aforesaid provisions, while granting registration.

Accordingly, the Tribunal held that the order denying registration to the assessee did not require any interference and dismissed the assessee’s appeal.

While computing long term capital gains, interest on funds borrowed for purchase of property, duly indexed will be allowed as a deduction. Prior to amendment vide Finance Act, 2023 there was no such restriction for excluding the deduction claimed on account of interest paid under Section 24(b) or under the provisions of chapter VIA.

79. DCIT vs. Neville Tuli

ITA No. 3203/Mum./2023

A.Y.: 2013-14

Date of Order: 26th November, 2024

Section: 48

While computing long term capital gains, interest on funds borrowed for purchase of property, duly indexed will be allowed as a deduction. Prior to amendment vide Finance Act, 2023 there was no such restriction for excluding the deduction claimed on account of interest paid under Section 24(b) or under the provisions of chapter VIA.

FACTS

During the previous year relevant to the assessment year under consideration, the assessee sold a property, held by him as a long term capital asset, for a consideration of ₹27 crore. This property was purchased from borrowed funds. While computing long term capital gains arising on sale of this property, the assessee deducted ₹9,90,67,611 being indexed cost of acquisition and ₹3,95,42,739 being indexed cost of interest paid to the bank (this was shown under “indexed cost of improvement”) and offered long term capital gain of ₹13,13,89,649.

The amount of interest claimed as deduction while computing long term capital gains was net of the amount claimed in earlier years under section 24(b) of the Act. In earlier years, interest up to ₹1,50,000 was claimed and was allowed as deduction under section 24(b) of the Act.

In the background of the above facts, the Assessing Officer, in the course of assessment proceedings framed two questions viz. (i) Whether interest paid is a cost of acquisition / cost of improvement; and (ii) whether the benefit of indexation is to be allowed to interest cost. The AO having perused the provisions of section 55 held that interest payment on housing loan cannot be said to be expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property. He also held that, on a reading of section 55, it is clearly evident that in no situation does the cost of acquisition involve bringing in any cost incurred after the date of acquisition, unless the cost of improvement and, in the instant case there is no improvement to the property. The AO supported his view by the ratio of the decisions of the Tribunal in the case of V Mahesh, ITO vs. Vikram Sadanand Hoskote [(2017) 18 SOT 130 (Mum.)] and Harish Krishnakkant Bhatt vs. ITO [(2004) 91 ITD 311 (Ahd. Trib.)].

The AO disallowed the sum of ₹3,95,42,739 and added the same to the income of the assessee.

Aggrieved, assessee preferred an appeal to the CIT(A) who during the course of appellate proceedings noted that a similar claim was allowed in earlier years as well. Having considered the relevant provisions of the Act and the judicial precedents on the issue, the CIT(A) allowed the appeal preferred by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in earlier assessment years as well, the assessee has claimed similar deduction of interest expenditure under the head income from house property and as cost of acquisition / improvement, which has been continuously allowed by the revenue authorities and therefore rule of consistency is required to be followed.

The Tribunal also noted that the Finance Act, 2023 has w.e.f. 1st April, 2024 amended the provisions of section 48 to provide that the cost of acquisition of the asset or cost of improvement thereto shall not include the deductions claimed on account of interest under clause (b) of section 24 or under the provisions of Chapter VIA. It held that for the period prior to the insertion of the said provision which is applicable w.e.f. 1st April, 2024, no such restriction can be imposed and / or made applicable. The Tribunal noted that the CIT(A) has also taken note of this amendment and has rightly held it to be not clarificatory.

The Tribunal after considering the ratio of various decisions on which reliance was placed on behalf of the assessee held that the interest paid on the borrowed funds for the purchase of property for the period prior to the provision inserted vide Finance Act, 2023 which was made applicable from 1st April, 2024, over and above claimed u/s 24(b) of the Act, would be deductible while computing the capital gains. Thus, we answered the question posed accordingly.

The Tribunal held that the order passed by CIT(A) does not suffer from any perversity, impropriety and / or illegality. It upheld the order passed by CIT(A) and dismissed the appeal filed by the revenue.

For the purpose of computing the ‘tax effect’, in the present case, only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue.

78. ACIT vs. Bennett Property Holdings Company Limited

ITA No. 556/Mum./2024

A.Y.: 2017-18

Date of order: 12th December, 2024

Section: CBDT Circular No. 5 of 2024 dtd. 15th March, 2024 r.w. Circular No. 9 of 2024 dtd 17th September, 2024

For the purpose of computing the ‘tax effect’, in the present case, only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue.

FACTS

For AY 2017-18, the Assessee company, primarily engaged in the business of earning rental income by letting out properties and running business centres, filed original return of income which was subsequently revised. The Assessing Officer (AO), in an order passed under section 143(3), assessed the total income of the Assessee under the normal provisions of the Act at ₹1,20,45,17,348/- and computed Book Profits of the Assessee under Section 115JB of theAct at ₹1,33,19,94,660/-. Since the tax payable on Book Profits was less than the tax payable on the income computed under normal provisions of the Act, the Assessee was assessed to tax under normal provisions of the Act.

Aggrieved by the additions made by the AO while assessing the total income, the assessee preferred an appeal to CIT(A) challenging certain additions / disallowances made under normal provisions of the Act viz. (i) disallowance of ₹6,38,05,371/- under Section 14A of the Act; (ii) addition taking deemed annual letting value of the immovable properties lying vacant during the relevant previous year at ₹23,28,000; and (iii) denial of claim of set off of accumulated loss of ₹12,86,53,730 and unabsorbed depreciation of ₹15,65,15,799 relatable to real estate service undertaking of Banhem Estates & IT Parks Ltd. That demerged into the Assessee pursuant to composite scheme of amalgamation and arrangement approved by the Hon’ble Bombay High Court vide order, dated 2nd December, 2016.

The assessee also challenged the following additions made by the AO while computing the amount of book profits u/s 115JB viz. (i) increase in Book Profits by Extra Depreciation of ₹4,38,18,551; (ii) increase in Book Profits by ₹6,38,05,371 disallowed under Section 14A of the Act by invoking provisions contained in Clause (f) of Explanation 1 to Section 115JB of the Act; and (iii) rejection of Assessee’s claim of substitution of long-term capital gain (computed by taking index cost of acquisition) in place of the profit on sale of capital asset appearing in the statement of Profit & Loss Account for the purpose of computing Book Profits.

The assessee also raised additional grounds seeking credit for TDS in respect of companies / undertakings forming part of composite scheme and also challenged computation of interest under section 234B of the Act.

The appeal preferred by the Assessee was disposed off by the CIT(A)as partly allowed vide order, dated 13th December, 2023. The CIT(A) granted partial relief by (a) deleting the addition made under normal provisions of the Act in respect in respect of deemed rental income estimated at ₹23,28,000/-, and (b) accepting Assessee’s contention that no disallowance of expenses can be made in respect of any exempt income by invoking provisions contained in Section14A read with Rule 8D of the IT Rules while computing Book Profits under Section 115JB of the Act.

Since, both, the Assessee as well as the Revenue were aggrieved by the order passed by the CIT(A), the present cross-appeals were preferred before the Tribunal.

Before the Tribunal, on behalf of the assessee, it was submitted that the Assessee has been assessed under normal provisions of the Act. Even if the grounds raised by the Revenue in relation to the computation of ‘Book Profits’ under Section 115JB of the Act are allowed in favour of the Revenue, the Assessee would be assessed to tax under the normal provisions of the Act. It was submitted that the grounds of appeal raised by the Revenue pertaining to the additions / disallowance made under the normal provisions of the Act carry tax effect below the specified monetary of ₹60 Lacs fixed by Central Board of Direct Taxes(CBDT) for filing Departmental Appeal before the Tribunal limit. Therefore, the appeal preferred by the Revenue should be dismissed as withdrawn in view of Circular No. 5 of 2024, dated 15th March, 2024, read with Circular No. 9 of 2024, dated 17th September, 2024, issued by CBDT.

HELD
The Tribunal noted that the Revenue has preferred appeal challenging the deletion of addition in respect of deemed annual letting income of ₹23,28,000 under normal provisions of the Act. The Revenue has also challenged the relief granted by the CIT(A) by accepting Assessee’s claim that the ‘Book Profits’ could not be increased by ₹6,38,05,371 (being amount disallowed under Section 14A of the Act read with Rule 8D of the IT Rules), by invoking provisions contained in clause (f) of Explanation 1 to Section 115JB of the Act. Thus, the Tribunal observed that Revenue has raised grounds having impact on the computation of income under normal provisions of the Act and the computation of ‘Book Profits’ under Section 115JB of the Act.

The Tribunal perused the Circular No. 5 & 9 of 2024 issued by the CBDT and held that Circular No.5 of 2024, dated 15th March, 2024, when read with Circular No.9 of 2024, dated 17th September, 2024, issued by CBDT clarifies that the monetary limit of ‘tax effect’ for filing departmental appeals before Tribunal has been increased from ₹50 Lakhs to ₹60 Lakhs. It has also been clarified in Circular No. 9 of 2024 that the aforesaid monetary limit for filing the appeal before the Tribunal would also apply to the pending departmental appeals.

The Tribunal held that for the purpose of computing the ‘tax effect’ involved in the present appeal preferred by the Revenue only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered. This is because the Assessee has been assessed under the normal provisions of the Act and this would continue to be the case even if all the grounds raised by the Revenue (whether related to computation of income under normal provisions of the Act or related to computation of Book Profits under 115JB of the Act) are allowed.

On examination the grounds raised by the Revenue having impact on computation of income under normal provisions of the Act, the Tribunal found that tax effect involved in the present appeal is below the monetary limit of Rs.60 Lakhs fixed by the CBDT for the purpose of filing departmental appeal before the Tribunal.

On perusal of Para 5.1 of Circular No. 5 of 2024 containing the definition of `tax effect’, the Tribunal observed that ‘tax effect’ has been defined to mean the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed. It held that when computed as aforesaid, the tax effect in the appeal preferred by the Revenue would fall below the specified monetary limit of ₹60 Lakhs for filing departmental appeals. On perusal of the computation submitted by the Assessee the Tribunal found that the tax effect in the appeal preferred by the Revenue would only be ₹5,63,973 for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue. Thus, accepting the contention of the Assessee, we dismiss the appeal preferred by the Revenue as ‘withdrawn’ in terms of Circular No.5 & 9 of 2024 issued by CBDT.

Dismissing the appeal under section 249(4) is unsustainable in a case where an assessee who has not filed the return of income has submitted before the AO that its income is exempt from tax and therefore it is not required to pay advance tax.

77. Srirampura Prathamika Krishi Pathina Sahakara Sangha Ltd. vs. ITO

ITA No. 1731/Bang./2024

A.Y.: 2017-18

Date of Order: 9th January, 2025

Section: 249(4)

Dismissing the appeal under section 249(4) is unsustainable in a case where an assessee who has not filed the return of income has submitted before the AO that its income is exempt from tax and therefore it is not required to pay advance tax.

FACTS

The assessee, a primary agricultural credit co-operative society, providing credit facilities to its members and also supplying the items like kerosene, fertilisers, food grains, etc. to its members did not file return of income. The notice u/s 142(1) of the Act was issued on 4th January, 2018 calling for return of income for the assessment year 2017-18 on or before 3rd February, 2018 but the assessee has neither filed any return of income nor filed any submission or response to the above notice.

Further, during the course of assessment proceedings, the AO found that assessee has deposited huge cash into his bank account with CDCC bank Hosadurga. The information has also been called for from the bank u/s 133(6) of the Act and on verification of the same, it was found that the assessee had deposited during the demonetised period a sum of ₹13,82,000/-.

The AO in his assessment order observed that the assessee vide letter dated 5th September, 2019 furnished the details of income and expenditure statement, profit & loss account and cash book. Further, the assessee in the said letter stated that they have exempted income for the financial year 2016-17 and therefore, not filed the income tax return for the said period.

The AO found the submission made by the assessee as not satisfactory and as the assessee had deposited cash in old currencies of denomination of ₹500/- & ₹1,000/-, amounting to ₹13,32,000/- into their bank account, the entire deposits were treated as assessee’s unaccounted income for the assessment year 2017-18 by invoking the provisions of section 69A of the Act and taxed u/s 115BBE of the Act.

Further, as the assessee had audited his books of accounts as per the provisions of the State Co-operative Society Act of Karnataka and the net profit as per income and expenditure statement was amounting to ₹1,13,376/- and hence a sum of ₹1,13,376/- was also considered by the AO as income of the assessee and brought to tax and accordingly, assessed on a total income of ₹14,45,376/-.

Aggrieved by the assessment completed u/s 144 of the Act dated 25th November, 2019, the assessee preferred an appeal before the CIT(A)/NFAC who dismissed the appeal of the assessee on the ground that the assessee had not paid the tax on returned income and the particulars of payment was also not mentioned in column 8 of Form 35. Further, as there was no response to deficiency letter dated 3rd June, 2024,the CIT(A) held that as the assessee has not paid tax on returned income / particulars of payment was not mentioned in column 8 of Form 35, the appeal of the assessee is not maintainable as per section 249(4) of the Act.

Aggrieved, the assessee filed the appeal before the Tribunal.

HELD

It is pertinent to note that section 249(4)(b) of the Act is clear that appeal before the CIT(A) should be admitted only when the assessee has paid an amount equal to the amount of advance tax, which was payable by him. Where the return of income has not been filed the proviso to said section also describe that the assessee will get exemption from this clause, if an application is made before the CIT(A) for not paying an amount equal to the amount of advance tax for any good and sufficient reason to be recorded in writing. The Tribunal noted that in the instant case, the AO in para 6 of the assessment order has observed that the assessee vide letter dated 5th September, 2019 had stated that they have exempted income for the financial year 2016-17 and therefore, not filed the income tax return for the said period. Before the Tribunal, as well, it was submitted that the assessee’s income is exempted and therefore, the question of paying advance tax does not arise in the case of the assessee as no amount is payable by the assessee. Being so, the Tribunal was of the opinion that dismissing the appeal on the grounds that the same is not maintainable as per section 249(4) of the Act is not sustainable as the income of the assessee is exempt from income tax. The assessee is not liable to pay any advance tax even though they have not filed the return of income.

While computing capital gains on slump sale under section 50B r.w.s. 48, transfer expenses are allowable as a deduction. There is no scope of deviation from the statutory provision regarding computation of capital gains in case of slump sale. The first limb i.e. “the expenditure incurred in connection with transfer” cannot be excluded from being claimed as deduction for the purposes of computation u/s 50B.

76. DCIT vs. Larsen and Toubro Ltd.

ITA No. 3369/Mum./2023

A.Y.: 2009-10

Date of Order: 20th December, 2024

Sections: 2(42C), 48, 50B

While computing capital gains on slump sale under section 50B r.w.s. 48, transfer expenses are allowable as a deduction. There is no scope of deviation from the statutory provision regarding computation of capital gains in case of slump sale. The first limb i.e. “the expenditure incurred in connection with transfer” cannot be excluded from being claimed as deduction for the purposes of computation u/s 50B.

FACTS

The Assessing Officer, while reassessing the total income of the assessee, under section 147 of the Act disallowed the sum of ₹27.08 crore claimed by the assessee to be expenditure incurred on transfer while calculation of capital gains on slump sale under section 50B of the Act. The sum of ₹27.09 crore disallowed comprised of Financial Advisory Fee of ₹8.31 crore and other expenses of ₹18.77 crore. The contention of the assessee was that this sum is allowable u/s 48(i) of the Act. These contentions did not find favour with the AO who held that section 50B is a code in itself for computation of capital gains arising on slump sale. Therefore, no other provision other than provision of section 50B shall be applicable.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed this ground of appeal.

Aggrieved, revenue preferred an appeal to the Tribunal, where on behalf of the assessee, reliance was placed on decision of Delhi High Court in case of free CIT vs. Nitrex Chemicals India Ltd [(2016) 75 taxman.com 282] and also on the decision of coordinate bench of theTribunal in case of Wockhardt Hospitals Ltd vs. ACIT [ITA Nos.7454/MUM/2013 and 7021/Mum./2013 for AY2010-11; Order dated 6th January, 2017], wherein in the context of computation of capital gains arising on slump sale of an undertaking, deduction was allowed in respect of expenditure incurred in connection with such transfer by reference to section 48(i) of the Act..

HELD

There is no scope for deviation from the statutory provision regarding computation of capital gains on slump sale.

Section 48 has two limbs –

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto.

The networth replaces the value as per section 48(ii). However, the first limb, which is, “the expenditure incurred in connection with the transfer”, cannot be excluded from being claimed as deduction for the purposes of computation under section 50B. The Legislature in its wisdom, clearly excludes indexation of such cost of acquisition and cost of improvement, for the purposes of slump sale in Section 50B itself. The Tribunal placed reliance on decision of Delhi High Court in case of PCIT vs. Nitrix Chemicals India Pvt. Ltd [(2016) 75 taxmann.com 282] and held that while computing capital gains arising on slump sale, in accordance with the provisions of section 50B that includes only the networth of the undertaking treating it as a cost of acquisition and cost of improvement without considering the provision of section 48(i), will be in contradiction to the intention of the Legislature.

The Tribunal observed that there is no dispute that the expenditures claimed by the assessee are incurred in connection with the transfer of the business as a going concern. Then, not computing the capital gains of the slump sale in accordance with the provisions of section 50B that require to treat cost of acquisition and cost of improvement and is allowable as a deduction as per section 48 (ii) of the act as net worth of the undertaking, and not to consider the expenditure incurred for the purpose of transfer as per section 48(i) will be in contradiction to the intention of the Legislature. It held that section 50B cannot be read and understood as argued by the Ld.DR, because the computation provision section 48 to the extent applicable to section 50B as mentioned in clause (2) of section 50B would then become ineffective and inapplicable to a slump sale.

The Tribunal did not agree with the arguments made on behalf of the revenue and held them to be not founded on the basic principles of interpretation. The Tribunal upheld the order of the CIT(A) and dismissed the ground of appeal filed by the revenue.

Research Analyst Regulations – Re-Birth

INTRODUCTION

Research Analysts play a very important role as they analyse information on securities and provide recommendations, and investors normally rely on their advice. However, such advice is many times prone to conflicts of interest arising from preparation and dissemination of research reports with vested interest. Such research analysts include independent research analyst, an intermediary that employs any research analyst or research entity that issues any research report.

This led to the need for Research Analyst Regulations way back in 2013 to establish a regulatory framework to ensure impartial reporting, address conflict of interest, improve governance standards, minimise market malpractices, etc. In order to regulate and streamline the activities of individuals and entities offering research analyst (RA) services, The Securities and Exchange Board of India (Research Analysts) Regulations, 2014, were notified on 1st September, 2014. However, every regulation stands the test of time and must be revisited from time to time.

One such instance that required to re-consider the relevance of existing regulatory framework, has been the mismatch in the large investor base vis-à-vis the number of investment advisors (IA) which led to the proliferation of unregistered entities acting as IA’s & RA’s.

It was extremely crucial to place a conducive regulatory framework by simplifying, easing and reducing the registration requirements and cost of compliance for RA’s and bringing in regulatory changes commensurate with the continually evolving nature of their business and the large investor base.

With this backdrop, The Securities and Exchange Board of India (SEBI) has issued amendments to Research Analyst Regulations on 16th December, 2024 and issued operating guidelines vide circular dated January 8, 2025. The recent changes include:

i. registration of part-time research analyst,

ii. appointment of independent compliance officer,

iii. compliance audit requirements,

iv. segregation of research & distribution activities,

v. capping on fees,

vi. qualifications & certification requirements,

vii. deposit requirements,

viii. dual registration requirements, etc.

One of the eye openers has been, who shall be a classified as Research Analyst? Persons providing ‘research services’ for consideration shall only fall within the definition of research analyst.

This implies that research services rendered without any consideration shall be outside the ambit of these regulations.

The key changes outlining the changes in the RA industry are discussed below, most of which are to be implemented by 30th June, 2025, unless specified otherwise:

PART-TIME RESEARCH ANALYSTS

There are many persons who provides research services however their main activity is not that of providing research services. SEBI has now introduced specific provisions for part-time research analysts, acknowledging the diverse professional backgrounds of individuals and not engaged in business / employment related to securities market and does not involve handling/ managing of money / funds of client / person or providing advice / recommendation to any client /person in respect of any products / assets for investment purposes. Further, applicant engaged in in any activity or business or employment permitted by any financial sector regulator or an activity under the purview of statutory self- regulatory organisations such as Institute of Chartered Accountants of India (‘ICAI’), Institute of Company Secretaries of India (ICSI), Institute of Cost Accountants of India (ICMAI) etc. shall be considered eligible for registration as part-time RA.

This shall create more avenues for CA’s providing their statutory services. For example, a CA who shall be engaged in providing security specific recommendations to the client, which is not investor specific, even though as a part of tax planning/tax filing is required to seek registration as a Part time RA. This provision allows for flexibility in the industry, opening opportunities for professionals in other domains to engage in research analysis while adhering to regulatory frameworks. However, one must keep in mind the provisions of Code of Ethics of ICAI before engaging in such assignment.

Part-time RA shall be required to have similar qualification and certification requirements prescribed under RA regulations for full-time RAs. They shall provide an undertaking stating that it shall maintain arms-length relationship between its activity as RA and other activities and shall ensure that its services are clearly segregated from all its other activities at all stages of client engagement and a specific disclaimer may be given to that extent.

The investor should at all times keep in mind that no complaints can be raised to SEBI for the other services provided by a part-time RA.

APPOINTMENT OF COMPLIANCE OFFICER

With the objective of reducing the cost of compliance by having a fulltime compliance officer, Regulation 26 of the RA Regulations allows non-individual research analysts to appoint an independent professional who is a member of professional bodies like ICAI, ICSI, ICMAI, or other bodies specified by SEBI, provided the professional holds the relevant certification from NISM as required by SEBI. However, the principal officer of the firm must submit an undertaking to the SEBI’s Research Analyst Administration and Supervisory Body (RAASB)/SEBI affirming that they will be responsible for ensuring compliance with the Act, regulations, notifications, guidelines, and instructions issued by SEBI or RAASB.

In this case, Practising Chartered Accountants will have better opportunities to be appointed as independent professionals in regulated entities, however, there lacks clarity whether one independent professional CA can be appointed as compliance officer in various RA entities or whether any statutory restrictions as applicable to number of audits permissible by a practising CA shall apply.

COMPLIANCE AUDIT REQUIREMENTS

Regulation 25(3) of the RA Regulations requires RAs or research entities to conduct an annual audit to ensure compliance with the RA Regulations. Practising CAs shall ensure that the audit is completed within six months from the end of financial year and the compliance audit report. Such compliance report along with adverse findings, if any and action taken thereof, duly approved by RA shall be submitted within 1 month from the date of audit report but not later than 31st October.

SEGREGATION OF RESEARCH AND DISTRIBUTION ACTIVITIES

Regulation 26C (5) of the RA Regulations mandates client-level segregation between research and distribution services within the same group or family of a RA or research entity. Furthermore, new clients must choose between receiving research services or distribution services at the time of onboarding. One of the key changes is that Stock broking activities shall not be considered as distribution services for the purposes of this regulation.

Clients are allowed to retain their existing assets under their current research or distribution arrangements without being forced to liquidate or switch them. However, they must comply with the new segregation requirements for any future services provided. The PAN of the client serves as the key control record for identifying and segregating clients at the individual or family level.

A member of ICAI/ICSI/ICMAI or auditor have to confirm compliance with client level segregation requirements within six months from the end of financial year.

While giving such certification, the practising CA shall ensure that for individual clients, the “family” is considered a single entity, and the PANs of all family members are grouped together for segregation purposes. Further verification should be done, whether the client has provided an annual declaration or periodic updation in respect of dependent family members. Further, RAs providing research services exclusively to institutional clients and accredited investors may be exempt from these segregation rules, provided the client signs a waiver acknowledging this.

FEE STRUCTURE AND CLIENT CHARGES

The new regulations outline the maximum fees that research analysts can charge their clients, ensuring transparency in the fee structure and a level playing field for both IA’s & RA’s.

RAs can charge maximum fee of ₹1,51,000 annually per individual or Hindu Undivided Family (HUF) client and exclude non-individual clients, accredited investors, and institutional clients seeking proxy advisory services. For these clients, fees will be negotiated bilaterally and are not subject to the specified caps. RAs may charge fees in advance with the client’s consent, but the advance should not exceed one-quarter of the annual fee. However, statutory charges are not included in this fee cap. The statutory auditor and the compliance auditor shall ensure adherence to these limits during the course of the audits of such research analysts.

i. Changes in Qualification and Certification Requirements

No person can act as an RA without possessing a requisite qualification. SEBI has prescribed minimum qualifications for Research Analysts as under: –

A professional qualification or graduate degree or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association.

Or

A professional qualification by completing a Post Graduate Program in the Securities Market (Research Analysis) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute.

One of the major changes as compared to the erstwhile regulations is eliminating the need of having in place a graduate in any discipline with an experience of atleast 5 years in activities relating to financial products or markets or securities or fund or asset or portfolio management.

This change has led to a level playing field for new entrants as well as veterans in this field.

ii. Persons associated with research services shall, at all times, have minimum qualification of a graduate degree in any discipline from a university or institution recognized by the Central Government or any State Government or a recognized foreign university or institution.

iii. An individual registered as research analyst under these regulations, a principal officer of a non-individual research analyst, individuals employed as research analyst, person associated with research services and in case of the research analyst being a partnership firm, the partners thereof if any, who are engaged in providing research services, shall have, at all times, a NISM certification.

This has expanded its scope of bringing within its ambit “Persons Associated with Research Services” to have at all times minimum qualification as well as certification requirements, which shall also include all sales staff, service relationship & client relationship managers, who may not be involved in any research function but by virtue of being associated have to be qualified and certified.

DEPOSIT REQUIREMENTS FOR RESEARCH ANALYSTS

The new regulation has done away with the requirement of having a minimum net worth as it was identified that the RA’s provide research services broadly owing to their understanding and knowledge of the subject and their skills to arrive at a suitable advice/recommendation under a particular circumstance.

Further, the services provided are fee based and not related to management of client fund and securities and no significant infrastructure requirements, hence the concept of maintaining networth may not be aligned with the activities of RA.

To safeguard the interests of investors and enhance the financial credibility of research analysts, SEBI has introduced mandatory deposit requirements with immediate effect and for existing clients by 30 April 2025, based on the number of clients which is detailed as under:

  •  Deposit Structure Based on Numbers of Clients:
  •  0 to 150 clients: ₹1 lakh
  •  151 to 300 clients: ₹2 lakh
  •  301 to 1,000 clients: ₹5 lakh
  •  Over 1,000 clients: ₹10 lakh

This deposit must be maintained in a scheduled bank with a lien in favour of SEBI’s Research Analyst Administration and Supervisory Body (RAASB). This deposit shall be utilized for dues emanating out of arbitration and reconciliation proceedings, if RA fails to pay such dues.

DUAL REGISTRATION: INVESTMENT ADVISER AND RESEARCH ANALYST

SEBI has introduced provisions allowing individuals or firms already registered as Investment Advisers (IAs) to apply for dual registration as RAs subject to maintaining arms-length relationship between its activity as IA and RA and shall ensure that its investment advisory services and research services are clearly segregated from each other.

This provision was introduced considering the overlapping nature of activities under IA & RA services.

PRINCIPAL OFFICER DESIGNATION

The erstwhile Regulations did not mandate the requirement of designation of Principal Officer; however, the need was felt that the overall function of business and operations of non-individual RAs should be looked into by a responsible person.

Also, Regulation 2(1)(oa) of the RA Regulations mandates that if a partnership firm is registered as a research analyst, one of its partners must be designated as the principal officer and where no partner meets the necessary qualification and certification criteria, it must apply for registration as a research analyst in the form of an LLP or a body corporate.

This change must be made by 30th September, 2025, as per the SEBI directive.

USE OF ARTIFICIAL INTELLIGENCE (AI) IN RESEARCH

Any research analyst or research entity using artificial intelligence (AI) tools to provide services to clients is solely responsible for ensuring the security, confidentiality, and integrity of client data and also responsible to disclose the extent of AI tool
usage in their research services to clients and additional disclosures as may be necessary to enable informed decision of continuance or otherwise with the RA.

For existing clients, compliance with this requirement must be met by 30th April, 2025.

Research services provided by research analyst or research entity

Regulation 20(4) of the RA Regulations requires that research services provided by a RA or research entity must be supported by a research report that includes the relevant data and analysis forming the basis of the research. The RA or research entity must maintain a record of such research reports to ensure transparency and accountability.

Research services being provided by research analyst or research entity to any of its clients availing its other services as registered intermediary in another
capacity shall be considered as research services provided ‘for consideration’ even though no fee is charged by such research analyst or research entity directly from the client.

This implies that Research services provided by the research entity, who is also registered with SEBI as stock broker, to the clients availing its stock broking services are considered as research services ‘for consideration.

MODEL PORTFOLIO GUIDELINES

Regulation 2(1)(u) and 2(1)(wa) of the RA Regulations now define research services provided by research analysts to include the recommendation of model portfolios. In order to provide clarity on recommendation in respect of model portfolio by RA’s and to provide for safeguard of model portfolio, the guidelines issued shall ensure recommendations of model portfolio such as minimum disclosures, rationale for recommendations, nomenclature and performance of such recommendations.

The compliance auditor shall ensure as a part of its audit procedures check compliance with obligations set out under the model portfolio guidelines.

DISCLOSURE OF TERMS AND CONDITIONS TO THE CLIENT

Regulation 24(6) of the RA Regulations mandates that RAs or research entities must disclose the terms and conditions of their research services to clients and obtain their consent before providing any services or charging any fees. They should also include the Most Important Terms and Conditions (MITC), notified vide SEBI circular dated 17th February, 2025.

KYC REQUIREMENTS AND RECORD MAINTENANCE

Under Regulation 25(1) of the RA Regulations, RAs or research entities are required to follow Know Your Client (KYC) procedures for fee-paying clients and maintain KYC records as specified by SEBI.

WEBSITE REQUIREMENTS

RA Regulations mandates that RAs or research entities must maintain a functional website that includes specific details as outlined by SEBI.

CONCLUDING REMARKS

The new SEBI guidelines represent a significant step towards improving the transparency and accountability of the research analyst industry in India and also easing regulations to bridge the gap between number of investors vis-à-vis the number Registered RAs.

The change in the business model of research as a function also requires corresponding changes to the regulations to be at pace with the RAs, which include recognition of model portfolios within the definition of research services, introducing the concept of Part-time RAs, eliminating the need for experience, to allow ease of entry and participation of exuberant young minds in the securities market, etc.

Such changes demonstrate that the regulator has been watchful, supportive and in sync with the industry that it regulates while ensuring the investor trust and confidence is retained in the securities market.

Learning Events at BCAS

1. Finance, Corporate & Allied Law Study Circle – REIT n InvIT as Investment avenues held on Thursday, 13th February, 2025 @ Zoom.

CA Harry Parikh explained the concepts of REIT and InvIT, their features, structural overview, eligibility criteria, investment conditions, etc. He highlighted that REIT or InvIT are investment products and not a tax-saving product. He dealt with the decision-making criteria for investing in REIT or InvIT vis-a-vis traditional investment with the help of examples of REITs. He also enlightened on the key differences between Equity vs. Mutual Fund vs. REIT vs. InvIT, and tax implications thereof. He also shared his insights on factors to be considered for investing in REIT.

More than 70 participants enriched out of the masterly analysis of REIT, InvIT as investment avenues.

Youtube Link: https://www.youtube.com/watch?v=GxO-5VpL-xk

2. Public Lecture Meeting on “Union Budget 25 — Indirect Tax Proposals” held on Wednesday, 12th February 2025 @ Zoom.

The lecture meeting on the Union Budget 2025 and its Indirect Tax Proposals, held on 12th February 2025, featured CA Sunil Gabhawalla discussing various amendments in the Finance Bill 2025. He focused primarily on GST provisions while briefly touching upon customs, excise, and service tax amendments.

He began by explaining the concept of ‘input service distributor,’ detailing its position in the pre-GST regime, GST regime until 31st March 2025, and the post-2025 scenario. He highlighted differences in the definition of ‘Input Service Distributor’ (ISD) between the existing and proposed regimes, emphasising the potential for varied interpretations and possible litigations. Using the draft circular issued by the CBIC and other relevant jurisprudence, he illustrated cases falling under the ISD and Cross Charge Mechanisms.

He also examined the impact of retrospective amendments in the GST law, referencing the Hon’ble Supreme Court’s decision in the Safari Retreat’s case and highlighting open issues post-amendment. Further, he discussed issues arising from the amendment that incorporates additional conditions for self-adjustment of taxes based on credit notes. He provided guidance on addressing these issues, especially in light of the mandatory Invoice Management System (IMS) introduced by GSTIN in October 2024. He cited practical examples to highlight various aspects taxpayers should consider when dealing with the IMS mechanism. Additionally, he explained how the proposed track and trace mechanism would complement E-way Bill provisions. The meeting emphasised the government’s intent to gather maximum data and use artificial intelligence to curb tax evasion, leading to increased compliance and affecting the ease of doing business.

Finally, he covered miscellaneous amendments related to ‘local authorities,’ ‘vouchers,’ amendments in Schedule III concerning supplies by SEZ / FTWZ units, and the rationalisation of pre-deposits required under appellate proceedings in disputed orders imposing penalties.

The lecture was attended by approximately 325 participants online.

BCAS Lecture Meetings are high-quality professional development sessions which are open to all to attend and participate. The readers can view the lecture meeting at the below-mentioned link:

Youtube Link: https://www.youtube.com/watch?v=yAzBv4CAHNw

3. Public Lecture Meeting on Direct Tax Provisions of Finance Bill, 2025 held on Thursday 6th February, 2025 @ Yogi Sabhagruh Auditorium Dadar East

The public lecture on Direct Tax Provisions under the Finance Bill 2025 was a comprehensive discussion led by noted tax expert CA Shri Pinakin Desai. The session emphasised the significant changes in income tax slab rates and corresponding rebate provisions, which were perceived positively. The lecture highlighted that this year’s budget prioritises stimulating consumption over infrastructure investment, marking a substantial increase in tax-free slab rates compared to previous years. Notably, there was a significant shift anticipated as taxpayers may transition from the old tax regime to the new one, leading to increased discretionary spending and ultimately contributing to GDP growth.

Shri Pinakin Desai provided insights into several key provisions of the Finance Bill, 2025 analysing changes to tax rates, corporate taxation, TDS rationalisation, and the taxation of charitable trusts. The lecture also discussed new provisions concerning Tax Collection at Source (TCS) and implications for companies undergoing amalgamations. Shri Pinakinbhai’s thorough analysis offered clarity on how these changes would affect various stakeholders and emphasised the need for careful navigation of the new tax landscape.

KEY INSIGHTS

  • Increased Tax-Free Income Thresholds: The new regime allows individuals to earn up to ₹12.75 lakhs without incurring tax, significantly benefiting middle-income taxpayers. This change is expected to uplift the overall spending capacity of households, resulting in higher consumption rates and positively influencing economic growth.
  • Charitable Trust Registration Validity: The extension of the registration period for small charitable trusts from five to ten years represents a significant reduction in administrative burdens for these entities, encouraging more charitable initiatives and financial stability among smaller trusts.
  • Tax Deductions for Rent Payments: The amendment reducing the threshold for tax withholding on rent from ₹2.4 lakhs annually to ₹50,000 monthly for companies is a notable change.
  • Implications of Changes in applicability of Rebate: The decision to disallow rebates for special rate incomes under capital gains could reduce tax relief for many taxpayers, necessitating careful consideration of investment strategies to optimise tax liabilities.
  • Restrictions on Loss Migration: The amendment aims to curb the indefinite extension of loss carry-forwards through repeated amalgamations, ensuring a fair and consistent tax treatment. Previously, amalgamated companies could extend the carry-forward period indefinitely, effectively resetting the 8-year limit with each new amalgamation. The amendment aims to prevent this perpetual “evergreening” of losses. Shri Pinakinbhai explained the impact of this amendment through various illustrations.
  • Non-Resident Tax Incentives: The concessional tax rates for foreign entities providing technology and services to specified manufacturing industries reflect India’s strategy to foster foreign investment in critical sectors such as electronics, enhancing competitive advantages and technological development. A new presumptive taxation scheme introduced for non-residents providing services or technology to Indian companies engaged in the manufacture of electronic goods. Shri Pinakinbhai also highlighted possibility of a drafting error in the proposed legislation, mistakenly suggesting that both payment and receipt of 100 rupees result in a taxable consideration of 200 rupees which should be corrected to align with sections 44B and 44BB, of the Income-tax Act.
  • Extension of time limit for passing Penalty Orders: The time limit for completing penalty orders related to assessment has been changed from 6 months from the month of receiving the order from the tribunal to 6 months from the end of the quarter of receiving the order.
  • Transfer Pricing Assessment: Instead of annual assessments, a block of 3 years for determining the Arm’s Length Price (ALP) is introduced. Once the methodology is settled in the first year, it remains binding for the next two years. Taxpayers can opt for this block assessment, either during or after the Transfer Pricing (TP) assessment. He also mentioned that the effectiveness of these new measures shall depend upon the rules to be prescribed in this regard.
  • Updated Return Filing: The provision now allows updated returns to be filed up to the end of the third or fourth year, with additional taxes of 60 per cent and 70 per cent, respectively. This provision aims to promote compliance by offering a structured approach for taxpayers to rectify errors or omissions, albeit with significant additional tax implications for later filings.

In summary, the lecture delivered by Shri Pinakin Desai provided a detailed analysis of the Finance Bill 2025, shedding light on various changes that will impact individual taxpayers, businesses, and charitable organisations alike. The meeting was attended in person by 450 plus participants and encouraging response of over 26,000+ viewers online.

The readers can view the lecture meeting at the below-mentioned link:

Youtube Link: https://www.youtube.com/watch?v=ncVT3ejAtPA

4. Felicitation of Chartered Accountancy pass-outs of the November 2024 Batch held on Friday, 31st January, 2025 @ IMC.

Milestone 2.0 — Felicitation of newly qualified CAs of the November 2024 batch.

A felicitation event for the newly qualified chartered accountants of the November 2024 batch was held on 31st January, 2025, at the Walchand Hirachand Hall of the Indian Merchant Chambers building at Churchgate by the SMPR Committee. The event was highly successful and close to 400 candidates attended the event. The theme for the event was Milestone 2.0, and the guest and mentor for the event was Past President CA Naushad Panjwani. He guided the participants by taking them through the Japanese concept of Ikigai and drawing parallels to their phase in life where they should aim to find their Ikigai, which would lead them to success and happiness. The participants diligently listened and also provided their perspectives on the matter. Rankers were felicitated first, and they addressed the audience subsequently and shared their experience throughout the journey of becoming a CA. A celebratory cake was cut and then all the successful newly passed CAs were felicitated. The excitement on everyone’s faces was visible, and that is testimony to the success of the event.

5. Indirect Tax Laws Study Circle Meeting held on Friday, 31st January, 2025 @ Zoom.

Group leaders CA G. Sujatha & CA Archana Jain prepared and presented various case studies on Government Supplies and explained the concepts of Central Government, Government Authority, State Government, etc.

The presentation covered the following aspects for detailed discussion:

1. Concept of Supplies by Central Government, State Government, Local Authority.

2. Supplies liable to tax or part of sovereign function.

3. Taxability of charges paid to the Ministry of Corporate Affairs at the time of registration & subsequently do both enjoy the exemption.

4. Detailed discussion on mining rights and other rights associated with land and fees paid for getting rights.

Around 60 participants from all over India benefitted by taking an active part in the discussion. Participants appreciated the efforts of the group leader & group mentor.

6. ITF Study Circle Meeting held on Thursday, 30th January, 2025 @ Zoom.

Group Leaders – CA Nemin Shah and CA Dipika Agarwal

Guidance for Application of Principal Purpose Test under India’s treaties vide CBDT Circular 1/2025 dated 21st January, 2025 (Circular) — Group Leader CA Nemin Shah.

During the session, CA Nemin Shah discussed the context relating to the Principal Purpose Test (PPT). For this, he extensively discussed the basics of MLI and PPT. Another perspective which was discussed was whether PPT was for general anti-avoidance or a specific anti-avoidance. The Group Leader went on to discuss the key points of the Circular, such as the application of PPT is based on an objective assessment of the relevant facts and circumstances, its applicability in cases where the PPT has been incorporated through bilateral negotiations or through MLI, the scope of grandfathering provisions under the treaties which will remain outside the purview of PPT. He went on to discuss the various issues that could arise, such as its applicability to the India-Mauritius tax treaty, which MLI does not cover.

SC Lowy P.I. (Lux) S.A.R.L, Luxembourg v. ACIT [2024] 170 taxmann.com 475 (Del-Tribunal) – Group Leader CA Dipika Agarwal

CA Dipika explained the facts and the arguments of the assessee and revenue. She discussed the Tribunal’s findings. One of the key focus points of the discussion was that it appeared from the Tribunal’s order that PPT was not invoked at the assessment level, but discussed only at the Appellate level. Further,
there was no discussion in the Tribunal’s order for choosing Luxembourg over the Cayman Islands for making investments. The group discussed the implications of the same. The Group Leader went on to discuss the Tribunal’s findings in relation to Tax Residencey Certificate (TRC) and Limitation of Benefits (LOB). With respect to the PPT clause, the assessee’s incorporation in Luxembourg was not for the principal purpose of obtaining tax treaty benefits, as it had substantial investments, which it continues to hold.

7. 22nd Residential Leadership Retreat — Living in Harmony held on Friday, 24th January, 2025 and Saturday, 25th January, 2025 @ Rambhau Mhalgi Prabodhini Keshav Srushti Bhayander (West)

The 22nd Leadership Retreat was held on the theme of `Living in Harmony’ under the guidance and training of Mr M. K. Ramanujam and Mr R Gurumurthy. 27 participants including 6 couples attended, of which, more than 15 participants were attending the Leadership Retreat for the first time.

The key learnings are summarised as follows:

  • Harmony is unity in diversity which brings joy, peace, happiness, satisfaction and fulfilment.
  • One has to focus from zoom in to zoom out. i.e. look at the wider picture from a broad perspective for a higher purpose over a long span and come out of small and micro views. Zooming out is like a compass of values to find the right meaning in life.

To identify challenges, zoom in and use an emotional filter to zoom out.

  • P R E M A: The acronym represented Positive Emotions, Relationship, Engagement.
  • (Karma Yoga), Meaningful Life and Achievement – selfless service for a noble cause. This could be the guiding light.
  • Listen vis-a-vis Silent. Listen with empathy and compassion. Words “Silent” and “Listen” are complementing. So, engage in listening to be silent within and establish connect outside.
  • R A S (Reticular Access Syndrome) explains that whatever one focuses on, expands in the mind. We see the world as we are. So, one can use this to reinforce the attention to important things in life.
  • Nature operates on contrast. Sattva, Rajas and Tamas are like an interplay of darkness and light. The contrast of bright and dark, light and dark, day and night, white and black, happiness and sadness, joy and gloom. Contrast is natural. Negative things help us to appreciate the value of positives. Pain is a warning signal to pause. Self-acceptance guides us to Harmony. Therefore, one can transform from fear to faith, anger to care and work to relax.
  • Practice Harmony by observing without being judgemental.
  • Understand the basic needs, physical, social, spiritual, personal, interpersonal. The needs are distinct from wants. Needs are expressed through feelings. Listen to the feelings. One can understand that anger moves us away, whereas Love and compassion bring us closer to Harmony. Human pursuit (Purushartha) is for Kama, Artha, Dharma & Moksha. The purpose of human life is Moksha, for which doing Kama or pursuing Artha should be based on Dharma, respecting the highest universal values and principles.
  • Like a peel on the surface of a juicy fruit, the outer layer may have an unpleasant taste, but with faith and conviction, one can have the taste of juice and nectar within.
  • Bring inner transformation by working from Gratitude with Empathy & compassion.

In the penultimate session, discussion was on the film Peaceful Warrior and the inspiring message coming out from the film’s dialogues.

In the concluding session, the participants shared the key points of learning from the camp.

8. Fireside Chat on “Return of Trump – What does it mean for America, India and the World” held on Monday, 27th January, 2025 @ BCAS

Speaker: Shri Natwar Gandhi

Moderator: Shri Rashmin Sanghvi

Widespread fear about various executive orders signed by Mr Trump is misplaced as most of them have been challenged and will have to pass the test of constitutional validity.

America has a strong democracy and deep-rooted institutions. No president can make fundamental changes at his will. Even with a majority in Congress and Senate, constitutional changes are not going to be possible in his four-year term.

One can expect him to use tariffs as a negotiating tool to gain trade favours. However, in the long term, it will hurt the US as well as the country on which high tariff is levied because it will lead to higher costs and consumer resistance. That will not augur well for the USA.

The USA will continue to be a dominant world power as long as the majority of trade uses USD as currency for settlement.

Tall claims about taking over some territories should be discounted as election rhetoric.

The US economy, despite popular perception, is doing well, with average household income (even in the most backward area) still much above par with the rest of the world. With the new administration, one can expect business-friendly policies and a return to manufacturing.

It will be difficult to reduce bureaucracy as all policies require ground-level staff to implement. The USA, with its large size and federal structure, will make such reduction only ornamental.

A large deficit close to USD 35 trillion will not curtail any growth initiatives as the world still uses America as its investment and wealth destination.

Despite threats, it will neither be possible nor practicable to deport almost 10 million illegal immigrants out of the US due to procedural and logistic challenges. By rough estimate, the cost and time of that purge will be 1 trillion USD and will take more than 10 years for the current number.

White supremacy lobby will continue to flourish, and borders will see very strong protection to prevent illegal immigrants from entering the USA. Despite that America is likely to become a Hispanic state with so many migrants from Latin America.

Skilled labour will be there to stay as the big business will not be able to operate without them. Hence, despite all the shouting about work visas, they will stay.

9. Webinar on Recent Important Decisions under Income Tax held on Friday, 24th January, 2025 @ Virtual

The Taxation Committee of the Bombay Chartered Accountants’ Society organised a Webinar on Recent Important Decisions under Income Tax.

Adv. Devendra Jain delivered an in-depth presentation on reassessment proceedings. He explained the evolving judicial perspective on reassessment, especially in light of recent amendments and rulings by the Supreme Court and the High Courts. His session provided clarity on the crucial points to be considered while representing matters on reassessment cases.

Adv. Ajay Singh began the session by providing a detailed analysis of key judicial decisions that have significant implications for the interpretation and application of Income tax laws. He highlighted the judgments relating to capital gains, gift tax under section 56(2)(x), reduction of share capital, Condonation of delay in filing forms, interest on IT refund, penalty provisions and share transactions, focusing on their impact on taxpayers and professionals alike. He emphasised the importance of understanding these rulings to develop better compliance and advisory strategies.

The session provided participants with a comprehensive understanding of recent developments in Income tax law and practical insights to navigate legal complexities.

Youtube Link: https://www.youtube.com/watch?v=FlL13OSdCOw

10. 25th Silver Jubilee Course on Double Taxation Avoidance Agreements held from Monday, 2nd December, 2024, to Tuesday, 21st January, 2025 @ Zoom.

The Society successfully conducted its 25th Silver Jubilee Study Course on ‘Double Taxation Avoidance Agreement’ via an online platform spanning from 2nd December, 2024 to 21st January, 2025.

Based on participants’ feedback and consultation with seniors in the Committee, for this 25th Silver Jubilee Course on Double Taxation Avoidance Agreements, BCAS has come up with a unique concept of sharing the recordings of the 24th DTAA Course undertaken in December 2023 as an option to the participants followed by multiple panel discussions. One introductory session on “Overview of International Taxation & DTAAs” and ten panel discussion sessions were planned to take forward the learnings by discussing the intricate and practical issues on the topics of International Taxation, making the course more interactive. Participants were also provided an option to share the queries or issues to the panellists by way of Google form before the respective panel discussion. Eminent tax professionals of the country were the panellists as well as moderators for the series of panel discussions.

All sessions of the course, including last year’s recorded sessions, covered all articles of DTAA, an overview of FEMA / BEPS / MLI / GAAR, Transfer Pricing, Source Rules under the Income Tax Act, 1961, TDS under section 195, Substance v/s Form, and other relevant provisions. The course included complex topics such as Taxation of Specific Structures (e.g., Partnership, Triangular Cases, AOP, etc.) and Selection of Structures.

More than 200 Participants from 15 states spread over 30 cities attended the course which was well-received and appreciated by the participants.

11. Revolutionising CA Practice with Generative AI: Practical Use Cases for Efficiency and Growth held on Thursday, 9th January, 2025 @ Virtual

CA Rahul Bajaj recently led an insightful 2-hour webinar, “Revolutionising CA Practice with Generative AI: Practical Use Cases for Efficiency and Growth,” showcasing how AI can transform Chartered Accountancy practice. The session delved into real-life applications of Generative AI, highlighting its potential to enhance productivity, streamline operations, and improve client servicing. Participants learned how AI can be used to draft professional emails, generate legal documents, automate data entry in Tally, and prepare financial forecasts, all while saving time and reducing errors.

Key takeaways included using AI to create checklists, templates, and peer review documentation like Engagement and Appointment Letters. AI also supports the generation of client training materials, social media content, and even notices, helping firms stay engaged with clients while improving efficiency. By automating repetitive tasks such as bank statement analysis, CAs can focus more on strategic activities, boosting overall productivity.

The session concluded with CA Rahul Bajaj emphasising the importance of integrating AI into CA practices for long-term growth. With tools that enhance accuracy and decision-making, AI is positioning itself as a game-changer, enabling Chartered Accountants to provide higher-value services and streamline their operations for greater success in an increasingly digital world.

The excellent response that the webinar got in terms of enrolment from across various cities of India and from persons of various age groups, as well as the feedback received at the end of the webinar, is testimony to the growing importance and popularity of AI in the CA fraternity.

12. BCAS Turf Cricket Tournament 2025 held on Sunday, 5th January, 2025 @ Andheri Sports Complex, Azad Nagar, Andheri West

The BCAS Turf Cricket Tournament 2025 held on 5th January 2025 at Andheri Sports Complex, was a resounding success, hosting 12 men’s and 2 women’s teams in a thrilling display of sportsmanship and camaraderie.

The tournament was exclusively for CA Members, Students, and BCAS Staff was well received with overwhelming participation.

The format in Men’s category was of four groups of three teams each, which formed the league stages followed by knockout rounds of Quarter-finals (8 teams), Semi-finals (4 teams) and the Finals. The 12 Men’s teams that competed in the Tournament were Bansi Jain Warriors, Bathiya Bravehearts, BYA Titans, CNK Super Strikers, G&S Gladiators, Kirtane & Pandit Maestros, KNAV Smashers, MAS Mavericks, MCS Super Kings, MGB Yoddhas, NPV Challengers and TeaMPC whereas the 2 Women’s teams were NPV Thunderbirds and BCAS Queens.

The tournament was filled with exciting matches, impressive individual performances, fun-filled live commentary and enthusiastic support from the spectators. The 8 teams that qualified for the Men’s quarterfinals were MAS Mavericks, Kirtane & Pandit Maestros, CNK Super Strikers, MGB Yoddhas, G&S Gladiators, NPV Challengers, KNAV Smashers and Bathiya Bravehearts. The Semi Finals were then played between the 4 teams viz. Kirtane & Pandit Maestros vs. NPV Challengers and CNK Super Strikers vs Bathiya Bravehearts.

The day culminated in a nail-biting Men’s final between Bathiya Bravehearts vs Kirtane & Pandit Maestros, with the former emerging victorious whereas BCAS Queens emerged as winners in the Women’s category.

The tournament left a lasting impression on all participants and thus setting the stage for future editions of this exciting event.

13. BCAS Nxt Learning and Development Bootcamp on Idea to IPO: A Beginner’s Guide held on Saturday, 4th January, 2025 in hybrid mode

The Human Resource Development Committee of BCAS organised a BCAS NXT Learning & Development Bootcamp on “Idea to IPO: A Beginner’s Guide” on Saturday, 4th January, 2025. The session was led by Mr Aditya Rathod, a CA Final student, who delivered a comprehensive presentation on the fundamentals and key regulations governing IPO in India. His presentation covered a wide range of topics, including essential definitions, various IPO methods, and an overview of the IPO process and its approach. He also shared practical experiences to help beginner article students navigate the complexities of the IPO Listing Process.

CA Rimple Dedhia, the mentor for the session, provided valuable insights and guidance throughout, offering expert interventions as needed. The boot camp was held in person at the Mehta Chokshi & Shah LLP office and streamed online, with active participation from students across India.

Youtube Link: https://www.youtube.com/watch?v=-WYuPDeOJus&t

14. Series of Sessions on Standards on Auditing and Key Learnings from NFRA Orders held on Friday, 13th December, 2024 to Friday, 3rd January, 2025 @ Zoom

BCAS has always been a pioneer in equipping its members, in particular and other stakeholders at large with the knowledge in the arena of Accounting Standards, Ind AS and Standards on Auditing. The challenge of the auditor is to address the risks posed while providing assurance services within the regulatory framework of ICAI and NFRA. Compliance with Auditing Standards is of utmost importance while carrying out audits.

Considering these challenges that the auditor has to address while performing duties, the Accounting & Auditing Committee organised a well-designed series of virtual sessions covering Auditing standards and Key Learnings from NFRA orders, which should be kept in focus while executing audit assignments along with practical guidance. The Sessions were held on Fridays for 2 hours each, totalling 8 hours.

The main objective of designing this series of sessions was to delve deeply into the subjects affecting the audit fraternity and to provide a platform for the Members in Practice to come together and get the opportunity to have deep insights into the practical challenges which crop up while implementing the complicated standards.

Course Segments: 4 sessions of 2 hours each

Session Topic Speaker
Learnings from recent NFRA Orders Ms Vidhi Sood Secretary, NFRA
Audit Documentation (SA 230) CA Amit Majmudar
SA 600 – Using the work of another auditor (along with the NFRA Circular dated October 03, 2024, regarding responsibilities of the Principal Auditor and Other Auditors in Group Audits CA Pankaj Tiwari
Planning risk assessment and related matters (SA 300, 315, 320 & 330) CA Murtuza Vajihi

The sessions were designed to give practical and case study-based insights to the participants on various topics.

The course was inaugurated with the opening remarks from the Chairman of the Accounting and Auditing Committee CA Abhay Mehta and the President of BCAS, CA Anand Bathiya, both underline the importance of knowledge sharing and the role of the BCAS in conducting such programs. To make the course effective, faculties with specialised knowledge and relevant experience were engaged to give participants practical insights and wholesome experiences.

The course started with the session of Ms Vidhi Sood Secretary, NFRA, where she updated the participants on various NFRA orders, practical examples and issues and learnings from the same.

The session of Audit Documentation SA 230 by CA Amit Majmudar broadly covered the areas pertaining to the Assembly of Audit Files, Key Audit Workpapers and guidance on ICAI Audit Documentation

The Session on SA 600 — Using the work of another auditor by CA Pankaj Tiwari mainly covered existing SA 600 & procedures adopted by the Auditor, various lapses highlighted by NFRA in the audit of CFS, Key elements of Circular issued by NFRA & potential challenges in implementation of the Circular.

The session on Planning Risk Assessment and Related Matters by CA Murtuza Vajihi broadly covered the scope, objective, and documentation of the standard along with practical examples of the standards and also reference to NFRA and QRB learnings on these standards.

The above sessions generated a lot of interactions between the participants and the respective faculties. The course commenced on 13th December, 2024, and ended on 3rd January, 2025. 111 participants attended the Course, and was well received with the overall feedback from the participants was very encouraging.

REPRESENTATIONS AND SOCIAL MEDIA

1. NFRA Representation: Addressing Duplication in Fraud Reporting for Statutory Auditors

BCAS has submitted a representation to the National Financial Reporting Authority (NFRA) regarding the fraud reporting requirements for statutory auditors of regulated entities. The representation highlights the need to eliminate the duplication of reporting to various authorities, aiming to streamline the process and simplify the regulatory framework for entities such as banks, insurance companies, and NBFCs. By reducing redundant reporting, the proposal seeks to create a more efficient and effective regulatory environment.

Readers can read the entire representation by link: https://bit.ly/NFRA-Representation

2. Union Budget 2025: 8th Consecutive Budget by FM Nirmala Sitharaman — BCAS’s Pre-Budget Memorandum Available Online.

As Finance Minister Nirmala Sitharaman presents her 8th consecutive Union Budget, BCAS continues its proactive role in representing the views of its members and the wider community. We are pleased to announce that BCAS has submitted the Pre-Budget Memorandum for the Finance Act 2025-26 to the Union Minister of Finance and the Ministry of Finance, Government of India.

Readers can read the entire representation by link: https://bit.ly/Pre-Budget-Memorandum-2025-26

3. BCAS Reimagine Conference: Exclusive Videos Now on YouTube, with Thousands of Views!

BCAS hosted the ReImagine Conference, a three-day event in January 2024 that explored progressive topics crucial to the professional landscape. With an overwhelming response, the discussions held the potential to shape the future trajectory of our profession.

In line with BCAS’s mission of knowledge dissemination for professional development, the event videos are now available on YouTube, completely free of charge. Featuring a wide range of topics presented by industry experts and professional stalwarts, these videos offer valuable insights for professionals at all levels.

Playlist Titles:

1. Reimagine India – Keynote Address by Padma Bhushan Shri Kumar Mangalam Birla

2. Digital Infrastructure – A Game Changer

3. Reimagine the new age professional firms

4. CFO Round Table – Technology, Innovation and Sustainability

5. Use of AI / Tech-Data as Evidence in Tax Cases – Direct Tax and Indirect Tax

6. Reimagine India’s Capital Market Landscape

7. Changing Corporate Landscape – Professional opportunities

8. The Victorious – A Model for Leadership

9. New Age Wars – Future of the World – Role of Professional

10. One World – One tax – VasudhaivaKutumbakam

11. Ride the Capital Market – Take the Bull by its Horns

12. The Future of Audit Profession

13. One Giant Leap – Start-ups – Importance of Professionals in Start up Journey

14. Interchanging Roles – Practice to CFO, CFO to Practice, CA to Nation Building

15. Reimagine – Closing Ceremony & Vote of Thanks

YouTube link: https://bit.ly/Reimagine-Conference

4. BCAS YouTube Channel Hits 1 Million Views

The BCAS YouTube channel has reached a significant milestone, surpassing 1 million views. Over the years, it has evolved into a valuable resource, offering a wealth of professional content and knowledge. With an expanding collection of open-for-all sessions, the channel continues to serve as a hub for valuable learning. Members who have not yet subscribed are encouraged to do so and stay updated with the latest content.

Youtube Link: https://www.youtube.com/channel/UC3cxrmOi8hRA31LxBEXGpUQ

5. Interactive meeting of managing Committee Members with Dr Harish Mehta and Mr Rajiv Vaishnav

Dr Harish Mehta and Mr Rajiv Vaishnav were invited to interact and share their experience of building and successfully running the NPO with the BCAS Managing Committee members on 8th January, 2025.

Dr Harish Mehta is a founder member and former Chairman of NASSCOM and Rajiv Vaishnav is former President of NASSCOM. They shared experience in building brands, nurturing teams, and growing organizations. During the interaction, Dr. Harish Mehta and Mr. Rajiv Vaishnav appreciated the work done by BCAS and emphasised the importance of valuing volunteers, building trust, and promoting unity, especially during challenging times. They also advised that before making representations to government authorities, it’s essential to gather collective opinions from members.

Dr Mehta autographed copies of his book, “Maverick Effect: The Inside Story of India’s IT Revolution”, for the committee members.

BCAS IN NEWS

Link: https://bcasonline.org/bcas-in-news/

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.7/2025-Central Tax dated 23rd January, 2025

By above notification the amendments are made in CGST Rules regarding grant of temporary identification number.

ii) Notification No.8/2025-Central Tax dated 23rd January, 2025

By above notification waiver for late fees for GSTR-9 is provided.

iii) Notification No.9/2025-Central Tax dated 11th February, 2025

By above notification, date of coming into force of rules 2, 8, 24, 27, 32, 37, 38 of the CGST (Amendment) Rules, 2024 is specified.

B. CIRCULARS

(i) Clarification on regularising payment of GST on co-insurance premium — Circular no.244/01/2025-GST dated 28th January, 2025.

By above circular the clarification is given regarding regularizing payment of GST on co-insurance premium apportioned by the lead insurer to the co-insurer and on ceding / re-insurance commission deducted from the reinsurance premium paid by the insurer to the reinsurer.

(ii) Clarification on applicability of GST on certain services — Circular no.245/02/2025-GST dated 28th January, 2025.

By above circular, clarifications regarding applicability of GST on certain services are given.

(iii) Clarification on late fees — Circular no.246/03/2025-GST dated 30th January, 2025.

By above circular, clarification is given about applicability of late fee for delay in furnishing of FORM GSTR-9C.

C. INSTRUCTIONS

(i) The CBIC has issued instruction No.2/2025-GST dated 7th February, 2025 by which instruction is given about procedure to be followed in department appeal filed against interest and/or penalty only, with relation to Section 128A of the CGST Act, 2017.

D. ADVANCE RULINGS

Classification – Instant Mix Flour
Ramdev Food Products Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/01 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2021/AR/17) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/29/2021 dated 19th July, 2021, passed by the Gujarat Authority for Advance Ruling [GAAR].

The appellant is engaged in the business of manufacture and supply of the below mentioned ten instant mix flours viz.

The process undertaken for manufacturing & selling the above products was explained as under:

“(a) that they purchase food grains and pulses from vendors.

(b) that such food grains/pulses are fumigated and cleaned for removal of wastage.

(c) that food grains/pulses are then grinded and converted into flour.

(d) that flour is sieved for removal of impurities.

(e) that flour is then mixed with other ancillary ingredients such as salt, spices, etc. The proportion of flour in most of the instant mixes is ranging from 70% to 90%.

(f) that flour mix is then subjected to quality inspection and testing.

(g) that flour mix is thereafter packaged and stored for dispatch.”

The table showing constituent components of instant mix flour was also submitted. The constituents included dried Leguminous Vegetable Flours, Rice & Wheat Flours, Additives, Spices etc.

The appellant’s submission was that the instant flour mix retains its identity as flour and therefore they are classifiable under heading 1101, 1102 or 1106, as the case may be, based on the dominant flour component.

With above information, appellant has sought ruling about classification of above products.

The ld. AAR has ruled that above products merits classification at HSN 2106 90 attracting 18 per cent GST as per Sl. No. 23 of Schedule III to the Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017.

The instant appeal was against the above ruling. The appellant reiterated its contentions about products being covered by heading 1101, 1102 or 1106 and liable to tax @ 5 per cent.

The appellant supported its contentions mainly on ground that the instant mix are mixture of flours like Black Gram (Urad Dal) and / or Rice and / or Refined Wheat flour and / or Bengal Gram (Chana Dal) and / or Green Gram (Moong Dal) with addition of very small amount of additives like iodised Salt and / or Sugar and/or Acidity regulator (Citric acid INS 330) and / or Raising agent (Sodium bicarbonate INS 500(ii)) and that it does not contain any spices and hence should be covered as flours under Chapter 11 and liable to GST @ 5 per cent;

The ld. AAAR referred to heading 1101, 1102 and 1106 and also Explanatory notes to HSN in respect of heading 1101 and 1102.

After referring to headings in detail, the ld. AAAR observed that the classification of the product is required to be determined in accordance with the terms of the headings. As per chapter heading 1106, it covers Flour, Meal and Powder of the dried leguminous vegetables of Chapter Heading 07.13 and other specified products. The ld. AAAR further observed that as the products of the appellant contain other ingredients like Iodised salt, Acidity regulator (INS 330), Raising agent (INS 500(ii)) in different proportions, which are not mentioned in the chapter heading 1106 or the relevant explanatory notes of HSN, the said products are not covered under Chapter Heading 1106.

The contention about classification under chapter heading 1101 and 1102 also rejected by the ld. AAAR observing that even if flour improved by adding of small quantity of specified substance remains under such heading the same will not be correct when substances (other than specified substances) are added to the flours with a view to use as ‘food preparations’, and said flour gets excluded from chapter heading 1101 or 1102.

The reliance of appellant on VAT determination order also held not applicable in view of change in classification entries.

Finally, the ld. AAAR approved the classification done by ld. AAR and rejected the appeal.

Exemption – Services to Panchayat / Municipality /State Government

Data Processing Forms P. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/03 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2022/AR/10) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/43 dated 28th September, 2022.

The appellant is engaged in the manufacturing of computer forms, cut sheets, printed forms & is also engaged in trading of printers, cartridges, laptops, barcode stickers, OMR Sheet and educational booklets etc.

The appellant provides below-mentioned services to Gujarat Public Service Commission (GPSC) and Gujarat Panchayat Service Selection Board (GPSSB);

The appellant was of the view that the aforementioned services provided to GPSC and GPSSB are exempt in terms of entries 3 and 3 A of the Notification 12/2017-CT (R) and sought ruling from the ld. AAR. The ld. AAR passed ruling that the appellant is not eligible to the exemption under entry No. 3 and 3A of notification No. 12/2017-CT (R) dated 28th June, 2017 as amended, for supply of service to the Gujarat Panchayat Service Selection Board or to GPSC.

This appeal was against the above ruling of AAR. The main argument of the appellant was that GPSSB is an integral part of Panchayat system & therefore a local authority and it is covered under the provisions of article 243G and entitled for the benefit of entries 3 & 3A of the notification.

Similarly, in respect of GPSC the argument of appellant was that, it is a constitutional body having its own identity and 100% controlled, financed & managed by the State Government and therefore it is ‘State Government’ attracting above entries 3 and 3A.

The ld. AAAR noted that in terms of the entry 3 of notification No. 12/2017-CT (R), as amended, pure services [excluding works contract services or other composite services involving supply of any goods], provided to a Central Government, State Government, Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G or to a Municipality under article 243W of the Constitution of India, are exempt. Similarly, in terms of entry 3A of notification, composite supply of goods and services, in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to Panchayat under article 243G or to Municipality under article 243W of the Constitution, are exempt.

The ld. AAAR also noted principle of interpretation that the exemption Notification is required to be interpreted strictly.

The ld. AAAR noted that appellant has relied on the definition of ‘local authority’ u/s 3(31) of the General Clauses Act. The ld. AAAR noted that since the supply to GPSSB is composite supply, it is required to be covered by entry 3A. The ld. AAAR observed that the GPSSB is neither a Central / State Government nor a Union territory. The ld. AAAR also held that it is not local authority as defined u/s.2(69) of the CGST Act. The ld. AAAR held that since the primary condition of the composite services having been provided to a Central Government, State Government, Union territory or local authority is not getting satisfied, the appellant is not eligible for the benefit of the notification and confirmed ruling of AAR about GPSSB.

In respect of GPSC, the ld. AAAR noted the contention of the appellant that GPSC is a constitutional body having its own identity and 100 per cent controlled, financed & managed by the State Government which amounts to ‘State Government’.

In this respect the ld. AAAR referred to definition of term ‘State Government’ under the General Clauses Act, 1897, which reads as under:

“(60) “State Government”, –
(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, the Central Government;

(b) as respects anything done [after the commencement of the Constitution and before the commencement of the Constitution (Seventh Amendment) Act, 1956], shall mean, in a Part A State, the Governor, in a Part B State, the Rajpramukh, and in a Part C State, the Central Government;

[(c) as respects anything done or to be done after the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean, in a State, the Governor, and in a Union territory, the Central Government;

and shall, in relation to functions entrusted under article 258A of the Constitution to the Government of India, include the Central Government acting within the scope of the authority given to it under that article];”

The ld. AAAR observed that in view of the above definition, GPSC is not State Government and confirmed ruling of AAR. The judgments cited by the appellant were distinguished. The ld. AAAR rejected the appeal confirming the ruling of ld. AAR.

Classification — “Nonwoven Coated Fabrics”

Om Vinyls Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2024/21 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2023/AR/22) Dated: 6th September, 2024)(Guj)

The applicant explained the nature of the product with manufacturing process as under:

“Nonwoven fabric is manufactured from PVC films, adhesive gum and nonwoven in their factory;

* that manufactured film is ready for further process called lamination / thermoforming;

* that cellular leather cloth/thermoforming is used widely for auto tops [canopy], sports shoe upper by laminating a thin PVC film with another layer of calendered sheeting containing blowing agent with textile backing; that this combination can be expanded in a separate stenter / foaming oven;

* a drum heated to about 180o C is driven & provided with a rubber coloured pressure roller to press the layers together & eliminate trapped air;

* the laminated combination is made to travel inside the heated chambers where the blowing agent is activated & controlled expansion is initiated in the middle calendered film;

* the process matches the standard approved by BIS; that the product is used mainly in outdoor application where the weather condition is uncertain.”

It is informed that components like, PVC resin, DOP / DIN, CPS 52 per cent, CA CO3, Stabilisers, Anti-oxidants, Pigment & Poly propylene are used in the process.

The uses of non-woven fabrics were also mentioned like use as table cover, TV cover, Sofa cover, fridge cover etc.

The appellant has raised following questions.

“1. Whether ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC falls under HSN 56031400?

2. If ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 50?

3. If ‘nonwoven coated fabrics -coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 39?”

In personal hearing the applicant explained composition of product as under:

“PVC film      55% Rs.12.60
Gum               29% Rs. 6.40
Nonwoven     16% Rs. 3.00
— ———-
Total            100% Rs. 20”

The ld. AAR referred to relevant material under Customs Tariff Act,1975, HSN, Circular etc. and reproduced same in AR.

Upon conjoint reading of the manufacturing process, the section notes, chapter notes, etc., the ld. AAR observed that the nonwoven coated fabrics — coated, laminated or impregnated with PVC, will not fall under chapter 56.

On going through the HSN explanatory notes of chapter 50, the ld. AAR observed that generally speaking chapter 50 covers silk, including mixed textile materials classified as silk, at its various stages of manufacture, from the raw materials to the woven fabrics and it also includes silk worm gut. The ld. AAR also observed that the applicant’s product nonwoven coated fabrics — coated, laminated or impregnated with PVC, is a combination of nonwoven fabrics, adhesive coat and PVC sheet, thereby not meeting the primary requirement for falling under chapter 50. In view of the foregoing, the ld. AAR held that the product of the applicant would not fall within the ambit of chapter 50 also.

After going through the information, the ld. AAR held that since the product of the applicant is a mixture of various constituents, the product is to be classified as if they consisted of the material or component which gives them their essential character. Observing that the major constituent is PVC sheet which is 120 GSM out of the total 240 GSM, the ld. AAR held that the goods of the applicant viz nonwoven coated fabrics — coated, laminated or impregnated with PVC would fall under chapter 39.

About bags, ld. AAR followed circular no. 80/54/2018-GST dated 31st December, 2018 and held that Non-Woven Bags laminated with BOPP would be classifiable as plastic bags under tariff item 3923 and would attract 18 per cent GST.

Accordingly, the ld. AAR passed ruling that the product, nonwoven coated fabrics -coated, laminated or impregnated with PVC will fall under chapter heading 39 and the products [a] table cover, [b] television cover [c] washing machine cover would fall within the ambit of tariff item 392690 and would attract 18 per cent GST, while bags would be classifiable under tariff item 3923 and would attract 18 per cent GST.

CLASSIFICATION – “SLACK ADJUSTERS”

Madras Engineering Industries Pvt. Ltd. (AR Order No. Advance Ruling No.27/ARA/2024 Dated: 5th December, 2024)(TN)

The facts are that M/s. Madras Engineering Industries Private Limited manufactures ‘Slack Adjusters’ and supplies the same to Truck, Bus and Trailer axle manufacturers in India. They supply these slack adjusters for the replacement market through their vast and well spread distribution arrangement.

The applicant further informed that Slack Adjusters under HSN code 87089900 are charged at 28 per cent as they are used for Trucks & Bus applications for both OE fitment and in the aftermarket. It was further informed that Slack Adjusters developed exclusively for trailer axle fitments are classified under HSN Code 87169010 and charged at 18 per cent for both OE fitment and for aftermarket requirements.

The difference between two products was explained as under:

Based on the above background, the applicant asked whether the HSN code followed and whether the GST rate applied for stack adjusters used in the truck and trailer applications is proper or not?

The ld. AAR referred to nature and use of product as under:

“7.1. The applicant is in the business of manufacturing and supplying ‘Slack Adjusters’ used in the braking system of Buses, Trucks and Trailers. Slack Adjuster is a part of a vehicle braking system and hence is an essential safety critical part of the vehicle. Slack adjusters are connected to the brake chamber push rod and Scam Shaft to convert lateral movement of brake chamber pushrod to rotational movement and rotate the S-cam shaft while brakes are applied. This is used to release and bring back the S-cam shaft to its original position when the brakes are applied. These slack adjusters are normally used in heavy vehicles namely, buses and trucks. It is also used in the trailers where the load carried is substantial. The specification of the slack adjusters used in ‘Buses & Trucks’ and in ‘Trailers’ are distinguishable as explained by the applicant.”

In order to arrive at an appropriate classification of the item used in the motor vehicle, the ld. AAR referred to the tariff classification as issued by the CBIC read with its schedules, guided by interpretative rules, section notes, Chapter Notes supported by the Explanatory Notes to the HSN.

In respect of Slack Adjuster for trailer, the ld. AAR referred to the entries for trailer. The ld. AAR observed that, a trailer is a wheeled vehicle attached to another powered vehicle for movement of goods and cargo. HSN 8716 exclusively deals with Trailers, Semi-trailers and other vehicles not mechanically propelled. As the HSN provides for a separate classification for trailers, semi-trailers and other such vehicles, the slack adjusters used exclusively in the braking system of trailers are rightly classified as ‘Parts and accessories of trailers’ under HSN 87169010. Accordingly, the ld. AAR approved classification made by applicant.

Regarding Slack adjusters used in the braking system of Buses and Trucks supplied to both, OEMs and aftermarket Sales, as ‘Parts and accessories of motor vehicles under HSN 87089900, the ld. AAR approved GST rate of 28 per cent.

Thus the ld. AAR upheld slack adjusters used in the braking system of a Trailer supplied to OEMs and aftermarket Sales as ‘Parts and accessories of trailers’ under HSN 87169010 and its GST rate of 18 per cent.

The ld. AAR mentioned that the applicant should ensure to adopt correct classification of the product as the slack adjusters supplied are different for both ‘buses & trucks’ and ‘trailer’ and accordingly allowed AR in favour of applicant.

SALE FROM FTWZ AND REVERSAL OF ITC

Haworth India Pvt. Ltd. (AR Order No. Advance Ruling No.26/ARA/2024 Dated: 5th December, 2024)(TN)

The applicant, M/s. Haworth India Private Ltd. had sought Advance Ruling on the following questions:
“1. In the facts and circumstances of the case, whether the transfer of title of goods by the Applicant to its customers or multiple transfers within the FTWZ would result in bonded warehouse transaction covered under Schedule III of the CGST Act, 2017 r/w CGST Amendment Act, 2018?

2. Whether the Integrated Tax (IGST) Circular No. 3/1/2018 dated 25th May, 2018 is applicable to the present factual situation?”

The questions were earlier decided vide AR dated 20th June, 2023 but the ld. AAAR remanded matter back vide appeal order dated 20th December, 2023 and hence this fresh proceeding. In fresh proceeding, following questions are considered:

“1. Whether in the facts and circumstances the activities and transactions would fall under paragraph 8(a) or 8(b) of Schedule III of CGST Act and remain non-taxable?

2. Whether irrespective of the activities and transactions falling under paragraph 8(a) or 8(b) as aforesaid input tax credit would be available without any reversals since no prescription has been notified for purpose of Explanation (ii) below Section 17(3) of CGST Act?”

The applicant is engaged in manufacture and sale of office furniture under the brand name ‘Haworth’. The applicant imports certain finished goods from its group entities. Applicant sales such imported goods.

The applicant contemplated to operate the import and re-sale transactions from a Free Trade Warehousing Zone (hereinafter referred to as ‘FTWZ’) for operational convenience involving less documentation and swift clearance process so as to expedite project execution. Applicant explained the process of such transaction.

The Applicant secures space in the FTWZ for a fee to store the imported goods from a unit holder. The Applicant executes required lease agreement with the FTWZ unit holder and deposits the goods from the port by filing Bill of Entry (BOE). FTWZ, owned and operated by independent third party, merely clears and warehouses the goods imported. The FTWZ collects warehousing charges from the Applicant.

No import duty is paid on clearance from the port.

The Applicant transfers the title of goods to customer under the cover of an invoice. The customer either clears goods from the FTWZ or may make further transfer of such goods to other customers. The goods continue to remain in FTWZ unit holder till the final customer files BOE and clears goods from FTWZ. The applicant reiterated that multiple transfers are made while goods are lying in FTWZ.

The final customer clears the goods from the FTWZ for home consumption and at this juncture, goods are removed from the warehouse and is taken to the premises of the Customer.

The applicant was of opinion that since FTWZ is equivalent to bonded warehouse, transfers within FTWZ before clearance shall fall under Schedule III of the CGST Act, 2017, thereby not attracting levy under GST.

The applicant was of further opinion that in case of goods deposited in a warehouse, only the person who is ultimately clearing the goods for home consumption is liable to tax and the transferor is not liable to tax on such transfer of warehoused goods.

The applicant also placed reliance on the advance rulings pronounced by Tamil Nadu Advance Ruling Authority in the case of The Bank of Nova Scotia – Order No. 23/AAR/2018 dated 31st December, 2018 -2019-VIL-29-AAR and

Sadesa Commercial Offshore De Macau Limited – Order No. 24/AAR/2018 dated 31st December, 2018 – 2019-VIL-28-AAR.

The ld. AAR examined scheme of ‘warehoused’ goods with reference to provision of GST Act.

After scrutiny of various aspects, in respect of question (1), the ld. AAR observed as under:
“7.23 Under these circumstances, we are of the opinion that a ‘Free Trade

Warehousing Zone’, as the name suggests, is a bonded premises providing warehousing facility, much in parity with the bonded warehouse under the Customs Act. Further, when the goods are imported and brought into a FTWZ unit, they are basically warehoused first and then traded or subjected to other authorized operations as the case may be. We notice that the applicant’s queries for advance ruling in the instant case is restricted to the first stage, i.e., when the imported goods are supplied to any person before they are cleared for home consumption, while they still remain warehoused. Accordingly, we are of the considered opinion that the provisions of 8(a) of Schedule III of the CGST Act, 2017, viz., “Supply of warehoused goods to any person before clearance for home consumption” applies to the instant case.”

Regarding question (2), the ld. AAR examined the provision of Section 17(2) and 17(3) which talks about apportionment of credit in such situations when a taxable person effects taxable supplies as well as exempted supplies. After examining the legal position, the ld. AAR observed as under:

“7.28 Under the facts and circumstances of the case, we are of the considered opinion that reversal of proportionate input tax credit of common inputs/input services/Capital goods is not warranted at the hands of the Applicant in terms of the amended Section 17(3) of the CGST Act, 2017 read with Explanation 3 of Rule 43 of the CGST Rules, 2017, even when the activity/transaction in question is covered under paragraph 8(a) of Schedule III of the CGST Act, 2017, as long as it does not relate to supplies from ‘Duty Free Shops’ at arrival terminal in international airports to the incoming passengers.”

Accordingly, the ld. AAR passed the ruling in favour of applicant.

Goods And Services Tax

HIGH COURT

98. M/S. Atulya Minerals Vs. Commissioner Of State & Others

[2025-Tiol-271-Hc-Orissa-Gst]

Dated: 3rd February, 2025

Rule 86A of CGST Rules 2017- Revenue’s right to block the credit expires on completion of one year when appropriate recovery proceeding is initiated.

FACTS

Pursuant to a judgment dated 10th September, 2024, revenue made a fresh order dated 27th September, 2024 invoking Rule 86A of CGST Rules, 2017. Petitioner challenged the said fresh order which justified appropriation of future input tax credit (ITC) when it becomes available to the petitioner and thus do negative blocking of ITC. The fact of the matter is that Rule 86A of Orissa GST Rules, 2017 allows blocking of electronic ledger for a period of one year. Vide the order passed by Hon. High Court, petitioner was directed to satisfy the authority during the blocking period of maximum one year to show that there did not exist a reason to continue to block the credit. According to the petitioner, the fresh order of the revenue was without any basis. Reliance was placed by petitioner on the view taken by division Bench of Telangana High Court [Laxmi Fine Chemical vs. Assistant Commissioner (2024) 18 Centax 134 (Telangana)] which in turn had considered several precedents.

HELD

Hon. High Court noted that Laxmi Fine Chemical (supra) was a view taken by Telangana High Court prior to the view taken in the above cited orders dated 10th September, 2024 and 23rd September, 2024. Further, revenue’s counsel submitted that the investigation report was already submitted and proceedings were to be initiated. Hence Hon. Bench found no necessity of appropriation for negative blocking as revenue’s right is already reserved to initiate recovery proceedings under section 73 or also under section 74, rather than invoking Rule 86A. Hence, impugned order purporting to justify blocking of future credit was without basis. Referring to Laxmi Fine Chemical (supra), it was held that on initiation of appropriate recovery proceedings, the blocking automatically will come to an end after expiry of one year thereby making available to the dealer to debit the electronic ledger for the available input tax credit.

99. M/s. TTK Healthcare Ltd vs. The Assistant State Tax Officer [Kerala]

[2025-TIOL-224-HC-Kerala-GST]

Dated: 29th November, 2024.

In absence of constitution of the Appellate Tribunal, 10 per cent of the disputed demand directed to be paid in order to defer the recovery and invocation of the bank guarantee; with a condition that the Appeal is filed within one month of Tribunal’s constitution.

FACTS

The petitioner challenged the order under section 129 of the GST law which was upheld by the First Appellate Authority. In absence of non-constitution of the Appellate Tribunal, a second appeal under section 112 of the law cannot be filed. On an apprehension that the bank guarantee furnished for the release of goods will be invoked, the present writ is filed.

HELD

The Court disposed of the writ petition by directing that if 10 per cent of the disputed amount is remitted, any further recovery or invocation of the bank guarantee will be deferred until a final decision is made by the Tribunal. However, the Appeal should be filed within one month of its constitution.

100. Rohan Dyes and Intermediates Ltd vs. Union of India and Ors [Gujarat]

[2025-TIOL-225-HC-AHM-GST]

Dated: 8th January, 2025.

In absence of an opportunity of personal hearing and insufficient verification of data, the order was remanded to the authorities for proper verification of data and provision of a fair hearing.

FACTS

The petitioner was unable to upload Form GST TRAN-1 to claim transitional credit and sought permission from the Court to file the form. After several legal proceedings and the issuance of a circular by CBIC, the Form GST TRAN-1 was filed in October 2022. The Assistant Commissioner questioned the claim and asked for further documentation. After submission of documentation, part of the claim was rejected, citing discrepancies based on the Service Tax Returns for June 2017.

HELD

The High Court noted that there was violation of principles of natural justice as the order was passed without providing an opportunity of being heard and the department failed to provide a reasoned order. Further the order was based on insufficient verification of data. Accordingly, the matter is remanded with a direction of giving a fair hearing and after verification of provisions of law.

101. Kamala Stores and Anr vs. The State of West Bengal and Ors [Calcutta]

[2025-TIOL-277-HC-KOL-GST]

Dated: 6th February, 2025

Considering the bona fides of the petitioner, the delay in filing the appeal was condoned and the Appellate Authority directed to dispose of the case on merits.

FACTS

Petitioner’s appeal was rejected on the ground that the same is barred by limitation. It was stated that without appropriately taking note of the grounds for condonation of delay, the appeal got rejected on the ground that the authority is competent only to condone the delay provided the appeal is filed within the period of one month beyond the time prescribed.

HELD

Petitioner had made the pre-deposit before filing the appeal. There appears to be a delay of 79 days in filing the appeal. Taking into consideration that they are a small partnership firm and there is no lack of bona fide and one does not stand to gain by filing a belated appeal, the Court directed the appellate authority to hear and dispose of the appeal, on merit, upon giving an opportunity of hearing, within a period of eight weeks.

102. BMW India Pvt. Ltd. vs. Appellate Authority for Advance Ruling for the State of Haryana

(2024) 24 Centax 382 (P&H.)

Dated: 12th November, 2024

ITC on demo vehicles used for promotional purpose shall be eligible even if such vehicles are capitalized in the books of accounts and itself are not sold separately.

FACTS

Petitioner was engaged in business of sale of motor vehicles. It was desirous of knowing the eligibility of ITC in respect of demo vehicles used for promotion and approached Authority of Advance Ruling (AAR) for the same. AAR responded in the negative. On further appeal, Appellate Authority of Advance Ruling (AAAR) (respondent) confirmed that such ITC on demo vehicle is not eligible. Aggrieved, by such an order petitioner filed a writ petition before the Hon’ble High Court.

HELD

The Hon’ble High Court relied upon Circular No. 231/25/2024-GST (F. No. CBIC-20001/6/2024-GST) dated 10th September, 2024, which clarified that ITC is admissible on demo vehicles used in the course or furtherance of business. Accordingly, impugned order was quashed and writ petition was disposed of in favour of petitioner.

103. Kshitij Ghildiyal vs. Director General of GST Intelligence, Delhi

(2024) 25 Centax 267 (Del.)

Dated: 16th December, 2024

Arrest made without communicating the grounds in writing to petitioner is illegal and violative of legal procedure and principle of natural justice.

FACTS

Petitioner was a director of a company engaged in e-waste management. A search was conducted at the company’s premises under section 67 of the CGST Act, 2017 and petitioner was taken under judicial custody at respondent’s office on 28th November, 2024 for two days. Petitioner was subsequently arrested on 30th November, 2024 alleging availing fraudulent ITC based on fake invoices without furnishing the grounds of arrest in writing. He was produced before the Chief Judicial Magistrate on 30th November 2024, who remanded him to judicial custody for 13 days. Aggrieved by illegal detention and procedural violations of law, petitioner filed an application before the Hon’ble High Court.

HELD

Hon’ble High Court ruled that failure to provide written grounds of arrest clearly violated Article 22(1) of the Constitution of India and section 69(2) of the CGST Act. The Court relied upon the Supreme Court judgment in the case of Pankaj Bansal vs. Union of India [(2023) 155 taxmann.com 39 (SC)] where it was reaffirmed that written communication of grounds of arrest is mandatory and fundamental. The Court further observed that respondent had committed various other procedure defaults such as irregularities in the issuance of summons, including backdated signatures, delayed DIN generation and illegally detaining for two days at the respondent’s office. Citing all the above stated reasons, the Court declared the petitioner’s arrest illegal and set aside the remand order.

104. Proxima Steel Forge Pvt. Ltd. vs. Union of India

(2024) 24 Centax 294 (P&H.)

Dated 3rd October, 2024.

Subordinate Authority cannot refuse to comply with and question the basis of directions of Appellate Authority.

FACTS

The petitioner filed a refund application of ₹2,02,09,111/-. However, the respondent rejected the claim, citing it as time-barred under Circular No. 157/13/2021-GST [F. NO. CBIC-20006/10/2021], dated 20th July, 2021. The petitioner filed an appeal against such rejection of application. Appellate Authority directed respondent for reconsidering the application on merits. Despite such clear directions of considering the refund application on merits respondent once again rejected the refund application ignoring the direction of Appellate Authority. Aggrieved by such order, petitioner filed an application before Hon’ble High Court.

HELD

Hon’ble High Court held that order passed by respondent dismissing petitioner’s refund application as time barred in spite of clear instructions given by appellate authority for deciding the application on merits, is bad in law. The Court further stated that such actions reflect a failure in the hierarchical structure of GST system which could lead to administrative chaos and evade public trust in appeal process. The Court also emphasized that subordinate officers must comply with appellate decisions to maintain the integrity of the system and prevent unnecessary litigation. The impugned order passed by respondent dated 24th January, 2024 was set aside directing Appellate Authority to appoint another officer to reassess and decide petitioner’s refund application purely on its merits within a stipulated period of two months.

105. Ali K. vs. Additional Director General, DGGI, Kochi

(2024) 24 Centax 283 (Ker.)

Dated: 9th August, 2024

Provisional attachment ought to be automatically vacated and cannot be extended beyond one year by issuing fresh order.

FACTS

The petitioner was a partner of a firm engaged in the business of scrap. A search was conducted at their business premises in November 2020 which resulted in cancellation of the firm’s GST registration. Subsequently, a SCN was issued in 2023 demanding GST alleging that petitioners had availed ITC based on fake invoices. During the pendency of proceedings, the respondent issued an order attaching bank accounts of petitioner and the firm. The petitioners requested the respondent for lifting attachment on conclusion of one year period as per Section 83 of the CGST Act, 2017. However, to safeguard revenue interests, the respondent issued a fresh attachment order on petitioner’s properties. Aggrieved by this action, the petitioners filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court held that courts cannot deviate from the plain meaning of statutory provisions even in the public interest. It was observed that section 83 of the CGST Act, 2017 explicitly limits the period of provisional attachment to one year from the date of initial order. High Court cited Radha Krishan Industries vs. State of Himachal Pradesh — 2021 (48) G.S.T.L. 113 (S.C.) where Supreme Court held that the time-period of provisional attachment under section 83 read with Rule 159 of CGST Rules, 2017 must be strictly interpreted as the same does not permit issue of a fresh attachment order after expiry of maximum period of one year. Accordingly, the Court dismissed the writ petition in favour of petitioner.

106. Sali P. Mathai. Ltd vs. State Tax Officer, State GST Department, Idukki

(2024) 24 Centax 316 (Ker.)

Dated 29th October, 2024

Limitation period of two years does not apply to fresh refund application after rectifying deficiencies when original refund application which was filed in time.

FACTS

Petitioner filed an application for a refund on 5th April, 2021 under section 54 of the CGST Act 2017. Respondent, upon reviewing the application, issued a deficiency memo on 19th April, 2021 highlighting certain discrepancies. In response, petitioner submitted a fresh refund application on 30th September, 2021. However, respondent rejected fresh application stating that two years had already passed and the same was time barred. Aggrieved, petitioner approached the Hon’ble High Court.

HELD

Hon’ble High Court held that Rule 90(3) of the CGST Rules requires a fresh refund application to be filed after rectifying deficiencies, but does not mandate that the period of limitation of two years under section 54(1) of the CGST Act, 2017 should apply to a fresh refund application. Once the original application was filed in time, limitation period cannot apply for subsequent application made after rectification of deficiency. Accordingly, the Court ordered respondent to take cognizance of documents submitted and process the refund application in accordance with the law.

107. A.N. Enterprises vs. Additional Commissioner

(2024) 24 Centax 347 (All.)

Dated: 19th September, 2024.

Goods cannot be detained or seized invoking section 129 of CGST Act merely on the basis of undervaluation of goods unless there is clear evidence of tax evasion, fraud, or misdeclaration.

FACTS

Petitioner was engaged in the business of scrap. It had sold aluminium cables in the normal course of business accompanied by all relevant documents. During transit, the goods were intercepted, and upon physical verification, respondent asserted that the consignment contained PVC Aluminium Mixed Cable (Feeder Cable) instead of aluminium cable. Respondent seized the consignment and initiated proceedings under section 129 of the CGST Act citing undervaluation of goods and made petitioner pay deposit towards penalty without issuing any SCN. On appeal by the petitioner, it was pointed out that Commissioner Commercial Tax had issued a circular on 9th May, 2018 that goods could not be detained on the ground of undervaluation. However, appellate authority supported the order of Additional Commissioner. Petitioner therefore challenged detention order of the respondent based on the ground of undervaluation and for the reason of difference in HSN before Hon’ble High Court.

HELD

Hon’ble High Court observed that almost similar goods were accompanied by all requisite documents and that there was no discrepancy in the HSN Code, quantity or tax rate. The Court emphasized that, as per the Commissioner’s Circular No. 229/1819009 dated 9th May, 2018, goods cannot be detained merely on the grounds of undervaluation. Accordingly, the writ petition was allowed, and the authorities were directed to refund any amount deposited by petitioner.

108. BLA Infrastructure (P.) Ltd. vs. State of Jharkhand

[2025] 171 taxmann.com 187 (Jharkhand)

Dated: 30th January, 2025

When an appeal filed against the order is allowed in favour of the Appellant, a right to receive the 10 per cent pre-deposit is vested in the name of the appellant and the same cannot be retained by the statutory authority citing a limitation period of 2 years under section 54 of the CGST Act which appears to be directory in nature and also is in conflict with Article 137 of the Limitation Act.

FACTS

The petitioner received a Show cause notice alleging the mismatch in GSTR-1 and GSTR-3B, followed by an ex-parte order confirming the demand. Aggrieved by the same, the petitioner preferred an appeal after making a statutory pre-deposit of 10 per cent of the disputed tax amount in terms of Section 107(6)(b) of the Act. After hearing the petitioner and scrutinizing the documents, the appeal was allowed in favour of the petitioner and Form GST APL-04 was issued. The petitioner made an application for a refund of the pre-deposit amount, which was held deficient being beyond the period prescribed under section 54(1) of the Goods & Services Tax Act and hence, aggrieved thereof, the petitioner filed the petition.

HELD

The Hon’ble Court held that there is no dispute to the effect that once a refund is by way of statutory exercise, the same cannot be retained by the State, or the Centre, especially by taking aid of a provision which on the face of it is directory. The language stated in Section 54 is “may make an application before the expiry of 2 years from the relevant date”. The Court also referred to Article 137 of the Limitation Act, 1963, which provides for a 3-year limitation period for filing a Money Suit. Referring to decisions of the Hon’ble Supreme Court using the use of the word ‘may’ and the decision of Hon’ble Madras High Court in the case of Lenovo (India) Pvt. Ltd. vs. Joint Commr. Of Gst (Appeals-1), Chennai 2023 (79) G.S.T.L. 299 (Mad.), as also, taking into consideration that the refund of statutory pre-deposit is a right vested on an assessee after an appeal is allowed in its favour, the Hon’ble Court further held that when the Constitution of India restricts levy of any tax without the authority of law, the retention of the same on the ground of statutory restriction, which is in conflict with the Limitation Act, appears to be being misread by the authorities of the GST Department.

109. Brand Protection Services (P.) Ltd vs. State of Bihar

[2025] 171 taxmann.com 318 (Patna)

Dated: 4th February, 2025.

For filing an appeal, the date of receipt of the order is to be excluded while counting the period of limitation. Also, the period mentioned in section 107(1) cannot be interpreted as 90 days and 30 days for section 107(4) of the CGST Act.

FACTS

The petitioner received a final demand order under section 73(9) on 27th December, 2023, along with a summary order in Form DRC-07. The petitioner filed an appeal in Form GST APL-01 under section 107 after a statutory period of 3 months but within the condonable period of one month on 26th April, 2024, claiming that the delay was due to ill health of the director. Revenue rejected the appeal at the admission stage on the grounds that it was filed beyond the limitation period of three months plus a condonable period of one month (interpreted as 120 days). Petitioner contended that the appellate authority erred in interpreting the limitation period as 120 days instead of four calendar months.

HELD

The Hon’ble Court held that the period of three months mentioned in section 107(1) and a period of one month under section 107(4) cannot be interpreted as a period of 90 days and 30 days respectively. By virtue of section 9 of the General Clauses Act, the date i.e. 27th December, 2023 on which the appellate order was received by the petitioner is liable to be excluded in counting the prescribed period of limitation. The Hon’ble Court referred to a method of computation of a ‘month’ as per Halsbury’s Laws of England, 4th Edn., para 2116, that when the period prescribed is a calendar month running from any arbitrary date the period expires upon the day in the succeeding month corresponding to the date upon which the period starts, save that if the period starts at the end of a calendar month which contains more days than the next succeeding month, the period expires at the end of that succeeding month. The Court also referred to various judicial precedents on the subject matter to conclude that in the present case, three-month periods from the date of receipt of the order of adjudicating authority i.e. 27th December, 2023 expired on 27th December, 2024 and since the appeal was preferred on 26th April, 2024, appellate authority was required to consider cause shown by petitioner to condone delay as petitioner could have preferred an appeal within a further period of one month i.e. 27th April, 2024. The Hon’ble Court thus held that the appeal was preferred within one month after the expiry of the prescribed period of limitation of three months and hence order rejecting the appeal is liable to be set aside.

110. (Andhra Pradesh) Habrik Infra vs. Assistant Commissioner (ST)

[2025] 171 taxmann.com 67

Dated 22nd January, 2025

Order without DIN number or signature is non-est and Invalid.

FACTS

The petitioner was served with an assessment order in Form GST DRC-07. He challenged the said order on various grounds, including that the said order did not contain the signature of the assessing officer and the DIN number. The petitioner relied upon the circular, dated 23rd December, 2019, bearing No.128/47/2019-GST, issued by the C.B.I.C., to submit that the non-mention of a DIN number would mitigate against the validity of such proceedings. He also pointed out that, the question of the effect of non-inclusion of DIN number on proceedings, under the G.S.T. Act, came to be considered by the Hon’ble Supreme Court in the case of Pradeep Goyal vs. Union of India & Ors 2022 (63) G.S.T.L. 286 (SC) in which, after noticing the provisions of the Act and the circular issued by the Central Board of Indirect Taxes and Customs (herein referred to as “C.B.I.C.”), the Hon’ble Supreme Court held that an order, which does not contain a DIN number would be non-est and invalid.

HELD

The Hon’ble Court held that, in view of the aforesaid judgments and the circular issued by the C.B.I.C., the non-mentioning of a DIN number and absence of the signature of the assessing officer in the impugned assessment order, would be liable to be set aside.

111. Addichem Speciality LLP vs. Special Commissioner I, Department of Trade and Taxes

[2025] 171 taxmann.com 315 (Delhi)

Dated: 7th February, 2025.

There is no authority in law to condone the delay in respect of appeals filed beyond the prescribed period of limitation provided by sections 107 (1) and 107 (4) of the CGST Act.

FACTS

The petitioners (in a batch of writ petitions) are registered proprietors / dealers under the CGST Act, each holding different registration number. They were assessed by the respective adjudicating authorities which resulted in certain demands being raised against them and in some instances, their GST registrations also were cancelled. Aggrieved by the cancellation of their GST registrations and the demands imposed, the petitioners filed statutory appeals before the Appellate Authority under section 107 of the CGST. However, those appeals were not entertained and were dismissed due to delay in filing.

HELD

The Hon’ble Court held that it is well settled that once a statute prescribes a specific period of limitation, the Appellate Authority does not inherently hold any power to condone the delay in filing the appeal by invoking the provisions of sections 5 or 29 of the Limitation Act, 1963. The Hon’ble Court relied upon the decision of Apex court in the case of Singh Enterprises vs. Commissioner of Central Excise, Jamshedpur & Ors. [(2008) 3 SCC 70 = 2008 (221) E.L.T. 163 (S.C.)], Commissioner of Customs and Central Excise vs. Hongo (2009) 5 SCC 791 and Garg Enterprises vs. State of UP 2024 (84) G.S.T.L. 78 (All.) in support of the said proposition. It further held that the Supreme Court has observed that the plenary powers of the High Court cannot, in any case, exceed the jurisdictional powers under Article 142 of the Constitution of India 1950, and even the Supreme Court cannot extend the period of limitation de hors the provisions contained in any statutory enactment. The Court further held that the power to condone delay caused in pursuing a statutory remedy would always be dependent upon the statutory provision that governs. The right to seek condonation of delay and invoke the discretionary power inhering in an appellate authority would depend upon whether the statute creates a special and independent regime with respect to limitation or leaves an avenue open for the appellant to invoke the general provisions of the Limitation Act to seek condonation of delay. The facility to seek condonation can be resorted provided the legislation does not construct an independent regime with respect to an appeal being preferred. Once it is found that the legislation incorporates a provision that creates a special period of limitation and proscribes the same being entertained after a terminal date, the general provisions of the Limitation Act would cease to apply.

परोपदेशेपांडित्यम् !

This is one of the most commonly observed aspects of human nature. While advising others, all are ‘scholars’ or ‘wise’ men; but when it comes to own conduct, they very rarely follow it. This is adopted from Hitopadesh (1.103)

परोपदेशेपाण्डित्यम् ‘wisdom’ or ‘scholarliness’ in advising others.

सर्वेषाम्सुकरंनृणाम् Is very easy for all human beings.

धर्मेस्वयमनुष्ठानं  However, when it comes to their own life.

कस्यचित्तुमहात्मन:  Very few great people (महात्मा) do follow those principles.

There is another version of this verse.

परोपदेशवेलायां At the time of advising others.

शिष्टा: सर्वेभवन्तिवै  All act like ‘gentlemen’ or ‘noble’ men.

विस्मरन्तीहशिष्टत्वं However, they forget all that wisdom.

स्वकार्येसमुपस्थिते When it comes to their own work.

This is nothing but hypocrisy. It is observed and experienced in every walk of life.

There are religious leaders who preach great morals in their discourses and sermons. However, in their own lives they are often exposed as greedy people with criminal minds and of loose character. There are number of examples of this type.

Even in day to day life, parents and teachers give lectures to children and students for good behaviour. They will explain the importance of cleanliness, discipline, helping others, chivalry, love for nature, hygienic food, good habits, high tastes and culture, hospitality, service to the nation, service to society, sacrifice, selflessness — so on and so forth. They will tell all the virtues under the sun. However, in own lives, they depict bad habits, cheap conduct, corrupt practices, indiscipline, selfishness, etc.

There is a parallel saying: –

चित्तेवाचिक्रियायां च साधूनामेकरूपता!

Noble people are consistent in what they think, what they speak and what they do. Their thoughts, speech and action reflect one and the same thing. Such persons are indeed very rare, particularly in today’s kaliyuga.

Take our political leaders. They will give long speeches at the top of their voice, full of high values; but they may be scoundrels of the first order! They amass humongous wealth, commit all crimes, harass poor people, adopt corrupt practices. Same is the case with industrialists, businessmen, bosses in offices, bureaucrats, senior professionals. Judges in the courts may punish someone for wrong doing; but they themselves may be committing those things in personal life!

It is also experienced that when you seek help from somebody, he will give you a lecture as to how you should have behaved. However, they won’t help you at all!

Doctors may advise you to avoid all ‘addictions’ but they may not themselves refrain from those addictions. A CA may explain the importance of documentation, financial planning and discipline. However, he may not be maintaining his own accounts, he may be lethargic in paper work; his own finances may be mismanaged! Management of an educational institution may admit students strictly on merits; but for their own children, they may resort to all those undesirable things for getting admission, getting good results in examination, and so on.

Even professional bodies teach ethics but in reality … The less said the better!

Nomination and Remuneration Committee

INTRODUCTION

One of the important committees of the Board of Directors of a listed company is the Nomination and Remuneration Committee (“NRC”). The NRC plays a very important role in the corporate governance of a listed company. Recognising its importance,  the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) has prescribed various roles and responsibilities for the NRC. Let us analyse its relevance in the context of a listed entity.

MANDATORY REQUIREMENT UNDER THE ACT’

Under the Act and the LODR, the NRC is a mandatory committee that all listed entities have to constitute. The Companies Act also requires that the following unlisted public companies constitute an NRC:

(i) Public Companies having a paid-up share capital of ₹10 crore or more; or

(ii)Public Companies having a turnover of ₹100 crore or more; or

(iii)Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crore.

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account for the above purpose.

However, despite being covered by the above thresholds, the following companies need not constitute an NRC:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act

ADDITIONAL REQUIREMENTS UNDER THE LODR

In addition to the provisions of the Act, the LODR contains certain additional provisions for the NRC. The NRC must comprise of at least 3 directors of which all directors shall be non-executive directors and at least 2/3 of the NRC shall be independent directors. Non-executive directors would mean those directors who are not drawing any remuneration other than director’s sitting fees and commission. Thus, the members of the NRC would be either independent directors or non-executive non-independent directors. The requirement of having 2/3 of the NRC as independent directors is the same as in the case of the Audit Committee. However, unlike in the case of the Audit Committee (where members must be financially literate), there is no further qualification prescribed for the members of the NRC.

The quorum for a meeting of the NRC is either 2 members or 1/3 of the members of the committee, whichever is greater, including at least 1 independent director in attendance. Thus, if there is no independent director in attendance, then an NRC cannot have a meeting.

The LODR requires that the NRC meets at least once in a financial year. Thus, while the Audit Committee must meet once every quarter, the NRC can meet only once in a financial year.

CHAIRPERSON

The Chairperson of the nomination and remuneration committee must be an independent director, this again is the same as in the case of an Audit Committee. However, the Chairperson of the Company’s Board of Directors cannot be appointed as the Chairperson of the NRC but he can be a member of the NRC. This is so irrespective of whether he is an executive or a non-executive director.

The LODR provides that Chairperson of the NRC may be present at the AGM, to answer the shareholders’ queries. However, the Act states that the chairperson of the NRC constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Thus, unlike in the case of the Audit Committee Chairman, it is not mandatory for him to present at the AGM.It is up to the chairperson to decide who shall answer the shareholders’ queries.

ROLE UNDER ACT

The Act requires that the NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

It shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. While doing so, the Committee must ensure that—

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the report of the Board of Directors.

ROLE UNDER LODR

The responsibilities of the NRC as laid down under the LODR include the following which are in addition to those laid down under the Act:

(a) Formulation of the criteria for determining qualifications, positive attributes and independence of a director – this could also include additional requirements over and above those mandatorily laid down under the Companies Act, 2013 and the LODR. Listed entities are free to prescribe additional criteria for an independent director. For instance, while the Act prescribes 2 terms of a maximum tenure of 5 years per term, many companies prescribe a maximum tenure of 3 years per term.

For every appointment of an independent director, the NRC is required to evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

  •  use the services of an external agencies, if required;
  •  consider candidates from a wide range of backgrounds, having due regard to diversity; and
  •  consider the time commitments of the candidates.

(b) Recommending to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees – in the case of directors, it would include board fees and directors’ commission. In the case of KMPs and other employees, it would include, salary, bonus, variable pay, employee stock option plans, etc.

(c) Formulation of the criteria for evaluation of performance of independent directors and the board of directors – this could include external evaluation, internal questionnaires, surveys, benchmarking, etc.

(d) Devising a policy on diversity of board of directors – this could include diversity in terms of gender, experience, qualifications, etc.

(e) Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal. Any vacancy in a director must be filled up by the entity within 3 months.

(f) Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

(g) Recommend to the board, all remuneration, in whatever form, payable to senior management. The LODR now expressly provides that remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management (except those who are part of promoter) shall not require approval of the audit committee provided that the same is not material.

(h) The appointment / re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. For this purpose, the NRC must provide a detailed explanation and justification for recommending such a person for appointment or re-appointment.

For the above purpose, the term “senior management” meansthose officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Boardof Directors) and shall specifically include the functional heads, by whatever name called and the persons identified and designated as Key Managerial Personnel (KMP), other than the board of directors, by the listed entity.

Earlier, the NRC only considered appointment and remuneration of the KMP. KMP under s.203 of the Companies Act, 2013 comprises of the MD, Manager, CEO, Whole-time Director, CFO and Company Secretary. However, now even one level below the KMP is covered within the ambit of the NRC. For instance, if there is a change in Vice-President Finance, then the same would have to be placed before the NRC.

When it comes to the appointment of KMP, the provisions of the LODR and the Companies Act are both relevant and should be kept in mind by the NRC:

(a) A whole-time KMP cannot hold office in more than one company except in its subsidiary company.

(b) A KMP can be a non-executive Director of any other company with the prior permission of his Board of Directors.

(c) S.196 of the Act lays down the requirements for a person to be appointed as an MD. For instance, one of the important requirements is that he must be a resident of India and resident for this purpose has been specifically defined under the Act. Another important requirement is that he must not have been sentenced to imprisonment for any period OR to a fine exceeding Rs. 1,000 for the conviction of any offence under 19 specific Laws, one of them is the Income-tax Act, 1961. For instance, if a person has been convicted for an offence relating to Tax Deducted at Source, he may become ineligible to be appointed as an MD of a company. To appoint such a person, prior approval would be required from the Ministry of Corporate Affairs.

(d) A person can be a Managing Director of maximum 2 companies. However, the 2nd company appointing such person as MD must approve his appointment by a Board resolution with the consent of all the directors present at the meeting.

(e) While fixing the managerial remuneration, the Act provides that the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198. The Remuneration payable to non-executive directors cannot exceed 1% of the net profits of the company. However, sitting fees payable for attending Board Meetings is not included in this limit, but the maximum fees payable per committee / board meeting cannot exceed ₹1 lakh.

Further, Schedule V to the Act provides for the maximum managerial remuneration in case of a company that has inadequate profits. The NRC must be cognizant of these provisions when it fixes the remuneration of an MD / Whole-time Director, Director, etc.

(f) The Companies Act provides that if the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. However, the LODR provides that any vacancy in the office of Chief Executive Officer, Managing Director, WholeTime Director or Manager or CFO shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy. The LODR providing a more stringent requirement will override the provisions of the Act.

(g) The Compliance Officer (Company Secretary) of the Company shall be a whole-time employee of the listed entity, not more than one level below the board of directors and shall be designated as a Key Managerial Personnel.

(h) Any vacancy in the office of the Compliance Officer shall be filled by the listed entity within 3 months.

(i) In case of resignation of an independent director of the listed entity, detailed disclosures shall be made to the stock exchanges by the listed entities within 7 days from the date of his resignation. The NRC should ensure that these disclosures are made.

(j) In case of resignation of KMP, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date that such resignation comes into effect. The NRC should ensure that these disclosures are made.

The powers of the NRC were scrutinised by the Bombay High Court in the case of Invesco Developing Markets Fund vs. Zee Entertainment Enterprises Ltd. [2022] 232 COMP CASE 20 (Bombay). The Court held that there is no bar on a shareholder to appoint an Independent Director on the Board of a Company. S. 160 of the Act expressly gave powers to a shareholder to appoint a Director even if the same was not appointed by the NRC. The Court held that if this interpretation were upheld a shareholder of a listed company would not only be disabled from proposing Independent Directors, but such disability would extend to all other Directors. Effectively, even a majority shareholder of a listed Company would not be able to appoint a Director without identification by the NRC. The Court held that this was not the intent or purpose of the Act.

ESOP REGULATIONS

In addition to the Act and the LODR, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“the ESOP Regulations”) also prescribe a role for NRCs of those listed companies that have instituted an ESOP. ESOPs for this purpose, can also be in the form of employee share purchase schemes, stock appreciation rights, etc.

The ESOP Regulations require that a company shall constitute a Compensation Committee for administration and superintendence of the ESOP schemes. However, its NRC can act as this Compensation Committee.

The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOP schemes. Regulation 5(3) of the ESOP Regulations lays down the terms and conditions of schemes to be formulated by the Compensation Committee.

The Committee must also frame suitable policies and procedures to ensure that there is noviolation of securities laws, including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

CORPORATE GOVERNANCE REPORT

The corporate governance contained in the company’s Annual Report must contain the following disclosures regarding the NRC:

(a) brief description of terms of reference;

(b) composition, name of members and chairperson;

(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.

PENALTY

For any contravention of the provisions of Act relating to an NRC, the company shall be liable to a penalty of ₹5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹1 lakh. The LODR provides a fine of ₹2,000 per day of non-compliance with respect to the constitution of the NRC.

In the case of Max Heights Infrastructure Ltd, Adjudication Order No. Order/BM/GN/2024-25/30529, SEBI’s Adjudication Officer held that under the LODR, at least 2/3 of the directors of the NRC must be independent directors. However, in that case, the one director was incorrectly classified as an Independent Director and hence, the number of independent director was reduced by 1 compared to what it should have been. Hence the independence requirements of nomination and remuneration committee was not fulfilled.

The Registrar of Companies, NCT of Delhi & Haryana has passed an adjudication order (order no.RoC/D/ADJ/2023/Section 178/PFS/2511-2515). The findings were that a company which was a listed public company was mandatorily required to constitute anNRC and its total strength could not be reduced below 3. As far as the role of the NRC was concerned, the same was spelt out under the Act and it was seminal in identifying persons who were suitable for becoming directors in a company, it was also responsible for laying down the criteria qualifications, positive attributes and independence of a director, besides laying down policies for syncing remuneration with the performance benchmarks. Owing to the withdrawal of a nominee director by the holding company, the NRC became dysfunctional as the number of directors fell below 3. The RoC held in spite of this the company did not show any alacrity in reconstituting the NRC. Accordingly, it held that the company and its MD had failed to discharge their obligation under section 178 of the Companies Act 2013 thereby rendering themselves for penal actions.

CONCLUSION

The NRC is a very vital cog in the corporate governance wheel. It is vested with great powers as regards appointment of the Directors, KMP and senior management. It would also act as an important link between the shareholders and management of the company.

Miscellanea

1. TECHNOLOGY AND AI

#Google Claims Its AI Tool Can Beat Math Olympiad Gold Medalists

Google has developed an artificial intelligence (AI) math system that can outwit human gold medalists at the International Mathematical Olympiad (IMO). AlphaGeometry2, the AI problem solver is capable of solving 84 per cent of geometry problems posed in the IMO where the gold-medal winners can only solve 81.8 per cent of the problems on average. IMO problems are known for their difficulty, and solving them requires a deep understanding of mathematical concepts — something which the AI models had not been able to achieve up until now.

Engineered by DeepMind, AlphaGeometry managed to perform at the level of silver medalists in
January last year when it was unveiled. However, a year later, Google claims the performance of its upgraded system had surpassed the level of average gold-medalists.

To enhance the system’s abilities, the California-based company said it extended the original AlphaGeometry language to tackle harder problems involving movements of objects, and problems containing linear equations of angles, ratios, and distances.

“This, together with other additions, has markedly improved the coverage rate of the AlphaGeometry language on IMO 2000-2024 geometry problems from 66 per cent to 88 per cent.”

Despite achieving an incredible 84 per cent efficiency rate in solving tricky math problems, Google said there is still room for improvement.

(Source: www.ndtv.com dated 24th February, 2025)

#Alibaba to invest more than $52 billion in AI over next 3 years

Alibaba opens new tab said on Monday it plans to invest at least 380 billion yuan ($52.44 billion) in its cloud computing and artificial intelligence infrastructure over the next three years.

The Chinese e-commerce giant had said it had plans to invest in the sector. The company had reported revenue of 280.15 billion yuan for the three months ended December 31.

Alibaba said the total investment amount exceeds the company’s spending in AI and cloud computing over the past decade. The company has kicked off 2025 as a winner in China’s AI race, drawing in investors with strategic business deals. Its stock has risen more than 68% this year, as of last close.

Other Chinese firms have also been investing into the sector, with ByteDance, the Chinese owner of TikTok, earmarking over 150 billion yuan in capital expenditure for this year, much of which will be centered on AI

(Source: www.reuters.com dated 24th February, 2025)

2 WORLD NEWS

Tesla in India: Trump says unfair to U.S. if Elon Musk builds factory in India

U.S.A. President Donald Trump has said that if Tesla were to build a factory in India to circumvent that country’s tariffs, it would be “unfair” to the U.S.A. Mr. Trump called out India’s high duty on cars during Prime Minister Narendra Modi’s visit to the U.S. last week but agreed to work towards an early trade deal and resolve their standoff over tariffs.

Tesla’s CEO Elon Musk has long criticised India for having import tariffs of around 100 per cent on EVs which protect local automakers such as Tata Motors in the world’s third largest auto market, where EV adoption is still at a nascent stage.

Mr. Trump said it is “impossible” for Mr. Musk to sell a car in the South Asian nation. “Every country in the world takes advantage of us, and they do it with tariffs… It is impossible to sell a car, practically, in, as an example, India,” he said.

India’s government in March unveiled a new EV policy lowering import taxes substantially to 15% if a carmaker invests at least $500 million and sets up a factory.

Tesla has selected locations for two showrooms in the Indian cities of New Delhi and Mumbai, and posted job ads for 13 mid-level roles in India. It does not currently manufacture any vehicles in India.

Mr. Trump said it would be “unfair” to the U.S. if Mr. Musk did decide to build a factory there. “Now, if he built the factory in India, that’s okay, but that’s unfair to us. It’s very unfair,” Mr. Trump said in the interview. Mr. Trump’s plans for reciprocal tariffs on every country that taxes U.S. imports have raised the risk of a global trade war with American friends and foes.

(Source: www.thehindu.com dated 20th February, 2025)

3. ENVIRONMENT

#Global glacier melt is accelerating, new study finds

Ice loss from the world’s glaciers has accelerated over the past decade, a first-of-its-kind global assessment has found, warning that melting may be faster than previously expected in the coming years and drive sea levels higher.

The assessment published in the journal Nature by an international team of researchers found a sharp increase in melting over the past decade, with around 36 percent more ice lost in the 2012 to 2023 period than in the years from 2000 to 2011.
Michael Zemp, a professor at the University of Zurich and co-author of the study, said the findings were “shocking” if not altogether surprising. Regions with smaller glaciers are losing them faster, and many “will not survive the present century”.

“Hence, we are facing higher sea-level rise until the end of this century than expected before,” Zemp told the AFP news agency, adding that glacier loss would also impact fresh water supplies, particularly in central Asia and the central Andes.

Overall, researchers found that the world’s glaciers have lost around five percent of their volume since the turn of the century, with wide regional differences ranging from a two-percent loss in Antarctica to up to 40 percent in the European Alps. On average, some 273 billion tonnes of ice are being lost per year – equivalent to the world population’s water consumption for 30 years, scientists said.

Martin Siegert, a professor at the University of Exeter who was not involved in the study, said the research was “concerning” because it predicts further glacier losses and could indicate how Antarctica and Greenland’s vast ice sheets react to global warming. “Ice sheets are now losing mass at increasing rates – six times more than 30 years ago – and when they change, we stop talking centimetres and start talking metres,” he said.

Zemp warned that to save the world’s glaciers, “you have to reduce the greenhouse gas emissions, it is as simple and as complicated as that.” “Every tenth of a degree warming that we avoid saves us money, saves us lives, saves us problems,” he said.

(Source: www.aljazeera.com dated 24th February, 2025)

Digital Assurance

The Securities and Exchange Board of India (SEBI) has recently issued a draft circular, dated 3rd February, 2025, requiring digital assurance, of financial statement. The first reaction is that this probably relates to IT-related controls or cyber security. That is not the case. SEBI has separate regulations for the same, e.g., Cyber Security and Cyber Resilience Framework for SEBI-regulated entities.

In the circular relating to digital assurance, SEBI states “As a continuous endeavour to enhance the quality of financial reporting being done by listed companies and in order to provide greater investor protection, it is proposed to mandate a separate report on digital assurance of financial statement. The report will increase transparency, improve disclosure standards and enable better enforcement, and thereby provide greater investor protection and trust in the ecosystem.”

The auditor shall conduct an examination in accordance with the “Technical Guide on Digital Assurance” issued by the Institute of Chartered Accountants of India (ICAI). The report shall be prepared by an auditor (Statutory Auditor or Independent Practitioner) who has subjected himself / herself to the peer review process of the Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

If SEBI issues the circular, reporting on digital assurance shall be applicable to the Top 100 listed entities by market capitalization from Financial Year 2024-25 onwards i.e. for the period ending on or after 31st March, 2025.

Some examples of external digital information that can be used to corroborate information in the financial statements are the following:

  1. Revenue of an entity can be corroborated with the GST tax portal
  2. Export receivables can be corroborated with the EDPMS report
  3. Import payables can be corroborated with the IDPMS report
  4. Tax deducted at source and advance taxes paid can be corroborated with the traces portal and AIS data
  5. Total contribution to provident fund by employer and employee, can be corroborated with Employee Provident Fund Organization portal
  6. Use of e-way bills to perform a sales cut-off procedure
  7. Traffic data submitted to NHAI can be corroborated with toll revenue.

The ICAIs technical guide was issued some time ago in January 2023. This guide primarily focuses on sources of external audit evidence available and how it can be utilized by the members in their audit procedures. This guide also highlights the importance of reliability and relevance of the source from which the information is being obtained. In addition to using the available source, the members are guided to consider the reliability and relevance of the source and information being used in the audit. This guide also provides various illustrations of available sources of external audit evidence and how they can be used. Some of those examples are given above.

The aforementioned Technical Guide primarily focuses on sources of external audit evidence and information available and how the same can be utilised by the members in their audit procedures. It is noted that the Technical Guide does not require any separate reporting by auditors on these aspects. Further, no responsibility is cast on the management of the listed entity to provide this information obtained from external data repositories to auditors or provide access to such information to auditors. However, rightfully so, SEBI in the draft circular requires management to take responsibility for sharing such information to the auditors of the company.

The ICAI’s stance not to require any separate audit attestation is understandable, because external audit evidence, whether digital or otherwise, is in any case covered under extant auditing standards and audit procedures in the audit of financial statements.

Paragraph 7 of SA 500 requires as under: “When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence.” Accordingly, the auditor is required to consider the relevance and reliability of information (e.g., information contained in accounting records, information obtained from other sources, information prepared using the work of a management’s expert) which is intended to be used by the auditor as audit evidence.

The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. However, SA 500 rightfully cautions, that there may be exceptions, for e.g., information obtained from an independent external source may not be reliable if the source is not knowledgeable, or a management’s expert may lack objectivity.

According to the Technical Guide, the following factors may be important when considering the relevance and reliability of information obtained from an external information source:

  • The nature and authority of the external information source, including the extent of regulatory oversight (if applicable)
  • The “independence” of the data — is the entity able to influence the information obtained  The competence and reputation of the external information source with respect to the information, including whether, in the auditor’s professional judgement, the information is routinely provided by a source with a track record of providing reliable information
  • The auditor’s past experience with the reliability of the information
  • Market acceptability of the data source
  • Whether the information has been subject to review or verification
  • Whether the information is relevant and suitable for use in the manner in which it is being used, including the age of the information and the nature and strength of the relationship between the information and the entity’s transactions, and, if applicable, the information was developed taking into account the applicable financial reporting framework
  • Alternative information that may contradict the information used
  • The nature and extent of disclaimers or other restrictive language relating to the information obtained
  • Information about the methods used in preparing the information, how the methods are being applied including, where applicable, how models have been used in such application, and the controls over the methods
  • When available, information relevant to considering the appropriateness of assumptions and other data applied by the external information sources in developing the information obtained.

The technical guide emphasises that, the information obtained by the auditor from external sources may reveal inconsistencies with the information obtained by the auditor from other sources (e.g., accounting records, information obtained during the course of audit, etc.). This would help the auditor in performing necessary modifications or additional procedures to resolve the matter. Thus, audit evidence obtained from external sources plays a vital role in the audit process.

SEBI has invited comments and suggestions, by 24th February, 2025. The author submits as follows:

1. There are numerous auditing standards that require an appropriate use of internal and external audit evidence, in the audit of financial statements, to ensure that they are true and fair. The implementation of these standards and the conduct of appropriate audit procedures are also verified by various peer reviewers, including the NFRA reviewers. Therefore, a separate audit report to certify the same is unwarranted and is an extra burden on the auditors.

Precisely for this reason, the Technical Guide of the ICAI does not require any separate audit report. What may be more appropriate under the circumstances, is that the auditors include a summary work paper in their audit file, which will document all the external evidences that they used to audit the financial statements. This in the normal course will be subjected to a review by various peer reviewers.

2.   If the above recommendation is not acceptable to SEBI, they should require the report to be issued by the company’s statutory auditor. It would be incorrect and inappropriate for an independent practitioner to certify the report, as they do not have the same level of knowledge about the client as the statutory auditor. A statutory auditorconducts regular audits, reviews financial statements, and has a deep understanding of a company’s internal controls, compliance framework, and financial history. On the other hand, an independent practitioner, who is engaged for a specific task, lacks this extensive familiarity. For instance, if a company has complex revenue recognition policies, the statutory auditor—being well-versed in past accounting treatments—can provide a more informed certification than an external practitioner with limited exposure to the company’s financial intricacies.

Suppose a company’s revenue figures in its financial statements need to be verified against GST (Goods and Services Tax) returns. The statutory auditor, having audited the company’s financials and tax reconciliations over time, is aware of any past discrepancies, discount or adjustments for returns, or specific reporting nuances, such as aggregating the multiple branches. An independent practitioner, however, would only be reviewing the data at a surface level and may not be aware of historical issues such as classification errors, past rectifications, or timing differences in revenue recognition.

3. The original purpose of digital assurance was to obtain more certification by statutory auditors on various non-GAAP measures in offer documents, which a merchant banker may not be competent, since they are not involved in the audit of financial statements; and may not have a deep understanding of clients databases and controls. Take for example, in the case of Swiggy, there are several non-GAAP measures that are used, such as adjusted EBITDA, quick commerce gross revenue, food delivery gross revenue, etc. Without opining on the relevance of these measures, it is not out of bounds for the statutory auditors to comfort such numbers.

In the offer document, Swiggy also provides industry and market-related data, basis the Redseer Report. Here the merchant banker’s basis their in-house experts or hired consultants should feel comfortable that the source is authoritative, and that it is fairly represented in the offer document, without any cherry-picking of information that suits the issuer, and avoiding those that are adversarial.

Likewise, there could be detailed cost-related data, where comforting by a cost accountant or cost auditor may be appropriate. A geoscientist may be more competent to certify mineral reserves. Information related to attrition rate for services company can be comforted by the statutory auditors, however, since there could be multiple ways of computing the same, the basis of measurement should be clarified by ICAI, so that there is consistency in calculations.

Whilst the merchant bankers are overall responsible for the information contained in the offer document, they should be supported by various professionals. Some of these professionals can be sourced as consultants or employed by the merchant bankers. Information that is closely associated with financial systems and related databases, should be comforted by the statutory auditors. SEBI should ensure that all stakeholders have a collaborative and cooperative approach in this matter, so that the end result is a solid offer document that can form a strong basis for evaluating a company.

Section 148: Reassessment assessment cannot be opened twice for the same reason.

27. SarikaKansal vs. ACIT

[W.P.(C) 7940/2024 & CM APPL. 32747/2024]

Dated: 30th January, 2025

(Del) (HC).] AY 2017-18

Section 148: Reassessment assessment cannot be opened twice for the same reason.

The petitioner challenged to the impugned order under Section 148A(d) of the Act and the impugned notice 148 of the Act. First, that the impugned order has been passed without considering that the information on the basis of which it was the subject matter of reassessment proceedings, which culminated in an order dated 29th March, 2022 passed under Section 147 read with Section 144B of the Act.

The second ground is that the impugned notice is beyond the period of limitation. According to the petitioner, the limitation for issuance of the impugned notice expired on 31st March, 2024.

The grounds on which the petitioner’s assessment is sought to be reopened revolves around transactions, whereby the petitioner had sold 1,70,000 (One Lac Seventy Thousand) shares of a company named Trustline Real Estate Private Limited (hereafter TREPL) to one Mr. Samir Dev Sharma at the rate of ₹42/- per share. The Assessing Officer (hereafter AO) suspects that the said shares were sold at an apparent consideration, which is below the fair market value with an intent to avoid tax.

The petitioner disputes the same and contends that her income for AY 2017-18 has been reassessed for the same reason that she had sold the shares of TREPL at a value, which was less than the fair market value.

Thus, the first and foremost question to be addressed is whether the AO had reopened the assessment for AY 2017-18 for the same reason that has led the AO to pass the impugned order holding that it is a fit case for issuance of the impugned notice.

The petitioner is an individual and there is no dispute that she files her income tax returns regularly. She had filed her return for AY 2017-18 on 2nd August, 2017 declaring her taxable income as ₹74,77,750/-. The said income also included income arising from sale of 1,70,000 (One Lac Seventy Thousand) shares of TREPL at the rate of ₹42/- per share. The petitioner claims that the said rate was settled on the basis of valuation report, whereby the shares of TREPL were valued taking into account its underlying assets including the first and third floor of the property bearing the address A-20, Friends Colony East, New Delhi (hereafter the Friends Colony property). The petitioner’s return was processed under Section 143(1) of the Act.

On 31st March, 2021, the AO issued a notice under Section 148 of the Act, as in force at the material time, calling upon the petitioner to file her return for AY 2017-18 within a period of fifteen days from the date of the said notice. Subsequently, the AO furnished the reasons for reopening the assessment.

It is apparent from perusal of the reasons that the petitioner’s assessment was reopened on the premise that the petitioner as well as certain other companies had sold the shares of TREPL to one Mr. Samir Dev Sharma during the Financial Year 2016-17 at an abysmally low value. During the course of the reassessment proceedings, the AO issued a notice under Section 143(2) read with Section 147 of the Act calling upon certain information including the information that was relevant for determining the market value of the Friends Colony property. The petitioner responded to the said notice and provided the information as sought for. The petitioner had explained that TREPL owns two floors of the Friends Colony property — first and third floors each having covered area of 2,248.44 sq. ft.

The petitioner asserted that the market value of the Friends Colony property, as determined by the government approved valuer, was ₹8,58,90,408/-(Rupees Eight Crores Fifty-eight Lakhs Ninety Thousand Four Hundred and Eight only) and she had also furnished the copies of the valuation report, balance sheet and profit and loss account of TREPL. A letter dated 24th March, 2022 furnished by the petitioner to the AO in response to the notice issued under Section 143(2) of the Act. The explanation as provided by the petitioner was accepted and the AO passed an assessment order dated 29th March, 2022 accepting the petitioner’s returned income.

Now the AO once again issued a notice dated 28th March, 2024 under Section 148A(b) of the Act enclosing therewith an annexure containing information which according to the AO, suggested that the petitioner’s income had escaped assessment and accordingly, called upon the petitioner to show cause why her assessment for AY 17-18 not be opened.
The Court observed that it was apparent from the reasons that the notice under Section 148A(b) of the Act was issued on the assumption that the petitioner had sold the shares of TREPL at an apparent value which was less than its fair value. It is important to note that whereas in the earlier round of proceedings, the AO had reasoned that income amounting to ₹18,91,41,050/- for AY 2017-18 had escaped assessment, the AO now stated that the information available suggested that the income amounting to ₹32,35,81,536/- had escaped assessment. The said view was premised on the basis that the value of the Friends Colony property was ₹32,35,81,536/- and the petitioner had sold the entire Friends Colony property to Mr. Samir Dev Sharma by transferring the shares of TREPL, which owned the said property. It is material to note that this was clearly the subject matter of examination in the previous round of the reassessment proceedings that had commenced by virtue of the notice dated 31st March, 2021 issued under Section 148 of the Act.

The petitioner responded to the notice by a letter dated 10th April, 2024. Once again, the petitioner reiterated that TREPL owned only two floors of the Friends Colony property – first and third floors and each of the said floors measured 2,248 sq.ft.

The petitioner furnished a valuation report which was furnished earlier disclosing the value of the two floors of the Friends Colony property which was owned by TREPL as ₹8,60,00,000/- (Rupees Eight Crores Sixty Lac Only). She reiterated that the fair market value of the shares sold by her and as determined in terms of Rule 11UAA of the Income Tax Rules, 1962 would amount to ₹42/- per share after considering the market value of the two floors of the Friends Colony property. The AO passed the impugned order holding that it is a fit case for issuance of notice under Section 148 of the Act. The impugned order proceeds on the basis that the entire shareholding (25,00,000 shares) of TREPL were transferred to one Mr. Samir Dev Sharma by three persons for a consideration of ₹10,50,00,000/-

The impugned order proceeds on the assumption that TREPL owned the entire Friends Colony property ad-measuring 500 sq. yds. (418.064 sq. mtrs.) and the circle rate in the given area is ₹7,74,000/- per sq. meter. Thus, the value of the immovable property owned by TREPL is ₹32,35,81,536/- and the same had been transferred indirectly by sale of shares of TREPL. The impugned order on the aforesaid basis computes the fair market value of the shares of TREPL sold by the petitioner.

The Hon. Court observed that it is clear that the information on the basis of which the impugned order has been passed was subject matter of examination in the earlier round of reassessment under Section 147 of the Act. The AO’s reason to believe that the petitioner’s income had escaped assessment, which had led to the issuance of notice dated 31st March, 2021, was founded on an assumption that the petitioner had sold the shares of TREPL at a price below its correct value. The notice issued under Section 143(2) of the Act during the said proceedings and the petitioner’s response dated 24th March, 2022 issued to the said notice clearly establishes that the examination revolved around the value of the immovable property held by TREPL (Friends Colony property). The petitioner’s response dated 24th March, 2022 indicates that the petitioner had forwarded the audited balance sheet and the profit and loss account of TREPL and had also explained that TREPL owned only two floors of the Friends Colony property. The AO had examined the said response and accepted the same. Clearly, the impugned order has been passed in respect of the same issue that was subject matter of examination in the earlier round.

The learned counsel for the Revenue contended that there was a difference in the issue involved as the impugned order has been passed on the information that TREPL had owned the entire Friends Colony property. He contended that in the earlier round, the AO had accepted that TREPL held only part of the Friends Colony property, however, information now available suggests that TREPL owns the entire Friends Colony property.

Undisputedly, the impugned order has been passed on the basis that TREPL owns the entire Friends Colony property. However, the same was clearly an issue in the earlier round as well and the petitioner had clearly explained the extent of property owned by TREPL. In her response to the notice dated 28th March, 2024 issued under Section 148A(b) of the Act, the petitioner had reiterated that TREPL owns only two floors of the Friends Colony property and there is no material on record available with the AO to contradict the same. The impugned order does not discuss why the petitioner’s assertion that TREPL owns only two floors of the Friends Colony property had been ignored. The counter affidavit filed on behalf of the Revenue also does not address the said issue. The counter affidavit merely reiterates what is stated in the impugned order.

The Court observed that it is apparent that the impugned order has been passed on surmises without any cogent material to controvert that TREPL owns only two floors of the Friends Colony property and not the entire building at the material time.

The question whether the TREPL owned the entire Friends Colony property is one that is easily verifiable by the AO. However, as noted above, the AO has completely ignored the petitioner’s response to the notice issued under Section 148A(b) of the Act in this regard in the impugned order. Similar approach has also been adopted in the counter affidavit as well.

Section 148A(d) of the Act mandates that the AO is required to pass an order on the basis of record and considering the response to the notice under Section 148A(b) of the Act. In this case, the record indicates that the information on the basis of which the assessment is sought to be reopened was fully examined in the earlier round of reassessment under Section 147 read with Section 144B of the Act. The petitioner’s response clearly stated that TREPL owned only two floors of the Friends Colony property and there is nothing credible on record that controverts it. The impugned order does not even advert to the said issue.

Thus, the impugned order and the impugned notice were quashed and set aside.

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

26. City Corporation Limited vs. ACIT Circle – 1 Pune &Ors.

[WP (C) No. 6076 TO 6081 OF 2023]

Dated: 29th January, 2025

(Bom) (HC)] [Assessment Years : 2013-14 to 2019-20]

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

The assessee is engaged in constructing and developing infrastructure facilities. In terms of the NCLT’s order dated 27th April, 2020, the CCL got merged with its wholly owned subsidiary “Amanora Future Tower Pvt. Ltd.” (AFTPL), with effect from 1st April, 2018.

By communication dated 27th April, 2020, the Petitioner informed the Income Tax Authority of the merger effective 1st April, 2018. This intimation bore the stamp and endorsement of receipt from the office of the Deputy Commissioner of Income Tax, Circle 1(1), Pune.

In the return filed on behalf of the Respondents, no dispute was raised about receiving this intimation on 27th August, 2020.

On 31st March, 2023, the Assistant Commissioner of Income Tax, Circle 1(1), Pune, issued a notice dated 31st March, 2013 under Section 148 of the Act, to AFTPL seeking to reopen the case in PAN: AAKCA3074H. The Assistant Commissioner obtained approval from the Principal Chief Commissioner of Income Tax to issue notice to “Amanora Future Towers Private Limited (now merged with City Corporation Limited)”.

The Petitioner thereupon instituted the writ Petitions, questioning the impugned notice dated 31st March, 2023, inter alia, on the ground that, post-merger, AFTPL was a non- existing entity. Therefore, no notice under Section 148 of the Act, could have been issued to AFTPL.

The learned counsel for the Petitioner, relied on Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. (2019) 107 taxmann.com 375 (SC); Uber India Systems (P.) Ltd. vs. Assistant Commissioner of Income(2024) 168 taxmann.com 200 (Bombay); and Alok Knit Exports Ltd. vs. Deputy Commissioner of Income-tax, Circle 6(1)(1), Mumbai (2021) 130 taxmann.com 457 (Bombay); in support of the contention that the notice issued to a non- existing entity post-merger was a substantive illegality and not some procedural violation. Accordingly, he urged that the impugned notices be quashed and set aside.

The learned counsel for the Respondents, submitted that issuing notices in the name of AFTPL was not illegal. He also submitted that the Principal Commissioner of Income Tax specifically approved the issuance of such notices. It was submitted that the material on record shows that the notice was meant to be served upon the Petitioner. However, due to certain technical glitches, the utility system generated a notice in the name of AFTPL. He said the facts in the present case were like those in Skylight Hospitality LLP vs. Asstt. CIT(2018) 92 taxmann.com 93/254 Taxman 390 (SC). He submitted that, in this case, the Delhi High Court upheld a notice issued to the company that had already merged. Accordingly, it was urged that these Petitions may be dismissed.

The Hon. Court observed that the merger between City Corporation Limited and Amanora Future Towers Private Limited, which was effective from 1st April, 2018, was not disputed. This merger was based on the NCLT’s order dated 27th April, 2020. There was also no dispute about the Petitioner, vide a communication received by the Income Tax Department on 27th August, 2020 informing about the merger effective 1st April, 2018. No dispute was raised about the department not receiving the intimation on 27th August, 2020 or about the department being unaware of the merger. Still, the impugned notices dated 31st March, 2023 under Section 148 of the Act, were issued only in the name of “Amanora Future Towers Private Limited”. The crucial factor being that all such notices were issued to and in the name of ‘Amanora Future Towers Private Limited’

As of the date of the issue of the impugned notices, the noticee ‘Amanora Future Towers Private Limited’ could not have been regarded as a ‘person’ under Section 2(31) of the Act. In fact, that was a non-existent entity. In Maruti Suzuki case the Hon’ble Supreme Court has held that notice issued in the name of a non-existent company is a substantive illegality and not merely a procedural violation of the nature adverted to in Section 292B of the Act.

The Hon. Court noted that in the Maruti Suzuki case, the Hon’ble Supreme Court noted that the merged company had no independent existence after the merger. The Court noted that even though the Assessing Officer was informed of the merged company having ceased to exist due to the approved merger scheme, the jurisdictional notice was issued only in its name. The Court held that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the merged entity ceases to exist upon the approved merger scheme. Participation in the proceedings by the petitioner company into which the merged company had merged or amalgamated could not operate as an estoppel against the law.

Similarly in Ubber India Systems case, the Coordinate Bench held that where by virtue of an order passed by the NCLT, the assessee company stood amalgamated with the petitioner, notice issued under Section 148A(b) and Section 148 to the assessee, which was a non-existent company was illegal, invalid and non-est. Similarly, in Alok Knit Exports Ltd(supra), another Coordinate Bench where the Assessing Officer had committed a fundamental error by issuing notice under Section 148 of the IT Act in the name of an entity which had ceased to exist because of it having merged with the petitioner company, the stand of the Assessing Officer that this was only an error which could be corrected under Section 292B could not be sustained.

The Court observed that in the affidavit filed by the tax department there is a clear admission that the amalgamation of the company was brought to the notice of the Department. The only explanation is that “notice was issued on the non-existing company due to technical glitch in the system wherein no field in the notice u/s 148 of the Act is editable.”

The affidavit states that files were moved proposing notices in the names of both entities, AFTPL and the Petitioner (CCL). There was a reference to seizure proceedings, the two PAN numbers, and the lack of an editable field on this notice. Therefore, it was submitted that the notice was generated on AFTPL’s PAN.

In short, the averments in the affidavit purport to apportion the blame on the department’s utility system. Based upon this, the fundamental error is sought to be passed off as a mere technical glitch.

The Court held that based on the above averments and the arguments, the fundamental error in issuing the impugned notices against a non-existing company despite full knowledge of the merger cannot be condone. The impugned notices, which are non-est cannot be treated as “good” as urged on behalf of the Respondents. In Maruti Suzuki case, the Hon’ble Supreme Court has held that issuing notice in the name of a non-existing company is a substantive illegality and not a mere procedural violation of the nature adverted to in Section 292B of the Act.

The department contention about the facts in the present case being akin to those in Skylight Hospitality LLP case could not be accepted. The Court held that the Special Leave Petition filed by the Skylight Hospitality LLP (supra) against the judgment of the Delhi High Court rejecting its challenge was dismissed in the peculiar facts of the case, which weighed with the Court in concluding that there was merely a clerical mistake within meaning of Section 292B. The Hon’ble Supreme Court held that in Maruti Suzuki case the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer, was issued to a non-existent company. The assessment order was issued against the amalgamating company. “This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B”.

The Hon. Court also referred to decisions in case of Anokhi Realty (P) Ltd. Vs. Income-tax Officer(2023) 153 taxmann.com 275 (Gujarat); Adani Wilmar Ltd. vs. Assistant Commissioner of Income-tax(2023) 150 taxmann.com 178 (Gujarat) and in the case of Principal Commissioner of Income Tax -7, Delhi vs. Vedanta Limited ITA No. 88 of 2022 decided on 17th January, 2025.

Accordingly, the impugned notices were quashed and set aside.

Statistically Speaking

1. COUNTRIES WHICH RECEIVED THE MOST MONEY FROM INDIA IN BUDGET 2025-26

2. POWERFUL PASSPORTS IN THE WORLD

Rank Country Visa free destinations
1 Singapore 195
2 Japan 193
3 Finland 192
3 France 192
3 Germany 192
3 Italy 192
3 South Korea 192
3 Spain 192
4 Austria 191
4 Denmark 191
India has dropped five places in this year’s rankings, falling from 80th to 85th.

The Indian passport now provides visa-free access to 57 countries
U.S. passport has fallen to ninth place. Currently, U.S. passport holders enjoy visa-free access to 186 destinations.
Pakistan, Yemen, Iraq, Syria, and Afghanistan rank among the bottom five. 
Source: Henley Passport Index 2025

 

3. DIRECT TAX COLLECTIONS FOR F.Y. 2024-25

            (₹ in Crore)
FY 2023-24 (as on 10th February, 2024)
Corporate

Tax (CT)

 Non*- Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total
Gross Collection 8,74,561 9,30,364 29,808 3,461 18,38,194
Refunds 1,41,132 1,46,321 – 78 2,87,531
Net Collection 7,33,429 7,84,042 29,808 3,384 15,50,663

(₹ in Crore)
FY 2024-25 (as on 10th February, 2025) Percentage growth
Corporate

Tax (CT)

 

 Non*-Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total Total Growth
Gross Collection 10,08,207 11,28,040 49,201 3,059 21,88,508 19.06%
Refunds 2,29,731 1,80,317 – 57 4,10,105 42.63%
Net Collection 7,78,475 9,47,723 49,201 3,003 17,78,402 14.69% 
Source: Central Board of Direct taxes

 

4. COUNTRIES WITH THE MOST IPOS IN 2024

5. GROWTH IN ELECTRONIC EXPORTS

Letter to the Editor

Dear Sir,

I read the ‘NAMASKAAR’ column with a keen interest. I’m writing to you about the article ‘One’s nature cannot be changed’ in a recent BCA Journal, authored by Mr C N Vaze. I appreciated this column and it has always fascinated me. It has a lot of learning, relearning, and material to introspect and work on oneself to become a better human being.

He has rightly said a lion cannot be expected to eat grass, or a fox will always remain धूर्त… For human beings, I will share a conversation between Lord Brahma and Naradaji, when Lord was seeding this planet with the various species, he would give details of that creation to Naradaji, when it was the turn to create humans, the Lord said about human beings, इसकी प्रवर्ति पानी की तरह नीचे ही गिरने की होगी, नारदजी विस्मय से बोले, प्रभु, ऐसा अनर्थ क्यो कर रहे हैं, ब्रह्मा जी ने उत्तर दिया, इसे मैं एक ऎसी चीज़ दे रहा हूँ, जिसे ये इस्तेमाल करेगा, तो मुझ पर भी राज करेगा, वो था दिमाग, विवेक… We as human beings need to use our विवेक, the biggest blessing bestowed on us, or we will live a life worse than animals and endanger the whole planet. And we should keep changing, and everybody can change; change is constant. Dinosaurs became extinct as they could not change, and tomorrow the human race will become extinct.

COVID-19 did try to give a wake-up call, but what we see today is better not said. I learn from Kabir, Rahim, Tulsidas, and many such saints.

My appreciation to Mr Vaze and the Editorial Team.

With regards

Yatendra Goyal,
Chartered Accountant

Tech Mantra

Some more productivity apps for this edition:

Simple Login – Anti Spam

When you give away your personal email ID online to anyone, there is a good chance that the same would end up with a spammer or a hacker. SimpleLogin acts as a firewall to protect your personal email inbox.

SimpleLogin is an open-source solution to protect your email inbox. It allows you to quickly create a random email address, an alias. All emails sent to that alias are forwarded to your personal email address.

You can use the alias when subscribing to a newsletter, signing up for a new account, or giving your email to someone you don’t trust. Not only an alias can receive emails, it can also send emails. An alias is a full-fledged email address.

Later, you can simply block or delete an alias if it’s too spammy. That’s it!

Android: https://bit.ly/4gjd8dy

 

USB Lockit – Pendrive Password

This app allows you to lock / unlock your USB drives. If you have USB drives with photos, audios, videos, etc. and would like to lock them with a password, this app is for you. Once the drive is locked, nobody can access your files without unlocking it by entering the password!

The locking / unlocking can be done easily, by inserting the USB drive in your phone / Laptop C-Type port and going through 3 quick steps:

1. To lock the USB drive and protects all your files, simply set a PIN and click on LOCK button.

2. To unlock the USB drive and access to all your files, enter your PIN and click on UNLOCK button.

3. To relock the USB drive without entering the PIN every time, just a click on the LOCK button.

ATTENTION: If you lose or forget the PIN, it cannot be recovered. It is advisable to write it in a safe place.

Android : https://bit.ly/3PVFQ9S

Windows : https://www.usblockit.com/

 

Auto Answer Call—Raise to Ear

If you are tired of always having to swipe in order to answer an incoming call, Auto Answer Call lets you answer a call by simply holding your phone to your ear. When your phone rings and the app detects that it is near your ear, it will beep once and automatically answer the call. It’s that simple!

NOTE: The app does not currently work for WhatsApp calls.

It works with your existing call screen / phone app and is very easy to enable and disable. You also have an option to end an ongoing call by turning the phone face down and to automatically turn down the ringer volume once the phone has been picked up.

A very simple and efficient app for daily use – for a small price.

Android : https://bit.ly/3WBPwdn

 

Droid Dashcam – Video Recorder

Convert your phone into a dashcam with Droid Dashcam!

Droid Dashcam is a great driving video recorder (dashboard camera, BlackBox) app for car / vehicle drivers that can continuously record videos in loop mode, add subtitles with needed information directly on those videos and record in the background, auto start recording, and much more.

You can overlay captions directly on the Recording Video file, including Timestamp (Date), Location Address, GPS Coordinates, Speed (based on GPS data), etc. You can continue recording in the background and use other apps that don’t use camera. You can also use the notification panel to start/stop recording while this app is running in the background. You can use any camera for recording (rear / front) but only some devices allow you to choose a camera with a wide-angle lens.

Overall, it is a great app if you will use your dashcam sparingly and do not need it daily.

Android : https://bit.ly/42svgi6

ASS – Movement

Readers may get the impression that it is a donkey’s movement. It is far from that. ASS stands for ‘Anti-Simplification of Statutes’. It is a great movement in the national interest.

There was a country where all laws were very complicated. Certain anti-social elements were pressurising the King to simplify the laws. The King directed his Minister to appoint various committees from time to time to look into the matter.

The Minister after a study over ten to twenty years, prepared a Bill to simplify a particular law relating to revenues. There was a big hue and cry in all circles, even before reading the contents of the Bill. Many could not even digest the idea of simplification.

Certain groups in the kingdom who were like opposition parties and not in favour of the King resisted it vehemently. They felt that it was their duty to protest any proposal made by the King without even knowing what it contained. Many didn’t know what and why they were resisting. There was a huge discontent in many quarters. Therefore, the King appointed 3 special judges to hear the representations of different groups.

Bureaucrats who were asked to draft the simplified law felt that it was unethical to do so. Their thinking was that any law has to be complicated. If a common man knows the law, he may commit lesser defaults and the King will lose revenue on account of fines and penalties.

Expert Committee members demanded the constitution of fresh committees to do a comparative study or cost-benefit analysis. It was difficult for them to survive without being a member of any such committee.

Lawyers had a point for objection. They said many of them would be left with no work, if laws are simplified and there is no litigation. Another strong objection came from the authors and publishers of books, people engaged in preparing CDs of compilation of cases and so on. They said it would create lot of unemployment in the printing industry and also in the distributing agencies.

Those who were in the liaisoning activity could not bear this shock. They said they thrive on the settlement of complicated cases. The Union of employees in the Revenue Department and the Courts realised that many of them would lose their jobs as many establishments would be closed down.

After all this happened, Chartered Accountants were asked about their reaction. They did not participate in the proceedings since their ‘say’ is never heard by anybody, not even by their own subordinates. According to them, ‘Simplification’ ‘Simply a Fiction’. They only expressed that be it simplified or be it complicated, please don’t make us certify any document or sign any report! They said all clients did whatever they liked and CAs are required to endorse all the sins committed by others.

Till the Bill is passed or otherwise, the book publishing business is thriving and there is a boom in seminar business!

ASS-Movement is always successful.

Regulatory Referencer

I. DIRECT TAX: SPOTLIGHT

1. Guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements — Circular No. 1/2025 dated 21st January, 2025

2. Rule 114DA(1) amended to substitute Form No. 49C and to provide that the said Form be filed within eight months from the end of the financial year — Income-tax (Fourth Amendment) Rules, 2025- Notification No. 14/ 2025 dated 7th February, 2025

II. FEMA READY RECKONER

RBI amends receipt and payment norms for trade transactions between two ACU residents:

The RBI has amended FEMA Notification No. 14(R), the Manner of Receipt and Payment Regulations. It has been now been provided that payment from a resident in the territory of one participant country to a resident in the territory of another participant country for a trade transaction should be through the ACU mechanism, or as per the directions issued by RBI to Authorised Dealers. Here, participant country means Member countries of ACU other than Nepal and Bhutan. Thus, the requirement is now restricted only to residents of these countries and not to suppliers located in these countries. Proviso meant for suppliers to India who are residents of countries other than countries that are participants of ACU has been consequently removed. For all other trade transactions between these countries, the payment can be in INR or any foreign currency.

[NOTIFICATION NO. FEMA 14(R)(1)/2025-RB, dated 4th February, 2025]

RBI announces steps to encourage the use of Indian Rupee and local currencies for settlement of cross-border transactions

The RBI has been focusing on Internationalisation of Indian Rupee since some time. In this process, it keeps amending FEMA notifications. Amendments have been made in FEMA Notification 5(R) — Deposit Regulations, FEMA Notification 10(R) — Foreign Currency Accounts by a person resident in India Regulations and FEMA Notification 395 — Mode of Payment and Reporting of Non-Debt Instruments Regulations. The main amendments are as follows:

i. The Overseas branches of AD banks will be able to open INR accounts for a person resident outside India for settlement of all permissible current account and capital account transactions with a person resident in India.

ii. Persons resident outside India will be able to settle bona fide transactions with other persons resident outside India using the balances in their repatriable INR accounts such as Special Non-resident Rupee (SNRR) account and Special Rupee Vostro Account (SRVA).

iii. Persons resident outside India will be able to use their balances held in repatriable INR accounts for foreign investment, including FDI, in non-debt instruments.

iv. Indian exporters will be able to open accounts in any foreign currency overseas for settlement of trade transactions, including receiving export proceeds and using these proceeds to pay for imports.

[Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 5(R)(5)/2025-RB, dated 14th January, 2025]

[Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 10(R)(5)/2025-RB dated 14th January, 2025]

[Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Third Amendment) Regulations, 2025 — Notification No. FEMA 395(3)/2025-RB, dated14th January, 2025]

RBI updates FEMA Master Directions on Foreign Investment, Export of Goods & Services, and Deposits

Over the last few months, the RBI and GOI have amended several FEMA rules and notifications. The changes have now been incorporated in the respective Master Directions. The RBI has issued Updated Master Directions on “Deposits and Accounts”, “Export of Goods and Services”, and “Foreign Investment in India”. There are several clarifications provided in the Master Direction on Foreign Investment in India, some of which are listed below:

  • Indian companies which are Foreign Owned and Controlled (referred to as FOCCs) are permitted to make further investment in an Indian company only as per the FDI provisions. In spirit, these are considered as non-residents and hence they need to comply with FDI provisions to make further investment in India. While all restrictions followed for FOCCs, it was not clear whether certain reliefs which were provided to non-residents for making FDI were available to FOCCs are not. It is not clarified that the reliefs provided to non-residents under NDI Rules while making FDI — like permissibility of swap, deferred consideration, etc. — are also available to FOCCs.
  • With respect to Indian residents who migrate abroad and become non-residents — it has been clarified that the investments will be held by them on a non-repatriable basis.
  • Further, it has been clarified where a non-resident acquires equity instruments by way of transmission on the death of an Indian resident, shall be considered as a non-repatriable investment.
  • The definition of control has been streamlined throughout all provisions.

[Master Direction — Deposits and Accounts; Export of Goods and Services; Foreign Investment in India]

IFSCA notifies IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations

The IFSC Authority (IFSCA) has notified IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations, and registration of bullion depositories & vault managers. It specifies provisions related to an application for recognition of bullion exchange, conditions for grant of recognition, period of recognition, renewal & withdrawal of recognition. Also, it prescribes the operational framework of bullion exchange and the general obligations of bullion clearing corporations.

[IFSCA Notification F. No. IFSCA/GN/2025/001]

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

89. Principal CIT vs. Vikram Dhirani

[2025] 472 ITR 342 (Del)

A. Y. 2007-08

Date of order: 20th August, 2024

Ss.132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

In an appeal by the Revenue, on the question whether the Tribunal erred in deleting the addition made to the income of the assessee in the assessment made pursuant to a search u/s. 132 of the Income-tax Act, 1961 for the A. Y. 2007-08, dismissing the appeal, the Delhi High Court held as under:

“i) Since the assessment initiated in respect of the A. Y. 2007-08 was one which had already stood concluded, the Tribunal had held that since the pen-drive and the data appearing thereon having not been unearthed in the course of the search u/s. 132 of the Act, it would not constitute incriminating material. It had consequently followed the view consistently taken by this court.

ii) The assessment was confined to section 153A and consequently the significance of the incriminating material found in the course of the search alone would be the basis for any additions to the income. Since the pen-drive was an article which was not recovered in the course of the search but constituted material which had been obtained by the Department through the exchange of information route, there was no ground to interfere with the view expressed by the Tribunal.”

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

88. HansaMetallics Ltd. vs. Dy. CIT

[2025] 472 ITR 737 (P&H)

A. Y. 2012-13

Date of order: 22nd January, 2024

S. 276C of ITA 1961

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

The Assessee filed its return of income for A. Y. 2012-13 on 29th December, 2012 declaring total income at ₹8,20,53,544. As per the return of income, the self-assessment tax was pending. The self-assessment tax was paid belatedly on 10th July, 2013 along with interest.

The Assessing Officer issued a notice dated 11th February, 2014 requiring the Assessee and its directors to show cause as to why the prosecution proceedings u/s. 276C(2) should not be initiated. On the basis of legal opinion sought from the standing counsel of the Income-tax Department, a complaint was filed u/s. 276C read with section 278B of the Act.

Thereafter, the Criminal Court came to the conclusion that a case was made out and charges were framed.

The Assesseecompany and its directors filed a petition for quashing the complaint and all the consequential proceedings arising therefrom. The Assessee’s contention was that there was no evasion of tax at all. Though there was a delay in payment of tax, but the said tax was admitted / acknowledged in the return of income. On the other hand, the Department contended that the Assessee was well within his financial limits to pay the tax at the time of filing return of income, yet it did not choose to pay the tax and thereby caused loss to the revenue.

The Punjab and Haryana High Court allowed the petition and held as follows:

“i) Prosecution u/s. 276C(2) of the Income-tax Act, 1961 read with the other provisions of the Act can only be launched if there was a wilful evasion or attempt at evasion of either tax, penalty or interest. Delay in payment of Income-tax would not amount to evasion of tax.

ii) It was not in dispute that the Income-tax was self assessed and payment thereof was also made, though belatedly. The tax along with interest was paid on July 10, 2013. The show-cause notice for delayed payment was sent only on February 11, 2014 and February 24, 2014 pursuant to which the complaint was instituted. Therefore, by no stretch of imagination could it be held that there was any evasion of tax on the part of the assessees, though there was a delay in the payment of the tax for which interest was paid. The prosection was not valid.”

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

87. Principal CIT vs. Jupiter Capital Pvt. Ltd.

[2025] 472 ITR 561 (Kar)

A. Y. 2014-15

Date of order: 20th February, 2023

S. 2(47) of ITA 1961

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

In an appeal by the Revenue,on the question whether the Tribunal was right in setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares when no such extinguishment of rights was made out by the assessee as required under section 2(47) of the Income-tax Act, 1961 and there was no reduction in face value of shares, dismissing the appeal, the Karnataka High Court held as under:

“i) The undisputed facts were that pursuant to the order passed by the High Court of Bombay, number of shares had been reduced to 9,988. The face value of the shares had remained same at ₹10 even after the reduction. The Assessing Officer’s view that the voting power had not changed as the percentage of the assessee’s share of 99.88 per cent. had remained unchanged was untenable because if the shares were transferred at face value, the redeemable value would be ₹99,880 whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300.

ii) The Tribunal had rightly followed the authority in Karthikeya vs. Sarabhai v. CIT [1997] 228 ITR 163 (SC); (1997) 7 SCC 524; 1997 SCC OnLine SC 152, with regard to meaning of transfer by holding that there was no transfer within the meaning of the expression “transfer” as contained in section 2(47). There was no error in the order of the Tribunal setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares.”

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

86. Principal CIT vs. International Coal Ventures Pvt. Ltd.

[2025] 472 ITR 307 (Del)

A. Ys. 2012-13

Date of order: 20th December, 2024

S.4 of ITA 1961

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

The assessee was a joint-venture company formed by five public sector undertakings, SAIL, CIL, RINL, NMDC and NTPC, for the purpose of ensuring adequate and dependable coal supply for its promoter companies. During the financial year relating to the A. Y. 2012-13, the assessee pursued a proposal to acquire and develop a coal mine overseas and received equity contributions from some of these undertakings. The amounts received from RINL were kept in a fixed deposit with a bank. Subsequently since the proposal for acquisition of the coal mine which was being pursued was abandoned, the assessee refunded the amount received from RINL. Since the assessee had earned interest on the amount received from RINL, it paid interest to RINL which confirmed that the amount received by it was accounted for as income in its hand and tax was paid.

In the appeal by the Revenue, on the question whether interest on funds that were called for and earmarked for a specific purpose of acquiring a coal mine and deposited in the short-term fixed deposit could be construed as incidental to setting up the business of acquisition of a coal mine, dismissing the appeal, the Delhi High Court held as under:

“i) The accounting treatment of capitalising expenses during the preoperative stage of setting up a business, rests on the rationale that the cost incurred for setting up the profit-making apparatus is required to be accounted for as the value of that asset. Such expenditure is incurred for bringing the undertaking into existence. Thus, it would not be apposite to treat such preoperative expenses as revenue expenses since it cannot be matched with the revenue receipts. The amount incurred for construction or acquisition of the asset would necessarily have to be accounted as the cost of that capital asset. This principle applies only in cases where substantial time is required to construct the asset or bring the asset to use. The financial costs for such assets are thus
considered as a part of the intrinsic value of the asset. There is a distinction between the price of an asset and its cost. On the same principles, the amounts received which are directly linked to the
acquisition or construction of the asset, are required to be reduced from the capital cost of the said asset. In one sense, such receipts mitigate the cost of the capital asset and it is essential to reflect the correct cost of the asset.

ii) The Accounting Standard 16 applies to a “qualifying asset”, which is defined as an asset that takes substantial period to get ready for its intended use or sale and also explains that the substantial period of time as contemplated under the standard, primarily depends upon the circumstances of each case. Ordinarily, the same should be considered as twelve months unless a shorter or longer period is justified in the facts and circumstances of the case. It also explains that for estimating this period, “the time which an asset takes technologically or commercially, to get ready for its intended use or sale”, is required to be considered.

iii) Accounting treatment of various items are guided by an overarching principle that final accounts should reflect the true and fair view of the reported entity. In order for a capital value of an asset (which takes a considerable time to bring it to intended use) to be fairly disclosed on historical cost basis, it would be essential to subsume within the cost of the said asset all elements of expenditure, which directly contribute to the cost of that asset. It is for this reason that general administrative cost of an entity which cannot be attributed to a particular asset is not construed as the cost of that asset. But the expenditure that is directly linked to the construction or acquisition of a qualifying asset, is required to be treated as a part of its cost.

iv) If the interest was earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up the assessee’s business, the interest earned would require to be accounted for as the part of the capital value of the business or asset. A caveat was added that such accounting treatment was or would be applicable only if the nature of the asset was such that required time for construction or for putting it in use. Illustratively, the same would be applicable where the asset is to be constructed, developed or is of a nature that required considerable time to bring it to use. In case where a plant is being set up in a factory and the requisite funds for setting up the same are deployed for a period of time, the interest paid on the amount borrowed for the said purpose and interest earned on temporary deposits during the course of deployment are required to be accounted for as a part of the capital costs. This is not true for an off-the-shelf product. Illustratively, if a motor vehicle is purchased from borrowed capital, neither the interest paid nor the interest earned on the funds borrowed for payment of consideration of the same can be accounted for as a part of the cost of the said asset.

v) The assessee was set up to acquire resources to ensure supply of coal and at the material time it was in the process of negotiation for acquiring a coal mine, to set up its business, and thus called for capital from its shareholders for the purpose of payment of the acquisition costs. It was the part of the said funds that were kept in the short-term fixed deposit in the bank for pending payment of the construction. The attempt to acquire the coal mine was aborted and thus the amounts borrowed were repaid to RINL. It was not disputed that the funds in question were not surplus funds of the assessee, the same were called for and were earmarked for acquisition of a coal mine overseas which was to be the assessee’s undertaking as the assessee was formed for the purpose of acquiring and operating a coal mine overseas.

vi) The interest received on borrowed funds, which were temporarily held in interest-bearing deposit, was a part of the capital cost and was required to be capitalised as capital work-in-progress.”

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

85. World Vision India vs. NFAC

[2025] 472 ITR 564(Mad.)

A. Y. 2018-19

Date of order: 19th December, 2024

Ss. 37, 142(2A) and 144of ITA 1961:

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

The assessee filed its return of income for AY 2018-19. The said return was selected for scrutiny assessment. The assessment was completed and order dated 14th September, 2021 was passed. In the said order, the Assessing Officer relied upon special audit report dated 2nd June, 2017 as also the assessment orders passed for A. Ys. 2014-15, 2015-16 and 2017-18. The report dated 2nd June, 2017 was prepared u/s. 142(2A) of the Act for AY 2014-15, pursuant to which the assessment orders for AYs 2014-15, 2015-16 and 2017-18 were passed. The orders for AY 2014-15, 2015-16 and 2017-18 were challenged in appeal before the CIT(A).

In the A. Y 2018-19, the Assessing Officer concluded that the Assessee had applied 67 per cent of the gross receipts for charitable purposes and for the balance the Assessee had failed to establish any documents to substantiate that the amount was utilised for charitable purposes and therefore the demand has been confirmed.

The Assessee filed a writ petition challenging the assessment order mainly on the ground that the basis for coming to the conclusion that the Assessee has failed to utilize the amount for charitable purposes is based on the special audit report dated 2nd June, 2017 which was generated for AY 2014-15. The Hon’ble Madras High Court allowed the petition and remanded the matter back to the AO for the re-computation of income and held as follows:

“i) Prima facie reliance on the special audit report u/s. 142(2A) generated for the earlier assessment years could not be a basis to conclude that the similar pattern would have been followed by the assessee during the subsequent assessment years and to do so would amount to assessment by sampling. The special audit report was for the A. Y. 2014-15. In terms of section 142(2A) the special audit report could relate only for a particular assessment year since the expression used is, “if at any stage of the proceedings before him”, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the Revenue, was of the opinion that it was necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of, (i) getting the accounts audited by an accountant, as defined in sub-section (2) of section 288 , nominated by the competent authority or (b) getting the inventory valued by a cost accountant nominated by the competent authority.

ii) The assessment order indicated that no allowance had been made for the expenses incurred by the assessee towards administrative and salary expenses of the assessee and had only been allowed to accumulate 15 per cent. of the gross receipt. It was the contention of the Department that if no other amount was to be allowed, the Department had to make best judgment assessment u/s. 144. Therefore, the assessment order was set-aside and the matter was remitted back to the Assessing Officer to pass a fresh order on the merits and in accordance with law independently without getting influenced by the special audit report u/s. 142(2A) generated for the A. Y. 2014-15. Since the re-computation of income required a proper consideration, the assessee was directed to give a proper reply with proper evidence explaining the expenses which it sought to exclude.”

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

84. Neha Bhawsingka vs. UOI

[2025] 472 ITR 335 (Cal)

A. Y. 2022-23

Date of order: 22nd November, 2024

Ss.142(1), 143(2), 144, 144B, 156, 271(1)(d) and 271AAC(1) of ITA 1961

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

The assessee was in trading business. For the A. Y. 2022-23, an intimation u/s. 143(1) of the Income-tax Act, 1961 was sent to the assessee’s registered e-mail address, confirming that the return was processed without any discrepancies. Similar communications for the earlier A. Ys. 2019-20 to 2021-22 and the subsequent year 2023-24 were also sent to the same registered e-mail address. While accessing the Income-tax portal, the assessee’s tax consultant discovered that several notices, including u/ss. 143(2) and 142(1) and show-cause notices were issued against the assessee for the A. Y. 2022-23 and sent to an unregistered e-mail address. The ex parte assessment order was passed u/s. 144 read with section 144B making disallowances on account of purchases as non-genuine and unsecured loan as unexplained credit u/s. 68. Penalty notices u/ss. 271(1)(d) and 271AAC(1) were also issued.

The assessee filed a writ petition contending that the assessment order and demand notices were vitiated since they were not served at the assessee’s registered e-mail address as required u/s. 282 but were sent to an unregistered e-mail address which was not associated with her. The Calcutta High Court allowed the petition and held as under:

i) The assessment order passed u/s. 144 read with section 144B, the consequent demand notice u/s. 156 and the penalty notices u/s. 271(1)(d) and 271AAC(1) were vitiated due to procedural lapses and non-compliance with statutory provisions. The notices u/s. 143(2) and 142(1) were not served to the assessee at her registered e-mail address as mandated u/s. 282 but were sent to an unregistered e-mail address, thereby depriving the assessee of a fair opportunity to respond, violating the principles of natural justice.

ii) The assessee had a legitimate expectation, arising from consistent past practices, that all communications would be sent to her registered e-mail address. The failure to adhere to this established protocol and the absence of proper service of notices invalidated the subsequent assessment proceedings and the ex parte assessment order passed u/s. 144 and 144B. The Revenue’s reliance on the assessee’s permanent account number database or an alternate e-mail address could not substitute for statutory compliance. Procedural irregularities in issuing and serving notices undermine the jurisdiction and legality of the entire assessment process. The assessment order could not be completed without issuance of a notice u/s. 143(2). Hence, the assessment proceedings and the assessment order without issuing the notice u/s. 143(2) were bad in law.

iii) Accordingly, the assessment order, demand notice and penalty notices were quashed and set aside. The authorities were directed to issue fresh notices, if deemed necessary, strictly adhering to the statutory provisions and ensuring proper service to the assessee.”

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

83. Religare Enterprises Ltd. vs. NFAC

[2025] 472 ITR 329 (Del)

A. Y. 2013-14

Date of order: 28th November, 2024

Ss. 143(3), 144B and 254 of ITA 1961

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

The Assessee filed revised return of income for AY 2013-14 declaring total income at ₹2,70,87,75,810. This included income from dividend amounting to ₹4,14,800 which was exempt. The Assessee had not claimed any deduction in respect of expenses amounting to ₹1,83,55,525 u/s. 14A of the Income-tax Act, 1961. The Assessee’s case was selected for scrutiny and an addition of ₹1,93,79,583 was made u/s. 14A of the Act in addition to the amount of ₹1,83,55,525 already disallowed u/s. 14A of the Act. The AO also made disallowances in respect of fines and penalties.

The CIT(A) partly allowed wherein the CIT(A) deleted the additional disallowance made by the AO. In the appeal before the CIT(A), the Assessee had raised an additional ground and claimed allowance of ₹1,83,55,525 which it had not done under the revised return.

The Tribunal remanded the matter regarding disallowance u/s. 14A and disallowance of fines and penalties to the AO for consideration afresh with the direction that the disallowance u/s. 14A was required to be worked out in respect of only those investments which were yielding exempt income. Thereafter, the Assessee filed a Miscellaneous Application requesting that the AO be directed to restrict the disallowance to the extent of exempt income. The Miscellaneous Application was allowed and the Tribunal modified its order and directed that the disallowance u/s. 14A of the Act be restricted to the exempt income.

Pursuant to the aforesaid directions, the Jurisdictional AO passed an order dated 4th February, 2023 to give effect to the directions issued by the Tribunal and restricted the disallowance u/s. 14A to the extent of dividend income. However, the AO did not give any specific findings in respect of fines and penalties. The Assessee also did not file any appeal against the said order.

Thereafter, the National Faceless Assessment Centre (NFAC) issued an intimation informing the Assessee that the assessment would be completed in accordance with the procedure u/s. 144B of the Act. Against this, the Assessee filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal as the Jurisdictional AO had already passed an order to give effect to the order passed by the Tribunal. However, the NFAC passed an order, once again making the same disallowance u/s. 14A and disregarded the directions of the Tribunal. The NFAC also expressly stated that its order would supersede the order of the Jurisdictional AO.

The Assesseefiledwrit petition against the said order of NFAC. The Delhi High Court allowed the writ petition and held as follows:

“i) There is no provision under the Income-tax Act, 1961 for continuing assessment proceedings after an assessment order is passed. Concluded assessments cannot be opened except by recourse to specific provisions including section 147 of the Act.

ii) The issue of disallowance u/s. 14A had stood concluded by the order dated February 4, 2023. The Assessing Officer did not issue any specific findings regarding the fines and penalties amounting to Rs. 35,18,803 and the assessee had not filed any appeal against such decision. Notwithstanding that an order dated February 4, 2023 passed by the jurisdictional Assessing Officer, the National Faceless Assessment Centre had proceeded to pass another order. Although, the jurisdictional Assessing Officer had passed an order giving effect to the order dated February 25, 2021 and the order dated February 25, 2021 as modified by the order dated April 1, 2022 by the Tribunal, the National Faceless Assessment Centre had issued an intimation dated February 15, 2023 informing the assessee that the assessment would be completed in accordance with the procedure u/s. 144B . The assessee had filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal since the jurisdictional Assessing Officer had already passed an order dated February 4, 2023 giving effect to the orders passed by the Tribunal.

iii) The National Faceless Assessment Centre had passed an order dated March 29, 2023 once again reiterating the disallowance of ₹3,60,51,977 made u/s. 14A, which included an additional disallowance of ₹1,93,79,583 which was made by the Assessing Officer in the assessment order dated March 28, 2016. Although, the National Faceless Assessment Centre had found that the order dated April 1, 2022 passed by the Tribunal had confined the disallowance u/s. 14A to ₹4,14,800, such directions were disregarded and had also expressly stated that its order would supersede the order dated February 4, 2023 passed by the jurisdictional Assessing Officer. The order dated February 4, 2023 passed by the jurisdictional Assessing Officer had set out that it was an order to give effect to the order passed by the Tribunal wherein it was held to the effect that after appeal effect income of the assessee (since merged with REL) for the assessment year 2013-14 was recomputed at ₹2,69,43,53,890 under the normal provisions of the Act. Credit for tax deducted at source, advance tax and regular taxes paid were given after verification and interests u/s. 234A, 234B, 234C and 234D were being charged, as applicable.

iv) Therefore, there was no doubt that the proceedings pursuant to the directions issued by the Tribunal stood concluded by the order dated February 4, 2023. The initiation of further proceedings by the National Faceless Assessment Centre pursuant to the orders passed by the Tribunal was without jurisdiction. The assessment order passed u/s. 143(3) read with sections 254 and 144B was set aside.”

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

82. Sunshine Capital Ltd. vs. DCIT

[2025] 472 ITR 293 (Del.)

A. Y. 2008-09

Date of order: 16th April, 2024

Ss.153 and 254 of ITA 1961

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

The case of the Assessee was selected for scrutiny and assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed after making various additions. CIT(A) partly allowed the Assessee’s appeal. The Tribunal, vide its order dated 08-10-2018 remanded the matter to the AO for the purpose of fresh assessment. The Tribunal also deleted the demand reflected on the Income Tax Portal.

Thereafter, the Assessee made several representations from July 2020 to August 2021 to the Department praying for rectification of the error with respect to the demand being reflected on the portal as well as the issue of refund. But there was no action by the Department. Since no reply was received by the Assessee upon representations, the Assessee filed an application in August 2021 in accordance with the Right to Information Act (RTI) to give effect to the order passed by the Tribunal. Pursuant to the RTI application, the AO passed an order in November 2021 wherein it expressed its inability to give appeal effect on the ground that it had not received the order passed by the Tribunal through proper channel. Against this order, the Assessee filed an appeal in December 2021 which came to be disposed vide order passed in January 2022 whereby it was decided that the information provided to the Assessee was adequate.

Thereafter, in February 2022, the Assessee filed an application to the registry of the Tribunal seeking information on service of order passed by the Tribunal. The Assessee was informed by the registry in March 2022 that the order passed by the Tribunal was duly sent to the CIT(Judicial) on 24th August, 2018 for further action. In March 2022, the Assessee also made subsequent representations to rectify the error with respect to the demand reflected on the portal, but to no avail.

The Assessee therefore filed writ petition challenging the inaction on the part of the Department and contended that despite the order passed by the Tribunal being communicated to the concerned authority of the Income tax Department within stipulated time, the Department failed to pass a fresh assessment order. The Delhi High Court allowed the petition and held as follows:

“i) Section 153 of the Income-tax Act, 1961, stipulates that an order for fresh assessment pursuant to an order u/s. 254 or section 263 or section 264 of the Act may be made at any time before the expiry of a period of nine months. The provision further encapsulates that the period has to be calculated from the end of the financial year in which the order u/s. 254 of the Act is received by the authorities mentioned in the section. Regarding the word “received” the language couched in section 260A of the Act is similar to that of section 153(3). The contextual interpretation of the phrase “received” postulates the time when the parties are notified about the pronouncement and are represented at that instant in the open court. The legislative intent behind the enactment of section 254(3) of the Act does not prescribe shifting of the onus of proving the receipt of the order under the provision on the assessee, the expression “is received” used in section 153(3) of the Act cannot mean to extend the limitation till perpetuity. The expression “received” employed in section 153(3) of the Act would not strictly mean that a certified copy of the order of the Tribunal, in the given facts and circumstances, ought to have been necessarily supplied to the concerned authority through an appropriate mechanism devised by the respondents. Further, section 254(3) of the Act casts a duty upon the Tribunal to send the copy of the orders passed under section 254 of the Act to the assessee as well as to the Principal Commissioner or Commissioner. A conspectus of section 254 read with section 153(3) of the Act would reveal that the provisions cannot be made applicable to the detriment of the assessee.

ii) The material on record showed that the Tribunal sent the order of the remand to the Department on October 24, 2018, but the Department denied having received it. It was sufficient to take note of the Tribunal’s stand of sending a copy of the order to the Department. Moreover, the assessee, as early as on July 30, 2020 itself, made the first communication to the Department to give effect to the order in appeal. The record would show that the subsequent representation sent by the assessee on July 9, 2021 to the Department contained all the requisite information of the orders passed by the concerned authorities in the case of the assessee. No concrete steps had been taken by the Department. Except harping upon the word “received”, the Department had not taken any measure to give effect to the order in appeal. Taking into consideration the Tribunal’s response that the concerned order was sent on October 24, 2018, the Department ought to have passed the order to give effect to the order in appeal within twelve months from then. However, that had not been done by the Department till date.

iii) Since the Department had failed to comply with the order of the Tribunal in passing a fresh assessment order within the stipulated time, the writ petition was to be allowed with the directions to the Department to ensure that the demands of quantum amounting to ₹34.70 crores and penalty amounting to ₹33.98 crores being reflected in the Income-tax Business Application portal were removed within two weeks, that the amount of ₹25,44,671 lying with the Department were refunded to the assessee with applicable interest as per law, that the properties of the assessee were released within two weeks of the passing of this judgment, and that the three bank accounts were defreezed by the Department within two weeks.”

Glimpses of Supreme Court Rulings

19. PCIT vs. Jupiter Capital Pvt. Ltd.

(2025) 170 taxmann.com 305 (SC)

Capital gains – Reduction of share capital – The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961 – Percentage of shareholding of the assessee in the Company prior to, and post, reduction in Share Capital is not relevant – Loss incurred on erosion of the net worth is allowable as capital loss.

The Respondent-Assessee was a company engaged in the business of investing in shares, leasing, financing and money lending. The Assessee had made an investment in Asianet News Network Pvt. Ltd. (ANNPL), an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having face value of ₹10/- each. Thereafter, the Assessee purchased 38,06,758 shares from other parties, thereby increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company, i.e., 15,35,05,750.

The said company incurred losses, as a result of which the net worth of the company got eroded. Subsequently, the company filed a petition before the Bombay High Court for reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered a reduction in the share capital of the company from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the Assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at ₹10 even after the reduction in the share capital. The High Court also directed the company for payment of ₹3,17,83,474/- to the Assessee as a consideration.

During the year, the Assessee claimed long term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the Assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income-tax Act, 1961. The Assessing Officer took the view that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Hence there was no extinguishment of the rights of the shareholders. Extinguishment of rights would mean that the assessee has parted with those shares or sold off those shares to second party, which was not the case here.

In appeal the CIT(A) vide order dated 14th December, 2017 while distinguishing the facts of the present case from those involved in the decision of the Supreme Court in Kartikeya V. Sarabhai vs. Commissioner of Income Tax (reported in (1997) 7 SCC 524) held that any extinguishment of rights would involve parting the sale of percentage of shares to another party or divesting rights therein. The appeal was therefore dismissed.

However, the ITAT reversed the order passed by the CIT(A) and allowed the appeal filed by the Assessee observing that the decision of the Supreme Court in Kartikeya vs. Sarabhai (supra) was squarely applicable to the facts of the present case. On the account of reduction in number of shares held by the Assessee company in ANNPL, the Assessee has extinguished its right of 15,33,40,900 shares and in lieu thereof, the Assessee received 9,988 shares at ₹10/- each along with an amount of ₹3,17,83,474/-. The Assessee’s claim for capital loss on account of reduction in share capital in ANNPL was therefore allowable.

The Revenue went in appeal before the High Court. The High Court, dismissed the appeal filed by the Revenue and affirmed the order passed by the ITAT, observing that the AO’s view that the voting power of the Assessee had remained unchanged was untenable. The rationale was that if the shares were transferred at face value, the redeemable value would be ₹99,880/- whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300/. According to the High Court, the ITAT had rightly followed the judgement in the case of Kartikeya V. Sarabhai vs. The Commissioner of Income Tax (supra).

The Supreme Court after having heard the learned ASG appearing for the Revenue, and having gone through the materials on record, were of the view that no error, not to speak of any error of law, was committed by the High Court in passing the impugned order.

According to the Supreme Court, whether reduction of capital amounts to transfer was no longer res integra in view of its decision in Kartikeya V. Sarabhai (supra).

According to the Supreme Court, the following principles are discernible from its aforesaid decision:

a. Section 2(47) of the Income-tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.

b. A company under section 66 of the Companies Act, 2013 has a right to reduce the share capital and one of the modes which could be adopted is to reduce the face value of the preference share.

c. When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of Section 2(47) of the Income-tax Act, 1961.

The Supreme Court noted that in the present case, the face value per share has remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares have been reduced from 15,35,05,750 to 10,000 and out of this the Assessee was holding 15,33,40,900 shares prior to reduction and 9,988 shares after reduction, it can be said that on account of reduction in the number of shares held by the Assessee in the company, the Assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the Assessee received 9,988 shares at ₹10 each along with an amount of ₹3,17,83,474.

The Supreme Court observed that in the case of Kartikeya v. Sarabhai (supra) it has not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital. In that case, it was observed that reduction of right in a capital asset would amount to ‘transfer’ under Section 2(47) of the Income-tax Act, 1961. Sale is only one of the modes of transfer envisaged by Section 2(47). Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income-tax Act, 1961.

The Supreme Court noted the decision of a Division Bench of the Gujarat High Court in the case of Commissioner of Income-Tax vs. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 where the Court clarified that receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains as envisaged under Section 48 of the Income-tax Act, 1961.

The Supreme Court further noted that in the case of Anarkali Sarabhai vs. CIT reported in (1997) 224 ITR 422, it was observed that the reduction of share capital or redemption of shares is an exception to the Rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the
Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer Under Section 2(47) of the Income-tax Act, 1961.

In view of the aforesaid, the Supreme Court held that that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961.

The Supreme Court therefore dismissed the appeal filed by the Revenue authorities.

Note: The judgment of the Supreme Court in the case of Anarkali Sarabhai has been analysed in the column “Closements” in April, 1997 issue of BCAJ.

From The President

Get out of the way!

– Stop micromanaging economic activity!

– Give entrepreneurs and households back their time and mental bandwidth.

– Regulators should hold themselves to the same standards that they expect of regulated entities.

The preface to the Economic Survey 2024-25 resounds with a bold and decisive call for reform. These foundational principles underscore the broader vision through which our nation’s governing dispensation can truly embrace and enable ‘growth through deregulation.’

The core takeaway from this year’s Economic Survey is the imperative need for a substantial rollback of regulatory excesses, as well as a conscious restraint from layering policies with additional operational conditions under the pretext of preventing misuse. More often than not, such over regulation distorts the original intent of policy measures, hampering rather than facilitating economic dynamism. The Survey makes an insightful case for leveraging India’s deeply ingrained social trust structures to attain scale and efficiency, especially
in its closely connected, kinship-based economic landscape. Each chapter of the Survey reinforces the necessity of ‘simplification and deregulation’ wherever feasible. As Chartered Accountants being enablers of commerce and enterprise, such unequivocal directional clarity in favour of effective deregulation is truly a welcome shift.

Encouragingly, early indicators of this ‘growth through deregulation’ vision are already visible. The conceptualisation of a Deregulation Commission, backed by well-defined terms of reference and coordinated efforts between the central and state governments, is a promising step forward. However, the success of this initiative hinges on its substantive execution rather than merely its structural existence. If implemented with true intent and depth, this deregulation drive can significantly bolster the competitiveness of Indian businesses, enabling them to expand and scale with greater ease and speed.

A Budget with Balance and Direction

The month of February commenced with the high-decibel presentation of the Union Budget 2025, accompanied by the introduction of the Finance Bill, 2025. A strong emphasis on driving consumption-led growth was evident, while an impressive balance has been achieved on the fiscal front. The Society hosted two highly engaging Public Lecture Meetings: one on the Direct Tax Provisions under the Finance Bill, 2025 by Shri CA. Pinakin Desai, and another on the Indirect Tax Proposals under the Finance Bill, 2025 by Shri CA. Sunil Gabhawala. Both sessions were well attended and have since garnered over 15,000 views on the Society’s YouTube channel. Additionally, our esteemed BCAS publication on the Analysis of Union Budget 2025-26 is now available for complimentary download via the Society’s website.

The Much-Anticipated Income Tax Bill, 2025 — Simplification in Form and not Substance?

In her Budget speech, the Hon’ble Finance Minister underscored ‘taxation’ as the foremost lever for ‘transformative reform’ within a broader set of six identified reformative pillars. This set the stage — and expectations — for the unveiling of a new Income Tax Bill, which was subsequently introduced in the legislature a week later.

Given that the palimpsest Income Tax Act, 1961 has governed direct taxation for over six decades, the introduction of the new Bill was anticipated to be a landmark moment — one that would bring forth a contemporary, well-calibrated framework equipped with modern concepts to facilitate real ease of compliance and substantive deregulation.

However, upon review of the Income Tax Bill, 2025, it becomes evident that the ‘simplification’ proposed within it is largely cosmetic. The revisions primarily revolve around improved structural organisation through better grouping of sections and chapters, rather than a meaningful reimagining of substantive provisions. While a detailed analysis does reveal a few high-impact potential changes, many appear to stem from drafting inconsistencies rather than deliberate policy shifts. It is reassuring to note that an ongoing review process seeks to address these inconsistencies, but the broader expectation of a comprehensive transformation in our tax statutes remains unmet.

Undoubtedly, rewriting well-entrenched and settled tax principles is a formidable challenge, and in many cases, an undesirable exercise. However, a more ambitious approach could have been undertaken — one that integrates fresh, progressive thinking into our tax framework in alignment with the overarching theme of ‘growth through deregulation’ as articulated in the Economic Survey. Alas, it appears that the journey toward a truly transformative tax regime is yet to be realised, and we must wait longer for substantive change.

Warm Regards,

CA Anand Bathiya

President, Ayodhya, 28th February, 2025

From Published Accounts

COMPILER’S NOTE

Given below are 3 typical ‘Emphasis of Matter’ paragraphs included in the audit reports for the year ended 31st March, 2024.

1. Infosys Ltd

Emphasis of Matter regarding Cybersecurity Incidents

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

As described in note 2.24.2 to the Consolidated Financial Statements, certain costs relating to possible damages or claims relating to a cybersecurity incident in a subsidiary are indeterminable as at the date of this report because of reasons stated in the note. Our opinion is not modified in respect of this matter.

From Notes to Consolidated Financial Statements  Note 2.24.2: McCamish Cybersecurity incident in November 2023

Infosys McCamish Systems (McCamish), a step-down subsidiary of Infosys Limited, experienced a cybersecurity incident resulting in the non-availability of certain applications and systems. McCamish initiated its incident response and engaged cybersecurity and other specialists to assist in its investigation of and response to the incident and remediation and restoration of impacted applications and systems. By 31st December, 2023, McCamish, with external specialists’ assistance, substantially remediated and restored the affected applications and systems. Loss of contracted revenues and costs incurred with respect to remediations, restoration, communication efforts, investigative processes and analysis, legal services and others amounted to $38 million (approximately ₹316 crore). Actions taken by McCamish included investigative analysis conducted by a third-party cybersecurity firm to determine, among other things, whether and the extent to which company or customer data was subject to unauthorized access or exfiltration. McCamish also engaged a third-party eDiscovery vendor in assessing the extent and nature of such data. McCamish in coordination with its third-party eDiscovery vendor has identified corporate customers and individuals whose information was subject to unauthorized access and exfiltration. McCamish’s review process is ongoing. McCamish may incur additional costs including indemnities or damages / claims, which are indeterminable at this time. On 6th March, 2024, a class action complaint was filed in the U.S. District Court for the Northern District of Georgia against McCamish. The complaint arises out of the cybersecurity incident at McCamish initially disclosed on 3rd November, 2023. The complaint was purportedly filed on behalf of all individuals within the United States whose personally identifiable information was exposed to unauthorized third parties as a result of the incident.

2. Indus Towers Ltd

Emphasis of Matter regarding material uncertainty at one of the largest customers and its consequential impact on the company’s business operations

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

Material uncertainty at one of the largest customers of the Company and its consequential impact on the Company’s business operations. We draw attention to note 48 of the consolidated financial statements, which describes the potential impact on business operations, receivables, property, plant and equipment, and financial position of the Company on account of one of the largest customer’s financial conditions and its ability to continue as a going concern. Our opinion is not modified with respect to the above matter.

From Notes to Consolidated Financial Statements’

48. A large customer of the Group accounts for a substantial part of revenue from operations for the quarter and year ended 31st March, 2024, and constitutes a significant part of outstanding trade receivables and unbilled revenue as of 31st March, 2024.

a) The said customer in its latest published unaudited financial results for the quarter and nine months ended 31st December, 2023, had indicated that its ability to continue as a going concern is dependent on its ability to raise additional funds as required, successful negotiations with lenders and vendors for continued support and generation of cash flow from operations that it needs to settle its liabilities as they fall due. The said customer had also disclosed in the aforesaid results that so far it has met all debt obligations to its lenders/ banks and financial institutions along with applicable interest till date. Further, the said customer had disclosed that one of its promoters has confirmed that it would provide financial support to the extent of ₹20,000 Mn to the said customer.

b) The Group, subject to the terms and conditions agreed between the parties, has a secondary pledge over the shares held by one of the customer’s promoters in the Group and a corporate guarantee provided by said customer’s promoter which could be triggered in certain situations and events in the manner agreed between the parties. However, these securities are not adequate to cover the total outstanding with the said customer.

c) During the quarter ended 30th June, 2022, through the quarter ended 30th September, 2022, the said customer had informed the Group that a funding plan was under discussion with its lenders and it had agreed to a payment plan to pay part of the monthly billing till December 2022 and 100% of the amounts billed from January 2023 onwards, which will be adjusted by the Group against the outstanding trade receivables. As regards the dues outstanding as of 31st December, 2022, the customer had agreed to pay the dues between January 2023 and July 2023. However, the said customer has not made the committed payments pertaining to the outstanding amount due as of 31st December, 2022. Based on Stock Exchange filings, the said customer (i) concluded its equity fund raise of ₹1,80,000 Mn through the FPO route on 22nd April, 2024, (ii) at its Board meeting held on 6th April, 2024 has, subject to the approval of the shareholders in the Extra-ordinary General Meeting to be held on 8th May, 2024, approved the issuance of equity share aggregating to ₹20,750 Mn on a preferential basis to one of its promoter group entity, (iii) issued Optionally Convertible Debentures (OCDs) amounting to ₹16,000 Mn to one of its vendors in February 2023 of which ₹14,400 Mn worth of OCDs were converted into equity shares on 23rd March, 2024, and (iv) is actively engaged with its lenders for tying-up the debt funding, which will follow the equity fund raise. The Group is in discussion with the said customer for a revised payment plan pertaining to the outstanding amount due. (d) As the said customer has been paying an amount largely equivalent to monthly billing since January 2023, hence, the Group continues to recognise revenue from operations relating to the said customer for the services rendered. The Group carries an allowance for doubtful receivables of ₹53,853 Mn as of 31st March, 2024 relating to the said customer which covers all overdue outstanding as at 31st March, 2024. (e) Further, as per Ind AS 116 “Leases”, the Group recognises revenue based on straight-lining of rentals over the contractual period and creates revenue equalisation assets in the books of accounts. During the quarter ended 31st December, 2022, the Group had recorded an impairment charge of ₹4,928 Mn relating to the revenue equalisation assets up to September 30, 2022 for the said customer and presented it as an exceptional item in the statement of profit and loss. Further, the Group had stopped recognising revenue equalisation asset on account of straight-lining of lease rentals from 1st October, 2022 onwards due to uncertainty of collection in the distant future. (f) It may be noted that the potential loss of the said customer (whose statutory auditors have reported material uncertainty related to going concern in its report on latest published unaudited results, which was issued before funding as mentioned above) due to its inability to continue as a going concern or the Group’s failure to attract new customers could have an adverse effect on the business, results of operations and financial condition of the Group and amounts receivable (including unbilled revenue) and carrying amount of property, plant and equipment related to the said customer.

3. Career Point Ltd.

Emphasis of Matter regarding legal action uncertainties on amounts receivable by the holding company and a subsidiary

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

We draw attention to

a) Note no 49 of the consolidated financial statements which describes Srajan Capital Limited (‘SCL’), a Subsidiary Company has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March, 2024 amounting to ₹ 782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for) (as of 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March, 2024, the related party has made a payment of ₹756.67 lakhs (total ₹1,707.40 lakhs up to 31st March 2024) to SCL against its outstanding dues, which is treated as income by the subsidiary company. The auditor of the SCL has not modified its opinion in this regard.

b) Note no. 38 of the consolidated financial statements which describes the uncertainties relating to legal action pursued by the Holding Company against Rajasthan Skill and Livelihood Development Corporation (RSLDC) before Hon’ble Arbitrator for invocation of bank guarantee of ₹54.22 lakhs by RSLDC and recovery of the outstanding amount of ₹213.41 lakhs (including ₹159.19 lakhs receivable). Based on its assessment of the merits of the case, the management of the Holding Company is of the view that the aforesaid receivable balances are good and recoverable and hence, no adjustment is required as stated in the note no. 38 of the consolidated financial statements for the amount receivable as stated in the said note. Further, in the opinion of the management of the Holding Company, stated amount is good and full recoverable. Our opinion is not modified in respect of above matters.

From Notes to Consolidated Financial Statements

Note No 38

During the earlier years, the Holding Company has received principal amount of 1st instalment of ₹216.90 lakhs from Rajasthan Skill and Livelihoods Development Corporation (RSLDC} for the Deen-DayalUpadhyayaGrameenKaushalyaYojana (DDU-GKY) project, against which the Holding Company had incurred ₹371.75 lakhs and Issued bank guarantee of ₹54.22 lakhs in terms of the agreement signed with RSLDC. During the year ended 31st March, 2022, RSLDC has invoked bank guarantee of ₹54.22 lakhs and has also demanded refund amounting to ₹334.76 lakhs (including interest of ₹117.36 lakhs) on termination of the above-stated project. The Holding Company has pursued the invocation of Bank Guarantee and other receivable of ₹213.41 lakhs (including ₹158.19 lakhs receivable) from RSLDC, before the Hon’ble Rajasthan High Court, Jaipur and the Rajasthan State Commercial Court under section 9 of Arbitration & Conciliation Act, 1996. The Hon’ble Rajasthan High Court, Jaipur Bench has appointed the sole arbitrator in the matter. The Holding Company has submitted its application before the Hon’ble Arbitrator. After submission of statement of defence by RSLDC, evidence and arguments, arbitral judge will pronounce the judgement. Based on its assessment of the merits of the case, the management is of the view that it has a creditable case in its favour and the aforesaid receivable balances are good and fully recoverable and hence, no adjustment is required as demanded by the RSLDC at this stage.

Note no 49

One of the Subsidiary Company Srajan Capital Limited (“SCL”), SCL has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March 2024 amounting to ₹782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)) (as at 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March 2024, the related party has made payment of ₹756.67 lakhs (Total ₹1,707.40 lakhs upto 31st March, 2024) to SCL against its outstanding dues and interest, which is treated as income by SCL

A Chartered Accountant’s Guide to Writing: Debit Procrastination, Credit Guilt

For over 15 years, I’ve juggled tax audits, reconciled financial statements, and answered client queries that range from the existential, Why do I pay so much tax? To the downright bizarre one like …Can I claim my dog’s grooming bill as a business expense?

I’ve survived financial year-end chaos, outsmarted the ever-crashing GST portal (at times), and, like every super working mom, somehow managed to keep my 11-year-old daughter from showing up at school in her PE uniform instead of a Navvari saree for Shivaji Jayanti celebrations. Yet, despite all of this, there is one thing I just haven’t managed to do—write an article.

For years, I have put off writing this article, finding new excuses every time. It has been on my to-do list for ages, just like that one client who always submits documents late but still expects everything to be done on time. I often picture myself writing smart and funny articles like Twinkle Khanna, but instead of bestselling books and popular columns, I have a laptop, a cold cup of masala chai, and an Excel sheet filled with numbers.

Recently, I even attended a writer’s workshop at the Bombay Chartered Accountancy, hoping to discover the writer in me. But every time I sit down in front of a Word document, my mind just goes blank. Every time I see the blinking cursor on a blank page, I feel completely stuck, not knowing where to begin.

As a Chartered Accountant, I live by numbers, spreadsheets, and logic. Writing, on the other hand, demand first and foremost—a topic, emotions, and naturally, some creativity. Numbers follow rules, while words seem to have a mind of their own!

Every time I sit down to write, my brain defaults to financial jargon. Should I start with an opening balance of my thoughts? Or maybe a profit-and-loss statement of my failed attempts? It’s as if my mind cannot function without an Excel sheet.

And just when I manage to gather some thoughts, life intervenes. My daughter needs help finding her debate notes. The doorbell rings because, apparently, Sunday at 3 p.m. is the best time to deliver a courier. A client who hasn’t contacted me in three months suddenly panics over a tax matter and expects an urgent answer, as if tax solutions come with instant gratification.

So, once again, writing takes a backseat…

For years, my writing has been confined to crisp WhatsApp messages, precise emails, engagement letters, and the occasional leave applications each with a clear recipient and a specific purpose. The shift from this structured, transactional writing to something meant for a wider audience, where there’s no fixed reader in mind, feels unsettling. The idea that my words will be out there, open to interpretation, reaction, or even indifference, makes me nervous. Writing in a professional setting is about clarity and brevity while writing for an audience is about connection and impact. Bridging this gap is the challenge and the adventure I now find myself navigating.

Over time, I have realized that writing and filing taxes are more similar than you’d think:

– You know it’s important, but you put it off until the last minute.

– You overthink every detail and are still terrified of making a mistake.

– You compare your work to others and convince yourself you are doing it all wrong.

– You finally submit it, feeling relieved but also paranoid that someone will find an error.

But unlike taxes, where deadlines and penalties force you to get things done, writing has no such enforcement mechanism. Honestly, if the Income Tax Department introduced a fine for incomplete and unwritten articles, I would have clinched the highest taxpayer title!

A Tiny Victory in an Endless Struggle

Here I am, finally putting words on paper. It’s not perfect, but then again, neither are tax laws, and yet they have managed to survive for decades. Maybe writing isn’t about perfection….it’s just about starting!!

So, to my fellow accountants who have been meaning to write but haven’t figured it out yet: If we can navigate the ever-changing world of financial regulations, we can conquer the written word too. After all, both demand:

– Structure

– Analysis

– And the ability to survive last-minute chaos

an expertise that is ingrained in every Chartered Accountant.

Now, if you’ll excuse me, I’m going to celebrate this little victory the best way I know how… by opening an Excel sheet!

1. An inspired writer from the workshop begins her journey in new avatar..

Thank You Letter Summarising the Workshop

To,

BOMBAY CHARTERED ACCOUNTANTS SOCIETY (BCAS)

I am delighted to have attended and learned from the Writers’ Workshop organized by the BCAS on 20th February. The key learning was how to develop or enhance professional writing skills.
Topics Covered:

  1.  Writers and Writing
  2. How to Write for the Profession and the Public
  3. How to Respond to Government Authorities

The session was conducted by experienced and knowledgeable speakers, all of whom are past presidents of BCAS: CA Raman Jokhakar, CA Gautam Nayak, and CA Anil Sathe.

KEY TAKEAWAYS:

  1.  Encouragement for Writing
  2. Importance and Relevance of Writing
  3. Importance of Writing a Book
  4. Techniques of Writing (Structure of Ideas, Express Thoughts Clearly, Create Meaningful Impact)
  5. Essentials of Good Writing
  6. Common Mistakes While Writing

WRITING INSIGHTS:

  1. Writing is a skill. 85 per cent of financial success comes through skills, and 15% through technical knowledge.
  2. Writing is an art.
  3. Writing creates permanent records
  4. Writing brings new and original ideas.
  5. Writing is a reflection of thoughts.
  6. Writing is tool for mental wellness.
  7. Writing is joyful and gives immense satisfaction.
  8. Writing is about crafting words and making an impact; this craft cannot be replaced by technology.
  9. write in simple English.
  10. Make a clear summary.
  11. Write, read, understand, and write what we understood.
  12. Use minimal words, be free from doubts, and unobjectionable.
  13. Say less, but mean more.
  14. State facts, not opinions.
  15. Grammar and punctuation are important.
  16. Use active voice.
  17. If writing is your goal, write for your audience, not for your personal style.
  18. Writing helps us to know history or basics.
  19. The more we read, the better writers we become.
  20. Writing clears our mind and thoughts.
  21. Reading is the other side of writing.
  22. Good reading and good writing go together.

ESSENTIALS OF GOOD WRITING:

  1. Complete Understanding of topic
  2. Command over Language
  3. Target Audience
  4. Research the Subject
  5. Topic should be current and relevant in future
  6. Conclusion: Logical and Rationale

From this workshop, it was evident that traditional skills like writing and reading will always hold importance and be irreplaceable. Rather, the value of these skills will be in high demand. According to one survey, due to over usage of technology, reading and writing skills have been reduced to 40 per cent of their earlier levels.

The workshop was organized in a very planned manner with timely sessions, learning methodology, and practical handouts. It was attended by participants from cities other than Mumbai as well.

A heartfelt thank you to all speakers, coordinators, the Chairman of the Journal Committee, the President, and the support staff. Special thanks for this new initiative by the Journal Committee. We look forward to more such enriching workshops.

Best Regards,

CA Samir Kasvala

Ink & Inspiration: Writers’ Workshop Reflections

The Journal Committee of the BCAS (Bombay Chartered Accountants’ Society) successfully organised a Writers’ Workshop on 20th February 2025 in physical mode at the BCAS Office. This initiative aimed to nurture and enhance the writing skills of members and budding Chartered Accountancy (CA) professionals. Recognising the importance of encouraging young talent, the committee offered concessional registration fees for CA students, ensuring wider participation and fostering a learning culture.

The workshop received an overwhelming response, attracting participants from various states across the country. Attendees expressed their appreciation for the workshop’s well-structured sessions and rich content, which provided practical insights and actionable takeaways to improve their writing capabilities.

Topics were:

  1.  Writer & Writing – CA Raman Jokhakar
  2.  How to Write for the Profession and the Public? – CA Gautam Nayak
  3.  How to Respond to Government Authorities? – CA Anil Sathe

REMINISCENCE….

AN ODE TO WRITER’S WORKSHOP

The music created in the prosody of writings,

BCAS being the concert hall.

Sounding so purposeful and deep

The participants were confident of taking writing as their faithful leap.

The enthusiasm knew no bounds,

The workshop will be weighed for months in pounds.

90+ participants and 3 authentic speakers,

The enrolment had to be closed for more seekers.

Laughter, deep insights and practical aspect,

The participants went inside their minds and started to introspect.

Write, write till your ink finishes,

Paint the paper till you see you own artist.

CA Divya Jokhakar

India Creates History

India created history and a world record with an estimated 66.30 crore devotees taking a dip at the PrayagrajMahaKumbh within 45 days. The scale and grandeur of the MahaKumbhMela was unprecedented. I have personally witnessed the superb arrangements, cleanliness in the Mela and unflinching faith of devotees. Truly, it is surprising that so many people taking a dip in one place did not trigger any pandemic or unrest. Salute and Pranam to the devotion and faith of crores of devotees and Kudos to the government for the success of the MahaKumbh, an event which happened in 144 years and could be witnessed only once in the lifetime of an individual.

Economically, too, this KumbhMela has been a great success. The MahaKumbh festival in Prayagraj has generated over ₹3 lakh crore in business, making it one of India’s largest economic events. Various sectors such as hospitality, transport, and retail have seen significant economic activity, benefiting not only Prayagraj but surrounding regions1.

1 https://economictimes.indiatimes.com

2 https://www.indiabuget.gov.in/economicsurvey/

Along with Prayagraj, Varanasi and Ayodhya witnessed a surge of pilgrims. Thus, we find that religious tourism can be tapped to boost the regional economies and help generate employment.

Let’s turn to other important events that happened during the last 45 days or so.

The change of regime in the USA has begun to change the geo-political scenario the world over. We have already started experiencing the same, with the USA changing its stance on the Ukraine War, taking Europe and the world by surprise. The USA has launched a new Golden Card for immigrants, requiring an investment of USD 5 million. A new tariff war to protect American industries has begun in tune with campaigns during the recently concluded election like “Making America Great Again (MAGA).”

Economic Survey 2024-2025 echoes these global developments and remarks that “lowering the cost of business through deregulation will make a significant contribution to accelerating economic growth and employment amidst unprecedented global challenges.”

The Economic Survey exhorts governments around the country to get out of the way and allow businesses to focus on their core mission to foster innovation and enhance competitiveness. It suggests rolling back of regulations significantly and embracing risk-based regulations. It emphasises changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’. It is indeed a treat to read the well-researched and pragmatic Economic Survey2. Economic Survey gives the real picture of the economy, the global perspectives/trends and benchmarking; sector and region-specific developments, challenges of the economy and possible solutions, etc. Therefore, it should be published at least one month prior to the Union Budget such that it doesn’t miss the limelight amidst the glare/hype of the Budget Proposals.

THE FINANCE BILL 2025

The editorial of January 2023 titled “The Middle Class Deserves More!” laid a case for much-needed relief to this vital class of the economy post-pandemic. Another editorial of January 2025 titled “Don’t Kill the Golden Goose” also urged the government for a friendly and reasonable tax regime and giving much-needed relief to the middle-class population.

On several occasions, the BCAS has represented and pitched for tax relief to the middle class, especially salaried people, the latest before the Consultative Group on Tax Policy at NITI Aayog, which visited the BCAS office on 10th December, 2024. Well, the BCAS efforts bore fruits, and we have had a historic Budget 2025-2026. The Finance Bill 2025 came with a much-awaited relief to the Middle Class, granting a tax-free income of up to ₹12 lakhs (₹12.75 lakhs to the Salaried Class). It is indeed a bold move to grant tax-free income to about 87 per cent of the taxpayers. Kudos to the Government for this unprecedented decision. There are some other relief measures to the Charitable Trusts, increase in thresholds of TDS and TCS; an increase in the investment and turnover limits for the classification of all MSMEs, etc. The estimated fiscal deficit at 4.4 per cent of GDP is in line with the government’s efforts to reduce it on year on year basis. Economic survey predicts growth of the Indian economy between 6.3 to 6.8 per cent for the FY 2025- 2026, which is quite optimistic when we look at the world average of 3.2 per cent.

THE INCOME TAX BILL 2025

Another significant development is the release of “ The Income Tax Bill 2025”, which is considered an honest attempt to simplify the Income-tax Act, 1961. The critics say, “It is old wine in a new bottle.” For a teetotaler like me, the age of wine may not matter, but for the connoisseur of wine, the age does matter – the older, the better. Technically also, it is good that the Bill only aims at simplifying the language without any substantial changes in the provisions, such that the jurisprudence of over six decades will be helpful in the interpretation of the new Act also. One significant change is the replacement of “Previous Year” and “Assessment Year” with “Tax Year”. This will help AamAdami to understand tax law better.

Even though some of the provisions of the Income-tax Act, 1961 are simplified, as well as some inconsistencies are removed, by and large, many old complex provisions requiring the fulfilment of several conditions and those exposed to ambiguous interpretations still remain. It is believed that the government missed a golden opportunity to make these changes at the bill stage. However, the government, with an open mind, may consider doing so at the time of enactment of the Bill, taking into account suggestions from various stakeholders.

EXCESSIVE FINANCIALISATION

One of the concerned areas of the present economy is potential excessive financialisation. The Economic Survey reports that “When the economy reaches a state of ‘over-finance’, the financial sector would compete with the real sector for resources.” It further adds that “the financial markets must grow in line with, but not faster than, the economy’s capital needs and overall economic growth. As the country undergoes this significant transformation, it is crucial to be aware of the potential vulnerabilities that may arise. Excessive financialisation can hurt the economy. The costs may be particularly high for a low-middle-income country like India.” Uday Kotak, founder and director of Kotak Mahindra Bank, expressed similar concerns about over-financialisation. He said, “Over-financialisation can hurt the Indian economy as investors move their savings into equities without understanding valuations.”

People are investing huge sums in Mutual Funds in various schemes/financial products and through SIPs, which are pumped into the equity market, besides direct investments by retail investors. Thus, we find that large amounts of savings of lower and middle-class people are invested in the stock market and the real sector is deprived of cheap finances. This view is supported by the Economic Survey, which states that “Greater levels of financial engineering can create complex products whose risks are not apparent to the regular consumer. At the same time, these products are designed so that the lenders have little ‘skin in the game’. Ultimately, the proliferation of such products can lead to an event such as the financial crisis of 2008.” It is here that Regulators should be vigilant and introduce checks and balances in the system.

The recent failure of the New India Cooperative Bank Ltd. has again brought auditors to the spotlight. We need to be vigilant and careful in certifying the quality of assets (including loans) and hidden liabilities / exposures clients (especially banks) have in their balance sheets.

To conclude, India is poised to grow at over 6 per cent for the fourth consecutive year, which can be faster if the recommendations of the Economic Survey about deregulation and free hand to Indian entrepreneurs are granted. The Income Tax Bill 2025 has raised hope of simplification and reduced litigation. Let’s hope that the tax administration and regulators abide by and follow the same standards of service and trust as they expect from the taxpayers and regulatees!

Greetings for the holy month of Ramadan and the festival of colours — Holi, Ugadi and GudiPadwa.

Jai Hind!

 

Best Regards,

Dr CA Mayur Nayak

Construction Input Tax Credits

Two recent decisions of the Supreme Court at the close of 2024 have set the direction over the interpretation of “construction credits” which were at the helm of constant controversy under the GST law. While the first decision was rendered in the case of Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P) Limited1 (Safari Retreat case) with respect to input tax credit availability to shopping malls, etc., the second decision namely Bharti Airtel Ltd. vs. Commissioner of Central Excise, Pune2 (Bharti Airtel case) was rendered in the context of availability of credit of Telecommunication towers to cellular companies under the Cenvat Credit scheme. The said matter was quickly adopted by the Delhi Court in the case of Bharti Airtel Ltd. vs. Commissioner, CGST Appeals-1, Delhi3 in the context the GST provisions. The GST Council quickly sprung into action by reversing the decision of Safari Retreat case and reaffirming its original intent to exclude land, building and civil structures from the scope of input tax credit. In this article, we would briefly summarise the principles emerging from these decisions and their application to the provisions of section 17(5)(c) and 17(5)(d) of GST law (colloquially be termed as ‘out-sourced / sub-contracted construction’ and ‘in-house construction’ respectively).

1  [2024] 167 taxmann.com 73 (SC)

2  [2024] 168 taxmann.com 489 (SC)

3  [2024] 169 taxmann.com 390 (Delhi)

CONTEXT OF THE ISSUE — BLOCK CREDIT

Extract of section 17(5)(c) and (d) is as under:

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

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business…………

Explanation –– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation –– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.”

A simple reading of the above extract suggests that all goods or services used for construction of an immovable property (except plant and machinery) are barred from input tax credit except when such activity is performed for onward supply of work contract / construction services. Similar provisions existed under the extant CENVAT credit rules and the respective State VAT laws. Despite modern laws being conceptualised on ‘value added tax’ principles, successive administrations have treated construction of immovable capital assets (specifically buildings) as ineligible for input tax credit based on the philosophy that capex buildings did not contribute to the value-addition of the end-product / service. This blockage also provided an attractive opportunity to Government(s) to realise substantial revenues on such construction activity.

The advent of the GST scheme shifted the focus to taxing all business activities and consequently transforming input tax credit from a narrow ‘one-to-one eligibility’ into a wider ‘business level eligibility’. Despite this wider stance, blocking of construction continued in a more regressive form having a larger impact on construction activity, re-emphasising the Government’s resolve to garner tax revenues from this blockage.

Construction intensive industries such as commercial complexes, warehousing/ logistic structures, hospitality buildings, etc., faced significant cost overruns on account of the above provisions. Though these business verticals were rendering output taxable services, substantial financial capital got sucked into GST credit blockage. There was also an onerous burden on such operators to establish that an item was ‘movable’ or ‘plant and machinery’ in order to stake a claim of input tax credit. Being a new law, these terms were being interpreted by field formations (including Advance ruling authorities) based on their personal bias rather than business application. This lead to the pioneer case of Safari Retreat case4, in which the Orissa High Court read down the provisions of section 17(5)(d) for shopping malls, commercial complexes, etc., and granted input tax credit to all construction activity when such complexes were directly used for onward taxable output activity. Sensing a huge revenue loss, the Government jumped into action by agitating its stand before the Supreme Court which ultimately culminated into the now famous Safari retreat case.

4 [2019] 105 taxmann.com 324 (Orissa)

BRIEF OF THE SAFARI RETREAT CASE

The key issue before the Supreme Court was the interpretation of section 17(5)(d) of the CGST Act. While the issue was limited to section 17(5)(d), reference and interpretation was being made to section 17(5)(c) to appreciate the true scope of both clauses. The key propositions/ arguments before the Court were:

Issue 1 – Constitutional challenge to the provisions of section 17(5)(d) on the premise that it violated Article 14 as it discriminated taxpayers onward selling the commercial structures with those leasing the very same structures despite both being liable to tax on their respective outward supply;

Issue 2 – Scope of ‘plant and machinery’ u/s 17(5)(c) and ‘plant or machinery’ u/s 17(5)(d) are different as the term ‘or’ in section 17(5)(d) is a conscious legislative usage de-linking the phrase from the defined term in the Explanation. Therefore, buildings, civil structures, telecommunication towers, etc which were specifically excluded from the definition of ‘plant and machinery’ u/s 17(5)(c) could still be considered as plant in its generic usage u/s 17(5)(d) based on its functionality;

Issue 3 – Condition placed by the phrase ‘on own account’ under section 17(5)(d) excludes suppliers of constructed apartments for sale as well as for lease/ licence. Hence credit was blocked only to cases where the construction was for self-usage and not for onward commercial exploitation.

The Hon’ble Supreme Court examined the legislative setting behind introduction of GST and the inter-play between the provisions of section 17(5)(c)/ (d). In so far as the constitution challenge is concerned, the provisions were clearly held to be valid and within legislative domain, putting to rest questions over the Council’s discretion in denying input tax credit even though the building contributed to generating taxable supplies. While addressing the question of law on the phrase ‘plant or machinery’ u/s 17(5)(d) in contrast to the phrase ‘plant and machinery’ adopted in 17(5)(c), the Court observed that the difference in ‘and’ and ‘or’ is not a legislative error but a conscious choice. Hence, the definition of ‘plant and machinery’ which specifically excluded land, buildings, civil structures would not apply to the phrase ‘plant or machinery’. ‘Plant’ or ‘machinery’ would be understood in generic terms and not by the definition of ‘Plant and machinery’. The Court borrowed the functionality test from the Income tax law5 to hold that if a building was used as a ‘technical structure’ rather than merely a ‘setting’ in which trade is carried on, such building would constitute a plant despite the specific exclusion of buildings in the explanation. It was observed that a plant is an apparatus used by a businessman for carrying on its business and does not include his stock in trade; it include all goods and property, whether movable or immovable, as long as it function as an apparatus in his trade. Since generating station building, hospital, dry dock and ponds were considered as apparatus based on the business functions, a building or a warehouse could also be considered as ‘plant’ within the meaning of Section 17(5)(d) if it served as an essential tool of trade with which business is carried on. However, if it merely serves as a setting or mere occupation, it will not qualify as a ‘plant’. On the third aspect, the court held that section 17(5)(d) blocked credit when the immovable property is used for ‘own account’. Where the construction of immovable property was for ‘other’s account’ and generating revenues which are in the nature specified in clause (2) or (5) of Schedule II, such structure would be eligible for input tax credit. The phrase ‘own account’ covered within its ambit only those cases where the building was for own residential or commercial occupation and not for cases where the building was for onward lease/ license. Accordingly in cases where any building was under construction with intent of generating leasing/ licensing revenue, credit was permissible u/s 17(5)(d) since the building was not constructed for ‘own account’ but for ‘other’s account’.

5 Commissioner of Income-tax vs. Taj Mahal Hotel [1971] 82 ITR 44 (SC); 
Commissioner of Income-tax vs. Anand Theatres [2000] 110 Taxman 338 (SC); 
Commissioner of Income-tax vs. Karnataka Power Corpn. [2000] 112 
Taxman 629 (SC)

RETROSPECTIVE AMENDMENT TO SECTION 17(5)(D)

The Finance Bill 2025 has now introduced an amendment attempting to overturn and rectify the acclaimed error in using the phrase ‘plant or machinery’ in section 17(5)(d) instead of ‘plant and machinery’. The said retrospective amendment (w.e.f. 1st July, 2017) effectively overcomes the decision of the Safari retreat case on the proposition that the term ‘plant or machinery’ is distinct from the term ‘plant and machinery’. Among the two exceptions which were cited by the Supreme Court, the first exception of differentiating ‘plant and machinery’ from ‘plant or machinery’ seems to have now been nullified. While thoughts are developing over challenging this retrospective amendment on the ground of denying vested credit6, probability of achieving a positive result seems to be bleak in view of the review petition filed by the Revenue. The Revenue still acclaims in its review that the use of the term ‘or’ was drafting error and not a legislative choice. De hors the review petition it would be suitable to treat both the clauses at par and apply the specific definition of ‘plant and machinery’ to all its cases.

6 Commissioner of Income-tax vs. Vatika Township (P.) Ltd. [2009] 
178 Taxman 322 (SC) & Tata Motors Ltd. v. State of Maharashtra and Others
 [(2004)5 SCC 783

ANALYSING ‘PLANT AND MACHINERY’

With retrospective amendment proposed w.e.f. 1st July, 2017 term ‘plant and machinery’ is applicable to both in-house construction and sub-contracted construction. The term has an inclusive portion to include apparatus, equipment and machinery and their structural or foundational support but specifically excludes land, building or other civil structures, telecommunication towers and pipelines outside the factory. Under the said definition, generic meanings of apparatus, equipment and machinery would continue to have prominence. The functionality test would still be applied to the fixtures, installations, etc., housed in the civil structures and makes them amenable to be termed as ‘plant and machinery’. What has been now overturned by the retrospective amendment to section 17(5)(d) is that the functionality test which could have been hitherto applied to land/ buildings, civil structures, to shift treat ‘buildings/ civil structures’ as ‘apparatus / equipment’ for a particular business function, is now not available. In view of the specific exclusion to the phrase ‘plant and machinery’, any building / civil structure in whatever form/usage could be excluded from the term plant and machinery. This position which was restrictive only to section 17(5)(c) (i.e. works contract inputs) is not extendable also to section 17(5)(d) (i.e. all goods and services where construction is on own account).

TECHNICALITIES ON THE PHRASE “OWN ACCOUNT”

The other exception to the applicability of the block credit was cases where the construction was ‘not for own account’ but ‘other’s account’. The phrase ‘own account’ has not been dealt with in much detail by the Supreme Court except for the conclusion that construction for onward sale/ lease/ license etc., to third party occupants does not amount ‘construction on own account’. The Court bestowed parity to entry 2 and entry 5(b) of Schedule II by quoting that where under-construction buildings are intended for sale credit is available. Similarly, under-constructed buildings intended for onward lease would also be a construction for ‘other’s account’. An interesting concept of under-construction lease is now evolving based on this observation of the Court.

While a ‘build-to-suit’ model is a classic case to fit into this proposition, many a times the commercial reality is fairly more complex. There may be a change in use of a structure either during construction or after issuance of the occupancy certificate. A strict reading of the clause suggests that only if the intent of lease is established during construction then the credit would be eligible. Where the intent of lease is not established up to occupancy certificate, such credit could be disputable on the sheer ground that construction in such cases would be for own account and not for lease. This is still an emerging area of study and will be engaged by revenue authorities if one argues the point of the construction being for other’s account.

BRIEF OF THE BHARTI AIRTEL CASE(S)

Moving onto the other case of the Supreme Court w.r.t the eligibility of Cenvat Credit of Base Transmission Stations (BTS), Telecommunication Towers, Antennas, Pre-fabricated Shelters (PFBs) etc., based on the argument of whether they are goods a.k.a. movable property. The Court examined the meaning of the phrase ‘immovable property’ under the General Clauses Act 1897 and the Transfer of Property Act, 1882 which include land, benefits arising out of land and things permanently attached or fastened to earth for the beneficial enjoyment of the building or land. In this context, the Court re-affirmed the long-standing principles extracted from series of decisions of the Supreme Court under Central Excise to assess whether a thing was immovable in nature, namely:

  •  Nature of annexation: This test ascertains how firmly a property is attached to the earth. If the property is so attached that it cannot be removed or relocated without causing damage to it, it is an indication that it is immovable.
  •  Object of annexation: If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable. Conversely, if the attachment is merely to facilitate the use of the item itself, it is to be treated as movable, even if the attachment is to an immovable property.
  •  Intendment of the parties: The intention behind the attachment, whether express or implied, can be determinative of the nature of the property. If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable.
  •  Functionality Test: If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, it is an indication that such fixation is for the benefit of the article, such the property is movable.
  •  Permanency Test: If the property can be dismantled and relocated without any damage, the attachment cannot be said to be permanent but temporary and it can be considered to be
    movable.
  •  Marketability Test: If the property, even if attached to the earth or to an immovable property, can be removed and sold in the market, it can be said to be movable.

Applying these tests to the telecommunication towers it was held that the towers were movable in nature and hence goods for the purpose of availment of CENVAT Credit. This rationale was adopted by the Delhi High Court in Bharti Airtel Ltd’s case once again to hold that telecommunication towers are movable in nature and hence the question of applying the definition of plant and machinery as applicable to section 17(5)(d) is irrelevant. The entire BTS/BSS, PFBs, etc. though being attached to earth/building are not for the purpose of beneficial enjoyment of the land/building to which they are attached but for technical reasons and efficient operations. Interestingly, the decision has treated the phrases ‘plant or machinery’ and ‘plant and machinery’ at equivalence and yet rendered that the explicit mention of telecommunication towers under the phrase ‘immovable property’ would not render the telecommunication towers as blocked items for input tax credit. This decision would hold the fort despite the retrospective amendment to the provisions of section 17(5)(d) and go a long way in deciding whether items are movable/ immovable in nature under the GST context. The innumerable advance rulings which have held that air conditioners, lift / elevator installations, electrical/ plumbing fixtures, fire extinguishers, etc., form part of the immovable property would need to be re-visited based on the above tests. In all likelihood the said items would fall outside the scope of immovable property based on the tests carved from the General Clauses Act & the Transfer of Property Act.

COMBINED INTERPRETATIVE DESIGN

Now both these decisions lead to a particular sequence of analysis to be factored before reaching a conclusion on block credits:

The above sequence suggests that entire blocked credit is founded upon the fundamental point of whether the goods or services in question are used for construction of an ‘immovable property’. If this primary test fails, there is absolutely no requirement even to examine the remaining contents of the said provisions. But where one doubts the outcome of this primary test to a particular building/ civil structure, it becomes essential to move to a secondary test of examining whether the same is plant and machinery. Land, buildings and other civil structures may still face the brunt of input tax credit blockage even if they are functionally operating as a ‘apparatus, equipment or machinery’. Interestingly, cases which are prima-facie blocked on account of it being considered as immovable property (other than plant and machinery) u/s 17(5)(d) (i.e. in-house construction) may still be granted input tax credit if they fall under a tertiary test of being construction for ‘onward leasing’ or ‘sale’.

INDUSTRY-WISE APPLICATION OF THE ABOVE SCHEMA

Commercial / Shopping Complexes – The Supreme Court had remanded the matter back to the Orrisa High Court to apply the functionality test in deciding whether such commercial constructions fall within the mischief of section 17(5)(d) (notably cases which covered u/s 17(5)(c) are not within the High Court’s purview and hence must be independently examined). Civil Structure portion of in-house constructions of commercial complexes would now be excludible from the phrase ‘plant and machinery’ (as retrospectively amended) as they fall under the blocked component. The HVAC, electrical / plumbing installations, fire equipment, movable fixtures, hoardings, digital displays, elevators, MLC parking structure, etc., may not be immovable. Even if they are said to be immovable they could be termed as technical equipment, apparatus, machinery and hence fall within the term ‘plant and machinery’ and this component of the construction costs would become eligible for input tax credit. The exclusion in the explanation to plant and machinery would have to be examined restrictively as being only w.r.t. to the ‘land, building, civil structure’ and not with reference to the installations/ fitments housed in such buildings.

Warehouse / Logistic Chains – A typical warehousing contains civil structures, prefabricated shelters, overhead sheets, etc. Certain items (such as foundation, concrete platforms, etc.) would qualify as civil structures and become ineligible for input tax credit. There are also components affixed to said civil structure which are dismantlable and capable of being re-assembled at alternate locations (such as pre-fabricated iron and steel girders, trusses and other structural components which are affixed with nut and bolt system to the civil foundation). One may claim that these are movable in nature based on the nature of annexation test specified above. But on a deeper analysis the object of affixation is for creating a permanent warehousing shed with these items and such affixation results in beneficial enjoyment of the immovable property itself. Moreover, the intent of establishment of the overall outer structure is to function as shelter for storage and would be excluded even if one forcefully argues them as being ‘equipment/ apparatus or machinery’. Therefore, such warehousing structures would form part of immovable property itself and may not be eligible for input tax credit. However, if the case falls under section 17(5)(d) (i.e. in-house construction) and the owner constructs these structures for onward leasing rather than own occupation/ storage, the Safari retreat’s case grants an opportunity to avail input tax credit on the argument of the structure being construction for other purposes and not on own account.

Hotels / Theatres / Convention Centres – The Supreme Court in the Safari retreat case has in its wisdom placed a blanket bar on treating such civil structures as plant u/s 17(5)(d). Be that as it may, the decision in Anand Theatres does not overrule the decision of Taj Hotels in so far as treating sanitary / electrical fittings, installations, fixtures affixed to such premises as being in nature of ‘plant’. Seating arrangements in theatres, sound-proofing panelling, air-conditioning systems, digital screens/ projectors, iron and steel fixtures which are affixed to the immovable property for functional utility need to be tested based on object and mode of affixation. The guiding principle would be to examine whether they are part of the civil structure for better occupation or for technical utility. On both counts of movability and functionality (under the explanation to plant and machinery), many of the above items can be treated as eligible for input tax credit. To reiterate, if the entire premises has been self-constructed with binding intent of onward leasing / licensing or sale, then the construction could termed as being for ‘other’s account’, thus granting a window to argue that the clause itself is not applicable. Challenge arises where certain hotels are leased out under an operator model to large hotel chains (such as Raddisson, etc.). Hotels have a complex formular for payment of fee based on the revenue collections/ occupancy and deduction of certain premises related expenditure. Since models do not fall under the traditional lease model, it would be an uphill task for one to claim that the construction is for ‘others account’.

Port Infrastructure – Port Corporations have developed substantial civil structures in the form of jetty, dock yards, terminals, breakwater walls, etc., which have technical functionality in its field of business. These items being civil in nature could be treated as apparatus / tool to function as port. But the critical counter argument of the revenue is that these are ‘other civil structures’ in the nature of land, building, etc., and hence not eligible. The company in which the phrase ‘civil structure’ is used gives an opportunity to argue that only those items which are immovable and meant for ‘occupancy’ like a building are to be treated as civil structure. The case of the Municipal Corporation of Greater Mumbai vs. Indian Oil Corporation7on storage tanks being termed as things attached to land despite being a technical structure would guide the revenue to pursue that these are in nature of civil structures and hence not eligible for input tax credit to the Port Corporation.

7 1991 SCC (SUPP) 2 18

Factory Constructions – Pre-fabricated structures constituting the walls and sheds of factory structures are part of the overall plant/ machinery. There does not seem to be any doubt on the internal concrete foundations, etc. which are necessary foundational/structural support to the machinery. The external walls / partitions and administrative buildings have been targeted as being ineligible for credit. Strictly speaking, the definition of plant and machinery specifically excludes buildings, civil structures. Though the issue could stand at rest here and credit may be denied, the perspective of these structural being movable needs to be tested. Re-iterating the discussion in the context of warehouses, there is certainly a case for the department to deny stating that the intent of fixation is for permanent enjoyment / occupation of the land and hence constitutes an immovable property.

Co-working spaces / Shared spaces – Internal Fixtures in bare shell civil structures to convert them to co-working space is a common phenomenon. Many of the fixtures are modular in nature and fitted with nuts and bolts (such as cabins, desks, partitions, cupboards, etc.) for enhancement of the workspace. While there are other fixtures which are affixed to the immovable property as a permanent feature. One would have to run a filter of these test and test the movable character of each of the items. The rest which are considered as immovable property and part of the building itself, can be denied even if they are said to be functionally essential for creation of a co-working space.

Residential PG accommodation – Apart from other issues, the unique issue with such accommodation is that the revenue stream is not in the form of a lease rental but akin to hotel models where it is for monthly or short-term basis on a per-bed / room basis. Now the Supreme court states that ‘hotels’ are not plant or machinery. By forming a parallel between PG accommodations and hotels, credit would certainly become a formidable challenge. One argument still prevailing after the retrospective amendment would be in cases where the construction is suited for ‘overall lease as a PG accommodation’ with local municipal licenses evidencing this fact. But where the owner himself operates such business, the operating income being in the nature of short-term accommodation would not permit it to claim credit based on the SC’s decision. Revenue will argue that this is not lease in the sense articulated by the Supreme Court and since the operations of the premises is under the occupation and control of the owner of the premises. Therefore, credit on such structures would fairly deniable.

On an overall basis it is slightly intriguing that business contributing to GST revenue using civil structures are being denied credit. An input in the form of lease rentals which comprises of all the capex cost of a civil structure are eligible but similar inputs where construction has been performed for self-occupation are being termed as ineligible. Is this encouraging unwarranted tweaks to business models merely for availing ITC benefit? These rulings have left an indelible mark on the future of the input tax credit on construction matters and would guide business decisions on account of the sheer volume of ITC involved. The legal fraternity would refer to these decisions time and again to press their respective contentions on a subject matter. The last word on this subject is yet to be told…!!

Part A | Company Law

18. Global One (India) Private Limited.

Registrar of Companies, NCT of New Delhi and Haryana

Adjudication Order No. ROC/D/Adj/Order/203/GLOBAL ONE/5224-5226

Date of Order: 31st January, 2025

Adjudication order for violation of section 203 of the Companies Act 2013(Act): Delay in appointing Whole Time Company Secretary.

FACTS

  •  The Company had earlier filed a compounding application before the Regional Director (NR) for the period starting from 1st November, 2013 to 1st May, 2023 for non-appointment of CS. During the hearing for compounding, it was indicated that for the period starting from 2nd November, 2018, the said default is under adjudication mechanism and accordingly, a separate application has to be filed before the ROC, NCT of Delhi & Haryana.
  •  In the adjudication application filed thereafter, it is stated that due to the financial constraints, the management was unable to find a suitable candidate for the purpose of appointment of Whole Time Company Secretary on Board.
  •  The CS could only be appointed on 1st May, 2023 and accordingly there has been a delay of 1642 days (i.e. from 2nd November, 2018 to 1st May, 2023) in the appointment.
  • Accordingly, a show cause notice for the default was issued to the company and its officer and a response was received to the notice. In its reply, the company put forth its business condition wherein it is submitted that the Company is part of the Orange Business Group i.e. multinational business group from France with Govt. of France. The Company had to carry certain business operations with Videsh Sanchar Nigam Limited (VSNL) but due to VSNL being wound up, this Company also did not pursue the business goals further. The company stated that it was neither carrying any business nor it had any revenue  from business operations so it could not appoint the CS to meet the requirement of the Companies Act. The company also requested for oral hearing in the matter.
  •  The authorised representative who appeared for oral submission in the matter requested to take a lenient view while levying penalty on the company and its officers as company is not making any revenue from its operations since many years.

EXTRACT FROM THE PROVISIONS OF THE ACT IN BRIEF:

Section 203 (Appointment of Key Managerial Personnel):

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and (iii) Chief Financial Officer:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or
Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,

(a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. ………

(5) “If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees”

Rule 8A (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 8A. Every private company which has a paid-up share capital for ten crore rupees or more shall have a whole-time company secretary.

FINDINGS AND ORDER

The Company has failed to appoint to whole time company secretary for a significant period. There has been a delay of 1642 days (i.e. from 2nd November 2018 to 1st May, 2023) in appointment of CS. Further, the submission of the company to grant any remission in the penalty cannot be considered as the law provides for a fixed penalty. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.

Thereafter in exercise of the powers conferred on the AO vide Notification dated 24th March, 2015 and having considered the reply submitted by the subject Company in response to the notice, the following penalty was imposed on the Company and its officers in default under Section 203 of the companies act 2013 for violation as follows:

  •  Penalty on Company of ₹5,00,000 being Maximum Penalty
  •  Penalty on each of the directors subject to Maximum of ₹5,00,000 per director

19. M/s HIND WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED

Registrar of Companies, Chandigarh

Adjudication Order No. ROC CHD/ADJ/ 860 TO 865

Date of Order: 27th November, 2024.

Adjudication Order for Non-disclosure of interest or concern in other body corporate or entities by the Directors in Form MBP-1at the first Board Meeting of the Financial Year as required under the provisions of the Section 184 of the Companies Act 2013.

FACTS OF THE CASE

Registrar of Companies (ROC) or Adjudication Officer (AO) during its inquiry on M/s HWAHMPL under Section 206 of the Companies Act, 2013 found that the directors had failed to disclose their interest or concern in other companies or body corporate, including their shareholding, at the first board meetings for the financial years 2020-21 and 2021-22 and necessary Form MBP-1 was not submitted/filed by the directors to the M/s HWAHMPL.

Thereafter, ROC issued a show-cause notice (SCN)on November 7, 2024 to directors for violation of Section 184 (1) of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules, 2014. However, directors did not provide any response or communication to the said SCN.

PROVISIONS

Section 184(1): “Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.”

Section 184(4): “If a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be liable to a penalty of one lakh rupees.”

Section 446B: “Notwithstanding anything contained in this Act, if penalty is payable for non­-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

Explanation. —For the pit/ poses of this section

(a) “Producer Company” means a company as defined in clause (1) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

Rule 3(12) of Companies (Adjudication of Penalties) Rules, 2014 “While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely.

a) size of the company

b) nature of business carried on by the company,

c) injury to public interest,

d) nature of the default,’

e) repetition of the default,’

f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default: and

g) the amount of loss caused to an investor or group of investors or creditors as a result of the default.

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.”

Rule 3(13) of Companies (Adjudication of Penalties) Rules, 2014 which read as under: “In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.”

ORDER

AO, after having considered the facts and circumstances of the case concluded that the directors of M/s HWAHMPL were liable for penalty as prescribed under section184(4)of the Companies Act 2013 for default made in complying with the requirements.

Hence, AO imposed an aggregate penalty of ₹5,00,000/- (Rupees Five Lakhs Only) i.e. ₹50,000/- (Rupees Fifty Thousand Only) on Each of the Director in default of M/s HWAHMPL for non-disclosure of interest or concern in other bodies corporate or entities at the first Board Meeting held for the Financial year 2020-21 and 2021-22 in form MBP-1 undersection 184 (4) of the Companies Act 2013 read with Section 446B of the Companies Act 2013.

Manufacturing’s Missing Might: India’s Growth Puzzle

Manufacturing’s crucial role in economic prosperity, highlighted by Prof. Kaldor’s research, prompted India to launch multiple initiatives like the National Manufacturing Policy 2011, Make in India and PLI Schemes. However, the sector’s performance remains weak, with manufacturing IIP growing at just 3.1 per cent CAGR (FY 2012–24) and 1.9 per cent (FY 2019–24), well below policy targets of 12–14 per cent. The sector’s GDP share has declined from 16 per cent to 13–14 per cent since the mid-2000s, challenging India’s vision of becoming a high-income nation by 2047 (Viksit Bharat). This underperformance persists despite favourable demographics, strong infrastructure spending, and healthy corporate balance sheets.

THE STRUCTURAL SHIFT: FROM PRODUCTION TO FINANCIALISATION

Manufacturing’s sluggish performance is commonly attributed to ill-defined external factors and reform gaps — a tenuous explanation without rigorous analytics. In contrast, the real reasoning emerges from an analysis of RBI’s comprehensive database, spanning over 2.33 lakh company-years across six decades, which reveals two key trends: Corporates’ declining productive investment and increasing financialisation since the mid-2000s [See Table]. Public Limited Companies (PLCs) experienced a significant shift in asset allocation between 1961 and 2023. The average share of Gross Fixed Assets (GFA) in total assets declined steadily from 70 per cent in the pre-liberalisation period [1961–90] to 55 per cent in recent years [2011–23], while the share of the financial investments surged from 3 per cent to 21 per cent. This trend suggests a notable shift from physical assets to financial ones. Private Limited Companies [Pvt LCs] followed a similar pattern, albeit at a moderate pace. The coincidence of import liberalisation, China’s entry into the WTO in the early 2000s and the subsequent accelerated growth in its exports to India are not merely coincidental. Further, corporates’ liquidity balances in terms of cash, cash equivalents and bank balances show a higher share during the last two decades compared to the first four decades, despite exponential growth in digital payments. The real factors behind these two shifts remain unaddressed and un-analysed.

Table: Non-Govt. Non-Financial Public & Pvt. Ltd Companies’ Financial Ratios as per cent of Total Assets

Sources: RBI: Compendium on Private Corporate Business Sector in India FY1951–2009 and DBIE Database

UNDERSTANDING THE INVESTMENT SLOWDOWN

Despite the increasing need for capital investment in advanced machinery and technology to enhance productivity and value addition in the manufacturing sector, corporate capital deepening has lagged behind expectations. This decline stems significantly from the opaque pricing of mis-invoiced and covert Chinese imports, creating severe uncertainties in cost structures and investment returns that ultimately jeopardise the viability of new manufacturing projects. As a consequence, it fosters assembly-focused operations and reliance on Chinese critical inputs, hindering capital deepening and the associated gains in total factor productivity growth. The corollary fall-out of under-investment in manufacturing is poor skill development and technological progress, and reduced productivity and competitiveness. This contrasts with India’s IT sector, where hands-on experience has driven skill development and success.

These issues are covered in the 145th Parliamentary Standing Committee Report (2018), the Directorate of Revenue Intelligence report (2015), the Global Financial Integrity Report (2019), George Herbert’s Research (2020), and Jha and Truong’s Analysis (2014). Research by Rhodium Group highlights that China can compel its companies to collude, fix prices and manipulate market dynamics to favour its export. No other country’s trade practices receive as frequent media coverage as those of China and its firms for their alleged tax evasion, hawala transactions, under-invoicing, breach of intellectual property rights, dumping, and transhipment. Harvard Prof. Graham Allison described China as the “most protectionist, mercantilist, and predatory major economy in the world.” China’s exploitation of WTO benefits while maintaining non-market practices, its predatory pricing, currency manipulation, various export subsidies, and export of counterfeits have triggered global anger and defensive responses. Some attribute China’s large export subsidies to contributing to China’s large public debt.

The massive gap between official trade data — shown by 19.5 per cent CAGR of Chinese imports [USD] over FY 2002–24 dwarfing India’s 2.6 per cent export CAGR to China coupled with huge volumes of unaccounted covert and mis-invoiced imports, illustrate the scale of predatory trade practices described above and sluggish manufacturing growth and employment. In addition to stifling manufacturing growth and capex, it led to NPA accumulation in the 2010s; drained savings, and hindered both job creation and on-the-job skill development.

Anecdotally, the severe impact of Chinese steel dumping on India’s steel industry is well-documented, with press headlines emphasising its consequences. In contrast, the full extent of the damage to many other industries caused by mis-invoiced and illicit Chinese imports remains largely unarticulated and unexplored.

When corporates face limited opportunities for productive capital investment, they tend to divert funds towards financial assets. The share of financial investment in total assets increased by 2.5 times and 2 times for PLCs and Pvt. LCs, respectively, since the 2000s. (See Table) Anecdotally, RBI’s Financial Stability Report (June 2014) highlighted a striking case of corporate over-financialisation- in FY 2013, the financial income of the top 10 corporates exceeded the treasury income of the top 10 banks.

TRADE CREDIT: DRIVING MANUFACTURING GROWTH FOR VIKSIT BHARAT 2047

A dysfunctional trade credit repayment ecosystem, coupled with massive illicit and mis-invoiced Chinese imports, is severely impacting India’s manufacturing sector. Trade credit, a vital enabler of cash flow, production, and operational continuity, is increasingly hindered by delayed payments and external pressures, stifling its role in driving economic growth. India can address these challenges by learning from successful digital lending models in China and Vietnam, where streamlined trade credit systems process millions of SME loans daily and have significantly strengthened their manufacturing bases. Integrating trade credit platforms with GSTN for real-time monitoring and enforcing payment discipline can create a robust B2B credit ecosystem. This approach can mitigate risks, enhance competitiveness, and position Indian manufacturers more effectively in global value chains.

The impact of this dysfunctional ecosystem is particularly evident in corporate liquidity patterns. Despite the exponential growth in digital payments, companies, especially smaller ones, are forced to maintain higher transactional liquidity levels than in the 1980s and 1990s due to uncertain receivables realisation and inconsistent trade credit availability, further straining their operational efficiency.

NAVIGATING THE PATH FORWARD

Addressing the structural challenges of India’s manufacturing sector requires a two-pronged approach. First, implementing rigorous, frequent, and surprise inspections at ports and airports to combat unscrupulous imports and dumping is crucial. Digital tracking systems should complement this administratively feasible and WTO-compatible strategy, enhanced quality testing infrastructure, and expedited anti-dumping investigations. Second, strengthening India’s trade credit payment ecosystem by learning from successful international models where streamlined trade credit payment discipline and invoice discounting systems have empowered SMEs to overcome financial constraints, boost exports, and improve their position in global value chains through enhanced innovation and productivity. This comprehensive approach can revitalise India’s manufacturing sector, fostering increased capital investment, technological advancement, and sustainable growth.

Evolution of Audit: From Paper to Pixels

In this article, the evolution of audit practices from paper-based documentation to digital platforms is illuminated, highlighting how technology has revolutionized the approach towards Audit. This Article further explains how this transition to electronic documentation (“E-Documentation”) has helped significantly in improving efficiency, accuracy and transparency in audits. It allows for secure storage, easy retrieval and structured organization of audit files, which enhances internal and external review processes. Digital tools like automated resource management, cost management and certain electronic tools streamline the operations, while advanced data analytics techniques for sampling and journal entry testing bolster audit effectiveness by detecting errors and anomalies with greater precision. Embracing these innovations enables audit firms to elevate their practices, moving from routine tasks to insightful analyses, ensuring consistent and efficient audit procedures in the digital age.

“Change is the only constant”, as rightly quoted by Heraclitus, a Greek philosopher. The field of audit has embraced this notion of believing that change has always been by its side.

From handwritten documentation to digital algorithms, the evolution of audit has been a journey “from paper to pixels”. In this article, we explore the advancements that have shaped the audit scope, exploring how technology has upgraded the way audits are conducted and how professionals navigate to understand the audit processes adopted in the digital age.

As industries adapt to the rapid pace of technological advancement, the audit profession has been at the forefront of innovation, embracing digitalisation to revolutionise its practices. From the rigorous scrutiny of paper documents to the swift analysis of digital data, the evolution of audit has been nothing short of extraordinary.

In this article, we will delve into the importance of the article by discussing the following aspects:

  •  The shift from paper-based to digital audit practices.
  •  Evaluating the risk of the client before accepting a new client or an existing client.
  • Facilitating communication between the client and the engagement team.
  •  Advanced tools like data analytics which enhance transparency, accuracy and efficiency.

In the field of auditing, the transition from paper-based processes to digital platforms has resulted in exceptional efficiency, accuracy and transparency.

DIGITALISATION OF AUDIT DOCUMENTATION – “E-DOCUMENTATION”

Before digitalisation, audit documentation was primarily done using physical / paper-based methods. This involved extensive manual processes like paperwork, handwritten notes, printed financial statements and physical files for audit engagement. Auditors would manually document their findings, observations and procedures. The process of compiling and organising audit documentation was labour-intensive and time-consuming. Storage and retrieval of paper-based audit files posed significant challenges in terms of  space, security, confidentiality and maintaining documents in a systematic way. Overall, the pre-digitalisation era of audit documentation relied heavily on manual processes, paper-based records and physical documentation, which were susceptible to inefficiencies, errors and limitations in terms of accessibility and flexibility.

The era of digitalization paved the way for ‘E- documentation’. E- Documentation stands for Electronic Documentation and refers to securing, maintaining confidentiality and storing the documents electronically. This revolutionary change has proved to be significant for all the professionals pursuing the practice of audit.

The introduction of electronic documentation with various accounting and auditing tools, such as Suvit, facilitates the process of audit documentation. This has various built-in features, such as risk evaluation forms, auto-populated workpapers / questionaries, and communications within the audit team and between the audit team and the management. The auditor can analyze the level of risk for a particular audit engagement as well as it shall also help the auditor to design effective audit procedures to be undertaken for the audit engagement. Moreover, the work performed, findings and reports of an auditor right from the audit planning phase to the conclusion phase can be stored for a prolonged period of seven years as per SA 230 and can be retrieved whenever required. This features robust functionality for maintaining compliance with the maker-checker policy. Additionally, it incorporates a mechanism to imprint immutable timestamps, ensuring the integrity and non-editable nature of the records. E-Documentation serves as a trail for all the actions performed by the auditor during an audit.

Some of the merits of E-Documentation are mentioned below:

  •  Internal review

The cloud-based tool can be accessed by the audit team at any point in time. This facilitates smooth review within the audit team and between the audit team and the Subject Matter Experts (‘SMEs).

  •  External review

Due to the storage of documentation in a structured manner, it helps in efficient reviews by the external person as well (such as a peer reviewer, or any other regulatory body). All the relevant information and data related to the entity being audited is stored in a centralised manner. E- Documentation also ensures retrieval for a prolonged period, which enables any person to review the work done at any point in time.

  •  Roll forward

Apart from the merits mentioned above, the documentation stored in the audit file for a particular year can be utilised in subsequent years by rolling it forward. This process involves transferring audit documentation such as audit memos, workpapers, checklists, auditor’s assessment and conclusion from the previous year to subsequent years. This feature facilitates in planning procedures for subsequent year’s audits.

  •  Standard checklists

E-Documentation tool includes checklists designed to facilitate and support auditors’ work. These checklists feature questions related to audit procedures conducted related to various critical areas such as Going concern, impairment of investments / assets, etc. Audit firms can embed/customize standard checklists on Accounting Standards (AS), Auditing Standards, Company Auditor’s Report Order (CARO), 2020, Internal Financial Control, Companies Act, etc., in the software to ensure uniformity across all the engagements / clients. The audit team uses these checklists to document their actual work performed in the respective areas under examination. Further, these checklists also help in ensuring that any important thing in relation to the audit is not missed out.

  •  Restricted access

Further, access to the E-Documentation tool can be restricted to the audit team until and unless access is granted to the extended team members with prior approvals. This ensures privacy, confidentiality and security of sensitive client information and data. Further, since working papers are the property of the auditor, utmost care should be taken so that the independence of the audit is maintained before access is granted to any external member.

EVALUATING RISKS AT THE FIRM LEVEL — CLIENT ONBOARDING

The client acceptance procedures shall be focused on ensuring that the clients who are chosen to serve should represent an appropriate balance of risk and reward. The firm minimises the exposure to high-risk clients by identifying each before accepting any engagement and then determining whether the firm is willing to manage the exposure. Additionally, internal risk evaluations, annual inspections, practice risk assessment and continuous monitoring are all integral for ensuring that when a firm chooses to serve a client, the firm follows the policies and procedures and meets the industry standards. The client acceptance process shall be workflow-driven and shall be dependent on the type of services warranted by the client and the size of the engagement. It must require more than one level of approval (in terms of maker and checker), each of which shall be generated electronically to avoid any bias.

  •  Apart from assessing a new client, it is equally important to assess the existing client relationships / engagements as well. Hence, evaluating client continuance should be a periodic process due to which the risk parameters of an existing client are revalued/reassessed. Further, the client assessment should also be carried out if there is a significant change in the composition of Those Charged with Governance (TCWG).
  •  Engagement acceptance is required to be performed prior to initiating a new engagement, irrespective of whether the firm has continuously performed the engagement for an existing client or will be performed for a new client. The EAF shall be completed and approved prior to the commencement of an engagement.

Hence, the firm should have these kinds of electronic forms which help in assessing the acceptance of a client or an engagement, and if there is any risk on account of any fraud, litigation, etc., against the TCWG / management, then the tool will populate the risk to the engagement team to evaluate the matter in detail.

EFFICIENT ELECTRONIC DATA EXCHANGE BETWEEN THE CLIENTS AND AUDIT TEAM

As mentioned above, in the pre-digitalisation era, exchanging data within the audit team and between the audit team and the client used to be chaos. Various difficulties were faced with respect to its storage and collation; to a certain extent, this might have hampered the overall quality of the audit. However, the digitalisation of the audit processes has led to better work management.

These tools automate the preparation of detailed requirement lists and facilitate secure file sharing, which enables auditors to manage audits effectively. These tools facilitate a collaborative environment for auditors and the client, ensuring real-time progress tracking and simplifying data management. These tools function as centralized digital platforms that manage and organize documents, making it easier for users to locate and access necessary information by arranging documentation within a unified digital repository. It also facilitates the retention of data and information for a prolonged period.

Due to such pioneering change, since the storage of data is now centralized, it has become easier to streamline the audit.

DIGITAL TOOLS

Let us delve into the use of various digital tools and their purpose, which can be used in the audit processes. Maximising audit effectiveness entails harnessing the power of data analytics to transform traditional auditing practices. By integrating sophisticated data analytical tools and techniques, auditors can revolutionize: Resource and cost management; communicating initial audit requirements to the client; selection of samples & vouching and testing of journal entries (JE).

A. RESOURCE MANAGEMENT

Resource management involves planning, allocation and optimisation of resources efficiently to achieve the goals of the firm. Keeping meticulous track of time spent on engagements is pivotal for preserving the trust and transparency vital to professional relationships. The time spent by the audit team and keeping a record of this is of utmost importance. This helps in demonstration of the time spent by partner and manager on engagements which is paramount in ensuring the success and credibility/quality of the overall audit.

This brings a wealth of experience and expertise to the table, which is essential for maintaining high-quality standards throughout the audit process. Their involvement is crucial in overseeing audit procedures meticulously, analyzing financial statements accurately and drawing well-supported audit conclusions.

Moreover, partners and managers play a pivotal role in managing audit risks effectively by identifying potential issues early on and implementing appropriate responses. Their technical knowledge allows them to address complex accounting matters with precision, ensuring compliance with auditing standards and regulatory requirements. Beyond technical aspects, their interaction with clients fosters clear communication, manages expectations and strengthens client relationships.

Additionally, partners and managers provide rigorous review and oversight of audit work performed by junior staff, ensuring thoroughness and accuracy in audit findings. Ultimately, the time invested by partners and managers in audit engagements not only enhances the quality of audits but also upholds the firm’s commitment to integrity, independence and ethical practices in auditing. By aligning costs with the services provided, clients are assured of fair invoicing, reinforcing confidence in the partnership. Moreover, this practice facilitates efficient resource allocation and project management, empowering firms to evaluate process effectiveness, pinpoint areas for enhancement and refine future resource distribution strategies.

B. EFFECTIVE COST MANAGEMENT

The documentation of work conducted during engagements serves multifaceted purposes. It not only provides a detailed record of audit procedures but also furnishes invaluable support for quality control evaluations. Assigning unique job codes to each engagement streamlines this process, simplifying cost analysis and bolstering accountability by correlating time expenditures with specific client projects or internal endeavours. This systematic methodology not only optimises billing procedures but also fortifies project management structures, culminating in an overall improvement of operational efficacy across the organisation.

C. COMMUNICATING INITIAL AUDIT REQUIREMENTS “PREPARED BY THE CLIENT (PBC)”:

“PBC” stands for “Prepared by Client.” This term refers to the documents and schedules that the client prepares and provides to the auditors as part of the audit process. These documents facilitate the auditors’ examination of the Company’s records and support the information presented in the financial statements. This typically includes reports, schedules, listings, vouchers and reconciliations.

Numerous interactions between clients and auditors make it challenging to track all the requirements and communications. To address this, an electronic PBC tool can be adopted to streamline the process. This tool allows the insertion of agreed timelines for data sharing and ensuring deadlines are met. It provides a robust review mechanism and enables task assignment to team members on both the auditor and the client sides. It also helps in improving collaboration and accountability. Importantly, it allows critical issues to be highlighted for partners or managers efficiently.

Adopting an electronic PBC tool enhances transparency and efficiency in the audit process. It ensures all communications and document submissions are tracked accurately, which reduces the risk of oversight.

This technology fosters a more organized and effective audit, leading to better outcomes and smoother operations for both auditors and the client.

D. SAMPLING AND VOUCHING

Diverse sampling methods in auditing, such as statistical, random, systematic, stratified, block, judgmental and haphazard sampling, offer tailored approaches to the auditor. Each method presents distinctive benefits, ensuring comprehensive, effective and efficient audit.

A FEW OF THE SAMPLING METHODS ARE EXPLAINED BELOW:

Statistical sampling: A method of selecting a subset of items from a population using statistical techniques to ensure that the selected subset is representative of the entire population.

Random sampling: A technique where each item in the population has an equal chance of being selected, eliminating bias and ensuring that the sample is representative of the entire population.

Systematic sampling: A method where items are selected at regular intervals from the entire population, starting from a randomly chosen number and then every 10th item of the entire population.

Stratified sampling: A technique where the population is divided into distinctive sub-groups (strata) based on specific characteristics, and samples are extracted from each sub-group to ensure that the selected sub-group is representative of the entire population.

Block sampling: A method where the population is divided into blocks or clusters, and entire blocks / clusters are selected randomly to form the  sample, often used when items within blocks / clusters are more like each other than items in the other blocks / clusters.

Judgmental sampling: A non-random method where the auditor selects items based on professional judgment, often used when specific items are believed to be significant, and the selection will be representative of the entire population.

Haphazard sampling: A non-random method where items are selected without any specific plan or pattern.

Further, for vouching, the audit team can also deploy data analytics, which enhances transaction verification, automates tasks and improves accuracy, thus streamlining processes and conserving resources. Advanced data analytical tools enable efficient cross-referencing of transactions with source documents which further helps in minimising errors.

E. JOURNAL ENTRY (JE) TESTING

JE Testing involves reviewing and verifying the accuracy and validity of financial transactions recorded in the Company’s books of account. Through data-driven approaches, auditors can identify patterns, anomalies and trends within large datasets, allowing for more targeted and efficient sampling methodologies (to a certain extent mentioned in the earlier sections).

Advanced data analytics enable auditors to scrutinise transactions with greater precision, enhance the detection of errors and irregularities, and ensure a more thorough examination of financial transactions, thus providing the outcome efficiently. Further, these data analytical tools help in scrutinising journal entries for accuracy and legitimacy, which facilitates the auditor to flag suspicious entries and provide deeper insights into financial transactions.

VARIOUS TESTS IN JE TESTING ENCOMPASS:

  •  Keyword analysis: Search for specific words or phrases like “bribe” or “charity” within worksheets.
  •  Year-End entries: Analyse journal entries made nearer to year-end dates.
  •  Public holiday entries: Review entries on holidays to detect unusual or large transactions and assess their reasonability.
  •  Weekend entries:Scrutinise entries, especially passed on weekends and evaluate their nature.
  •  Materiality assessment: Review entries above the materiality to identify unusual transactions.
  •  Single entry verification: This means that basic accounting method where each transaction is recorded once rather than using a double-entry system. It is important to ensure that no single entries are mistakenly passed into the books of account.

Incorporating digital tools and data analytics enhances audit effectiveness by optimising resource management, improving cost efficiency and facilitating clear communication of audit requirements. Advanced sampling techniques and JE testing with data analytics further strengthen accuracy and reliability, ensuring thorough scrutiny of financial transactions. These innovations not only streamline processes but also uphold integrity, independence and compliance with auditing standards, ultimately fostering robust audit outcomes and client & regulatory satisfaction.

CONCLUSION

Hence, the suggested tools for audit digitalization and optimization are merely a starting point and not an exhaustive list. These tools exemplify how technology can significantly enhance the audit process, from manual documentation to resource management to risk assessment; effective communication between the client and the engagement team and using Digital tools truly harnesses the benefits of these advancements.

Audit firms and their quality control departments must mandate the use of these digital tools, ensuring consistent, accurate and efficient audit practices.

By embracing these innovations, audit firms can transform their practices from routine tasks to insightful analyses, unlocking new levels of precision and efficiency. The future of auditing is bright and with these tools, firms will be well-equipped to lead the charge into this exciting new era

Key Year End Audit Considerations

Statutory Audit of financial statements is mandatory for all companies under the Companies Act, 2013. Whilst audit process commences well before the close of the financial year, for issuing the audit report attention needs to be paid to certain key matters as at the financial year end. Regulators like SEBI, NFRA, ROC, etc. are also keeping a close watch on the information contained the financial statements and the audit report through inspection of the audit work papers and other documents. The focus areas for the regulators generally cover matters regarding modified audit report, reliance on estimates, fraud risk factors, related party transactions, communication to those charged with governance and compliance with laws and regulations keeping in mind the overarching principle of materiality. Any slippages in these critical areas can make or break the reputation of the audit firms and their personal.

1. INTRODUCTION

Presentation and disclosure in financial statements play an important role in providing transparency to stakeholders. They help users to understand the financial health and performance of a company. Regulators are putting more emphasis on presentation and disclosures in financial statements due to increased stakeholder expectations, higher focus on public interest, and ongoing efforts to enhance global harmonization and prevent financial irregularities and frauds.

In today’s volatile market, every company is grappling with multiple challenges. Uncertainty in laws and regulations and economic volatility have put immense pressure on companies. Whereas earlier the annual reports were a thin booklet, currently, their size has increased manifold, which includes the financial statements and statutory auditors report issued to the members of a company under the Indian Companies Act, 2013 “(the Act”). Further, even though the audit report is addressed to the members since the annual report is mandatorily required to be hosted on the company’s website by listed companies under SEBI guidelines, there is no limit on the public accessibility thereof, making companies more accountable.

Finally, regulators like the Securities and Exchange Board of India (SEBI), Registrar of Companies (RoC), National Financial Reporting Authority (NFRA), etc., are keeping a close watch on the information, especially the audited financial statements and the report thereon which are available in public domain.. These regulators have regulatory powers to conduct inspections to delve into the working papers and documents of an audit firm to check if there is any lacuna in the audit procedures followed by the auditor and whether the auditor has complied with relevant Standards on Auditing (“SAs”).

With the end of the financial year (FY) 2024-25 around the corner, the hustle and bustle of audit have already commenced. This article presents some of the key year-end considerations for the auditors that they should keep in mind while performing the audit.

KEY CONSIDERATIONS PERTAINING TO AUDITOR’S REPORT

On completion of the audit, the auditor is required to issue an audit report to express the audit opinion. The following Standards on Auditing deals with respect to audit conclusions and reporting:

  •  SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
  •  SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
  •  SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
  •  SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
  • SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information

SA 700 (Revised) prescribes the content of an audit report, which should, at a minimum, be forming part of the audit report. The following are certain issues requiring careful consideration:

A. QUANTIFICATION IN QUALIFICATIONS

It is pertinent to note that pursuant to paragraph 21 of SA 705 (Revised) if there is a material misstatement of the financial statements that relate to specific amounts in the financial statements (including quantitative disclosures in the notes to the financial statements), the auditor is required to include in the Basis for Opinion paragraph a description and quantification of the financial effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial effects, the auditor is required to state that fact in this section. Where an accurate quantification is not possible, but a management estimate is available, the auditor performs such audit tests on those management estimates as are possible and clearly indicates that the amount quantified is based on management’s estimate. If it is impracticable for the auditor to quantify or estimate the effect of the misstatement, this fact needs to be included in the Basis for Modified Opinion paragraph.

Therefore, the auditor needs to quantify the financial effects of the misstatement, and only if it is impracticable, the auditor can include the qualification without quantification. The word ‘impracticable’ is not defined in Standards on Auditing but is commonly understood as ‘after making every reasonable effort’ to do so.

B. OTHER MATTER

As per paragraph 10 of SA 706 (Revised), if the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor is required to include an “other matter” paragraph in the auditor’s report, provided:

  •  That is not prohibited by law or regulation; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

An auditor should not include other matter paragraph for matters adequately disclosed in the financial statements. It can be included, for example, to highlight that in case the audit of some of the components of a company has been audited by other auditors, then this fact is required to be presented in the audit report to the consolidated financial statements under the “Other Matters” paragraph. However, in view of the recommendation by NFRA for revision of SA-600 on the lines of ISA 600, it needs to be seen whether the reference to the work of other auditors will be permissible.

C. EMPHASIS OF MATTER VS. QUALIFIED OPINION

Another important area is the use of the ‘Emphasis of matter’ (EOM) paragraph in the auditor’s report.
As per paragraph 8 of SA 706 (Revised), if the  auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor’s report provided:

  •  The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

EOM paragraph should not be included as a substitute for modification. For example, if the company has not provided adequate requisite disclosures in its financial statements, the auditor should evaluate the requirement to express a qualified opinion on the basis of the requirement of SA 705 (Revised) and should not include an EOM paragraph.

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are:

  •  Uncertainty relating to the future outcome of exceptional litigation or regulatory action.
  •  A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
  •  Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.
  •  A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

KEY CONSIDERATIONS PERTAINING TO ESTIMATES (INCLUDING USING THE WORK OF MANAGEMENT EXPERTS)

The auditor is required to perform adequate procedures to obtain sufficient appropriate audit evidence for estimates and complex transactions. The auditor should maintain documentation in sufficient detail to demonstrate the following:

  •  Competence, capabilities and objectivity of management experts have been determined (the auditor should consider the self-interest threat of the management expert when numerous valuation assignments from other group companies were being performed by the same valuer);
  •  Evaluating for management bias;
  •  Procedures performed in order to determine the reasonableness of the assumptions/methods used by management experts;
  •  Procedures performed by the auditor over management assessment;
  •  Professional judgements made by the auditor in concluding on high-estimate areas;
  •  In case of critical estimates/balances, involve internal experts for determining the appropriateness of the assumptions/methods used for valuation;
  •  In case there are caveats in the valuation report, legal opinions, etc., documentation on how the auditor has dealt with those

KEY CONSIDERATIONS PERTAINING TO COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (TCWG)

SA 260 (Revised), Communication with TCWG requires the auditor to communicate significant findings from the audit with those charged with governance. This is another key focus area for the regulators. Some of the key considerations are as follows:

  •  TCWG comprises a Board of Directors, Audit Committee and Management. Communication with the Audit Committee is not sufficient.
  •  Auditors should maintain documented evidence for:

– Communication of the planned scope and timing of the audit with TCWG.

– Minutes (“what and when”) of meeting with the TCGW/Audit Committee, including the team’s conclusion on the matters discussed.

– Accounting/auditing matters discussed with TCWG during the initial planning meeting and their final resolution

  •  Critical matters should be communicated to TCWG, and regular discussions with the management should be documented.
  •  Audit committee presentation contains only management’s estimate/representation, does not include audit procedures performed and auditor’s conclusion
  •  Minimum communication with TCWG to ensure compliance with SA 260

– Auditor Independence

– The Auditor’s Responsibilities in Relation to the Financial Statement Audit

– Planned Scope and Timing of the Audit

– Significant Findings from the Audit, including the auditor’s assessment

– Inquiries with TCWG and response thereto

NFRA recently issued “The Auditor-Audit Committee Interactions Series 1”, which draws the attention of the auditors to the potential questions the Audit Committee / Board of Directors (BoD) may ask them in respect of accounting estimates and judgements. The first in the series in this regard includes aspects pertaining to the audit of Expected Credit Losses (ECL) for financial assets and other items as required by Ind AS 109, Financial Instruments.

SA 260 also requires the auditor to communicate with TCWG about qualitative aspects of the accounting practices, policies and disclosures. The reason behind such a communication is that the views of the auditor would be particularly relevant to TCWG in discharging their responsibilities for oversight of the financial reporting process.

This series put forwards some key questions relating to the following topics which the BoD / Audit Committee may ask the auditor regarding the audit of ECL:

  •  Audit of ECL computation
  •  Test of design and operating effectiveness of control mechanism over recognition and measurement of ECL
  •  Audit of methodology used for ECL computation

KEY CONSIDERATIONS RELATED TO INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR)

The auditor has to report under section 143(3) of the Act as to whether the company has adequate internal financial controls in place and the operating effectiveness of such controls. As per the Act, the term ‘internal financial controls’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to the company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The Guidance Note on Audit of Internal Financial Controls Over Financial Reporting states that the auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. Because a company’s internal controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment.

Some of the key areas which require careful consideration are as follows:

  •  Evaluation of controls over management override as part of entity-level controls; the auditor should maintain adequate documentation and procedures for controls around management override (remain cautious that deviation to the process might be a red flag for management override).
  •  Evaluation of management testing of ICFR is critical, and its impact on ICFR conclusion should be documented. Inquiries with the internal auditor and evaluation of the role of the internal auditor, and a review of internal audit reports and the auditor’s conclusion should also be documented.
  •  Adequate testing/focus even on non-critical areas (e.g. PPE)

KEY CONSIDERATIONS RELATING TO SIGNIFICANT UNUSUAL OR HIGHLY COMPLEX TRANSACTIONS

Material misstatement of financial statements, including fraudulent financial reporting, can arise from significant unusual or highly complex transactions, including situations that pose difficult “substance over form” questions, such as transactions not in the ordinary course of business undertaken with related parties. The Standards on Auditing give particular attention to the accounting for and disclosure of such transactions in the context of the auditor’s identification and assessment of risks of material misstatement, whether due to error or fraud and the auditor’s responses thereto.

The auditors are required to exercise professional judgment and maintain professional skepticism throughout the planning and performance of an audit and, among other things, identify, assess and respond to risks of material misstatement, whether due to fraud or error. Accordingly, the auditor plans and performs an audit with professional skepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of overlooking unusual circumstances. The auditor is required to:

  •  Evaluate whether information obtained about the entity indicates that one or more fraud risk factors are present; for example:

♦ Significant related party transactions not in the ordinary course of business or with related entities not audited or audited by another firm; and

♦ Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions

♦ Inquire of management and others within the entity as appropriate about the existence or suspicion of fraud, including, for example, employees involved in initiating, processing or recording complex or unusual transactions and those who supervise or monitor such employees;

♦ Inquire of management and others within the entity, and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to:

♦ authorise and approve significant transactions and arrangements with related parties; and

♦ authorise and approve significant transactions and arrangements outside the normal course of business;

If the auditor identifies significant transactions outside the normal course of business, inquire management about the nature of these transactions and whether related parties could be involved.

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Management override of controls or other inappropriate involvement by management in the financial reporting process may involve such techniques as omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period or engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. The auditor is required to treat the risk of management override of controls as a risk of material misstatement due to fraud and, thus a significant risk.

COMPLIANCE WITH LAWS AND REGULATIONS

Compliance with laws and regulations is a crucial aspect which engages the attention of auditors for which they need to keep in mind the requirements laid down in SA-250. Auditors are primarily concerned with the non-compliance with Laws and Regulations that materially affect financial statements, which includes the following, amongst others:

  •  Form and content of financial statements, including amounts to be reflected and disclosures to be made (Schedule III, Banking Regulation Act, Insurance Act, SEBI Mutual Fund guidelines, etc.)
  •  Conducting of business including licensing and registration (Banks, Mutual Funds, NBFCs, Pharmaceutical companies, fertilizer companies, etc.), which could have potential going concern issues
  •  Operating aspects of the business (Provisioning, valuation, taxation, safety aspects etc.) with possible financial consequences like fines, penalties, etc.

Adequate and appropriate procedures need to be performed to identify instances of non-compliance:

  •  Inquiries with the Management.
  •  Inspecting correspondence with relevant statutory authorities.
  •  Reading the minutes.
  •  Appropriate Control and Substantive procedures for industry-specific requirements like provisioning, valuation, accrual of expenses for retirement benefits, computation of incentives and subsidies etc.

Following are some of the instances of non-compliance which need to be considered in the context of year-end financial reporting:

  •  Non-payment / delayed payment of statutory dues (CARO reporting).
  •  Non-compliance with certain statutory and procedural requirements under various laws in respect of certain transactions or investigations by government departments resulting in fines and penalties or other demands and consequential disclosure of contingent liabilities or making provisions.
  •  Unsupported transactions, especially with related parties.

KEY CONSIDERATIONS PERTAINING TO MATERIALITY

The concept of materiality is the final test which determines the nature and extent of reporting and the issuance of the final opinion in the audit report as to whether the financial statements present a fair view. It helps to determine the material misstatements. As per SA 320, misstatements are material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of the users taken on the basis of financial statements. Whilst generally materiality is determined on a quantitative basis, in certain situations, misstatements may be qualitatively material, which needs to be kept in mind during year-end reporting as follows:

  •  Transactions resulting in changing loss into profit and vice versa.
  •  Transactions having an impact on compliance with debt covenants (e.g. current ratio, DSCR, etc.)
  •  Transaction has an impact on contractual agreements.
  •  Transaction has an impact on compliance with regulatory provisions.
  •  Transaction has an effect on variable compensation payable to Key Managerial Person.
  •  Transaction resulting in fraud or omission or commission.

The following are the different stages in the calculation of materiality.

  •  Planning Materiality: It is computed as the overall materiality representing a threshold above which the financial statements could be misstated and would affect the economic decision of the user of the financial statements. It depends on the size of the organization, types of transactions, character of management and auditor’s judgement and is set as a percentage of the profit, assets or net worth depending upon the nature of the entity.
  •  Performance Materiality: It is an amount less than overall materiality and acts as a safety buffer to lower the risk of aggregate uncorrected and undetected misstatements, which could be material for overall financial statements.
  •  Specific Materiality: It is established for a class of transactions, account balances and disclosures.

The materiality must be appropriately calculated since that has a bearing on the aggregate uncorrected and undetected misstatements and the consequential impact on the overall audit opinion.

CONCLUSION

Audit of financial statements is no longer about simply issuing an audit report but demonstrating and documenting the conclusions reached in respect of all auditing standards, as applicable to a particular company, especially in respect of matters requiring modification, reliance on estimates, fraud risk factors and related party transactions, amongst others whilst at the same time ensuring compliance of all relevant laws and regulations keeping in mind the overarching principle of materiality. With the constant inspections to which the auditors are exposed, any material deviations, especially in the aforesaid critical areas, can make or break the reputation and hard work built by the audit firms and the individual partners/proprietors and senior audit team members with severe consequences like fines and penalties and debarring the firm from undertaking audits.

Non-Repatriable Investment by NRIs and OCIs under FEMA: An Analysis – Part – 1

This is the 11th Article in the ongoing NRI series dealing with “Non-repatriable Investment by NRIs and OCIs under FEMA — An Analysis.”

Summary

“What cannot be done directly, cannot be done indirectly – Or can it be?”

FEMA’s golden rule has always been that what you cannot do directly, you cannot do indirectly—but then comes Schedule IV, sneaking in like that one friend who always finds a way out. It’s the ultimate legislative exception, allowing NRIs and OCIs to invest in India as if they never left, minus the luxury of an easy exit. Curious? Dive into the fascinating world of non-repatriable investments — you won’t be disappointed (unless, of course, you were hoping to take the money back out quickly!)

INTRODUCTION AND REGULATORY FRAMEWORK

Non-resident investors — including Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and even foreign entities — can invest in India under the Foreign Exchange Management Act, 1999 (FEMA). FEMA provides a broad statutory framework, which is supplemented by detailed rules and regulations issued by the government and the Reserve Bank of India (RBI). In particular, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) (issued by the Central Government) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Reporting Regulations) (issued by RBI) lay down the regime for foreign investments in “non-debt instruments.” These are further elaborated in the RBI Master Direction on Foreign Investment in India, which consolidates the rules and is frequently consulted by practitioners.

Under this framework, foreign investment routes are categorised by schedules to the NDI Rules. Of particular interest are Schedule I (Foreign Direct Investment on a repatriation basis), Schedule III (NRI investments under the Portfolio Investment Scheme on a repatriation basis), Schedule IV (NRI / OCI investments on non-repatriation basis), and Schedule VI (Investment in Limited Liability Partnerships). This article focuses on the nuances of non-repatriable investments by NRIs / OCIs under Schedule IV, contrasting them with repatriable investments and other routes. We will examine the legal definitions, eligible instruments, sectoral restrictions, compliance obligations, and the practical implications of choosing the non-repatriation route, with a structured analysis suitable for legal professionals.

DEFINITION OF NRI AND OCI UNDER FEMA; ELIGIBILITY TO INVEST

Non-Resident Indian (NRI) – An NRI is defined in FEMA and the NDI Rules as an individual who is a person resident outside India and is a citizen of India. In essence, Indian citizens who reside abroad (for work, education, or otherwise) become NRIs under FEMA once they cease to be “person resident in India” as per Section 2(w) of FEMA. Notably, this definition excludes foreign citizens, even if they were formerly Indian citizens – such persons are not NRIs for FEMA purposes once they have given up Indian citizenship.

Overseas Citizen of India (OCI) – An OCI for FEMA purposes means an individual resident outside India who is registered as an OCI cardholder under Section 7A of the Citizenship Act, 1955. In practical terms, these are foreign citizens of Indian origin (or their spouses) who have obtained the OCI card. OCIs are a separate category of foreign investors recognized by FEMA, often extending the same investment facilities as NRIs. In summary, NRIs (Indian citizens abroad) and OCIs (foreign citizens of Indian origin) are both eligible to invest in India, subject to the FEMA rules.

Eligible Investors under the Non-Repatriation Route – Schedule IV specifically permits the following persons to invest on a non-repatriation basis):

  •  NRIs (individuals resident outside India who are Indian citizens);
  •  OCIs (individuals resident outside India holding OCI cards);
  •  Any overseas entity (company, trust, partnership firm) incorporated outside India which is owned and controlled by NRIs or OCIs.

This extension to entities owned / controlled by NRIs / OCIs means that even a foreign-incorporated company or trust, if predominantly NRI / OCI-owned, can use the NRI non-repatriation route. However, as discussed later, such entities do not enjoy certain repatriation facilities (like the USD 1 million asset remittance) that individual NRIs do. Moreover, it is important to note that while these NRI / OCI-owned foreign entities are eligible for Schedule IV investments, they cannot invest in an Indian partnership firm or sole proprietorship under this route — only individual NRIs / OCIs can do so in that case.

NRIs and OCIs have broadly two modes to invest in India: (a) on a repatriation basis (where eventual returns can be taken abroad freely), or (b) on a non-repatriation basis (where the investment is treated as a domestic investment and cannot be freely taken out of India). Both modes are legal, but they carry different conditions and implications, as explained below.

WHAT ARE NON-DEBT INSTRUMENTS? – PERMISSIBLE INVESTMENT INSTRUMENTS

Under FEMA, all permissible foreign investments are classified as either debt instruments or non-debt instruments. Our focus is on non-debt instruments, which essentially cover equity and equity-like investments. The NDI Rules define “non-debt instruments” expansively to include:

• Equity instruments of Indian companies – e.g. equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares, and share warrants. (These are often referred to simply as “FDI” instruments.)

• Capital participation in LLPs (contributions to the capital of Limited Liability Partnerships).

• All instruments of investment recognized in the FDI policy, as notified by the Government from time to time (a catch-all for any other equity-like instruments).

• Units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).

• Units of mutual funds or Exchange-Traded Funds (ETFs) that invest more than 50 per cent in equity (i.e. equity-oriented funds).

• The junior-most (equity) tranche of a securitization structure.

• Immovable property in India (acquisition, sale, dealing directly in land and real estate, subject to other regulations).

• Contributions to trusts (depending on the nature of the trust, e.g. venture capital trusts, etc.).

• Depository receipts issued against Indian equity instruments (like ADRs / GDRs).

All the above are considered non-debt instruments. Thus, when an NRI or OCI invests on a non-repatriation basis, it can be in any of these forms. In practice, the most common instruments for NRI / OCI non-repatriable investment are equity shares of companies, capital contributions in LLPs, units of equity-oriented mutual funds, and investment vehicles like AIFs / REITs.

It is important to note that debt instruments (such as NCDs, bonds, and government securities) are governed by a separate set of rules (the Foreign Exchange Management (Debt Instruments) Regulations) and generally fall outside the scope of Schedule IV. NRIs / OCIs can also invest in some debt instruments (for example, NRI investments in certain government securities on a non-repatriation basis are permitted up to a limit, but those are subject to different rules and are not the focus of this article.

REPATRIABLE VS. NON-REPATRIABLE INVESTMENTS: MEANING AND LEGAL DISTINCTION

Repatriable Investment means an investment in India made by a person resident outside India which is eligible to be repatriated out of India, i.e. the investor can bring back the sale proceeds or returns to their home country freely (net of applicable taxes) in foreign currency. In other words, both the dividends/interest (current income) and the capital gains or sale proceeds (capital account) are transferable abroad in a repatriable investment without any ceiling (subject to taxes). Most foreign direct investments (FDI) in India are on a repatriation basis, which is why repatriable NRI investments are treated as foreign investments and counted towards foreign investment caps. For instance, if an NRI invests in an Indian company under Schedule I (FDI route) or Schedule III (portfolio route) on a repatriable basis, it is counted as foreign investment (FDI / FPI), with all attendant rules.

Non-Repatriable Investment means the investment is made by a non-resident, but the sale or maturity proceeds cannot be taken out of India (except to the limited extent allowed). The NDI Rules define it implicitly by saying, “investment on a non-repatriation basis has to be construed accordingly” from the repatriation definition. In simple terms, this means the principal amount invested and any capital gains or sale proceeds must remain in India. The investor cannot freely convert those rupee proceeds into foreign currency and remit abroad. Such investments are essentially treated as domestic investments –— the NDI Rules explicitly deem any investment by an NRI / OCI on a non-repatriation basis to be domestic investment, on par with investments made by residents. This distinction has crucial legal effects: NRI/OCI non-repatriable investments are not counted as foreign investments for regulatory purposes. They do not come under FDI caps or sectoral limits (since they are treated like resident equity). This was confirmed by India’s DPIIT (Department for Promotion of Industry and Internal Trade) in a clarification that downstream investments by a company owned and controlled by NRIs on a non-repatriation basis will not be considered indirect FDI. Effectively, non-repatriable NRI / OCI investments enjoy the flexibility of domestic capital but with the sacrifice of free repatriation rights.

Advantages of Non-Repatriation Route: The non-repatriable route (Schedule IV) offers NRIs and OCIs significant advantages in terms of flexibility and compliance:

  •  No Foreign Investment Caps: Since it is treated as domestic investment, an NRI/OCI can invest without the usual foreign ownership limits. For example, under the portfolio investment route, NRIs cannot exceed 5 per cent in a listed company (10 per cent collectively), but under non-repatriation, there is no such limit — an NRI could potentially acquire a much larger stake in a listed company under Schedule IV (outside the exchange) without breaching FEMA limits. Similarly, total NRI / OCI investment can go beyond 10/24 per cent aggregate because Schedule IV holdings are not counted as foreign at all.
  •  Simplified Compliance: Many of the onerous requirements applicable to FDI – e.g. adherence to pricing guidelines, filing of RBI reports, sectoral conditionalities, mandatory approvals — are relaxed or not applicable for non-repatriable investments (since regulators treat it like a resident’s investment). We detail these compliance relaxations below.
  •  Current income can be freely repatriable: Current income arising from such investments like interest, rent, dividend, etc., is freely repatriable without any limits and is not counted in the $1mn threshold.
  •  Deemed Domestic for Downstream: As noted, if an NRI/OCI-owned Indian entity invests further in India, those downstream investments are not treated as FDI. This can allow greater expansion without triggering indirect foreign investment rules.

Drawbacks of the Non-Repatriation Route: The obvious trade-off is illiquidity from an exchange control perspective. The investor’s capital is locked in India. Specifically:

  •  Inability to Repatriate Capital Freely: The principal amount and any capital gains cannot be freely
    converted and sent abroad. The investor must either reinvest or keep the funds in India (in an NRO account) after exit, subject to a limited annual remittance (discussed later).
  •  Perpetual Rupee Exposure: Since eventual proceeds remain in INR, the investor bears currency risk on the investment indefinitely, which foreign investors might be unwilling to take for large amounts.
  •  Exit Requires Domestic Buyer or Special Approval: To actually get money out, the NRI / OCI may need to convert the investment to repatriable by selling it to an eligible foreign investor or seek RBI permission beyond the allowed limit. This adds a layer of uncertainty for the exit strategy.
  •  Not Suitable for Short-Term Investors: This route is generally suitable for long-term investments (often family investments in family-run businesses, real estate purchases, etc.) where the NRI is not looking to repatriate in the near term. It is less suitable for foreign venture capital or private equity, which typically demand an assured exit path.

INVESTMENT UNDER SCHEDULE IV: PERMITTED INSTRUMENTS AND SECTORAL CONDITIONS

What Schedule IV Allows: Schedule IV of the NDI Rules (titled “Investment by NRI or OCI on the non-repatriation basis”) lays out the scope of investments NRIs / OCIs can make on a non-repatriable basis. In summary, NRIs/OCIs (including their overseas entities) can, without any limit, invest in or purchase the following on a non-repatriation basis:

  •  Equity instruments of Indian companies – listed or unlisted shares, convertible debentures, convertible preference shares, share warrants – without any limit, whether on a stock exchange or off-market.
  •  Units of investment vehicles – units of AIFs, REITs, InvITs or other investment funds — without limit, listed or unlisted.
  •  Contributions to the capital of LLPs – again, without limit, in any LLP (subject to sectoral restrictions discussed below).
  •  Convertible notes of startups – NRIs / OCIs can also subscribe to convertible notes issued by Indian startups, as allowed under the rules, on a non-repatriation basis.

Additionally, Schedule IV explicitly provides that any investment made under this route is deemed to be a domestic investment (i.e. treated at par with resident investments). This means the general FDI conditions of Schedule I do not apply to Schedule IV investments unless specifically mentioned.

Sectoral Restrictions – Prohibited Sectors: Despite the broad freedom, Schedule IV carves out certain prohibited sectors where even NRI / OCI non-repatriable investments are NOT permitted. According to Para 3 of Schedule, an NRI or OCI (including their companies or trusts) shall not invest under non-repatriation in:

  •  Nidhi Company (a type of NBFC doing mutual benefit funds among members);
  •  Companies engaged in agricultural or plantation activities (this covers farming, plantations of tea, coffee, etc., and related agricultural operations);
  •  Real estate business or construction of farmhouses;
  •  Dealing in Transfer of Development Rights (TDRs).

These mirror some of the standard FDI prohibitions, with a key addition: agricultural / plantation is completely off-limits under Schedule IV (whereas under FDI policy, certain agricultural and plantation activities are permitted up to 100 per cent with conditions). The term “real estate business” is defined (by reference to Schedule I) to mean dealing in land and immovable property with a view to earning profit from them (buying and selling land/buildings). Notably, the development of townships, construction of residential or commercial premises, roads or infrastructure, etc., is specifically excluded from the definition of “real estate business”, as is earning rent from property without transfer. So, an NRI / OCI can invest in a construction or development project or purchase property for earning rent on a non-repatriation basis (since that is not considered a “real estate business” for FEMA purposes) but cannot invest in a pure real estate trading company.

Implication – Some Sectors Allowed on Non-Repatriation that are Prohibited for FDI, and vice versa: Because Schedule IV’s prohibited list is somewhat different from Schedule I (FDI) prohibited list, there are interesting differences:

  •  Additional Sectors Open under Schedule IV: Certain sectors like lottery, gambling, casinos, tobacco manufacturing, etc., which are prohibited for any FDI under Schedule I, are not mentioned in Schedule IV’s prohibition list. This may imply that an NRI / OCI could invest in such businesses on a non-repatriation basis. For example, a casino business in India cannot receive any FDI (foreign investor money on a repatriable basis), but it could receive NRI/OCI investment as a domestic investment under Schedule IV. However, such investments may be subject to provisions or prohibitions in various other laws and Statewise restrictions in India, and therefore, one must be careful in making such investments.
  •  From a policy perspective, this leverages the idea that an Indian citizen abroad is still treated akin to a resident for these purposes. Thus, apart from the specific exclusions in Schedule IV, all other sectors (even those barred to foreign investors) are permissible for NRIs / OCIs on non-repatriation. This provides NRIs/OCIs a unique opportunity to invest in sensitive sectors of the economy, which foreigners cannot, theoretically increasing the investment funnel for those sectors via the Indian diaspora.
  •  Conversely, Some Investments Allowed via FDI Are Barred in Non-Repatriation: There are cases where FDI rules are more liberal than the NRI non-repatriable route. A prime example is plantation and agriculture. Under FDI (Schedule I), certain plantation sectors (like tea, coffee, rubber, cardamom, etc.) are allowed 100 per cent foreign investment under the automatic route (with conditions such as mandatory divestment of a certain percentage within time for tea). However, Schedule IV flatly prohibits NRIs from investing in agriculture or plantation without exception. Thus, a foreign company could invest in a tea plantation company on a repatriable basis (counting as FDI), but an NRI cannot invest in the same on a non-repatriable basis, ironically. Another example: Print media — FDI in print media (newspapers / periodicals) is restricted to 26 per cent with Government approval under FDI policy. If an Indian company is in the print media business, an NRI / OCI could still invest on a non-repatriable basis (since Schedule IV’s company restrictions don’t list print media) — meaning potentially up to 100% as domestic investment. However, if the print media business is structured as a partnership firm or proprietorship, Schedule IV (Part B) prohibits NRI investment in it. We see a regulatory quirk: an NRI can invest in a print media company on non-repatriation (domestic equity, no specific cap) but not in a print media partnership firm. These inconsistencies require careful attention when structuring investments.

In summary, NRIs / OCIs have a broader canvas in some respects under Schedule IV, but must be mindful of the specifically forbidden areas. As a rule of thumb, apart from Nidhi, plantation / agriculture, real estate trading, and farmhouses / TDRs, most other activities are allowed. NRIs have leveraged this to invest in real estate development projects, infrastructure, and even sectors like multi-brand retail by ensuring their investments are non-repatriable (thus not triggering the foreign investment prohibitions or caps). On the other hand, they cannot use this route for farming or plantation businesses even if foreign investors could via FDI.

Special Case – Investment by NRIs / OCIs in Border-Sharing Countries: In April 2020, India introduced a rule (now embodied in NDI Rules) that any investment from an entity or citizen of a country that shares a land border with India (e.g. China, Pakistan, Bangladesh, etc.) requires prior Government approval, regardless of sector. This was to curb opportunistic takeovers. This rule applies to NRIs / OCIs as well if they are residents of those countries. However, notably, that restriction is relevant only for investments on a repatriation basis. If an NRI / OCI residing in, say, China or Bangladesh wants to invest under the non-repatriation route, Schedule IV does not impose the same approval requirement. In effect, an NRI/OCI in a neighbouring country can still invest in India as a de facto domestic investor under Schedule IV without going through government approval, whereas the same person investing under a repatriable route would face a clearance hurdle. This exception again underscores the policy view of NRI non-repatriable funds as akin to Indian funds. Whilst permissible, in view of authors, considering the geo-political climate, care and caution need to be exercised. Loophole or policy openness may not be the final answer, as national interest always comes first.

PRICING GUIDELINES AND VALUATION — ARE THEY APPLICABLE?

One significant compliance relief for non-repatriable investments is in pricing regulations. Under FEMA, when foreign investors invest in or exit from Indian companies on a repatriation basis, there are strict pricing guidelines to ensure shares are not issued at an unduly low price or purchased at an unduly high price (to prevent outflow/inflow of value unfairly). For instance, the issue of shares to a foreign investor must typically be at or above fair market value (as per internationally accepted pricing methodology), and transfer from resident to foreign investor cannot be at less than fair value, etc. These pricing restrictions do not apply to investments under Schedule IV. Since Schedule IV investments are treated as domestic, the law does not mandate adherence to the pricing formulae of Schedule I.

Practical effect: Indian companies can issue shares to NRIs / OCIs on a non-repatriation basis at face value or book value or any concessional price they choose, even if that is below the fair market value, without contravening FEMA. Similarly, NRIs/OCIs could potentially buy shares from resident holders at a negotiated price without being bound by the ceiling that would apply if the NRI were a foreign investor on a repatriation basis. This flexibility is often useful in family arrangements or preferential allotments where prices may be deliberately kept low for the NRI (which would otherwise trigger questions under FDI norms). For example, an Indian family-owned company can allot shares to an NRI family member at par value under Schedule IV, even if the fair value is much higher — a practice not allowed if the NRI were taking them on a repatriable basis. The only caution is that the Income Tax Act’s fair value rules (for deemed income on undervalued transactions) might still apply, but from a FEMA standpoint, it’s permissible.

To illustrate, the RBI Master Directions explicitly note that pricing guidelines are not applicable for investments by persons resident outside India on a non-repatriation basis, as those are treated as domestic investments. Thus, NRIs / OCIs have an advantage in valuation flexibility under Schedule IV.

REPORTING AND COMPLIANCE REQUIREMENTS

Another area of divergence is in regulatory reporting. Normally, any foreign investment coming into an Indian company must be reported to RBI (through its authorised bank) via forms on the FIRMS portal (previously Form FC-GPR for new issues, Form FC-TRS for transfers, etc.). However, investments by NRIs / OCIs on a non-repatriation basis do not require filing the typical foreign investment reports like FC-GPR. The rationale is that since these are not counted as foreign investments, the RBI does not need to capture them in its foreign investment data.

Indeed, no RBI reporting is prescribed for a fresh issue / allotment of shares under Schedule IV. An NRI/OCI investing on a non-repatriable basis can be allotted shares without the company filing any form to RBI (By contrast, if the same shares were issued under FDI, a Form SMF/FC-GPR would be required within 30 days.) That said, it is a best practice for the investee company or the NRI to intimate the AD bank in a letter about the receipt of funds and the fact that the shares are issued on a non-repatriation basis. This helps create a record, so that if in future any question arises, the bank/RBI is aware those shares were categorized as non-repatriable from the start.

One exception to the no-reporting rule is when there is a transfer of such shares to a person on a repatriation basis. If an NRI/OCI holding shares on a non-repatriable basis sells or gifts them to a foreign investor or NRI on a repatriable basis, that transaction does trigger reporting (Form FC-TRS) because now those shares are becoming foreign investments. The responsibility for filing the FC-TRS lies on the resident transferor or transferee, as applicable. We will discuss transfers shortly, but in summary: no reporting when NRIs invest non-repatriable initially, but reporting is required when the character of investment changes to repatriable via a transfer.

It’s important to maintain proper records in the company’s books classifying NRI / OCI holdings as non-repatriable. Practitioners note that if a company mistakenly records an NRI’s holding as repatriable FDI and files forms or treats it as a foreign holding in compliance reports, it could lead to regulatory confusion or even penalties. For instance, it might appear the company exceeded an FDI cap when, in reality, the NRI portion should have been excluded. Therefore, both the investor and investee company should internally document the nature of the investment (e.g. through a board resolution noting the shares are issued under Schedule IV, non-repatriation).

In summary, compliance for Schedule IV investments is lighter: no entry-level RBI approvals (it’s an automatic route in all cases), no pricing certification, and no routine filing for allotments. Contrast that with Schedule I investments, where one must comply with valuation norms and file forms within the prescribed time. This ease of doing business is a key attraction of the non-repatriable route for many NRIs.

Mode of Payment and Repatriation of Proceeds

Funding the Investment: An NRI/OCI investing on a non-repatriation basis can fund the investment through any of the standard channels for NRI investments. Permissible modes include:

  •  Inward remittance from abroad through normal banking channels (i.e. sending foreign currency, which is converted to INR for investment).
  •  Payment out of an NRE or FCNR account maintained in India (these are rupee or foreign currency accounts which are repatriable).
  •  Payment out of an NRO account in India (Non-Resident Ordinary account, which holds the NRI’s funds from local sources in INR).

Use of an NRO account is notable — since NRO balances are non-repatriable (beyond the USD 1 million a year), routing payment from NRO naturally aligns with the non-repatriable nature of the investment. But even if funds came from an NRE/FCNR (which are repatriable accounts), once invested under Schedule IV, the money loses its repatriable character for the principal and becomes subject to Schedule IV restrictions.

Credit of Sale / Disinvestment Proceeds: When an NRI / OCI eventually sells the investment or the Indian company liquidates, the sale proceeds must be credited only to the NRO account of the investor. This rule is crucial — it ensures the money remains in the non-resident’s ordinary rupee account (NRO), which is not freely repatriable. Even if the original investment was paid from an NRE account, the exit money cannot go back to NRE; it has to go to an NRO (or a fresh NRO if the investor doesn’t have one). Once in NRO, those funds are under Indian jurisdiction with limited outflow rights.

Repatriation of Proceeds — The USD 1 Million Facility: FEMA does provide a limited facility for NRIs / OCIs to remit out funds from their NRO accounts/sale proceeds under the Remittance of Assets Regulations, 2016. A Non-Resident Indian or PIO is allowed to remit up to USD 1,000,000 (One Million USD) per financial year abroad from an NRO account or from the sale proceeds of assets in India, including capital gain. This is a general limit for all assets combined per person per year. This means an NRI who sold shares that were on a non-repatriable basis can utilise this route to gradually repatriate the money, up to $ 1M (USD One Million) annually. Notably, this facility is only available to individuals (NRIs / PIOs) and not to companies or other entities. So, if an NRI made a large investment and eventually exited, they could take out $1M each year (approximately ₹8.75 crore at current rates) from India. Any amount beyond that in a year would require special RBI approval.

In practice, RBI approval for exceeding the USD 1M cap is rarely granted except in exceptional hardship cases. RBI typically expects the NRI to stagger the remittances within the allowed limit across years. Therefore, investors should plan accordingly if the sums are large – it could take multiple years to fully repatriate the corpus unless they find some other mechanism (like transferring the shares to a repatriable route investor before sale, etc.). It has been observed that RBI is generally not inclined to allow one-time large remittances beyond the automatic limit, emphasizing that the non-repatriable route is meant for money that essentially stays in India with only a slow trickle out.

No $1M facility for foreign entities: As mentioned, if the investor was not an individual but an overseas company or trust owned by NRIs / OCIs, that entity does not qualify as an NRI or PIO under the Remittance of Assets rules. Thus, it cannot directly avail of the $1M automatic repatriation. Such entities would have to apply to RBI for any repatriation, which is uncertain. This is why advisors often recommend that if repatriation might eventually be desired, the investment should be structured in the individual NRI’s name (or at least eventually transferred to the individual NRI before exit). By keeping the investor as a natural person, the exit flexibility using the $1M per year route remains available.

Repatriation of Current Income: Importantly, current income (yield) from the investment is freely repatriable even if the investment itself is non-repatriable. FEMA distinguishes between repatriation of capital versus repatriation of current income such as dividends, interest, or rent. As a general rule, any dividend or interest earned in India by an NRI can be remitted abroad after paying due taxes, irrespective of whether the underlying investment was on a non-repatriation basis. RBI Master Circular confirms that authorised dealers may allow remittance of current income (like dividends, pension, interest, rent) from NRO accounts, subject to CA certification of taxes paid. This means an NRI who invested in shares under Schedule IV can still have the company declare dividends, and the NRI can get those dividends out of India without dipping into the $1M capital remittance limit. Likewise, interest on any NRO deposits of the sale proceeds is repatriable as current income. This provision is a relief because it allows NRIs/OCIs to enjoy returns on their investment globally, even though the principal stays locked.

To summarize, the inflow of funds for non-repatriable investments is flexible (NRE/FCNR/NRO all allowed), but the outflow of funds is tightly controlled. NRIs should channel the exit money into NRO and then plan systematic remittances of up to $1M a year unless they intend to reuse the funds in India. Many simply reinvest in India, treating it as part of their India portfolio.

“And That’s a Wrap… for Now!”

Congratulations! If you’ve made it this far, you’re officially a FEMA warrior—armed with the wisdom of Schedule IV and the art of non-repatriable investments. We’ve explored how NRIs and OCIs can invest in India like residents and enjoy the flexibility that even FDI can’t offer. But wait—what happens when it’s time to exit? Can you sell, transfer, or gift these investments? Will FEMA let you walk away freely, or will it make you fill out just one more RBI form?

All this (and more!) is in Part 2, where we unlock the secrets of transfers, repatriation limits, downstream investments, and compliance puzzles. Stay tuned—because just like FEMA regulations, this story isn’t over yet!

Allied Laws

52. Sunkari Tirumala Rao and Ors. vs. Penki Aruna Kumari

2025 LiveLaw (SC) 99

17th January, 2025

Partnership Firm — Unregistered — Suit instituted by partners for recovery of money from another partner — Suit not maintainable — Registration of Partnership firm compulsory — Mandatory provision. [S. 69, Partnership Act, 1932].

FACTS

The Petitioners (Original Plaintiffs) had instituted a suit for recovery of money in their capacity as the partners of an unregistered partnership firm against the Respondent (Original Defendant), who was also a partner of the said unregistered firm. The Respondent had challenged the maintainability of the said suit on the ground that, as per section 69 of the Partnership Act, 1932 (Act), no suit can be filed by a partner of an unregistered firm. However, the learned Trial Court held that since the partnership firm had not commenced business, the Petitioners were entitled to file a suit for recovery of money under section 69 of the Act. In the revision proceedings before the Hon’ble Andhra Pradesh High Court at Amravati, the Hon’ble Court held that the provisions of section 69 are mandatory in nature, and a suit can only be filed by partners of a registered partnership firm.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court after relying on its earlier decision in the case of Seth Loonkaran Sethiya and Others vs. Mr. Ivan E. John and Others (1977) 1 SCC 379, along with other decisions, reiterated that provisions of section 69 are mandatory in nature and also apply to unregistered partnership firms that have not commenced their business. The Petition was, therefore, dismissed, and the order of the Hon’ble High Court was upheld.

53. Surendra G. Shankar and Anr. vs. Esque Finamark Pvt. Ltd. and Ors.

Civil Appeal No. 928 of 2025 (SC)

22nd January, 2025

Condonation of delay — Appeal — Appellate Court restricted to adjudicate the matter only on the delay aspect — Cannot adjudicate on merits.

FACTS

The Appellants had filed a complaint before the Maharashtra Real Estate Regulatory Authority (RERA) for possession of a flat. The said complaint was filed against the Respondent and one M/s. Macrotech Developers Ltd. (Respondent No. 2). Thereafter, Respondent No. 2 was discharged from the proceedings vide order dated 23rd July, 2019 citing no privity of contract between the Appellant and Macrotech Developers Ltd (Respondent No. 2). Thereafter, a final order was passed on 16th October, 2019 dismissing the complaint of the Appellant. Aggrieved, an appeal was preferred before the RERA Tribunal against the order dated 16th October, 2019. The Appellant also appealed against the order of the RERA dated 23rd July, 2019 (wherein Respondent No. 2 was discharged) along with an application for condonation of delay. However, the RERA Tribunal dismissed the delayed appeal. Thereafter, the appellants filed a second appeal before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court condoned the delay and thereafter proceeded to decide the issue on merits, resulting in the dismissal of the appeal.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that once the Hon’ble High Court had condoned the delay of the Appellant, it ought to have restored the matter back to the file of the RERA Tribunal since the scope of appeal was limited to the condonation of delay. This was further strengthened by the fact that the RERA Tribunal had not commented / adjudicated on merits. Therefore, the decision of the Hon’ble High Court was set aside, and the matter was restored to the file of the RERA Tribunal with a direction to decide the appeal on merits without being prejudiced by the observations made by the Hon’ble High Court. The appeal was, therefore, allowed.

54. Central Bank of India vs. Smt. Prabha Jain and Ors.

2025 LiveLaw (SC) 103

9th January, 2025

Suit Property — Possession Debt Recovery Tribunal — Powers / jurisdiction — Possession can be given only to the borrower or possessor. [S. 17, 34, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002; Order VII, Rule 11, Code for Civil Procedure, 1908.].

FACTS

Respondent No. 1 (Ms. Prabha Jain, Original Plaintiff) had instituted a suit for possession of the suit property. According to Ms. Prabha Jain, she had inherited a 1/3rd share in the suit property after the death of her husband in 2008. However, the suit property was illegally sold by one Mr. Sumer Chand Jain (brother of the deceased husband, Appellant / Original Defendant) to one Mr. Parmeshwar Das Prajapati (Appellant / Original Defendant). Thereafter, Mr. Parmeshwar Das Prajapati executed a mortgage deed in favour of Central Bank of India (Appellant-Bank) for obtaining a loan. Thereafter, the Appellant-Bank took over the possession of the suit property under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act, 2002 and published an advertisement for putting the suit property on auction. Consequently, Ms. Prabha Jain filed a suit to declare the said sale deed by Sumer Chand Jain to Mr. Parmeshwar Das Prajapati as illegal and to hand over the possession of the suit property to her. The Appellant-Bank, however, challenged the maintainability of the said suit on the ground that as per section 34 of the SARFAESI Act, no civil court has the jurisdiction to entertain any suit or proceedings in respect of matter which Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered to. The said contention of the Appellant-Bank was accepted by the learned Civil Court, which was, thereafter, reversed by the Hon’ble Madhya Pradesh High Court.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court by the Appellant-Bank.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Original Plaintiff (Ms. Prabha Jain) had prayed for three reliefs before the learned Civil Court. The first two reliefs related to declaring the sale deed by Sumer Chand Jain to Parmeshwar Das Prajapati and the consequent mortgage deed in favour of Appellant-Bank as invalid. The third relief was with regard to handing over the possession of the suit property back to the Plaintiff. At the outset, the Hon’ble Court observed that the first two reliefs, undisputedly, were under the jurisdiction of a civil court and not under the DRT. With respect to the third relief, the Hon’ble Supreme Court observed that according to section 34 r.w.s. 17(3) of the SARFAESI Act, the DRT has some power to ‘restore’ the suit property to an individual who is a borrower or a possessor of the property. However, in order to ‘restore’ the suit property, Ms. Prabha Jain (Original Plaintiff) was neithera borrower nor a possessor of the suit property when the Appellant-Bank took over the possession of the property. Therefore, the Hon’ble Supreme Court confirmed that DRT had no jurisdiction to entertain the suit, and Ms. Prabha Jain had rightly instituted the suit before the civil court. The Hon’ble Supreme Court further noted that if a plaint/suit is filed before the civil court wherein, the Plaintiff has urged multiples reliefs (as in the present case), and if it is noticed that some of the reliefs are barred by law, then, the Civil Court cannot reject the entire plaint under Order VII, Rule 11 of the Code for Civil Procedure, 1908. In such a scenario, the Civil Court must address the issues / reliefs which are not barred by the law and avoid commenting on issues/reliefs which are barred by law. Before parting ways, the Hon’ble Court opined a need for the Reserve Bank of India to develop a standardised and practical framework for preparing title search reports (by the bank officials) before a loan has been sanctioned by the banks. Further, the Court opined that in the said framework, the liability of the erring bank official who had sanctioned the loan must also be determined.

The appeal was thus allowed.

55. Rakesh Brijal Jain vs. State of Maharashtra

CRA No. 379 of 2016 (Bom)(HC)

21st January, 2025

Offence of money laundering — Punishment for money — laundering — Allowing the Criminal Revision application the Court awarded exemplary cost ₹1 lakh each on complainant and Enforcement Director ( ED) for invoking criminal action and harassing the Developer with criminal action — Breach of agreement – Purchaser and Developer — Law Enforcement Agencies like ED should conduct themselves within parameters of law and that they cannot take law in to their own hands without application of mind and harass citizens. [S. 3, 4, Prevention of Money Laundering Act, 2002; Indian Penal Code 1860, S. 120B, 406, 418, 420]

FACTS

The police station forwarded the charge sheet to the Enforcement Director (ED). The ED lodged a criminal case against a developer. Criminal Revision Application was filed challenging the legality and validity of the order dated August 08, 2014, issuing process passed by the learned Special Judge, Mumbai under the Prevention of Money Laundering Act, 2002. The Criminal Revision Application sought setting aside of the order, principally on the ground that prima facie no offence whatsoever was made out under Sections 406, 418, 420 read with 120B Indian Penal Code, 1860.

HELD

Allowing the petition, the Court held that a mere breach of promise, agreement or contract does not, ipso facto, constitute an offence of criminal breach of trust without there being a clear case of entrustment. Clearly, the allegation / charge under Section 406 of the IPC has no basis. Once it is established that there is no cheating involved under the IPC then there are no proceeds of crime involved under Section 2(1)(u) of PMLA and therefore there is no Money Laundering involved under Section 3 of PMLA in the present case prosecution. ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. At the highest, if the complainant is aggrieved due to delay in receiving possession, his remedy lies in a Civil Court under the Sale Agreement, which he has already invoked. No offense of cheating or Money Laundering exists qua the prosecution, and ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. ED has supported the complainant’s false case without application of mind or without going through the record delineated hereinabove. The attachment of the two flats and garage purchased by the Applicant is cancelled.

56. Tomorrowland Limited vs. Housing and Urban Development Corporation Limited and Another

2025 LiveLaw (SC) 205

13th February, 2025

Director’s Responsibility — Dishonour of Cheque — Twin conditions — in charge and responsible of management of company. [S. 141, Negotiable Instruments Act, 1881]

FACTS

The case involves a contractual dispute between the Appellant and Respondent regarding the allotment of land for a 5-star hotel at Andrew’s Ganj, New Delhi. In 1990, the Ministry of Urban Development (MUD) decided to develop a 71-acre land parcel in Andrew’s Ganj through HUDCO. HUDCO invited bids, including for a 99-year lease of land to develop a 5-star hotel and an adjacent car park. Tomorrowland emerged as the highest bidder and was issued an allotment letter. Disputes arose between the Tomorrow land (Appellant) and HUDCO (Respondent).

A complaint was lodged against the Appellant and the company’s directors regarding the dishonour of a cheque under the Negotiable Instruments Act, 1881. Seeking to have the complaint quashed, the Appellant approached the High Court, arguing that the said-director had no role in the company’s daily operations and was not a signatory to the cheque in question. However, the High Court declined to intervene, ruling that the matter required further examination. Consequently, the appeal was dismissed, and the Court imposed a monetary cost on the Appellant. Dissatisfied with this decision, the Appellant filed the present appeal before the Hon’ble Supreme Court.

HELD

It was inter alia held that, there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act. In the complaint, it must be alleged that the person who is sought to be held liable by virtue of vicarious liability, at the time when the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company. A Director who is in charge of the company and a Director who was responsible to the company for the conduct of the business are two different aspects. The requirement of law is that both the ingredients of sub-Section (1) of Section 141 of the 1881 Act must be incorporated in the complaint.

Appeal was allowed.

Whether Obtaining Prior Approval For Reopening Of Assessment Has Become An Empty Ritual?

I. INTRODUCTION

The Finance (No. 2) Act, 2024, inserted new sections 148, 148A, and 151 relating to the reopening of assessment in the Income Tax Act, 1961 (“the Act”).

Sections 148 inter alia provides for procedure for reopening of assessment and section 148A inter alia provides for passing of an order before issuance of notice for reopening of assessment under section 148. As per these sections, the acts of issuing notice for reopening of assessment and passing an order before the issue of notice for reopening of assessment can be done by the Assessing Officer only after obtaining prior approval of the specified authority laid down under section 151, which states that specified authority for section 148 and 148A shall be the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director as the case may be.

In this write-up, an attempt is made to show the manner in which the rigours of provisions relating to obtaining prior approval for the reopening of assessment have been toned down as per the recent amendment, and thus, the said provisions have become an empty ritual.

II. IMPORTANT OBSERVATIONS OF THE COURTS IN THE CASE OF REOPENING OF ASSESSMENT

It would be apposite to refer to the important observations of the Courts in the case of reopening of assessment as under :

  1.  The Gujarat High Court in the case of P. V. Doshi vs. CIT (1978) 113 ITR 22 has held that provisions relating to the reopening of assessment are to lay down the necessary safeguards in the wider public interest by way of fetters on the jurisdiction of the authority itself, and they could not be said to be merely for the private benefit of the individual assessee concerned.
  2.  The Supreme Court in the case of ChhugamalRajpal vs. S. P. Chaliha (1971) 79 ITR 603 has held that the provisions of section 151 must be strictly adhered to because it contains important safeguards.
  3.  The Supreme Court in the case of ITO vs. LakhmaniMewal Das (1976) 103 ITR 437 has held that the powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that the income of the assessee has escaped assessment.
  4.  The Supreme Court, in the case of has observed, “We must keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfilment of certain preconditions, and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, the review would take place”.
  5.  The Bombay High Court, in the case of German Remedies Ltd. vs. DCIT (2006) 285 ITR 26, has held that it is a settled position of law that though the powers conferred under section 147 of the Income Tax Act for reopening the concluded assessment are very wide, the said power cannot be exercised mechanically or arbitrarily.

Thus, in spite of the fact that Courts have held that the provisions relating to the reopening of assessment are to lay down the necessary safeguards in the wider public interest, by the recent amendments by the Finance (No. 2) Act, 2024, the provisions relating to obtaining approval of the specified authority for the reopening of assessment, which acted as an important safeguard, have been watered down to facilitate carrying out of reassessment by the assessing authorities, by toning down the rigours of the provisions relating to “approval” as discussed hereafter.

III. AMENDMENT OF SECTION 151 OF THE INCOME-TAX ACT

It would be apt to have the background of the following provisions of the Act before discussing the provisions relating to approval as provided under section 151 of the Act.

  1.  Earlier, prior to 31st March, 1989, the definition of the “Assessing Officer” under section 2 (7A) of the Act included only the Assistant Commissioner, the Income Tax Officer or the Deputy Commissioner. Thereafter, consequent to subsequent amendments to sub-section (7A) to section 2 from time to time, other officers were included in the definition of “Assessing Officer”, which has been stated hereafter.
  2.  (i) Presently, subsection (7A) to section 2 of the Act, which defines “Assessing Officer” as meaning the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income Tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under subsection (1) or sub-section (2) of section 120 or any other provisions of this Act and the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to an Assessing Officer under this Act.

(ii) Sections 116 to 118 deal with the Income Tax Authorities, both quasi-judicial and executive. As per the notifications issued by the Board from time to time pursuant to powers vested in it under section 118, the hierarchy of these authorities is in the same order as provided in section 116. The relevant portion of the said section 116 has been reproduced as under, just to indicate which of these authorities fall within the ambit of the definition of “Assessing Officer” as per section 2 (7A) of the Act :

(a) xx

(aa) xx

(b) xx

(ba) xx

(c) xx

(cc) Additional Directors of Income Tax or Additional Commissioners of Income Tax or xx.

(cca) Joint Directors of Income Tax or Joint Commissioners of Income Tax or xx

(d) Deputy Directors of Income Tax or Deputy Commissioners of Income Tax or xx

(e) Assistant Directors of Income Tax or Assistant Commissioners of Income Tax

(f) Income Tax Officers

(g) xx

(h) xx

(iii) As per section 2 (28C), the Joint Commissioner includes an Additional Commissioner. Further, as per section 2 (28D), the Joint Director includes an Additional Director. Therefore, as per notification issued under section 118 r.w.s. 116, Joint Commissioner of Income Tax is subordinate to Additional Commissioner, but by virtue of section 2 (28C), the rank of Joint Commissioner and Additional Commissioner is at par. Similarly, as per notification issued under section 118 r.w.s. 116, the Joint Director is subordinate to the Additional Director, but by virtue of section 2 (28D), the rank of Joint Director and Additional Director is at par.

3.  Under the then provisions of section 151 operative up to 31st March, 1989, no notice under section 148 could be issued :

a. After the expiry of eight years from the end of the relevant assessment year without the approval of the Board.

b. After the expiry of four years from the end of the relevant assessment year without the approval of the Chief Commissioner or Commissioner.

After the amendment of section 151 w.e.f. 1st April, 1989, the sanctioning authorities depended upon whether an earlier assessment was made under section 143 (3) or section 147 of the Act or not, and also the period after the expiry of the assessment year beyond which the assessment is reopened. The said section provided that where the notice is issued after the expiry of four years from the end of the assessment year, the approval of the Chief Commissioner or the Principal Chief Commissioner or the Principal Commissioner or the Commissioner was required.

From the above provisions, it is clear that where the assessment is reopened beyond the expiry of four years from the end of the assessment year, the approving authorities were not assessing authorities.

But sub-section (2) of section 151 permitted approval of certain Assessing Authorities where the assessment earlier made under section 143 (3) or section 147 is reopened within four years from the end of the assessment year. Thus, approving authorities and Assessing Authorities happened to be the same only in specified cases where the reopening of the assessment was made within four years from the end of the assessment year. It is submitted that the said provisions relating to the approval of assessing authorities were not in tune with the ratio of the Supreme Court decisions discussed hereafter. After the rationalisation of provisions relating to the reopening of assessment by the Finance Act, 2021, and further amended by the Finance Act, 2023, the approving authorities depended upon whether less than three years or more than three years have elapsed from the end of the relevant assessment year. But in both the said cases, the approving authorities were not assessing authorities. From the aforesaid discussion, it is clear that prior to the amendment made by the Finance Act, 2021 and the Finance Act, 2023, earlier section 151 made the distinction between the reopening of assessments after the expiry of a specified number of years or those which are not, as also whether assessment made earlier was under section 143 (3) or section 147. In such cases, where the reopening of assessment was made beyond a specified number of years or in cases where an earlier assessment was made under section 143 (3) or section 147, the approval of Superior Authorities, who were not assessing authorities, was required. The amendments to section 151 made by the Finance Act, 2021 and the Finance Act, 2023 mandated the approval of Superior Authorities who were not Assessing Authorities in all cases, depending upon whether the reopening of assessment was made within three years or beyond the period of three years from the end of the assessment year. Shockingly, as per the recent amendment to section 151 by the Finance (No. 2) Act, 2024, reopening of assessment can be made with the approval of specified authorities who happen to be the assessing authorities. The Superior Authorities, like the Principal Chief Commissioner, Principal Commissioner, etc., have not been included in the definition of “specified authority” under the amended section 151 of the Act.

The Uttaranchal High Court in the case of McDermott International Inc. vs. Addl. CIT (259 ITR 138) has held that the provision for sanction under section 151 is a safeguard so that the assessee need not be unnecessarily harassed by the Assessing Officer.

After the present amendment to section 151, the specified authorities for the purposes of sections 148 and 148A are the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, as the case may be. The specified authorities enumerated under section 151 fall within the definition of “Assessing Officer” as per section 2 (7A) of the Act, the hierarchy of which is given as above as per section 116 of the Act. If approval of any of them is to be obtained, then the same must be sought by the Assessing Authority who is below their rank as specified authorities are themselves Assessing Officers. Thus, the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, who are themselves the Assessing Authorities, can give approval to the Assessing Authorities below their rank to reopen the assessment. As all these authorities fall within the definition of “Assessing Officer” as per section 2 (7A) of the Act, the amendment made is manifestly arbitrary and unreasonable. This is for the reason that the Superior Authorities like the Board, the Principal Chief Commissioner of Income Tax, the Principal Commissioner of Income Tax, etc., have been removed from the definition of “specified authority” under section 151 of the Act, with the result that important safeguards in the form of approval of superior authorities as hitherto provided under the predecessor section 151 and earlier section 151, have been removed, with the result that the rigours of obtaining approval have been substantially toned down.

IV. MEANING OF ASSESSMENT AND APPROVAL AND MIX–UP OF ASSESSING POWER AND APPROVING POWER NOT PROPER

Black’s Law Dictionary defines “assessment” as the process of ascertaining and adjusting the shares respectively to be contributed by several persons towards a common beneficial object according to the benefit received. It is often used in connection with assessing property taxes or levying property taxes. The same Dictionary defines “approval” to mean an act of confirming, ratifying, assenting, sanctioning or consenting to some act or thing done by another. In the case of Vijay S. Sathaye vs. Indian Airlines & Others (AIR SCW 6213), the Supreme Court has held that approval means confirming, ratifying, assenting, and sanctioning some act or thing done by another. In the case of Manpower Group Services India Pvt. Ltd. vs. CIT (430 ITR 399), the Delhi High Court has held that approval means to agree with the full knowledge of the contents of what is approved and pronounce it as good. In the case of Dharampal Satyapal Ltd. V/s. Union of India (2018) 6 GSTROL 351, it has been observed by the Gauhati High Court that grant of approval means due application of mind on the subject matter approved, which satisfies all the legal and procedural requirements. In the context of the Land Acquisition Act, 1894, the Supreme Court, in the case of Vijayadevi Naval Kishore Bhartia v/s. Land Acquisition Officer (2003) 5 SCC 83, has drawn the distinction between the approving authority and the appellate authority. It has been observed that the Collector, after assessing the land, makes an award for its acquisition and works out compensation payable under section 11 of the said Act, and his award is sent to the Commissioner for his approval as per proviso to section 11 (1) of the said Act. It has further been observed that the said Act has not conferred an appellate jurisdiction on the Commissioner under the proviso to section 11 (1) of that Act, but the appropriate government exercises the appellate power. On the same logic, there is a distinction between the assessing authority and the approving authority. Thus, the assessing power, approving power and appellate powers are separate and distinct, and there should not be a mix-up of the said powers.

Reading section 151 of the Act with section 2 (7A) of the Act, the approving authorities, i.e. Additional Commissioner or the Additional Director or Joint Commissioner or the Joint Director, may act as the assessing authorities as also approving authorities. Further, the Joint Commissioner and Additional Commissioner are of the same rank. Again, the Joint Director and the Additional Director are of the same rank. It is a paradox that all these authorities perform dual functions of assessing and approving authorities.

In certain circumstances, the provisions of section 151 may become unworkable.

For example, the Assessing Authority who proposes to issue notice under section 148 may be a Joint Commissioner. How can the Additional Commissioner accord his sanction for reopening as both the Joint Commissioner and the Additional Commissioner are of equal rank? The same reasoning applies in the case of the Joint Commissioner and the Joint Director, as both are of equal rank. In such cases, the sanction for reopening would be vitiated by official bias, resulting in a violation of the principles of natural justice. Reliance is placed on the ratio of the following decisions :

i. In GullapalliNageshwara Rao vs. A. P. State Road Transport Corporation (Gullapalli I) AIR 1959 SC 308, the petitioners were carrying on the motor transport business. The Andhra State Transport Undertaking published a scheme for nationalisation of motor transport in the State and invited objections. The objections filed by the petitioners were received and heard by the Secretary, and thereafter, the scheme was approved by the Chief Minister. The Supreme Court upheld the contention of the petitioners that the official who heard the objections was ‘in substance’ one of the parties to the dispute, and hence, the principles of natural justice were violated.

ii. In Mahadayal vs. CTO AIR 1961 SC 82, according to the Commercial Tax Officer, the petitioner was not liable to pay tax, and yet, he referred the matter to his superior officer and, on instructions from him, imposed tax. The Supreme Court set aside the decision.

iii. Again, no man can be a judge in his own cause. If it is so, his action is vitiated.

V. LEGAL POSITION OF APPROVAL/SANCTION

1. In the case of the State (Anti–Corruption Branch) Government of NCT of Delhi &Anr. vs. R. C. Anand& Another (2004) 4 SCC 615, it has been held by the Supreme Court as under :

“The validity of the sanction would, therefore, depend upon the material placed before the sanctioning authority and the fact that all the relevant facts, material and evidence, including the transcript of the tape record, have been considered by the sanctioning authority. Consideration implies the application of the mind. The order of sanction must ex-facie disclose that the sanctioning authority had considered the evidence and other material placed before it. This fact can also be established by extrinsic evidence by placing the relevant files before the Court to show that all relevant facts were considered by the sanctioning authority.”

2. In the case of Chhugamal Rajpal v/s. S. P. Chaliha (Supra), which related to the reopening of assessment, it was observed by the Supreme Court that the report submitted by the Income Tax Officer under section 151 (2) did not mention any reason for concluding that it was a fit case for the issue of a notice under section 148 and the Commissioner mechanically accorded his permission. On these facts, it was held by the Supreme Court that important safeguards provided in sections 147 and 151 were lightly treated by the Income Tax Officer as well as by the Commissioner, and therefore, notice issued under section 148 of the Act was invalid and had to be quashed.

From the aforesaid decisions of the Supreme Court, it is clear that the approving / sanctioning authority, while approving the documents placed before him, should apply his mind, and the approval / sanction must ex–facie disclose that the approving/sanctioning authority had considered the evidence and other material placed before it. Therefore, if the assessment order is passed by the Additional Commissioner, who is also the Sanctioning Authority, the question arises as to how the aforesaid provisions would be workable. This question arises because the specified authorities stated under section 151 include the Additional Commissioner, who can happen to be the Assessing Officer, as per the definition of Assessing Officer under section 2 (7A) of the Act.

VI. PRIOR APPROVAL OF THE SUPERIOR AUTHORITIES – A CASUAL APPROACH

It is submitted that though the legislature considered obtaining approval / sanction of the Superior Authorities as a safeguard provided to the assessees, the Assessing Officers consider the said provisions of obtaining approval lightly, and the Superior Authorities also act casually in granting approval. The same is evident from the observations of the Bombay and the Allahabad High Courts in the below-noted cases.

  1.  In the case of German Remedies Ltd. v/s. DCIT (2006) 287 ITR 494 in the context of obtaining sanction for the reopening of assessment, the Bombay High Court has observed as under :
    “It is not in dispute that the Assessing Officer on 15th September, 2003, had himself carried file to the Commissioner of Income-tax and on the very same day, the rather same moment in the presence of the Assessing Officer, the Commissioner of Income-tax granted approval. As a matter of fact, while granting approval, it was obligatory on his part to verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year. It was also obligatory on the part of the Commissioner to consider whether or not the power to reopen is being invoked within 4 years from the end of the assessment year to which they relate. None of these aspects have been considered by him, which is sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind. In the above view of the matter, the impugned notices and, consequently, the order justifying the reasons recorded are unsustainable. The same are liable to be quashed and set aside.”
  2.  In the case of PCIT vs. Subodh Agarwal (2023) 450 ITR 526 in the context of obtaining sanction for issuing notice to conduct search assessment, the Allahabad High Court has observed as under :

“In the instant case, the draft assessment order in 38 cases, i.e. for 38 assessment years placed before the Approving Authority on 31-12-2017, was approved on the same day, i.e., 31st December, 2017, which not only included the cases of respondent-assessee but the cases of other groups as well. It is humanly impossible to go through the records of 38 cases in one day to apply an independent mind to appraise the material before the Approving Authority. The conclusion drawn by the Tribunal that it was a mechanical exercise of power, therefore, cannot be said to be perverse or contrary to the material on record.”

VII. CONCLUSION

Though the specified authorities of the rank above the assessing authorities can give their approval/sanction for the issue of notice for reopening of assessment under section 148 and passing of order before the issue of notice under section 148 for the reopening of assessment under section 148A, there will not be any accountability as all of them are the Assessing Officers who, perform their duties sitting in the offices usually situated in the same floor of a building. There are chances of getting substantive irregularities getting cured as superior Authorities, such as the Principal Chief Commissioner, Principal Commissioner, etc., have no role to play in giving approval / sanction. Thus, the provisions relating to obtaining prior approval have become an empty ritual. The obtaining of prior approval in such cases may also suffer from a bias, and there is every chance of assessees being harassed by the Assessing Authorities. See the observation of the Uttaranchal High Court in the case of McDermott International Inc. vs. Additional CIT (Supra). Further, the Supreme Court in the case of Manek Lal v/s. Premchand AIR 1957 SC 425 has observed that reasonable apprehension or reasonable likelihood of bias is a vitiating factor.

One is reminded of the Chief Justice of the USA, Justice John Marshall, who had said in the year 1801 that “the power to tax involves the power to destroy”. The fitting reply came about a hundred years later from another Judge from the USA, Justice Holmes, who said, “The power to tax is not the power to destroy while this Court sits”. Such is the importance of Courts. The eminent Jurist and the legendary Tax Counsel Late Mr Nani Palkhivala had said in one of his famous budget speeches that “the bureaucrats are the unacknowledged legislatures of India.” Thus, it is submitted that they have amended section 151 in such a manner that their colleagues do not face any problem in obtaining prior approval while issuing notice for reopening of assessment. The amended provisions have ensured that no matter goes to the Courts on the ground of invalid approvals / sanctions for reopening of assessment by eclipsing several Court decisions where the Courts have quashed reopening of assessment only on the ground of invalid approval / sanction.

In spite of the fact that Courts have observed that for a wider public interest, adequate safeguards should be provided for resorting to the reopening of assessment, the legislature has been making amendment after amendment by removing adequate safeguards to implement the above provisions and making such provisions simple and smooth for the assessing authorities to execute the same. The Hon’ble Finance Minister, while presenting the (Finance No. 2) Bill 2024 in para 140 of her Budget Speech, has stated, “I propose to thoroughly simplify the provisions for reopening and reassessments.” One should ask her a question as to whether such simplification is for the benefit of the Income Tax officials or the benefit of taxpayers.

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

13. General Motors Company USA vs. ACIT, International Taxation

[2024] 166 taxmann.com 170 (Delhi – Trib.)

ITA No: 2359 and 2360 (Delhi) of 2022

A.Y.: 2014-15 & 2015-16

Dated: 5th September, 2024

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

FACTS

General Motors Company USA was a single-member LLC incorporated under the laws of the USA that received fees for technical/included services from two Indian entities. The Assessee claimed the rate of taxation was 15% as per Article 12 of the India-USA DTAA, which is beneficial compared to the rate of 25% under Section 115A for the relevant AY.

The AO believed that the LLC was not subjected to taxation in its own hands as per US tax laws and could not qualify as a ‘resident’ under Article 4 of DTAA. Further, the LLC is not liable to tax in US as it is a fiscally transparent entity and is not partnership or trust to get covered by Article 4(1)(b) of the treaty.. Accordingly, the AO concluded that even if the member of the LLC was a resident of the USA and pays tax on their share of the LLC’s income, the single-member LLC was not entitled to the treaty benefits.

The DRP concurred with the draft order.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The status of a corporation has to be determined based on the laws in which such LLC is formed. Publication No. 3402 of the Department of Treasury, IRS, USA explained the taxation of LLCs. Depending on its election, a two-member LLC could have been regarded as a corporation, partnership, or disregarded entity for federal tax purposes. A single-member LLC could be regarded as a corporation or a disregarded entity, and income is taxed in the hands of the owner.
  •  Instruction No. 8802 provides instructions for the application for a Tax Residency Certificate (‘TRC’) by an entity subject to US Tax. Further, Form No. 6166 provides that a fiscally transparent entity formed in the US that does not have US owners is not entitled to a TRC.
  •  The TRC issued by the IRS shows that the income of the single-member LLC is taxed in its owner’s hands; hence, the LLC was liable to tax, and the scope of such phrase had to be determined as per US tax laws.
  •  The Assessee satisfied the requirement of being a resident under Article 4 by incorporation and its separate existence from its member. Therefore, it qualifies as a person under DTAA and is entitled to benefits under DTAA.

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

12. TBEA Shenyang Transformer Group Company Limited vs. DCIT (International Taxation)

[2024] 169 taxmann.com 145 (SB)

ITA No: 581 (Ahd.) of 2017

A.Y.: 2012-13

Dated: 11th November, 2024

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

FACTS

The Assessee, a tax resident of the Republic of China, obtained a contract for offshore and onshore supply and services via separate agreements. A PO was formed in India to carry out onshore supply and service. A portion of onshore services had been subcontracted to third parties. The HO in China had received and also made payments on behalf of the PO due to the non-availability of a bank account in India at the relevant time.

The AO treated the transaction as reimbursement and referred it to the TPO for ALP determination. The TPO found that the rates received from PGCIL (contractor) for civil work were lower than those paid to subcontractors, suggesting that the PO was not adequately compensated at arm’s length price (ALP), leading to losses.

A Special Bench was constituted on a reference made by the Division Bench because of apparently conflicting views on the applicability of TP provisions to the transactions between an HO and its PE.

Assesses’ Arguments before SB

  •  Even if the PE is considered an enterprise per Section 92F, it does not treat PE as separate from its foreign company.
  •  There is no international transaction as per Section 92 and only fund movement between HO and PO, and the actual transactions are between PE and third parties.
  •  The Taxpayer argued that under Section 90 of the Act, the DTAA provisions override the Act to the extent they are beneficial. Further, Article 9 stipulates that TP adjustments are applicable only when one of the enterprises involved is a resident of the other contracting state. Since neither the HO nor the PE is considered a resident, the Taxpayer contended that transactions between them should not be subject to TP adjustments as per the DTAA.

HELD

  •  The object of fair and equitable tax allocation should be kept in mind while interpreting transfer pricing provisions. The crucial aspect of the case is that the PO had incurred losses while rendering services on behalf of the HO, and an evaluation of whether an independent party would enter such a contract to perform similar services is required.

Whether PE is a separate enterprise

  •  The determination of ALP is computed for an ‘enterprise’, and not for a person. There is a clear distinction between the two terms under the Act. Interpreting the term enterprise as a person will make certain provisions redundant; hence, such interpretation should be avoided.
  •  The SB referred to Article 7(2) and observed that the PE had to be treated as a separate and distinct enterprise to determine business profits.

Income arising from International Transactions

  •  The HO had undertaken the receipts and payments on behalf of the PE. The agreement entered by the HO had a bearing on the PE’s revenue and consequential income. Hence, income had to be understood in a commercial and business sense.
  •  Section 92F(v) defines the term ‘transaction’ and includes arrangement or understanding. The arrangement entered by HO led to a substantial loss in the hands of PO; hence, it must be subject to transfer pricing.

Associated Enterprise

  •  Sections 92A(1) and 92A(2) must be read together and satisfied cumulatively. Section 92A(2) provides scenarios by which an enterprise may participate in management, capital, or control of another.
  •  The SB noted that in cases involving a PE, traditional tests like holding voting power through shares or appointment of directors may not apply, as a PE does not have its own share capital or directors. The SB however indicated that the clauses of the AE definition that refer to the control by one enterprise over the other enterprise on account of certain commercial relationships (e.g. dependence on intangible property or substantial supplier or customer relationships etc.) may apply in HO-PE situations.
  •  The SB directed the division bench to analyze the applicability of Section 92A(2) clauses based on the facts and circumstances.

Deemed International Transactions

  •  The SB also highlighted the difference between Sections 92B(1) and 92B(2). The SB observed that under 92B(1), an international transaction is evaluated at an associated enterprise level, whereas under 92B(2), it was evaluated at a transaction level.
  •  The SB observed that section 92B(2) was triggered when the transaction between an enterprise and an unrelated person was influenced by the associated person of the enterprise. Such influence may be in the form of price or terms and conditions.
  •  The PO carried out the obligations of the contract entered by the HO and incurred substantial losses. When the PO was made to accept the contract terms concluded by HO, provisions of Section 92B(2) may apply.
  •  The SB directed the division bench to analyze the applicability of 92B(2) based on the facts and circumstances.

Treaty Override

  •  The purpose of Article 9 is limited to broadly confirming that similar rules exist in domestic law. Article 9(1) does not bar adjustment of profit under the domestic law even if the conditions differ from those of Article 9(1).
  •  Even if the DTAA is assumed to prevail, profits must be attributed to the PE as if it were an independent enterprise, in line with Article 7 of the DTAA. The SB concluded that this approach aligns with the arm’s length principle and found no conflict between Article 9 of the DTAA and TP regulations of the Act.
  •  Article 7(2) provided that PE had to be treated as a separate and distinct enterprise to determine profits. This reflects the transfer pricing principles, which intend to evaluate how the independent parties would have dealt in an uncontrolled situation. Thus, contention of the assessee that there is a conflict between Article 9 of DTAA and Act is rejected.

Sec. 43A: Where the assessee claimed expenses on account of foreign exchange fluctuation, which were merely reinstatement of losses as per accounting standards and there was no actual payment or remittance, section 43A could not apply.

75. Bando (India) (P.) Ltd. vs. DCIT

[2024] 114 ITR(T) 275 (Delhi – Trib.)

ITA NO.: 7743 (DEL) OF 2018

A.Y.: 2014-15

Date of Order: 11th July, 2024

Sec. 43A: Where the assessee claimed expenses on account of foreign exchange fluctuation, which were merely reinstatement of losses as per accounting standards and there was no actual payment or remittance, section 43A could not apply.

FACTS

During the year the assessee had claimed losses on account of foreign exchange fluctuation of ₹6,42,33,238/-. The AO had disallowed amount of ₹4,20,57,880/- u/s 37(1) treating exchange fluctuation as capital expenditure on account of ECB loan being utilized for purpose of acquiring capital asset which had enduring benefit. Aggrieved by the order, the assessee was in appeal before CIT(A). The CIT(A) in its order sustained the disallowance by invoking the provisions of section 43A instead of section 37 invoked by the AO.

Aggrieved, the assessee filed an appeal before the Tribunal –

HELD

The ITAT observed that the assessee had reinstated income or loss from fluctuation of currency as per accounting standards AS11 and the assessee was regularly following the same system of accounting in the previous years and subsequent years.

The ITAT observed that disallowance u/s 37 and u/s 43A of the Act, both operate in different spheres. Section 43A is a deeming provision for adding or deducting, the fluctuation loss or profit, from the cost of asset whereas disallowance u/s 37 was however for the reasons that capital expenditures are specifically disallowed.

The ITAT held that there was no ground to invoke section 43A since there was merely reinstatement of losses on account of fluctuation in foreign exchange currency and there was no actual payment or remittance. The ITAT following the concept of consistency, allowed the losses claimed for foreign exchange fluctuation.

The appeal of the assessee was accordingly allowed.

Sec. 68: Where the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No.2, though notice u/s 133(6) was not complied with by the investor company, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company for addition u/s 68 in respect of share capital and share premium.

74. ITO vs. Shree Banke Bihari Infracon (P.)Ltd.

[2024] 115ITR(T) 223(Raipur – Trib.)

ITA NO.:95 (RPR) OF 2020

CO.: 8(RPR) OF 2023

AY.: 2013-14

Date of Order: 18th March, 2024

Sec. 68: Where the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No.2, though notice u/s 133(6) was not complied with by the investor company, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company for addition u/s 68 in respect of share capital and share premium.

FACTS

The assessee company was engaged in the business of real estate and building work. The assessee company had e-filed its return of income on 21st December, 2013 declaring a total income of ₹229,982/-. The assessee company’s case was selected for scrutiny proceedings u/s 143(2) of the Act.

During the course of assessment proceedings, it was observed that the assessee company had claimed to have received share capital and share premium of ₹2.05 crores from M/s. Modakpriya Merchandise Pvt. Ltd [the investor company].

The AO had issued notices u/s 142(1) of the Act which was returned unserved by postal authority. The A.O. sought for a direction from the Jt. CIT, Range-4, Raipur, and under his direction issued a commission u/s. 131(1)(d) of the Act. The A.O. directed his Inspector to carry out a spot verification about the existence of the investor company at its old address. The Inspector vide his report dated 23rd March, 2016 informed the A.O. that the investor company was neither available at the address that was provided to him nor any board evidencing the availability of the investor company was found at the said address.

The AO observed that the assessee company had failed to discharge the onus that was cast upon it as regards proving the authenticity of its claim, the identity of the investor company was not established and except for the aforesaid transaction of payment made towards share capital / premium, the bank account of the investor company revealed no other transaction.

Accordingly, the AO being of the view that the assessee company in the garb of share capital/premium had laundered its unaccounted money, thus, made an addition of the entire amount of Rs.2.05 crore (approx.) u/s. 68 of the Act. Aggrieved by the order, the assessee company filed an appeal before the CIT(A).

The CIT(A) observed that the inquiry was done on the back of the assessee company and results of enquiry were not confronted to the assessee before making the addition. The CIT(A) further observed that the AO made inquiry at wrong address of Synagogue Street Kolkata instead of correct address of Mango Lane, Kolkata. The CIT(A) observed that the availability of the investor company could not be gathered by the AO for the reason that the necessary inquiries were carried out at an incorrect address, i.e., the old address of the assessee company. It was also observed that the ARs were attending hearing before the AO and AO could have very well informed the result of the inquiry across the table to the AR. All the documents in respect of M/s Modakpriya Merchandise Pvt. Ltd. such as ITR, audited balance sheet, bank account statement, ROC certificate were furnished. It was observed by CIT(A) that the investment of ₹2.05 crore made by the investor company with the assessee company was sourced from the sale of its investments, and complete details of the same were filed with the AO. Without finding any fault in the documents furnished by the appellant, no adverse finding can be made by the AO.

The CIT(A) observed that the assessee had discharged its onus to prove the existence of the investor company, genuineness of the transaction and the creditworthiness of the investor company and thus, deleted the addition made by the AO.

The revenue being aggrieved with the order of the CIT(Appeals) filed an appeal before the ITAT.

HELD

The ITAT observed that the investor company had shifted from its old address “Synagogue Street, Kolkata” to its new address: “3, Mango Lane, 4th Floor, Kolkata(WB)-700 001”, however, the spot verification was carried out at its old address. The ROC records of the investor company also revealed its new address. The AO himself on Page 3 of his order had referred to the new address of the investor company. In spite of the above facts, the AO drew the adverse inference about the unavailability of the investor company at its old address and doubted the genuineness of the transactions. The ITAT did not approve the adverse inferences drawn by the AO.

The ITAT observed that the department had accepted the investment of ₹39.99 lacs (approx.) made by the investor company with M/s. Rupandham Steel Pvt. Ltd. during A.Y.2017-18, vide its order u/s. 143(3) dated 31st December, 2019 while framing the assessment for A.Y 2017-18 of M/s. Rupandham Steel Pvt. Ltd. and thus it dispels all doubts about the existence of the investor company.

The ITAT further observed that the AO had issued notice u/s. 133(6) of the Act at the new address of the investor company but it had carried out necessary verifications at its old address. The ITAT held that though notice u/s 133(6) was not complied with, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company.

The ITAT observed that the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation of the investor company, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No. 2. The ITAT also observed that on a perusal of the bank account of the investor company, the amount remitted to the assessee company as an investment towards share application money was not preceded by any cash deposits in the said bank account but is sourced from bank transfers made through RTGS and had filed the confirmations of the source of RTGS as well.

The ITAT held that the assessee company had discharged the double facet onus that was cast upon it as regards proving the authenticity of its claim of having received genuine share application money from the investor company –

i by substantiating based on documentary evidence the “nature” and “source” of the amount so credited in its books of account, i.e. receipt of the share application money from the investor company; and

ii by coming forth with a duly substantiated explanation about the “nature” and “source” of the sum so credited in the name of the investor company, as per the mandate of the “1st proviso” to Section 68 of the Act.

In the result, the appeal of the revenue was dismissed.

S. 12AB–CIT(E) cannot deny registration under section 12AB on the ground that some of the objects of the applicant-trust had an element of commerciality.

73. (2025) 170 taxmann.com 198 (IndoreTrib)

Aruva Foundation vs. CIT

ITA No.: 398 & 399(Ind) of 2024

A.Y.: N.A.

Date of Order: 11th December, 2024

S. 12AB–CIT(E) cannot deny registration under section 12AB on the ground that some of the objects of the applicant-trust had an element of commerciality.

FACTS

The assessee-company was incorporated under section 8 of the Companies Act, 2013 with the objects of, inter alia, selling and marketing of products developed by the weaker sections of the society. It was granted provisional registration / approval under section 12AB and section 80G. Subsequently, it applied to CIT(E) for grant of final registration / approval under section 12AB as well as section 80G.

CIT(E) rejected assessee’s application under section 12ABon the ground that some of the objects of the assessee as mentioned in the Memorandum of Association clearly showed that its intention was to carry out various commercial activities and also to engage in trading of various products and therefore, it was not eligible to obtain registration under section 12AB. He also rejected the application under section 80G on the ground that as a consequence of denial of registration under section 12AB, approval under section 80G was not available to the assessee. Further, the said application was also belated.

Aggrieved, the assessee filed appeals before ITAT.

HELD

The Tribunal observed that-

(a) Proviso to section 2(15) defining ‘charitable purpose itself allows commerciality in the activities of assessee but up to a ceiling limit of 20 per cent. Further, section 11(4A) grants exemption to commercial or business activity on fulfillment of certain requirements.

(b) Section 13(8) also provides that the exemption under section 11/12 shall be denied in that previous year only in which the proviso to section 2(15) is violated. Therefore, these provisions of law clearly show that even if any object or activity of assessee, out of various multiple objects and activities, has element of commerciality, that would result in denial of exemption under section 11/12 to that extent and in that particular previous year only; but the CIT(E) in exercise of power under section 12AB cannot deny registration to assessee.

(c) It was also a fact that the assessee had done only charitable activities till date and had not undertaken any activity contemplated under the said “commercial” objects. Therefore, as and when the said activity was actually undertaken by assessee in future, it would be a prerogative of Assessing Officer in that particular year, to ascertain the quantum of exemption under section 11/12 available to assessee.

In the result, the appeal of the assessee was allowed and CIT(E) was directed to grant registration under section 12AB.

With regard to the approval under section 80G, the Tribunal observed that the assessee had already filed a fresh application to CIT(E) within the extended timeline of 30.6.2024 [as extended by Circular No. 7/2024 dated 25.04.2024] and therefore, remitted the matter back to the file of CIT(E) for an appropriate adjudication.

S. 12A–If the charitable institution had filed its return of income belatedly but within time allowed under section 139(4), then the tax department must allow exemption under section 11.

72. K M Educational & Rural-development Trust vs. ITO

(2024) 169 taxmann.com 617(Chennai Trib)

ITA No.: 1326(Chny) of 2024

A.Y.: 2018-19

Date of Order: 4th December, 2024

S. 12A–If the charitable institution had filed its return of income belatedly but within time allowed under section 139(4), then the tax department must allow exemption under section 11.

FACTS

The assessee-trust was registered under section 12A. For AY 2018-19, it filed its return of income belatedly on 30th November, 2018 [due date for filing of return under section 139(1) was 30th September, 2018] declaring total income of ₹NIL and claimed a refund of ₹1,96,656. While processing the return of income under section 143(1), the Central Processing Centre (CPC) did not allow the exemption under section 11 on the ground that the return of income / audit report was not filed within the due date under section 139(1).

On appeal, CIT(A) upheld the action of CPC.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Citing CBDT Circular No.F.No.173/193/2019-ITA-I dated 23rd April, 2019 the Tribunal held that CPC and CIT(A)erred in restricting the time limit for filing return of income to the due date under
section 139(1) and therefore, if the assessee had filed its return of income within the time allowed under section 139, that is, even if it is filed belatedly, then CPC was required to allow the exemption under section 11 by rectifying its intimation under section 143(1)(a).

Accordingly, the Tribunal allowed the appeal of the assessee and restored the issue back to the file of CIT(A) with a direction to pass rectification order as required vide CBDT Circular dated 23rd April, 2019(supra).

S. 54F–Deduction under section 54F is allowable to the assessee even if the new residential property was purchased by him in the name of his wife.

71. VidjayaneDurairaj -VidjayaneVelradjou vs. ITO

(2024) 169 taxmann.com 625 (ChennaiTrib)

ITA No.:1457 (Chny) of 2024

A.Y.: 2012-13

Date of Order: 4th December, 2024

S. 54F–Deduction under section 54F is allowable to the assessee even if the new residential property was purchased by him in the name of his wife.

FACTS

During FY 2011-12, the assessee sold three immovable properties for consideration of ₹50,40,000 and received the sale proceeds in cash. Out of the sale proceeds, he had deposited ₹19,75,000 into his own bank account and an amount of ₹36,00,000 in his wife’s bank account. Thereafter, a residential property was purchased in the assessee’s wife’s name for ₹44,27,994. The assessee did not file his return of income for AY 2012-13.

Vide notice under section 148 dated 27th March, 2018, the Assessing Officer (AO) reopened the assessment on the ground that he had received information from ITS Data that the assessee had deposited cash into his UCO Bank account to the tune of ₹19,75,000. In response thereto, the assessee filed his return of income claiming deduction of ₹44,27,994 under section 54F being capital gain invested into residential property purchased in his wife’s name. The AO did not allow the claim of deduction under section 54F on the ground that the residential property in question was purchased in the name of the assessee’s wife who was also assessed to tax separately and not in the assessee’s name.

The assessee preferred an appeal before CIT(A) who dismissed the same citing the decision of Punjab and Haryana High Court in Kamal Kant Kamboj vs. ITO, (2017) 88 taxmann.com 541 (Punjab & Haryana).

Aggrieved with the order of CIT(A), the assessee filed an appeal before ITAT.

HELD

The Tribunal noted that the predominant judicial view is that for the purpose of section 54F, new residential house need not be purchased by the assessee in his own name and therefore, following the decision of jurisdictional High Court in erred in CIT vs. V. Natarajan,(2006) 154 Taxman399/287 ITR 271 (Madras), the Tribunal directed the AO to allow deduction under section 54F to the assessee.

 

Penalty levied under section 270A deleted where the assessee having fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act made a belated application under section 270AA and no opportunity was given to the assessee as also no order passed by the AO rejecting the assessee’s application.

70. Bishwanath Prasad vs. CIT(A)

ITA Nos. 163 to 166/Patna/2023

A.Ys. : 2017-18 to 2020-21

Date of Order: 29th August, 2024

Sections: 270A, 270AA

Penalty levied under section 270A deleted where the assessee having fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act made a belated application under section 270AA and no opportunity was given to the assessee as also no order passed by the AO rejecting the assessee’s application.

FACTS

All the appeals were against orders passed under section 270A of the Act levying penalty for under-reporting of income. The facts in each of the years under appeal being the same, the Tribunal considered the facts in the case of Nand Kumar Prasad Sah for assessment year 2017-18 and apply the decision to all other appeals.

The assessee, an individual, filed return of income under section 139(1), for AY 2017-18, declaring total income of ₹8,35,425. Subsequently, consequent to search conducted at the business premises of the assessee, the assessee in response to a notice issued under section 153A of the Act filed the return of income declaring therein a total income of ₹13,97,271. The assessment of the assessee for AY 2017-18 stood abated.

The Assessing Officer (AO) completed the assessment under section 153A of the Act by accepting the income returned in response to notice issued under section 153A of the Act. The AO levied penalty with reference to the difference between income assessed under section 153A and the income declared in return of income filed under section 139(1).

The assessee belatedly filed an application under section 270AA for grant of immunity from levy of penalty and initiation of prosecution. The AO rejected the application and levied a penalty of ₹6,20,495.

Aggrieved, the assessee preferred an appeal to CIT(A) claiming that since returned income has been assessed there is no under-reporting under section 270A(2) of the Act. It was also argued that the AO ought to have considered the application for grant of immunity. The CIT(A) dismissed the contentions and confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal before the Tribunal where two-fold arguments were raised viz. relying on decision of Delhi High Court in PCIT vs. Neeraj Jindal [(2017) 399 ITR 1] it was contended that once the assessee is subjected to search and notice u/s 153A of the Act is issued for furnishing the return and the assessee furnished return since the return filed originally gets abated and become non-est. Therefore, since there is no difference between the returned income and assessed income, no penalty is leviable u/s 270A of the Act. Second fold of the arguments was that the AO erred in rejecting the assessee’s application for grant of immunity without granting an opportunity of being heard which is contrary to the principles of natural justice. Relying on the decision of the Madras HC in Natarajan Anand Kumar vs. DCIT [(2024) 159 taxmann.com 637 (Mad)] it was contended that the ratio of the said decision squarely applies to the present case and that the AO ought to have condoned the delay in furnishing application under section 270AA because the assessee satisfied all the conditions required to be satisfied for grant of immunity.

HELD

The Tribunal observed that there is no difference between the income returned under section 153A and assessed income. The Tribunal examined the second fold of the arguments first viz. that the case of the assessee was covered by the decision of the Madras High Court in Natarajan Anand Kumar (supra) and therefore the AO ought to have condoned the delay and granted immunity.

The Tribunal noted that there was no tax and interest payable as per assessment order passed under section 143(3) r.w.s. 153A and assessee had not preferred any appeal against the order of assessment. The application for grant of immunity is required to be filed within one month from the end of the month in which the assessment order is received. Assuming that the assessment order is received by the assessee on the very same date of its passing viz. 31st March, 2022 there is a delay of 45 days in filing an application for grant of immunity. The application of the assessee has been rejected without providing any opportunity of being heard.

The Tribunal observed that –

i) the Madras High Court has in Natarajan Anand Kumar (supra) dealt with almost identical issue and held that it was a fit case to condone the delay of 30 days in filing the application for grant of immunity. The Court condoned the delay;

ii) the Delhi High Court in the case of Ultimate Infratech Private Limited v. National Faceless Assessment Centre in WP 6305/2022 dated 20th April, 2022 where the Court has held that upon satisfaction of the conditions mentioned in section 270AA the assessee acquires a right to be granted immunity under section 270AA;

iii) the Rajasthan High Court in GR Infraprojects Ltd. vs. ACIT [(2024) 158 taxmann.com 80] has held that “Sub-section (4) of section 270AA provides that the Assessing Officer shall pass an order accepting or rejecting any application filed by the assessee seeking immunity from imposition of penalty under section 270A within a period of one month from the end of month in which the application under sub-section (1) is received.

The Tribunal held that the ratio laid down in the above decisions is squarely applicable in favour of the assessee and therefore, it was of the considered view since, the assessee has fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act, the actions of the AO levying penalty u/s 270A of the Act, is not justified because firstly, no opportunity was given to the assessee and secondly, no order has been passed by the AO rejecting the assessee’s application.

The Tribunal held the case of the assessee to be a fit case for immunity of penalty u/s 270AA of the Act and on this ground itself deleted the impugned penalty. In view of the decision of the Tribunal on the second fold of the arguments of the assessee, the Tribunal held that the first fold of the arguments became academic in nature. The penalty levied by AO and confirmed by the CIT(A) was deleted and the appeals filed by the assessee were allowed.