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Year: 2025

Where Revenue has failed to establish direct nexus between the borrowed funds and interest-free advances, the presumption is that the interest-free advances have been made out of interest-free funds available with the assessee.

69. SiwanaAgri Marketing Ltd. v. ACIT

ITA No. 1094/Ahd./2024

A.Y.: 2017-18

Date of Order: 27th November, 2024

Section: 36(1)(iii)

Where Revenue has failed to establish direct nexus between the borrowed funds and interest-free advances, the presumption is that the interest-free advances have been made out of interest-free funds available with the assessee.

FACTS

For A.Y. 2017-18, the assessee filed its return of income declaring a total income of ₹31,91,560. While assessing the total income of the assessee under section 143(3) of the Act, the Assessing Officer (AO) disallowed ₹65,86,200 under section 36(1)(iii) of the Act on the ground that the assessee had advanced interest-free loans of ₹5.48 crore while incurring significant interest expenses on unsecured borrowings. He held that the assessee failed to demonstrate the nexus of these advances with interest-free funds and did not demonstrate any business purpose.

Aggrieved, the assessee preferred an appeal to CIT(A) contending that interest-free advances were made out of sufficient interest-free funds available with it. The CIT(A) held that the assessee failed to substantiate its claims with adequate evidence or satisfy the legal requirements under the Act. He observed that no fund flow statement or evidence provided to establish the nexus of interest-free funds with advances and that business purpose or commercial expediency has not been demonstrated. He confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee, on the basis of financial statements it was contended that the assessee has sufficient own funds. The net worth as on 31st March, 2016 was ₹30.31 crore and that on 31st March, 2017 was ₹27.11 crore whereas the amount of loan given during the year is only ₹15.75 lakh and the balance is all opening balances. It was also pointed out that no disallowance was made in earlier years despite the existence of similar advances of ₹5.33 crore and assessee has earned net interest income of ₹1.10 crore during the year thereby negating any suspicion of diversion of interest-bearing funds. Reliance was placed on decision of SC in CIT(LTU) vs. Reliance Industries Ltd. [(2019) 410 ITR 466]. It was contended that the reliance placed by AO and CIT(A) on the decision of S A Builders [Appeal (civil) 5811 of 2006 (SC)] was misplaced in light of later SC ruling in Reliance Industries Ltd. (supra).

HELD

The Tribunal, based on material on record, held that had sufficient interest-free funds amounting to ₹27.10 crores as on 31st March, 2017, which were more than adequate to cover the interest-free advances of ₹5.48 crores. It observed that the CIT(A) did not address the assessee’s submission that no disallowance was made in earlier years despite similar advances. The principle of consistency was disregarded. The CIT(A)’s emphasis on the absence of a fund flow statement is unjustified, as the assessee’s financial statements clearly indicated the sufficiency of interest-free funds and the CIT(A)’s reliance on S.A. Builders vs. CIT (supra) is misplaced.

The Tribunal held that while the decision in the case of S A Builders (supra) emphasizes the requirement of commercial expediency, the principles laid down in CIT vs. Reliance Industries Ltd. (supra), a subsequent decision of the Supreme Court clarifies that where sufficient interest-free funds are available, the presumption arises that such advances are made from those funds. Following the principle established in CIT vs. Reliance Industries Ltd. (supra), it is presumed that such advances are made from interest-free funds. The Revenue has failed to establish a direct nexus between borrowed funds and these advances. Therefore, the disallowance of interest expenses under Section 36(1)(iii) of the Act cannot be sustained.

Where funds were introduced by the partners of the firm as their capital contribution and their confirmations filed, the onus cast on the assessee stood discharged. If the AO is not satisfied with the explanation then the addition may be made in the hands of the partners but not in the hands of the assessee firm.

68. J K Associates vs. ITO

ITA No. 1200/Ahd./2024

A.Y.: 2017-18

Date of Order: 5th December, 2024

Sections: 68, 69A

Where funds were introduced by the partners of the firm as their capital contribution and their confirmations filed, the onus cast on the assessee stood discharged. If the AO is not satisfied with the explanation then the addition may be made in the hands of the partners but not in the hands of the assessee firm.

FACTS

For the assessment year 2017-18, the Assessing Officer (AO) received information that the assessee firm had purchased immovable property of ₹1 crore in Financial Year 2016-17. Since the assessee firm had not filed return of income, he recorded reasons and issued a notice under section 147 of the Act and completed the assessment by making an addition of ₹1 crore in respect of unexplained investment in immovable property.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was submitted that the source of investment in the immovable property was duly explained by the assessee before the AO as well as before the Ld. CIT(A). It was submitted that the property was acquired out of capital contribution made by 12 partners of the firms and the details of amount contributed by the individual partners along with their confirmations was filed before the AO. It was further explained that the partners had made withdrawals from other firms as well as taken loan from other entities for making capital contribution to the assessee firm. Therefore, the identity, genuineness and creditworthiness of the partner’s contribution towards the acquisition of property was duly established. Therefore, the AO was not correct in making an addition in the hands of the assessee firm. Relying on the decision of the Gujarat High Court in PCIT vs. VaishnodeviRefoils&Solvex [(2018) 89 taxman.com 80(Gujrat] it was submitted that in case the AO was not satisfied with the explanation of the assessee, then the addition should have been made in the hands of the individual partners but not in the case of assessee firm.

HELD

The AO was not correct in rejecting the evidences filed by the assessee as self-serving documents. The assessee has discharged its onus by explaining the source of investment made in the immovable property. It is not that the amounts were borrowed by the assessee from 3rd parties; rather all the fund had come from its own 12 partners in the form of their capital contribution. The assessee had discharged its onus to explain the source of investment in the immovable property. The confirmation of the partners was also filed in this regard. If the AO was not satisfied about the creditworthiness of the partners, then the enquiry was required to be made at the end of the partners. No addition in respect of unexplained capital contribution made by the partner can be made in the hands of the firm. The Tribunal held that the assessee had discharged its onus to explain the source of investment in the immovable property.

The addition of ₹1 crore made by the AO in respect of unexplained investment in property was deleted.

Credit card dues settled / paid in cash, qualify for addition u/s 69A if the source of cash deposit is not explained.

67. Dipak Parmar vs. ITO

ITA No. 178/Srt./2024

A.Y.: 2017-18

Date of Order: 19th November, 2024

Section: 69A

Credit card dues settled / paid in cash, qualify for addition u/s 69A if the source of cash deposit is not explained.

FACTS

For A.Y. 2017-18, the assessee filed his return of income declaring total income at ₹2,78,400/-. The assessee had made cash payment towards credit card purchases of ₹6,16,142/-. The Assessing Officer ( ‘AO’) asked the assessee to explain the source of the above cash payments. The AO also issued show cause notice which was not replied to by the assessee. Therefore, the AO held that the amount of cash payment of ₹6,16,000/- remained unexplained and constitutes income of the assessee u/s 69A of the Act which is taxable at the rates mentioned in section 115BBE of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who issued seven notices which were not responded neither were any written submissions filed. The CIT(A) concluded that the assessee was not interested in pursuing the appeal and therefore decided the same based on material on record.

The CIT(A) observed that assessee failed to explain the source of cash payment of ₹6,16,000/- towards credit card purchases; hence, the impugned amount constitutes income in the hands of the assessee u/s 69A of the Act. The CIT(A) also relied on the order of Hon’ble Punjab & Haryana High Court, in case of Anil Goel vs. CIT, 306 ITR 212 (P& H) wherein relying on the earlier decision of the High Court in case of Popular Engineer Co. vs. ITAT, 248 ITR 577 (P & H), it was held that elaborate reasons need not be recorded by the CIT(A) as has been done by the AO. The reasons are required to be clear and explicit indicating that the authority has considered the issue in controversy. If the appellate / revisional authority has to affirm such an order, it is not required to give separate reasons, which may be required incase the order is to be reversed by the appellate / revisional authority.

Aggrieved, the assessee preferred an appeal to the Tribunal where none appeared on behalf of the assessee and therefore the appeal was decided ex-parte.

HELD

The Tribunal noted that the assessee had made cash payments for credit card purchases i.e. ₹3,37,650/- with RBL Bank Ltd., ₹1,66,492/- with SBI Cards and Payment Services Pvt. Ltd. and ₹1,12,000/- with City Bank. It observed that both AO and CIT(A) issued several notices but assessee chose not to respond to the notices nor file any written submission. Having observed that the provisions of section 69A are clear, the Tribunal held that in the present case, assessee has purchased the credit cards by making cash payments. It is, therefore, clear that assessee was owner of money (cash) which was used to make credit card purchases. However, he has not explained the nature and source of acquisition of such money, being cash, of ₹6,16,142/-. The AO has added the same u/s 69A of the Act due to non-compliance by assessee to the statutory notices as well as the show cause  notice. The CIT(A) has rightly confirmed the addition because assessee did not attend before him or filed any written submission in support of the grounds raised before him.

The Tribunal upheld the order of CIT(A) holding that the provisions of section 69A are clearly attracted to the facts of the case.

Society News

1. Alternative Investment Fund (AIF) Conclave 2025 was held on 17th and 18th January, 2025 at Hotel Ginger Mumbai Airport.

This event was organized by the Finance, Corporate, and Allied Laws Committee jointly with the National Institute for Securities Market (NISM) on Friday and Saturday, 17th and 18th January, 2025, at the Hotel Ginger Mumbai Airport. Kotak Alternate Assets Manager Limited supported the event as Knowledge Partners.

The details of the program were as follows:

Keynote Address on India’s Regulatory Framework and the Role of AIFs in Capital Markets-Shri Manoj Kumar, Executive Director, SEBI, delivered the keynote address, highlighting the critical role of AIFs in driving innovation and economic growth. He discussed recent regulatory developments, SEBI’s focus on transparency and investor protection, and the need for adopting best practices in the evolving AIF landscape.

Day 1: Foundation & Regulatory Landscape

Session 1: Introduction to AIFs- CA DhavalVakharia S V N D & Associates, Chartered Accountants: provided an overview of AIFs, explaining their structure, types, and regulatory framework. He highlighted the key differences between AIFs and traditional investment vehicles, emphasizing their appeal to high-net-worth individuals and institutions.

Session 2: Legal and Regulatory Framework of AIFs- Adv. Leelavathi Naidu IC Universal Legal: outlined the legal and regulatory framework governing AIFs, focusing on SEBI’s regulations. She addressed challenges in compliance and the importance of investor protection within this sector.

Session 3: Structuring an AIF-CA Subramaniam Krishnan Ernst & Young LLP: discussed the key considerations in structuring AIFs, including entity types, tax optimization, and governance. He emphasized how proper structuring ensures compliance and attracts investors.

Session 4: Investment Strategies for AIFs – Equity, Debt, and Hybrid Models – CA ShitalGharge Senior Vice President, Kotal Alternate Asset Manager Limited: CA ShitalGharge explored various investment strategies for AIFs, including equity, debt, and hybrid models. She discussed how each strategy aligns with investor objectives and market conditions, offering diverse risk-return profiles.

Session 5: Role of Trustees in AIFs – Ensuring Governance and Compliance- CA Naushad Panjwani Chairman, Mandarus Partners and Board Member – ITI Trusteeship: discussed the vital role of trustees in ensuring governance and regulatory compliance within AIFs. He emphasized the importance of trustee oversight to protect investor interests and ensure transparency.

Panel Discussion 1: Key Challenges for Aspiring AIF Promoters Panelist 1: Mr. Abhishek PrasadManaging Partner, Cornerstone Venture Partners, Panelist 2: Mr Gopal Modi Limited Partner in various funds, Panelist 3: Ms Aparna Thyagarajan Chief General Manager, SEBI Panelist 4 MrSachinTagra Managing Partner, JSW Ventures & Moderator Prof. K S Ranjani Asst. Professor, Indian Institute of Management. Mumbai: This panel addressed challenges faced by AIF promoters, including fundraising, regulatory hurdles, and market competition. Panellists shared practical strategies to overcome these obstacles and succeed in the AIF sector.

Session 6: Technology and Innovation in AIFs- Mr. Neeraj Sharma, Executive Vice President – Technology, 360 One Asset Management Limited, discussed the role of technology in AIF operations, focusing on AI, blockchain, and digital platforms. He highlighted how technology improves efficiency, transparency, and investor engagement in AIFs.

Day 2: Advanced Techniques & operational Aspects

Session 7: GIFT City Showcase: India’s Emerging Global Financial Hub for AIFs – Mr. Sandip Shah Head – IFSC Department, GIFT City: presented GIFT City as a global financial hub, outlining its advantages for AIFs, including tax incentives, infrastructure, and favourable regulations. He discussed how GIFT City can help India attract international AIF investments.

Session 8: Comparative Global Destinations for AIFs: Opportunities and Strategies- Adv. Siddharth Shah Khaitan& Co: Adv. Siddharth Shah compared global AIF destinations, discussing regulatory advantages and challenges in jurisdictions like Singapore, Luxembourg, and the Cayman Islands. He offered strategies for selecting the best jurisdiction for AIFs.

Session 9: Fundraising, Investor Relations, Risk Management, and Compliance in AIF – CA Shreyas Trivedi Partner & CFO, Cornerstone Venture Partners: focused on fundraising, managing investor relations, and ensuring compliance in AIFs. He shared strategies to build investor trust, address risks, and navigate regulatory complexities effectively.

Session 10: Valuation, Reporting, and Transparency – Mr. Ravishu Shah, Managing Director at RBSA Advisors, emphasized the importance of accurate valuation, transparent reporting, and maintaining high standards of financial integrity in AIFs. He discussed methodologies and best practices for ensuring investor confidence.

Panel Discussion 2: Success Journeys of AIF Funded Companies – Panelist 1: MrUmair Mohammed, Chief Executive Officer, Nitro Commerce, Panelist 2: Mr Sandeep Ghule Co-Founder and Chief Product Officer, Credilio Financial Technologies Private Limited & Panelist 3: Mr. Manish Chhabra Chairman of Hygienic Research Institute Private Limited, Moderator: Mr. PranayVakil Chairman of Praron Consultancy (India) Pvt. Ltd.:Panellists shared the success stories of companies funded by AIFs, highlighting the role of AIF capital in their growth. They discussed key factors contributing to success, such as market positioning, innovation, and strategic partnerships.

The 2-day AIF Conclave brought together industry leaders, professionals, service providers, regulators and experts to discuss the latest trends and challenges in the Alternative Investment Funds sector. With insightful sessions, enriching discussions, and valuable networking opportunities, participants explored innovative strategies and solutions to navigate the evolving landscape. The conclave concluded on a high note, reinforcing the importance of collaboration and knowledge-sharing in shaping the future of AIFs. Participants attended the program. Out of the total 146 participants, 88 were BCAS members, and the remaining 58 were non-members. Further, 47 of the participants who attended this seminar were from outside of Mumbai.

On the sidelines of the AIF conclave, a Closed-Door Roundtable Discussion was held on the Challenges and Gaps in the AIF Ecosystem. The discussion was attended by Shri Rajesh Gujjar, Chief General Manager at SEBI, officials from BCAS and NISM, top leadership from 15 AIFs, and legal experts. The session was moderated by Adv. Siddharth Shah. The insights and suggestions provided by the panellists were documented and will be presented to the regulators in the form of a White Paper.

2. Lecture Meeting on Navigating the Insolvency & Restructuring Landscape

The Lecture meeting on “Navigating the Insolvency & Restructuring Landscape” was held virtually on Wednesday 15th January, 2025. More than 150 participants attended the webinar.

The Keynote address was delivered by Mr. M.S. Sahoo, Former Chairperson – IBBI.

The key takeaways of the session are:

  •  The Insolvency and Bankruptcy Code (IBC) aims to resolve stress by reviving viable companies and facilitating the exit of unviable ones. The IBC uses both resolution plans and liquidation as means to achieve stress resolution.
  •  The IBC overrides pre-insolvency rights and prioritizes stakeholder claims via a hierarchical order. It is designed to prevent a value-reducing run on company assets.
  •  The code rebalances the rights of stakeholders, allowing creditors to decide the fate of debt-laden companies, as they are considered to possess the necessary commercial wisdom.
  •  IBC is not a recovery mechanism. The code’s performance should be assessed based on its effectiveness in resolving stress, not just the recovery rate. It is realizing 65% of the value of the assets, which is the organizational capital.
  •  The IBC promotes entrepreneurship by providing a framework for stress resolution, but it currently only applies to corporate entities, leaving proprietorships, partnerships, and individuals without access.

Key takeaways from – Role of Chartered Accountants under IBC by CA Dhinal Shah

  •  Chartered Accountants (CAs) can play a critical role as resolution professionals (RPs), acting as a link between the corporate debtor, creditors, and potential buyers. This role requires them to act as a de facto CEO.
  •  The role of an RP is demanding and requires a broad range of skills, including soft skills, business acumen, and a solution-oriented approach. RPs need to maintain the company as a going concern.
  •  CAs can contribute in various supportive roles, such as verification of claims, preparing and updating accounts, and ensuring regulatory compliance.
  •  CAs can also play a crucial role in investment banking activities, assisting with the preparation of information memorandums and identifying potential buyers.
  •  It is critical to maintain integrity, ethics, and transparency while performing any role under the IBC and avoid any conflict of interest.

The field of insolvency and restructuring continues to evolve with significant developments, challenges, and opportunities for professionals. The webinar helped the participants to gain insights from the experts and enhance their understanding of this critical domain.

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/code:

YouTube Link: https://www.youtube.com/watch?v=RJ2fWjg6UBI

QR Code:

3. Succession & Estate Planning – Advanced Tax and Legal Aspects held on Saturday, 4th January, 2025 @ IMC, Churchgate.

This event was organized by the Finance, Corporate, and Allied Laws Committee on Saturday, 04th January, 2025 at the IMC Hall, Churchgate.

The details of the program were as follows:

Key Strategies for Wealth Transfer – CA Ketan Dalal: Informative session on wealth transfer that guided the participants through the subtle intricacies of gifting, bequests, and the delicate dance of tax efficiency.

Legal Framework of Wills & Probate:Drafting and Contesting Wills – Adv. Bijal Ajinkya: The enlightening lecture demystified the art of wills and probate. It helped equip the participants with the tools to draft wills that stand the test of time and mitigate disputes before they arise.

Trusts in Estate Planning: Structuring, Taxation and Legal Framework – CA Suresh Surana: Descriptive discussion which unravelled the magic of trusts—structures that combine the elegance of legal precision with the power of asset protection. This session redefined the way you approach succession planning.

Cross-Border Estate Planning: Navigating International Tax and Legal Complexities – Adv. Nishith Desai: A contemporary talk by this global thought leader, his expertise helped bridge the chasm between jurisdictions; this session highlighted the myriad of different laws affecting different countries and their complex laws.

Panel Discussion: Key Challenges and Future Trends – Panellist: CA DrAnup Shah & CA ParthivKamdar and Moderator: CA SnehBhuta: An interactive exchange by the power-packed panel, artfully moderated with precise questions that delved into the future of succession planning, giving us a lens into the emerging challenges and trends that will shape the profession in the years to come.

The Seminar brought forward a holistic perspective on Succession and estate planning laws, it included a series of interactive sessions which simplified this complex topic.
The program had 190 physical attendees. Out of the total 190 participants, 121 were BCAS members, and the remaining 69 were non-members. Further, 48 of the participants who attended this seminar were from out of Mumbai.

4. India’s First Edition of CA-Thon 2024 – Run For A Cause on 22nd December 2024 in South Mumbai – by Seminar, Membership & Public Relations (SMPR) Committee.

India’s First Edition of CA-Thon 2024 – Run for Cause was organized on Sunday, 22nd December 2024, in South Mumbai (the area around Azad Maidan) under the aegis of the Seminar, Membership &Public Relations (SMPR) Committee.

The event attracted 1,600+ participants – Chartered Accountants and non-Chartered Accountants alike – between the age group of 7 to 70 years – drawn from all walks of life, from different corners of the country.

The event helped increase the visibility of Brand BCAS at a pan-India level, deepen relationships within the community at large, promote health and fitness among participants drawn from all walks of life and contribute to a righteous cause(part of the proceeds went donating sewing machines to women from marginalized communities, to help supplement their livelihood and become financially independent). BCAS Foundation also joined hands in supporting these women through this donation.

The CA-Thon proved to be a fitting finale to an eventful year – one which had started with the grand three-day mega event in January 2024.

5. Workshop on Mastering the Art of Negotiation held on Saturday, 21st December, 2024 @ BCAS.

The Speaker for the Workshop Mr. Jagdeep Kapoor, is a leading Brand Strategic Marketing Consultant with an impressive list of clients- national and foreign. He defines negotiation as the means by which people deal with their differences. In the Workshop, he discussed various ways that would help professionals like Chartered Accountants to be good negotiators.

The starting point to negotiate effectively is overcoming the fear of losing clients, for which one should choose expertise, be sure of oneself, and be decisive, disciplined and proactive.

Further, it is important to assess the core style of negotiation that one has, like – is one naturally inclined to fight or take flight or filled with fright in negotiation scenarios. Whatever the style, one has to keep in mind that the basic objective of negotiation is to continue the business and professional relationship seamlessly.

There are barriers to negotiation which should be broken like lack of trust, poor communication, over-confidence, irrational expectations and ego-driven escalations of the offer.

Mr. Kapoor shared a 9E Strategy Module, which covers nine qualities to be possessed for negotiating effectively which are- Exclusive, Excellent, Effective, Engaging, Efficient, Economical, Expertise, Extraordinary and Evolving. Each of these was explained in detail with examples from his own experiences.

Lastly, the Speaker also shared ways of handling objections from the clients by normalizing them and giving appropriate responses.

The program had 42 physical attendees.

6. ITF Study Circle Meeting held on Thursday, 12th December, 2024 @ Zoom.

The International Tax and Finance Study Circle organized a meeting (online mode) on 12th December, 2024 to discuss the issues faced by Fiscally Transparent Entities in claiming the benefit of tax treaties.

The Group Leader commenced the discussion with the meaning and type of Fiscally Transparent Entities in various jurisdictions and the core issue involved in claiming tax treaty benefits.

The Group further discussed the recent ruling of the Delhi Tribunal in the case of General Motors and other significant rulings with respect to the availability of the tax treaty benefits to Fiscally Transparent entities and India’s position on the above issue was also discussed.

The discussion ended with members expressing their views on various controversies arising out of the core issue of the availability of tax treaty benefits to Fiscally Transparent Entities.

Reshaping Of the Prohibition of Insider Trading (PIT) Regulations, 2015

REGULATOR ADDRESSING CHANGING REALITY

PIT as a concept finds its origination way back in 1992 around the same time when SEBI Act, 1992 was enacted. The objective of the “The Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 is to prevent Insider Trading by prohibiting trading, communicating, counselling, or procuring ‘unpublished price sensitive information’ relating to a company to profit at the expense of the general investors who do not have access to such information”

SEBI (PIT) regulations have undergone various amendments from time to time based on changing market conditions and experience gathered through regulatory enforcement actions. The focus has always been on making the regulation more predictable, precise and clear by suggesting a combination of principle-based regulation and rules that are backed by principles.

Some of the key changes which have been implemented in the last one year include;

i. re-visiting the key elements of trading plan,

ii. amending the definition of connected person and relatives,

iii. bringing Mutual Funds Units under the ambit of PIT Regulations.

BROADENING THE REACH

In order to understand some of the key changes which include rationalizing the scope of expression of connected person and introducing the definition of ‘relative’, it is important to understand how these terms were defined prior to the amendment:
1. An ‘insider’, as defined in regulation 2(1)(g) of PIT Regulations, means any person who is i) a connected person; or ii) in possession of or having access to Unpublished Price Sensitive Information (UPSI).

2. A ‘connected person’ in terms of regulation 2(1)(d)(i) of the PIT Regulations is any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

3. ‘Unpublished price sensitive information’ as provided under Regulation 2(1)(n) of the PIT Regulations means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel.”

4. The following categories shall be ‘deemed to be connected person’ unless the contrary is established: –

(a)an immediate relative of connected persons specified above; or

(b) a holding company or associate company or subsidiary company; or

(c)an intermediary as specified in section 12 of the Act or an employee or director thereof; or

(d)an investment company, trustee company, asset management company or an employee or director thereof; or

(e)an official of a stock exchange or of clearing house or corporation; or

(f)a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or

(g) a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or

(h) an official or an employee of a self-regulatory organization recognised or authorized by the Board; or

(i) a banker of the company

Such categories of persons that are “deemed to be connected” persons are the ones who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are in know of the company operations. However, it is observed by the regulator that certain other persons who are not deemed to be connected person as per the extant regulation may also be in a position to have access to UPSI by virtue of their proximity and close relationship with the “connected person” and hence can indulge in Insider Trading and present enforcement challenges.

To rationalise these challenges, the following additions are made to the categories of “deemed to be connected person”: –

(i) a concern, firm, trust, Hindu undivided family, company, or association of persons wherein a director of a company or his relative or banker of the company, has more than ten percent of the holding or interest

(ii) a firm or its partner or its employee in which a ‘connected person’ is also a partner; and

(iii) a person sharing household or residence with a ‘connected person’.

Though this amendment appears as simple, it poses a challenge on implementation and execution. For example, in case of a person, in a professional engagement with the company that allows him the access of UPSI, his firm, other partners, all employees of the firm are considered deemed to be connected persons. As all employees are covered there seems to be no distinction between Key Managerial Personnel and support staff. In a scenario, where a person has only 1 % share in the firm, it shall lead to all other partners and employees of that firm to be classified as deemed to be connected person.

The question further arises on the point (iii) above that, how one defines sharing household or residence with connected person, whether the stay is permanent or temporary, the nature of relationship, nature of sharing arrangement, etc. SEBI’s view in this is that the primary objective of this inclusion of household or residence sharing individual is to cover those who, by virtue of their close relation or co-habitation with the connected person, could come in possession of price-sensitive information and indulge in insider trading. Regarding concerns about the meaning of residence, duration of residence or the inclusion of individuals sharing a residence on a rental basis, it is important to emphasize that investigations are event-driven based on attendant facts and circumstances. The intent is to cover relevant individuals during the process of investigation based on their accessibility to UPSI, rather than limiting it by the time frames or residential arrangements.

Under the current framework, connected persons are presumed to possess UPSI unless they can prove otherwise. This creates a rebuttable presumption, placing the onus on the accused to demonstrate his innocence. This may be logical for an individual reasonably assumed to have access to UPSI, expanding the number of people falling under the definition of connected person significantly increases the number of people unjustly burdened by this presumption.

DEFINITION OF RELATIVE

The change in the definition from “Immediate Relative” to “Relative” further adds to the number of people falling under the definition of connected person.

The definition prior to amendment of “Immediate Relative” of a person means spouse / parent / sibling / child of such person or of the spouse, who is dependent financially on such person, or consults such person in taking decision relating to trading in securities. Regulator has been of the view that the communication of UPSI to a related person does not necessarily depend on whether the relative is financially dependent or consults in trading decisions.

Price-sensitive information can also be transferred to such relatives for reasons such as natural love and affection without being them financially dependent and they can potentially indulge in Insider Trading.

Therefore, in order to bring such persons within the regulatory ambit, “Relative” shall mean the following:

(i) spouse of the person;

(ii) parent of the person and parent of its spouse;

(iii) sibling of the person and sibling of its spouse;

(iv) child of the person and child of its spouse;

(v) spouse of the person listed at (iii); and

(vi) spouse of the person listed at (iv)

It is intended that the relatives of a connected person also become connected person for the purpose of these regulations with a rebuttable presumption that the connected person had UPSI. However, this amendment does not require any additional disclosures and shall be limited for the purpose of establishing insider trading during investigation.

As per Regulation 4 (1) of SEBI (PIT) Regulations, 2015, no insider shall trade in securities that are  listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

There have been judicial contours in the past wherein Securities Appellate Tribunal (SAT) had fully or partially set aside SEBI orders like in the matter of NDTV Ltd (2023 SCC Online SAT 855) on the grounds that SEBI had not deep dived into the issue of whether alleged trades were undertaken to take advantage of any UPSI that may have been in possession of the parties.

In one of the earlier judgements in the matter of SEBI v/s Abhijit Rajan (SEBI v/s Abhijit Rajan 2022 SCC Online SC 1241), which was also upheld by the Supreme Court, SAT held that in order to penalize an entity for insider trading, it is imperative to establish that entity’s trades were motivated by UPSI.

The onus of showing that a certain person was in possession of or had access to UPSI at the time of trading would therefore, be on the person levelling the charge after which the person who has traded when in possession of or having access to UPSI may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.

Therefore, it is important that various other additional parameters such as financial dependency, factors of commonalities between both relatives not being in the immediate relationship, Person Acting in Concert, alleged insider trading pattern vis-à-vis the UPSI, motives of making unlawful gains owing to the relationship status, etc, may also be considered for levelling the charge.

MOVE TO RE-DEFINE UPSI

In addition to the above, SEBI has released a consultation paper to include certain events in the definition of UPSI with the objective to bring greater clarity and uniformity of compliances by aligning the definition of UPSI with events from Para A and Para B of part A of Schedule III as enumerated under Regulations 30 of SEBI (LODR) Regulations, 2015.

Prior to April 2019, “material event in accordance with listing agreement” was part of UPSI.SEBI had conducted a study on a subject matter on material events disclosed to the stock exchanges and events classified as UPSI by listed entities wherein companies were limiting the classification of UPSI to items explicitly mentioned in Regulation 2(1)(n) of the PIT Regulations, often failing to align with the broader intent and spirit of the law.

This led to the need for reviewing the definition of UPSI which has been proposed vide consultation paper dated 09 November 2024 with the objective of bringing regulatory clarity, certainty and uniformity in compliance for the listed entities.

The recommendations aim to align the illustrative list of UPSI events with the material events enumerated in Para A and Para B of Part A of Schedule III of the LODR Regulations. This alignment would ensure that the revised definition does not adversely impact the ease of doing business or lead to undue compliance challenges for listed entities.

The proposal after considering the feedback from the market participants was discussed in the SEBI Board Meeting to include the following within the definition of UPSI(which are pending to be notified);

a. Change in rating/s other than ESG rating/s,

b. Fund Raising proposed to be undertaken,

c. Agreements by whatever name called which may impact the management or control of the company,

d. Fraud or defaults by the company, its promoter, director, key managerial personnel, senior management, or subsidiary or arrest of key managerial personnel, senior management, promoter or director of the company, whether occurred within India or abroad. Definition of fraud or default for the purpose of this clause was included,

e. Change in key managerial personnel, other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor,

f. Resolution plan/ Restructuring/one-time settlement in relation to loans/borrowings from banks/financial institutions,

g. Admission of winding-up petition filed by any party / creditors, admission of application by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process (CIRP) against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016,

h. Initiation of forensic audit, by whatever name called, by the company or any other entity for detecting misstatement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report,

i. Action(s) initiated or orders passed by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, senior management, promoter or subsidiary, in relation to the company,

j. award or termination of order/contracts not in the normal course of business,

k. outcome of any litigation(s) or dispute(s) which may have an impact on the company,

l. Giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business,

m. granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals,

n. For identification of events, enumerated in this clause as UPSI, the guidelines for materiality referred at para B of Part A of Schedule III of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time, shall be applicable.

As the intent of law was not perceived by the market participants which were drafted on the back of a combination of “principles” and “rules backed by principles” are now shifting base to a rule-based approach. This shift seems to be the result of aggressive  ideas and white-collar crimes intended to circumvent the laws and take an undue advantage of the financial ecosystem.

Regulators are trying their best to curb such malpractices and give directives and principles on dealing in Securities Market, but cannot drive the intent of the person. In order to achieve minimum regulation and maximum governance, the onus lies on the market participants to abide by the laws in the right spirit.

Regulatory Referencer

DIRECT TAX : SPOTLIGHT

  1.  Extension of due date for determining the amount payable under under column (3) of the Table in  section 90 of the Direct Tax Vivad Se Vishwas Scheme, 2024 from 31st December, 2024, to 31st January,  2025 – Circular No. 20/2024 dated 30th December, 2024.
  2.  Extension of due date for furnishing belated/revised return of income for the Assessment Year 2024-25  by resident individuals from 31st December, 2024 to 15th January, 2025 – Circular No. 21/2024 dated 31st December, 2024.
  3.  No deduction of tax shall be made under the provisions of section 194Q of the said Act by a buyer, in respect of purchase of goods from a Unit of International Financial Services Centre, being a seller, subject to fulfillment of certain conditions – Notification No. 3/ 2025 dated 2nd January, 2025.
  4.  Unit of International Financial Services Centre shall not be considered as buyer for the purposes of section 206C(1H) in respect of purchase of goods from a seller, subject to fulfillment of certain conditions – Notification No. 6/ 2025 dated 6th January, 2025.

II. FEMA READY RECKONER

Master Direction issued for investment in Debt Instruments by Non-residents:

The Reserve Bank of India has issued Master Direction on Non-resident Investment in Debt Instruments in India. While it does not consolidate all existing provisions for debt investment by non-residents, it provides additional guidance on the channels for such investment like eligibility of investors to invest in various types of debt instruments; the limits & conditions; exit provisions, etc.

[FMRD.FMD.No.10/14.01.006/2024-25 dated 7th January, 2025]

RBI mandates banks to report OTC transactions in gold derivatives:

The RBI has mandated banks to report ‘over-the-counter’ transactions in gold derivatives undertaken by them and their customers from 1st February, 2025. The reporting of the transactions undertaken by the bank or their customers should be done before 12:00 noon of the following business day.

[Circular No. FMRD.FMD.NO.08/02.03.185/2024-25 dated 27th December, 2024]

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.1/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-1 for the month of December, 2024 and the quarter of October to December, 2024 is extended to 13th January, 2025, and 15th January, 2025 respectively.

ii) Notification No.2/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-3B for the month of December, 2024 and the quarter of October to December, 2024 is extended to 22nd January, 2025 and 24th January, 2025 respectively.

iii) Notification No.3/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-5 for the month of December, 2024 is extended till 15th January, 2025.

iv) Notification No.4/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-6 for the month of December, 2024 is extended till 15th January, 2025.

v) Notification No.5/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-7 for the month of December, 2024 is extended till 15th January, 2025.

vi) Notification No.6/2025-Central Tax dated 10th January, 2025

By the above notification, the due date for furnishing FORM GSTR-8 for the month of December, 2024 is extended till 15th January, 2025.

NOTIFICATIONS (RATES)

CBIC has issued Notifications Central Tax (Rates)1 to 8 on 16th January, 2025. The effective date of notification and effect thereof may be summarized in brief, as follows:

CTR-1, effective from 16th January, 2025, notifies the rate of tax applicable on Fortified Rice Kernel. (Reduced from 18 per cent to 5 per cent). It also redefines the expression ‘pre-packaged and labelled’, for all commodities intended for retails sale.

CTR-2/2025, effective from 16th January, 2025, provides exemption from tax to “Gene Therapy”.

CRT-3/2025, effective from 16th January, 2025, provides for concessional rate of tax on food inputs of food preparations intended for free distribution to economically weaker section under a Government program.

CRT-4/2025, effective from 16th January, 2025, provides for increase in GST rate applicable on sale of old and used motor vehicles (from 12 per cent to 18 per cent).
(The taxable value is determined based on the margin of the supplier – same as earlier).

CRT-5/2025, is in respect of the rate of tax applicable on hotel accommodation services. (Effective from 1st April, 2025). The applicable rate of tax on such services, will now be decided based on the concept of “specified premises’” for a financial year, instead of earlier system of “declared tariff”.

CRT-6/2025, is in respect of certain services of insurance provided by the Motor Vehicle Accident Fund. (Effective from 1st April, 2025)

CRT-7/2025, effective from 16th January, 2025, provides for certain changes in applicability of provisions of RCM. Accordingly, now (1) “sponsorship services” provided by ‘any person other than a body corporate’ will attract RCM. (earlier the wordings were: ‘provided by any person’). (2) RCM, in respect of renting of Immovable Property (other than residential dwelling), provided by an un-registered person to a registered person, will not be applicable to those registered persons who have opted for ‘composition scheme’.

B. CIRCULARS

(i) Clarification on ITC availed by Electronic Commerce Operators – Circular no.240/34/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided in respect of input tax credit availed by electronic commerce operators, where services specified under Section 9(5) of CGST Act are supplied through their platform.

(ii) Clarification on ITC as per section 16(2)(b) of CGST – Circular no.241/35/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided on availability of input tax credit as per section 16(2)(b) of CGST Act in respect of goods, which have been delivered by the supplier at his place of business under Ex-Works Contract.

(iii) Clarification on place of supply of Online Services supplied to Unregistered recipient – Circular no.242/36/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided in respect of place of supply of Online Services supplied by the suppliers of services to unregistered recipients.

(iv) Clarifications on issues related to GST treatment of voucher – Circular no.243/37/2024-GST dated 31st December, 2024.

By the above circular, clarification is provided on various issues pertaining to treatment of vouchers under GST.

C. ADVISORIES

i) Vide GSTN dated 18th December, 2024, guidance is provided for Entry of RR No./eT-RRs following the Integration of E-Way Bill with Freight Operation Information System of Indian Railways.

ii) Vide GSTIN dated 17th December, 2024, the information about updating to E-Way Bill and E-Invoice Systems is provided.

iii) Vide GSTIN dated 15th December, 2024, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Chhattisgarh, Goa and Mizoram is provided.

iv) Vide GSTIN dated 1st January, 2025, the information related to extension of E-way bills expired on 31st December, 2024, is provided.

v) Vide GSTIN dated 31st December, 2024, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Arunachal Pradesh is provided.

vi) Vide GSTIN dated 14th January, 2025, the information about Waiver scheme under Section 128A is provided.

vii) Vide GSTIN dated 14th January, 2025, the information about Generation date for Draft GSTR-2B for Dec, 2024 is provided.

viii) Vide GSTIN dated 8th January, 2025, the information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Rajasthan is provided.

ix) Vide GSTIN dated 7th January, 2025, the information about enabling of filing of Application for Rectification as per Notification no.22/2024-CT dt.8th October, 2024 is provided.

D. INSTRUCTIONS

The CBIC has issued instruction No.1/2025-GST dated 13th January, 2025 by which, instructions about guidelines for arrest and bail in relation to offences punishable under the CGST Act, 2017, are revised.

E. ADVANCE RULINGS

‘Tolerating an Act’ – Scope

Chamundeswari Electricity Supply Corporation Ltd. (AAR Order No. KAR/AAAR/02/2024 dated 6th November, 2024 (Kar)

The present appeal has been filed by the appellant, M/s. Chamundeswari Electricity Supply Corporation Limited, against the Advance Ruling order No. KAR/ADRG/09/2023 Dated: 27th February, 2023 – 2023-VIL-39-AAR.

The facts are that the appellant is a public sector company of Government of Karnataka, engaged in the distribution of electricity and supply of electric power in the districts of Mysore and others.

The Appellant is supplying electricity for housing, irrigation and also for all kinds of commercial and non-commercial purposes to the cliental comprising of individuals, farmers, organisations, hospitals, government organisations, commercial establishments, industries etc.

To meet the huge energy demand and universal supply obligation, it purchases power from central and state generating stations, private power generators which also include generators from non-conventional sources like wind, solar, mini hydel etc. The retail tariff is determined by the Karnataka Electricity Regulatory Commission, (KERC) as per the Electricity Act, 2003.

As per scheme, such Industries or companies can also buy power from private generators notwithstanding that they have entered into agreement with the appellant under “Open Access Consumers” (“OA Consumers” for short). To comply with the obligations created in agreement with its customer, the appellant enters into back-to-back Power Purchase Agreements (PPA) with private and state-owned energy generators to purchase power as back up for seamless supply of electricity assured to such customers.

The further relevant facts are as under:

The appellant collects an Additional Surcharge, the subject matter of this appeal, from Consumers when Consumers opt to buy electricity from third party private generators by invoking an open access clause.

The appellant has to pay third-party generators. Appellant recovers said amount from its customers under the heading of ‘Additional Surcharge’. The issue was about the liability of GST on the above collection.

In the above factual scenario, the appellant filed application for AR raising various different questions. The question (vii) was as under:

“vii. Whether Additional Surcharge collected from Open Access Consumer as per sub section (4) of Section 42 of the Electricity Act, 2003, clause 8.5.4 of the Tariff Policy 2016. Clause 5.8.3 of the National Electricity Policy and Clause 11(vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under the GST Acts?”

The ld. AAR answered the said question as under:

“vii. Additional Surcharge collected from Open Access Consumer as per subsection (4) of Section 42 of the Electricity Act, 2003, clause 8.5.4 of the Tariff Policy 2016, Clause 5.8.3 of the National Electricity Policy and clause 11(vii) of the KERC (Terms and Conditions for Open Access) Regulations, 2004, is taxable under GST Act.”

The main reason of ld. AAR to hold as above was that it interpreted the charges as for ‘tolerating an act’ and hence, a supply of service under GST Act.

The appellant was aggrieved by the above decision of ld. AAR and hence this appeal to ld. AAAR.

The ld. AAAR went through elaborate submission / grounds of appeal of the appellant. The main argument of appellant was that the appellant is collecting additional surcharge as per the Electricity Act; Tariff Policy; National Electricity Policy of Ministry of Power, Government of India and Karnataka Electricity Regulatory Commission (Terms and conditions for open Access) Regulation, 2004, KERC (Electricity Supply) Code, 2004 of Karnataka Electricity Regulatory Commission, Government of Karnataka from the open access customers, and therefore it forms part of tariff for the supply and distribution of electricity and cannot be taxable as separate service by way of ‘tolerating an act’.

The ld. AAAR also referred to Circular 178/10/2022-GST dated 3rd August, 2022 in which the concept of supply vis-à-vis ‘tolerating an act’ is explained.

The ld. AAAR observed that the collection of Additional Surcharge from OA consumers based on quantum of energy wheeled from the private generators is only to meet the fixed cost of the appellant arising out of this obligation to supply. Such collection mechanism is backed by an Act and policies of Central Government as well State Government. The ld. AAAR also observed that, the Appellant has entered into agreements with their customers, basically for supply of electricity and the money is collected by the Appellant in the form of Additional Surcharge, in situations where OA customer is not purchasing the entire requirement of electricity from them. The ld. AAAR also observed that there is no express or implied promise by the Appellant to agree to do or abstain from doing something in return for the money paid to them, rather they are ready to supply electricity as per the agreement. The ld. AAAR also observed that there is no independent arrangement entered into by the appellant for tolerating an act against which the consideration is collected as Additional Surcharge and, therefore, such amount do not constitute payment (or consideration) for tolerating an act.

Referring to section 15(2)(a), which provides that any taxes, duties, cesses, fees and charges levied separately under any law for the time being in force, other than GST, should be part of valuation of supply, the ld. AAAR held that Additional Surcharge levied under Electricity Act on their customers is part of taxable value and exempt along with electricity charges in terms of entry No. 104 of Notification No. 02/2017 CT(R) dated 28th June, 2017 applicable to goods and /or entry No.25 of the Notification No.12/2017-Central Tax (Rate) dated 28.06.2017 applicable to services and therefore not liable to tax.

The ld. AAAR thus allowed appeal in favour of appellant.

TAXABILITY OF VOUCHERS

Payline Technology Pvt. Ltd. (AAAR Order No. 04/AAAR/23/09/2024 dated 23rd September, 2024 (UP)

This appeal was filed by M/s. Payline Technology Pvt. Ltd. against the advance ruling no. UP ADRG-43/2024 dated 20.02.2024-2024-VIL-118-AAR, passed by the ld. UPAAR.

The facts are that the appellant is in the business of selling and purchasing Gift Cards, Vouchers, and pre-paid Vouchers closed or semi-dosed-ended vouchers (referred to as cards/voucher) against which goods or services can be purchased from specific brands on e-commerce platforms (such as Amazon, Flipkart, etc.). Appellant purchases cards from entities against advance payments at a discounted price. Thereafter, these vouchers are supplied to clients. The further fact is that once these vouchers are purchased by the appellant from the original issuers, the appellant becomes the
absolute owner of these vouchers, and both risk and reward lie with the appellant. It is noted that the appellant is neither the issuing person nor the user of these Vouchers.

The ld. AAR held that supply of Vouchers by the appellant are taxable @ 18% as per residual entry no.453 of the Third Schedule of Notification No.01/2017-Central Tax (Rate) dt.28th June, 2017.

Before the ld. AAAR, the appellant reiterated its ground that vouchers are very much in the nature of “money” and hence excluded from the definition of “Goods” as well as from “Services”, making the supply of these instruments non-taxable. The judgment in case of Premier Sales Promotion Ltd. relied upon.

It was further submitted that the goods/services are not identifiable at the time of issuance of said vouchers and hence, the time of supply of such vouchers shall fall at the time of their redemption which usually happens only after the cards are sold to the end consumers by the appellant. It was accordingly submitted that, there is no GST liability on cards sold by it.

The ld. AAAR referred to nature of vouchers considering the regulations of the Reserve Bank of India (RBI) in terms of the Payment and Settlement Systems Act, 2007 (PSS)and the guidelines issued there under.

The ld. AAAR observed that the pre-paid payment instruments (PPI, in short) that can be issued in India can be classified under three categories. Looking at Guidelines given by RBI, the ld. AAAR observed that these conditions are mainly applicable to the issuers of the PPIs, and not to its traders, like appellant, as the Appellant is not the issuer of the voucher, but is the third party who buys and sells the vouchers.

The ld. AAR held that, the voucher in the hands of the appellant cannot be termed as “money”.

The ld. AAAR also analysed whether the vouchers are ‘goods’ or ‘services’.

For this purpose, reference made to definition of said terms in CGST Act. The ld. AAAR also verified whether it can be actionable claim. After discussion, the ld. AAAR observed that voucher by itself is a movable property and hence constitutes goods. It is further observed that since the voucher is in the possession of the claimant at the time of claim, it cannot be considered as actionable claim.

Further, referring to section 7(1) of CGST Act, the ld. AAAR held that it is taxable in hands of appellant.

The ld. AAAR deferred with the ld. AAR in respect of time of supply. In AR the ld. AAR has held that the sections 12(2) and 12(4) are not applicable to appellant. However, the ld. AAAR held that the section 12(4) of the CGST Act, 2017 is a specific provision for deciding the time of supply of the vouchers and is applicable to the appellant. Accordingly, the ld. AAAR held that time of supply of vouchers will be determined in terms of Section 12(4) of the CGST Act, 2017.

The ld. AAAR also held that in the present case, the appellant is engaged in trading of Vouchers/coupons and getting commission in the form of discount on such services, which are taxable.

Considering the above, the ld. AAAR held that trading in Vouchers/coupons, being a service, is the taxable event where the time of supply is when the Vouchers/coupons are traded or sold. It is also held that the value of service shall be the margin between the buying and selling price of the coupons.

Accordingly, the ld. AAAR modified AR holding that the supply of Gift voucher is a transaction of supply of goods and time of supply to be decided as per section 12(4) of CGST Act. It is further held that GST is applicable on the commission/discount earned in the trading of Vouchers/Coupons by the appellant and the time of supply will be the time when the Vouchers/ Coupons are traded or sold. It is further held that the value of service shall be the margin between the buying and selling price of the Vouchers/ Coupons.

[Note: The CBIC has issued Circular No.243/37/2024-GST, in which clarifications are given about taxability of voucher under GST.]

VALUATION – FREE OF COST SUPPLY

High Energy Batteries (India) Ltd. (Advance Ruling No. 28/ARA/2024 dated 6th December, 2024 (TN)

The applicant is engaged in manufacture of “Silver Oxide Zinc Torpedo Propulsion batteries” falling under Chapter sub heading No.850640 and secondary Silver Oxide Zinc Rechargeable Batteries falling under Chapter sub heading No. 8501780. It supplies the same to various Naval Defence formations (Indian navy) on payment of applicable GST.

The applicant submitted that the silver required for the manufacture of such batteries is supplied free of cost by the recipient, i.e. Naval formations by way of supplying their used batteries (non-serviceable). It was submitted that after extracting the silver from the used batteries supplied by Naval formations, the applicant manufactures the “Silver Zinc Batteries” as per the specification provided by the Naval formation and supplies the same to them. It was explained that while fixing the price for the batteries manufactured, the cost incurred by the applicant for extracting the silver from the old batteries is also included but the cost of the silver contained in the old batteries, supplied by the Naval formations free of cost in the form of old batteries, is not included in the taxable value for the purpose of payment of GST on the ground that the same is supplied free of cost by the Naval formations, who are the purchasers of the applicant.

It was also explained that the above mode of dealing is included in the contract signed between the applicant and their customer.

With above background, applicant raised following question before the ld. AAR.

“(1) Whether the value of the Silver supplied free of cost by the Naval Formations (in the form of old batteries) are to be included in the taxable value adopted by the applicant on the batteries manufactured by the applicant and supplied to the Naval Formations for the purpose of payment of GST or not.”

The applicant relied upon section 15(1) which provides for valuation as transaction value. The reference also made to definition of ‘consideration’ in section 2(31) of CGST Act. It was submitted that the transaction value agreed between the parties is only relevant for valuation purposes under GST and it is a matter of commercial arrangement between the supplier and recipient, as to what is in the scope of each of the parties. It was submitted that once it is clear that the supplier has to only supply final goods, then there is no question of adding the value of the free materials for determining the transaction value.

The ld. AAR observed that as per section 15(1) value of supply will be transaction value if,

a. the supplier and the recipient of the supply are not related parties.

b. the price is the sole consideration for the supply.

The ld. AAR observed that though the applicant and the recipient are not related persons, the consideration is not paid wholly in money. The ld. AAR, on perusal of the agreement, inferred that the contract is for the supply of Silver Oxide – Zinc Torpedo propulsion Battery Type A- 187M3- Complete with Hardware. It is further observed that the main input namely; Silver, is supplied free of cost against Bank Guarantee in the form of old and used batteries by the recipient, in addition to the consideration in money value for the supply of said Silver Oxide – Zinc Torpedo propulsion Battery. Therefore, the provision of Section 15(1) of the CGST Act, 2017 i.e. to adopt the transaction value as the value of supply of goods or services or both is not applicable for determining the value of supply in the applicant’s case, observed the ld. AAR. The ld. AAR observed that the consideration for the supply of Silver Oxide Zinc Torpedo propulsion Battery is paid in terms of money and Old and used Batteries.

The ld. AAR observed that old and used batteries are supplied by the naval formations i.e., by the Central Government Department to the applicant and for the said supply, unless otherwise exempted, the recipient of the said old used goods, that is the applicant, is liable for payment of Central tax and State Tax or as the case may be the Integrated Tax, as envisaged under Section 9(3) of the CGST Act or Section 5(3) of the IGST Act, read with corresponding Notifications issued, viz., Notification No.36/2017- Central Tax (Rate), dated 13/10/2017 and Notification No. 37/2017 Integrated Tax (Rate) dated 13th October, 2017, respectively.

The ld. AAR in this respect also referred to section 15(4) and Rule 27 and held that value of the taxable supply in case of applicant should be determined as per Rule 27(b) of CGST Rules,2017.

BLOCKED ITC U/S.17(5)(A) – NATURE OF EXCEPTION

A2Mac1 India Pvt. Ltd. (Advance Ruling No. 29/ARA/2024 dated 6th December, 2024 (TN)

The applicant is incorporated under the Indian Companies Act and is engaged in providing ‘Collaborative Automobile Benchmarking services’ by data management to the customers as a subscription package through an online platform where the detailed analysis of software concept of structure, process and global benchmarking data is made available.

From the database, the subscribers of the applicant get 360 degrees vehicle insights such as technology insights, cost insights, performance insights, market insights, sustainability insights, software insights, supply chain insights etc. and can use it for its own purpose. The applicant earns from subscription.

For vehicle benchmarking, the Applicant purchases brand new cars in the domestic market, disassembles them and adds research data to the corpus knowledge database for providing various insights to the customers. Motor vehicles bought by the Applicant are wholly and exclusively used for automotive research purpose carried out at the applicant’s factory. Hence, these vehicles are temporarily registered with RTO (Regional Transport Office).

The applicant also furnished a detailed process flow of the activities undertaken by it connected to vehicle dynamic benchmarking process with relevant images.

The cost of the vehicle bought and used for automotive benchmarking process is expensed out in the books by applicant. Further, at the end of specific/vehicle retention period, they are sold and the applicant is of the view that it is an activity of ‘supply’ in the course of its business and discharges applicable GST on such transactions.

The applicant was of view that ITC of tax paid on the purchase of new vehicles/cars is available to him as the applicant is providing taxable service using vehicles/cars for research purposes and the purchase of vehicles / cars are integral part of the business model. It was submitted that the cost of purchase of vehicles / cars are predominant to the business without which the main revenue stream of the Applicant i.e., supply of services via platform subscription would fail.

In above fact, the applicant sought to know whether the input tax credit on the purchase of vehicles/cars is claimable or not, in terms of Section 17(5)(a) of the CGST Act.

The applicant explained its eligibility to ITC on purchase of new motor cars explaining the scheme and intention of ITC with reference to various provisions like section 16(1) and 16(2) on CGST Act. The applicant also demonstrated its eligibility to get out of blocked credit in view of exception in section 17(5)(a)(A) on ground that for the Company’s business, the motor vehicles are indispensable tools for Research Study which in turn offered for subscription to the Customers.

The ld. AAR, for deciding the above issue, referred to section 17(5) which reads as under:

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

2[(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely: –

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;1

(aa) vessels and aircraft except when they are used-

…………”

The ld. AAR also referred to definition of ‘Motor Vehicle’ as provided in Section 2(76) of CGST which further refers to Motor Vehicles Act,1988 for merging of Motor Vehicles for purpose of GST Act.

The ld. AAR observed that Section 17(5) (a) blocks credit for ‘motor vehicle for transportation of persons’ and exceptions are available only to the three specified activities.

Referring to Circular No.231/25/2024-GST dt.10th September, 2024, the ld. AAR observed that the law is very clear and specific that except for the exceptions provided in sub-clauses (A), (B) and (C), the input tax credit on the purchase of vehicles, irrespective of any kind of outward supplies, shall not be eligible.

The ld. AAR observed that the applicant is seeking eligibility to ITC on the ground that the motor vehicles, used by them for making exhaustive analysis, are sold and the applicant is of the view that it is activity of ‘supply’ in the course or furtherance of business and discharges applicable GST on such transaction. However, the ld. AAR did not approve eligibility to ITC on above basis as it is not within Exception clauses (A), (B) and (C).

The ld. AAR, on perusal of the sample invoices relating to supply of motor vehicles after retention period, saw that the applicant is not classifying the product after use as ‘used or old motor vehicles’ but are supplying it as scrap of ‘Automobile part’ paying GST @ 18 per cent (CGST-9 per cent and SGST-9 per cent). The ld. AAR observed that the applicant is supplying the goods as ‘Scrap’ and therefore, the activity will not also fall within the scope of ‘further supply of such motor vehicles’. Accordingly, the ld. AAR held that the applicant cannot claim the exception and was not eligible to avail ITC on the motor vehicles purchased by them.

CLASSIFICATION – CHANGE OF TARIFF – PARTS OF SHIP

Imtiyaz Kaiym Barvatiya (Advance Ruling No. GUJ/GAAR/R/2024/19 (in application no.Advance Ruling/SGST&CGST/2023/AR/17) dated 3rd September, 2024 (Guj)

The facts are that the applicant imports various goods/spares, which are supplied on ships and it is the applicant’s contention that this equipment forms an essential part of the ship and makes the ship ‘sea worthy’. The goods are imported by the applicant on payment of IGST. The appellant has provided detailed list of equipments by way of Annexure. The name of equipments, description and utility as part of ship is explained in the said chart.

The applicant stated that they charge GST on parts/equipment supplied by them on the ship by classifying it under the same tariff head under which the goods are imported and discharges GST liability on supply based on rates applicable to such tariff entry. Instance is given that a “Standard Solas Model” is classified under tariff head “8479” captioned as “Ship Spares” and is taxed at the rate of 18 per cent.

The applicant has further stated that the customer insists for GST at 5 per cent on the reasoning that these goods form part of ship and are covered at Sr. No. 252 of notification No. 1/2017-Central Tax (which covers parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907).

With above background the applicant has raised the following question for advance ruling viz;

“To decide as to whether the supply of goods [as listed in Annexure I-A of this ARA application is classifiable as “parts of goods of headings 8901, 8902, 8904, 8905, 8906, 8907” under entry 252 of Schedule I of GST Notification No. 01/2017-Central Tax (Rate) dated 28.6.2017 as amended and is liable to GST @ 5% (CGST-2.5% and SGST-2.5%) or IGST @ 5% or not.”

The applicant has relied upon the AAR ruling in the case of M/s. A. S. Moloobhoy Private Ltd. dated 18.7.2018 passed by the Maharashtra Authority for Advance Ruling-2018-VIL-232-AAR.

The ld. AAR reproduced entry 252 as under:

“Notification No. 1/2017-Central Tax dated 28.6.2017 Schedule I – 2.5%

The ld. AAR referred to the classification mechanism under GST including notes for classification under Customs Tariff.

The ld. AAR referred to one of the items for determination viz. “Standard Solas Model”, wherein the goods are classified under chapter heading 8479 as ‘ship spares’ and liability is discharged @ 18 per cent.

The ld. AAR noted that the applicant imports the goods and during the importation, the goods are classified by Customs under the Customs Tariff Act, 1975, and the applicant discharges the relevant customs duties including the IGST, which is applicable. It is also noted that the applicant willingly discharges the duties involved, which leads to the inference that he has agreed to the classification of the imported goods as done by the proper officer of Customs.

The ld. AAR observed that;

“18. On the aforementioned background, we find that the applicant is before us with an averment, that though the goods have been classified by Customs under various tariff items [as is mentioned in column 4 of the table above in respect of the bills of entry, the copies of which has been submitted vide email dated 29.7.2024] he now feels that consequent to the importation while undertaking further supply of the said goods, it should be classified under the heading 8901, 8902, 8904, 8905, 8906 & 8907 and thereby be eligible for benefit of Sr. No. 252 of notification No. 1/2017- CT (R) dated 28.6.2017. Availing the benefit of the said exemption notification, will make the supply leviable to GST @ 5%.”

In view of above the ld. AAR was to decide whether a change in classification is permissible.

The ld. AAR has opined in negative and held that change of classification is not permissible. The reasoning is based on the following factors.

“[a] the applicant without any protest agreed with the classification done by Customs and discharged the duties; and

[b] classification under GST is based on Customs Tariff Act, 1975, in terms of explanation (iii) and (iv) of notification No. 1/2017-CTR dated 28th June, 2017;

[c] that there is no change in the character of the goods supplied by the applicant to the one imported.”

The ld. AAR did not agree with the reliance of the applicant on the advance ruling dated 18th July, 2018 in the case of A S Moloobhoy Private Limited on the ground that it is applicable only to A S Moloobhoy Private Limited in terms of section 103 of the CGST Act, 2017.

In view of the above, the ld. AAR gave a ruling that the supply of goods given in application is classifiable under the same chapter, heading, sub-heading and tariff item under which the goods were imported and the rate of the supply of said goods would be in terms on the rates applicable to such respective tariff entry.

Goods And Services Tax

HIGH COURT

88. Gujarat Chamber of Commerce and Industry and Others vs. Union Of India & Others

2025-TIOL-48-HC-Ahm-GST

Dated: 3rd January, 2025

Assignment by transfer of leasehold rights for plot of land allotted by GIDC to the Lessee in favour of third party against consideration is not supply of service because it is a transfer of immovable property. Also, stay of operation of the judgement not provided to Revenue.

FACTS

i) GIDC, a Nodal agency of Government of Gujarat acquired land in the past and developed it for development of industrial estates in Gujarat, similar to other corporations in other States of India. Consequently, GIDC entered into execution of lease deed for 99 years in favour of various lessees upon terms and conditions. Some of these lessees had transferred their leasehold rights in GIDC land along with constructed building for industry/business to third parties by entering into an assignment deed against consideration for the balance period of lease. while also seeking approval of GIDC for such transfer against payment of fees to GIDC. GST authorities issued summons / show cause notices after 1st July, 2017 to various assignees to whom the leasehold rights were assigned / transferred by original / subsequent lessees proposing to levy GST @18 per cent on the consideration received/paid for the transactions of assignment/transfer. To examine the issue as to whether such transactions amount to “supply of service” as defined under section 7 of the CGST Act, 2017 to attract the levy of GST, various terms defined under the said CGST Act, 2017, viz. business, goods, registered person, services, supplier, taxable person and importantly, the definition of ‘supply’ were examined and analysed in detail besides examining the terms ‘lease’ and “Immovable Property” under Transfer of Property Act.

ii) The ownership of the plot of land allotted by GIDC remains with it and only the right of possession and occupation are transferred by way of leasehold rights to such third party/assignee.

iii) Various petitioners inter alia contended that transfer/assignment of leasehold rights is nothing but a sale and transfer of benefits arising out of immovable property, viz. the plot of land which cannot be considered as “supply of services” because sale, transfer and exchange of benefits arising out of immovable property is nothing else but sale, transfer and exchange of the immovable property itself. Hence, tax cannot be levied under GST Act as the same does not amount to ‘supply’ for the purpose of section 7 of the CGST Act. The scope of the said section 7 of the GST Act requires to be considered by analysing various provisions of different Acts as to what is an “immovable property” because the term, immovable property is not defined under the GST law. Further, it also requires to be examined whether leasehold rights can be said to be benefits arising out of such immovable property and hence qualify to be covered by item no. 5 of Schedule III of CGST Act which shall be treated neither as supply of goods nor a supply of service.

iv) Petitioners submitted and Hon. High Court analysed and examined a number of provisions of relevant Acts including Transfer of Property Act, The Indian Stamp Act, 1899 etc. to analyse the term “immovable property” and the term ‘lease’ and in such context, a host of precedents were also referred to and/or relied upon.

v) On behalf of Revenue, Ld. Advocate General drew distinctions between “immovable property” and “interest in immovable property”, i.e. difference between tangible rights and intangible rights in the immovable property to contend that immovable property is as such not taxable under the GST law whereas interest in immovable property like leasehold rights transferred by way of sale is liable to the levy of GST falling within the scope of “supply of services” and relied upon various relevant precedents in support of such contention.

HELD

a) When GIDC allotted a plot of land along with the right to occupy, right to construct, right to possess on a long-term basis, it is a supply of service as the right of ownership of the plot in question remains with GIDC which reverts on expiry of the lease period. As against this, the transaction of sale and transaction of leasehold rights by the lessee-assignor in favour of a third party-assignee, divest the assignor of all the absolute rights in the property. Hence, the interest in the immovable property is not different than the immovable property itself.

b) Therefore, when lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be a transfer of “immovable property”, as leasehold rights is nothing but benefits arising out of the immovable property which according to other statutes would be immovable property, as the GST Act has not defined the term ‘immovable property’.

c) In such circumstances, leasehold rights are nothing but interest in immovable property in terms of section 105 r.w.s108(j) of the Transfer of Property Act and constitutes absolute transfer of rights in such property (because the legal relationship between GIDC and the assignor-lessee comes to an end and the third party-assignee becomes lessee liable for obligation under the Assignment Deed vis-à-vis the GIDC). Such transaction therefore is not one of supply of service but that of immovable property. For this, Hon. High Court relied on Hon’ble Apex Court in case of Gopal Saran vs. Satya Narayana (1989) 3 SCR 56 wherein definition of assignment as per Black’s Law Dictionary, Special Deluxe Edition page 106 is referred to as assignment means “is a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein”. It was further held that assignment would include “transfer by a party of all its rights in lease, mortgage, agreement of sale or a partnership.” In view of this definition of assignment, assignment of leasehold rights is also subject to levy of stamp duty being transfer of “immovable property.”

d) Hon. High Court also noted that in case of Munjal Bhatt vs. UOI 2022-TIOL-663-HC-AHM-GST this Court also observed that the intention of GST regime was not to change the basis of taxation of the Value Added and service tax regime and that supply of land in every form was excluded from the purview of GST Act.

e) The Court further observed that in various cases, GIDC allotted the plot of land to the lessee who constructed the building and developed the land to run the business / industry. Hence what is assigned for a consideration is not only land allotted by GIDC but the entire land with the building constructed on such land along with leasehold rights and interest in land which is a capital asset in the form of “immovable property”. Thus lessee earned benefits there from constructing and operating factory which constitutes “profit in prendre” which is also an immovable property. Therefore not subject to tax under GST Act as clause 5 of Schedule III of the GST Act clearly excludes sale of land and building which fortifies the intention of GST Council not to impose tax on transfer of immovable property continuing the underlying object of erstwhile service tax regime. To analyse” profit in prendre”, relevant discussions in Anand Behera vs. State of Orissa Air 1956 SC 17 and State of Orissa vs. Titaghur Paper Mists Co. Ltd. (1985) Supp SCC 285 were referred to and relied upon. Hon. High Court disagreed with the contention of the Revenue that exclusion from GST for sale of land and building as per Schedule III, would not include transfer of leasehold rights as the interest in immovable property is in intangible form and hence, is covered by the scope of ‘supply’ as per section 7 of the GST Act. The Hon. High Court held that assignment is nothing but absolute transfer of right and interest arising out of land and hence, cannot be considered a service as contemplated under the GST Act. Also, assignment / transfer of rights is outside the scope of supply of service.

f) In view of above, question of utilization of input tax credit to discharge GST on such transactions does not arise and the prayer on behalf of the revenue for stay of operation and implementation of the judgment also was rejected.

89 M. Trade Links vs. Union of India

[2024] 163 taxmann.com 218 (Kerala)

Dated: 4th June, 2024

The High Court rejected the challenge to the constitutional validity of section 16(2)(c) and section 16(4) of the Central Goods and Services Act (CGST Act) but held that for the period from 1st July, 2017 till 30th November, 2022, if a dealer has filed the return after 30th September and the claim for ITC was made before 30th November, the claim for ITC of such dealer should also be processed, if he is otherwise entitled to claim the ITC.

FACTS

In this case, the Petitioners raised the following issues before the Hon’ble Court:

(i) Section 16(2)(c) be declared as unconstitutional and violative of Articles 19(1)(g) and Article 300A of the Constitution of India;

(ii) In the alternative, the provision of section 16(2)(c) may be read down and if the recipient dealer sufficiently establishes that he has paid the tax to the supplier and the default is on the part of the supplier dealer, the ITC should not be denied to the recipient dealer and the action should be taken against the supplier dealer who has defaulted in posting the tax collected from the recipient dealer;

(iii) ITC is a matter of right and not a concession. Hence, the denial of ITC on a mismatch with the figure mentioned in the auto-populated documents in FORM GSTR-2A is unjustified. Authorities must conduct an enquiry and should verify the documents in possession of the purchaser or the recipient dealer to ascertain the bona fide of such a dealer in claiming the ITC on supplies received from the supplier dealer.

(iv) Ona reading the provision of sections 39, 41, 44 and 50, which permit relaxation in furnishing returns, filing returns with late fees and payment of tax with interest on the late period is permitted. The provision under section 16(4) mandating submission of a claim for ITC within a particular time should be read as a directory and not mandatory.

(v) The Court may read down section 16(4) to give effect to the amended provision of providing the 30th day of November for the due date for furnishing the return under section 39 for the month of September with effect from 1st July, 2017, considering the peculiar nature of difficulties in initial period of implementation of the GST regime.

(vi) The actual availment of credit happens in the books of account, and it is merely disclosed through the GST return. Hence, the availment of ITC is not dependent on the filing of GSTR-3B. Therefore, if an assessee can prove with evidence that the credit was availed in the books of account within the time limit prescribed in section 16(4), claim the ITC would be in compliance with section 16(4).

HELD

(i) Referring to various decisions, the Court held that both Central and State legislation have the power to enact the CGST / SGST Act, and the Constitution prescribes no limitation for enacting such legislation. Therefore, these legislations are valid legislations.

(ii) In light of the decisions in the cases of Godrej & Boyce Manufacturing Company (P.) Ltd 1992 taxmann.com 967 (SC), India Agencies vs. Addl. Commissioner of Commercial Taxes 2006 taxmann.com 1841, Jayam& Co. vs. Assistant Commissioner [2016] 15 SCC 125], ALD Automotive (P.) Ltd. vs. CTO [2019] 13 SCC 225 and VKC Footsteps (India) (P.) Ltd. 2021] 130 taxmann.com 193, the Hon’ble Court did not find substance in the submissions of the Learned Counsel for the petitioners that section 16(1) of the GST Act provides an absolute right to claim Input Tax Credit and conditions in sub-section (2) of section 16 cannot take away the right conferred under sub-section (1) of Section 16.

(iii) The Court further held that the Scheme of the Act also provides that only tax collected and paid to the Government could be given as input tax credit. When the Government has not received the tax, a dealer cannot be given an input tax credit. Referring to the scheme of transfer of credit under section 53 of the IGST Act, the Hon’ble Court felt that without section 16(2)(c) where the inter-state supplier’s supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. It therefore held that the conditions on entitlement of ITC cannot be said to be onerous or in violation of the Constitution, and section 16(2)(c) is neither unconstitutional nor onerous on the taxpayer and that the respondents cannot contend that the conditions, restrictions, and time limits for ITC and time-bound tax collection in a financial year can be substituted or replaced with recovery actions against defaulters, the outcome of which is uncertain and not time-bound. The Court also held that section 16(2) restricts the eligibility under section 16(1) for entitlement to claim ITC. Section 16(2) is the restriction on eligibility and section 16(4) is the restriction on the time for availing ITC. These provisions cannot be read to restrict other restrictive provisions, i.e. sections 16(3) and 16(4). The challenge to the constitutional validity of section 16(2)(c) and section 16(4) of the CGST Act are thus rejected.

(iv) Lastly the Hon’ble Court held that where for the period from 1st July, 2017 till 30th November, 2022, if a dealer has filed the return after 30th September, and the claim for ITC was made before 30th November, the claim for ITC of such dealer should also be processed, if he is otherwise entitled to claim the ITC. The amendment in section 39 of the CGST Act by section 105 of the Finance Act 2022 (refer to amendment to section 16(4) of the CGST Act by section 100 of the Finance Act, 2022 notified with effect from 1st October, 2022) is procedural and has a retrospective effect. Accordingly, the time limit for furnishing the return for the month of September is to be treated as 30th November in each financial year with effect from 1st July, 2017.

90. L and T PES JV vs. Assistant Commissioner of State Tax

[2025] 170 taxmann.com 181 (Telangana)

Dated: 29th November, 2024

Where the contract sponsored by the State of Telangana was executed partly in Maharashtra and partly in Telangana and the Telangana State Agency has deducted TDS under section 51 of the CGST Act on the entire contract value, including the value in respect of which the petitioner has paid tax in the State of Maharashtra treating the same as Intra-State supply, the State Agency was not required to deduct the turnover taxed in the State of Maharashtra. Consequently, the petitioner’s application for refund in respect of the said TDS lying in the electronic cash ledger of the State of Telangana should not be denied. Where construction works is spread over multiple state boundaries, works executed would be intra-State and liability will be discharged in proportion to work done in each state.

FACTS

Petitioner is an unincorporated Joint Venture (JV), comprising of two partners viz. Larsen & Toubro Ltd (L&T) and PES Private Limited. The petitioner has received a contract from State of Telangana, for construction of Irrigation Barrage, the execution of which was spread over the State of Maharashtra and State of Telangana. The petitioner obtained separate GST registrations in the State of Maharashtra and State of Telangana and reported turnover based on work executed in respective States treating them as Intra-State supplies. However, Telangana State Agency, deducted TDS under section 51 of the CGST Act on the entire contract value (including the portion of turnover which was reported by the petitioner in Maharashtra State). The petitioner discharged tax liability independently in State of Maharashtra and filed a refund application for TDS portion on the said turnover accumulated in the Electronic Cash Ledger of the State of Telangana. In the meanwhile, on a comparison of GSTR-7A and GSTR-1, the former revealed much higher turnover (as it also included the value of the turnover pertaining to Maharashtra). Accordingly, a show cause notice was issued to the petitioner making them liable to pay tax on the entire contract value in the State of Telangana.

HELD

The Hon’ble Court held that the contract in the instant case is for undertaking works contract services and hence, the place of supply of services would fall under section 12(3) of the IGST Act and not under section 12(2)(a) of the CGST Act. Since, the work was admittedly carried out in both the States, the place of supply of service shall be treated as made in each State equivalent to the proportion of work executed in that State, in accordance with the terms of the agreement as specified in the explanation to section 12(3) of IGST Act.

The Hon’ble Court further held that as the State of Telangana was not a registered deductor in the State of Maharashtra, in terms of proviso to section 51 of the CGST Act, the Telangana State Agency can only deduct GST for the invoices raised by the supplier located in Telangana for the works executed in Telangana and ought not to have deducted GST in respect of the bills raised for the works executed in Maharashtra. The Court accordingly held that if the State of Telangana had not transferred tax liability to the extent of work executed in State of Maharashtra to the tax authorities in the State of Maharashtra, there was no reason on part of Telangana State authorities in not granting refund, upon petitioner providing relevant material, proof evidencing discharge of tax liability in the State of Maharashtra.

91. Mrs. Lakshmi Periyasamy vs. State Tax Officer

[2025] 170 taxmann.com 133 (Madras)

Dated: 25th November, 2024

Order passed after the death of the assessee is null and without jurisdiction. The petition under Article 226 is thus maintainable.

FACTS

The petition was filed before Hon’ble Court on a limited ground that impugned order u/s 62 of the CGST Act was made in the name of a dead person (who was husband of the petitioner) subsequent to his death.

HELD

The Hon’ble Court held that the assessment order passed in name of dead person is nullity and without jurisdiction and thus is an exception to rule of alternative remedy and hence can be entertained under Article 226. The impugned order was set aside.

92. Vigneshwara Transport Company vs. Additional Commissioner of Central Tax

[2025] 170 taxmann.com 264 (Karnataka)

Dated: 28th November, 2024

Proper Officer cannot issue show cause notice under section 74 of the CGST Act on “borrowed satisfaction”. When investigation including search and seizure was conducted by other officer and the matter was transferred to Proper Officer for want of jurisdiction, the Proper Officer was required to redo the investigation and come to an independent conclusion as contemplated under section 74 of the CGST Act.

FACTS

Petitioner was transporting goods and was registered under the provisions of the CGST Act, 2017. The investigation was initiated against the petitioner on the ground that the petitioner along with several other persons indulged in purchase of areca nut from several persons and supplying the same to various Gutkha manufacturers without payment of appropriate applicable GST. Accordingly, a show cause notice was issued to the petitioner.

Aggrieved, the present writ petition was filed on the ground that investigation was initiated against the petitioner without valid jurisdiction. It was submitted that pursuant to the initiation of such investigation; inspection, search and seizure of several premises belonging to the petitioner as envisaged under Chapter 14 of the CGST Act / KGST Act was carried out, certain materials were seized and the petitioner was called upon for questioning and his statements were recorded. Further, the petitioner was forced to make an adhoc payment towards probable liability during investigation and the same was paid by the petitioner under protest. It was also contended that the inspection, search and seizure was not conducted by a Proper Officer and that when the department realised the same, the case was transferred to the Proper Officer, to conduct the necessary investigation. But the said Proper Officer instead of conducting the investigation afresh, relying upon the records built by other officer issued a show cause notice under section 74 of the CGST Act and KGST Act.

HELD

The Hon’ble Court held that in instant case, a substantial part of investigation including search and seizure of materials had been done by the person who was not Proper Officer and under circumstances, said investigation, inspection, search and seizure was to be considered void ab initio. When the same is considered as ab initio void, notice issued under section 74 of the CGST Act based upon search, seizure and the statements recorded from the petitioner which has been relied upon, has to be considered illegal and that there is no satisfaction on part of the Proper Officer for issuing of the notice under section 74 of the CGST Act. The Court held that the Proper Officer was required to re-investigate and come to an independent conclusion as contemplated under section 74 of the CGST Act and only thereafter a fresh notice could be issued. Under said circumstances, the Hon’ble Court set aside the impugned notice and directed respondents to refund amount deposited by assessee and also return seized documents and other goods.

93. LJ- Victoria Properties Pvt. Ltd. vs. Union of India

(2024) 24 Centax 270 (Bom.)

Dated: 19th November, 2024

There is no bar on conducting Audit under section 65 of CGST Act even where registration was already cancelled and business was closed.

FACTS

Petitioner filed an application for cancellation of registration on 27th March, 2023 citing business closure. The registration was cancelled with effect from 2nd May, 2023. However, on 6th November, 2023, respondent issued a notice to conduct an audit for the F.Y. 2020-21. Petitioner refused to cooperate stating that audit cannot be conducted as per section 65 of the SGST Act once registration is cancelled. However, respondent proceeded with the audit and concluded that there was non-reversal of ITC and excess of ITC claims in its audit report. Being aggrieved by such audit proceedings, petitioner filed a writ petition before Hon’ble High Court.

HELD

Hon’ble High Court held that the provisions of section 65 of the CGST Act, 2017 apply to conduct an audit for a F.Y. during which a person was registered under GST, even if the registration was subsequently cancelled. The Court emphasized that cancellation of registration under section 29(3) does not absolve a person from obligations under the Act or prevent audit proceedings for the relevant period when the person was registered. Consequently, writ petition was challenging validity of audit was dismissed and decided against petitioner.

94. SBI General Insurance Company Ltd. vs. Union of India

(2024) 24 Centax 158 (Bom.)

Dated: 24th October, 2024

Appeals should not be dismissed by adopting a hyper technical approach without conducting proper verification and providing an opportunity to rectify the same.

FACTS

Petitioner filed an appeal against impugned order passed by an adjudicating authority. Respondent dismissed petitioner’s appeal on a technical ground that the signature present in the appeal memo was not done by the authorised signatory without verifying the GST portal and that no evidence regarding the same was provided by the petitioner. The respondent failed to verify that the signatory was duly authorised, which lead to the dismissal without granting an opportunity to rectify the alleged defect or prove authorisation. Aggrieved by such dismissal, petitioner challenged the impugned Order-in-Appeal before Hon’ble High Court.

HELD

Hon’ble High Court held that dismissing an appeal on the ground of lack of proof of an authorised signatory, without providing an opportunity to rectify the defect, violates principles of natural justice and fair play. It condemned the practice of dismissing appeals based on hyper-technicalities and emphasised that respondent must allow petitioner to demonstrate authorisation before rejecting appeals. Accordingly, Court set aside the impugned order and restored the appeal directing the Commissioner (Appeals) to hear the matter on merits and pass a reasoned order after granting a fair hearing.

95. MeghmaniOrganocem Ltd vs. Union of India

(2024) 22 Centax 388 (Guj.)

Dated: 14th June, 2024

Refund of IGST to SEZ unit on credit received through Input Service Distributor (ISD) cannot be denied under the pretext that only supplier to SEZ is eligible to claim refund under Rule 89(4) of CGST Rules.

FACTS

Petitioner was an SEZ unit engaged in business of chemical manufacturing. It filed an application for refund of unutilised Input Tax Credit (ITC) on exports made without payment of tax under Rule 89(4) of the CGST Rules which was duly granted. However, Commissioner (Appeals) subsequently directed respondent to file an appeal, on the ground that under GST law, only suppliers of goods or services could claim a refund for supplies to SEZ units. Appellate Authority set aside the refund. Aggrieved by such order the petitioner filed an application before Hon’ble High Court.

HELD

Hon’ble High Court held that the petitioner was entitled to a refund of unutilised ITC, applying the principles laid down in the decision of Britannia Industries Ltd. vs. Union of India 2020 (42) G.S.T.L. 3 (Guj.) (pending before Supreme Court). It was held therein that it is not possible for suppliers to file refund claims for supplies to SEZ units under Rule 89 of CGST Rules when an ISD distributes ITC on input services. It further held that the Appellate Authority had erred by ignoring the dictum of law merely on the ground that appeal is pending before Supreme Court, especially where no stay has been granted and, also where the facts in the present case were substantially similar, leaving no basis for a different interpretation. Accordingly, Court quashed the order passed by Appellate Authority and restored the refund sanctioned deciding the matter in favour of petitioner.

96. Prince Steel vs. State of Karnataka

(2024) 24 Centax 314 (Kar.)

Dated: 18th September, 2024

Blocking of Electronic Credit Ledger purely based on report of enforcement authority without providing prior opportunity of being heard does not sustain.

FACTS

Respondent had blocked the electronic credit ledger of petitioner without providing any prior hearing or specific reasons for initiating such a stringent action. Further, the decision to block electronic credit ledger was based solely on the reports received from the Enforcement Authority stating that ITC was fraudulently availed by the petitioner. Being aggrieved by such blocking of electronic credit ledger, hence the petition.

HELD

The Hon’ble High Court held that impugned order blocking petitioner’s electronic credit ledger was violative of principles of natural justice and procedural requirements mandated under Rule 86A of the CGST Rules, 2017. The Court further observed that impugned order lacked independent and cogent reasons to believe that ITC was fraudulently availed or ineligible. Consequently, impugned order was quashed, and respondent was directed to immediately unblocking of the electronic credit ledger.

97. Otsuka Pharmaceutical India Private Limited vs. Union of India

(2024) 24 Centax 141 (Guj.)

Dated: 19th September, 2024

Demand for erroneous refund made alleging violation of Rule 96(10) of CGST Rules cannot sustain for exports made with payment of tax by utilizing imported duty-free goods under Advance Authorisation / EOU Scheme during 23rd October, 2017 to 9th October, 2018.

FACTS

Petitioner was engaged in manufacture and export of pharmaceutical products on payment of IGST by utilising the imported duty-free raw materials against Advance Authorisation during the period from 23rd October, 2017 to 9th October, 2018. Respondent concluded that there was violation of Rule 96(10) of CGST Rules and demanded IGST on the exports made with the payment of tax during 23rd October, 2017 to 9th September, 2018 based on the decision of Gujarat High Court in case of Cosmo Films Ltd. vs. Union of India (2020 (43) G.S.T.L. 577 (Guj.)). Hence a writ petition.

HELD

The Hon’ble High Court held that there was a mistake in the earlier decision of Gujarat High Court in case of Cosmo Films Ltd. vs. Union of India (2020 (43) G.S.T.L. 577 (Guj.)), which was subsequently rectified vide order dated 19th September, 2024 (Cosmo Films Ltd. vs. Union of India (2024) 22 Centax 553 (Guj.)).Therein, it was confirmed that the Notification No. 54/2018-CT restricting export with payment of tax, where the benefit of EOU/Advance Authorisation is taken, would apply prospectively from 9th October, 2018. Therefore, demand made in respect of exports made with payment of IGST during 23rd October, 2017 to 9th October, 2018 was set aside.

स्वभावो दुरतिक्रम:

One’s nature cannot be changed

This is a very commonly used ‘proverb’ in day-to-day parlance. It means that people are so obstinate that their nature cannot be changed. A situation may force them to change their opinion on a particular matter, but their basic nature cannot be changed.

It is adapted from Valmiki Ramayana. Readers would be aware of the broad story of Ramayana. Ravana, the King of demons, had kidnapped Seeta, Ram’s wife. Many people from Ravana’s family and other well-wishers advised him to release her since it was not ethical to kidnap anyone and keep her in one’s custody forcibly. They also apprehended that it would lead to a disaster and total extinguishment of Demons; especially Ravana’s family.

People who advised him included his brother Bibheeshana, his wife Mandodari, and his grandfather Malyavan. Even Kumbhakarna, Ravana’s brother, deplored him for this act. However, Ravana showed his helplessness. He was stubborn. He said: –

द्विधा भज्जेयमप्येवं न नमेयं तु कस्यचित् !
एष मे सहजो दोष: स्वभावो दुरतिक्रम: !!

Meaning: –

द्विधा भज्जेयमप्येवं ! Even if I am cut into two pieces.

न नमेयं तु कस्यचित्! I will not bow down before anyone.

एष मे सहजो दोष: This is my natural ‘lacuna’ (from birth).

स्वभावो दुरतिक्रम! I cannot change my nature.

In Hitopadesh (3.56), there is a story of a fox falling in a pot with blue colour water. He started telling small animals that a Goddess has now made him a king of animals. An old and wised fox advises other foxes to shout in their natural voice. This fox also joined them in shouting. Thus, his truth was exposed.

There is another shloka with a similar meaning (Hitopadesh 3.58)

य: स्वभावो हि यस्यास्ति स नित्यं दुरतिक्रम: !
श्वा यदि क्रियते राजा स किं नाश्नात्यु पानहम् !!

य: स्वभावो हि यस्यास्ति A person with his nature

स नित्यं दुरतिक्रम: That nature is unchangeable.

श्वा यदि क्रियते राजा If a dog is made a king.

स किं नाश्नात्यु पानहम् Will he give up eating (chewing) the footwear?

It also applies in a good sense. Even if a lion is in an adverse situation and starving, he will not eat grass. A brave and noble man will not compromise on ethics and graceful behaviour. Even if a torch is forcibly held upside down, its flame will always go up.

We come across examples of this principle every day – in our family, at workplace, in social life and everywhere. A criminal person or thief will very rarely give up bad habits. Similarly, it is well-nigh impossible for one to give up angry nature, greedy nature, stingy attitude, confused approach and so on if these things are in one’s nature. One may be arrogant, rude, selfish, humorous, timid, sceptical, defeatist, optimistic, generous, fair, ethical, and normally, he won’t deviate from it.

However, if one succeeds in changing one’s nature, one can become a hero and receive praise from all, especially if one gives up bad aspects of one’s nature.

Banning Of Unregulated Lending Activities

INTRODUCTION

Digital Lending platforms, unregulated ‘peer to peer’ lending platforms, lending apps have mushroomed in recent times. Several of these unregulated lending activities have caused a great deal of harm to the financial ecosystem and have also impacted naive and gullible borrowers. Recognising this malaise, the Finance Ministry, Government of India has proposed a Law titled the Banning of Unregulated Lending Activities (“the Law”). The Bill is currently in its draft stage. Let us have a look at this important law that should impact the lending space in India. The Bill states that it is enacted to provide for a comprehensive mechanism to ban the unregulated lending activities other than lending to relative(s) and to protect the interest of borrowers. A few years ago, the Government enacted the Banning of Unregulated Deposit Schemes Act, 2019 to ban unregulated deposit schemes and to protect the interest of depositors. This is a second similar law aimed at banning unregulated lending activities.

The provisions of this Law shall have effect notwithstanding anything contained in any other law for the time being in force, including any law made by any State or Union Territory. Thus, it overrides any other law that is contrary.

UNREGULATED LENDING

The Law applies to unregulated lending activities which are defined in an exhaustive manner to mean lending activities which are not covered under regulated lending activities, carried on by any person whether through digital lending or otherwise. Further, these activities must not be regulated under any other law for time being in force. It even states that the Law shall not apply to lending activities which are exempted under any other law for the time being in force.

LENDING

Interestingly, the all-important term lending has not been defined under the Law. One may draw reference to other similar laws and judicial decisions.

For instance, the Maharashtra Money Lending (Regulation) Act, 2014, defines the term “money lending” to mean the business of advancing loans whether in cash or in kind and whether or not in connection with or in addition to any other business.

The Supreme Court in Ram Rattan Gupta vs. Director of Enforcement, 1966 SCR (1) 651 has held as follows:

“What is the meaning of the expression “lend”? It means in the ordinary parlance to deliver to another a thing for use on condition that the thing lent shall be returned with or without compensation for the use made of it by the person to whom it was lent. The subject-matter of lending may also be money. Though a loan contracted creates a debt, there may be a debt created without contracting a loan; in other words, the concept of debt is more comprehensive than that of loan.”

The Supreme Court in JiwanlalAchariya vs. RameshwarlalAgarwalla, 1967 SCR (1) 93, in the context of the Bihar Money Lenders Act has defined the term loan to mean an advance, `whether of money or in kind, on interest made by a money-lender.’

The Usurious Loans Act, 1918 defines the term loan to mean a loan whether of money or in kind and includes any transaction which is, in the opinion of the Court, in substance a loan.

Black’s Law Dictionary, 6th Edition, West defines the phrase lending or loaning of money to mean transactions creating customary relation of borrower and lender, in which money is borrowed for fixed time on borrower’s promise to repay amount borrowed at stated time in future with interest at fixed rate — Bancock County vs. Citizen’s Bank & Trust Co., 53 Idaho 159, 22 P.2d 674.

DIGITAL LENDING

Lending can also be by Digital Lending which means a remote and automated public lending activity, largely by use of digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service. Thus, digital lending platforms are sought to be covered by this definition.

The phrase “Public lending activity” has been defined in the draft Law to mean the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind but does not include loans and advances given to relative(s). Interestingly, even the expression “business” has been defined exhaustively to mean an organised activity undertaken by a person with the purpose of making gains or profits, in cash or kind. Thus, profit-motive is an essential factor for a lending activity to be covered under this Law. In addition, the lending activity must be a business for the lender. Hence, if a person gives a loan to his friend / family, it would not be his business (even if the loan is interest-bearing) and hence, it would be outside the purview of this Law. To that effect, this Law is similar to the Money Lending laws.

However, any lending to a relative by a lender would be exempt even if it constitutes his business. Relative for this purpose means spouse, parents, children, members of an HUF, son-in-law and daughter-in-law, step-parents, step-children and step-siblings are also included in this definition.

REGULATED LENDING ACTIVITIES

Regulated Lending Activities have been defined to mean those lending activities that are specified in the Schedule to the Act. It refers to lending activities regulated under the provisions of the following Acts or that are exempted under the same:

  1.  Reserve Bank of India Act, 1934, e.g., lending by non-banking financial companies (NBFCs)
  2.  Banking Regulation Act, 1949, e.g., lending by Banks
  3.  State Bank of India (SBI) Act, 1955
  4.  The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970
  5.  Regional Rural Banks (RRB) Act, 1976
  6.  Export Import Bank of India (EXIM) Act, 1981 undertaken by EXIM Bank
  7.  Multi State Co-operative Societies Act, 2002
  8.  National Housing Bank (NHB) Act, 1987
  9.  National Bank of Agriculture and Rural Development (NABARD) Act, 1981
  10.  National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021
  11.  Small Industries Development Bank of India (SIDBI) Act, 1989
  12.  Life Insurance Corporation of India (LIC) Act, 1956
  13.  Companies Act, 2013, e.g., loans to Directors under s.185
  14.  Chit Funds Act, 1982
  15.  Limited Liability Partnership Act, 2008
  16.  Co-operative Societies Acts of various States / UTs
  17.  The State Financial Corporations Act, 1951
  18.  State Money Lenders Acts, e.g., lending by money lenders under the Maharashtra Money Lending (Regulation) Act, 2014
  19.  The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  20.  The Factoring Regulation Act, 2011

LENDER

The term Lender has been defined to mean any person, who undertakes lending activities. Person for this purpose includes-

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a trust — it does not specify the type of trust and hence, both public and private trusts would be covered;

(e) a partnership firm;

(f) a limited liability partnership;

(g) an association of persons;

(h) a co-operative society registered under any law for the time being in force relating to co-operative societies;
or

(i) every artificial juridical person, not falling within any of the preceding sub-clauses;

BANNING OF UNREGULATED LENDING ACTIVITIES

Once the Bill becomes an Act, all unregulated lending activities (including digital lending) will be banned. Further, no lender shall, directly or indirectly, promote, operate, issue any advertisement in pursuance of an unregulated lending activity.

The penalty for contravention is imprisonment for a term which shall not be less than 2 years but which may extend to 7 years and with fine which shall not be less than ₹2 lakhs but which may extend to ₹1 crore.

Any lender who lends money whether digitally or otherwise and uses unlawful means to harass and recover the loan, shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 10 years and with fine which shall not be less than ₹5 lakhs but which may extend to twice the amount of loan.

Further, no person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, digitally or otherwise to induce another person to apply or take loan from lenders involved in unregulated lending activity. The penalty for this is imprisonment for a term which shall not be less than 1 year but which may extend to 5 years and with fine which may extend to ₹10 lakhs.

The Bill also provides a harsher penalty for repeat offenders. Whoever having been previously convicted of an offence, is subsequently convicted of an offence shall be punishable with imprisonment for a term which shall not be less than 5 years but which may extend to 10 years and with fine which shall not be less than ₹10 lakhs but which may extend to ₹50 crores.

In case of offences by non-individual lenders, every person who, at the time the offence was committed, was in charge of, and was responsible to, the lender for the conduct of its business, as well as the lender, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

The Bill also proposes that investigations can be transferred to the Central Bureau of Investigation if the lender, borrower, or properties are located across multiple states or union territories, or if the total amount involved is large enough to significantly impact public interest.

INFORMATION BY LENDERS

Every lender which commences or carries on its business as such on or after the commencement of this Act shall intimate the Authority constituted under the Act about its business in such form and manner and within such time, as may be prescribed.

DATABASE

The Central Government may designate an Authority to create an online database for information on lenders operating in India and which shall have the facility for public to search information about lenders undertaking regulated lending activities and shall also facilitate reporting of illegal lenders or cloned lenders.

CONCLUSION

This is an important enactment to prevent illegal lending activities and to protect the interests of borrowers. However, as with all Statutes it would have to be ensured that genuine cases are not harassed.

Investment by Non-Resident Individuals in Indian Non-Debt Securities – Permissibility under FEMA, Taxation and Repatriation Issues

EDITOR’S NOTE ON NRI SERIES:

This is the 10th article in the ongoing NRI Series dealing with “Investment in Non-Debt Securities – Permissibility under FEMA. Taxation and Repatriation Issues”. This article attempts to cover an overview of investments in non-debt securities that can be made by an NRI / OCI under repatriation and non-repatriation route, the nuances thereof, and issues relating to repatriation. It also covers the tax implications related to income arising out of investment in Indian non-debt securities and the issues relating to repatriation of insurance proceeds, profits from Limited Liability Partnership (“LLP”), and formation of trust by Indian residents for the benefit of NRIs / OCIs.

Readers may refer to earlier issues of BCAJ covering various aspects of this Series: (1) NRI – Interplay of Tax and FEMA Issues – Residence of Individuals under the Income-tax Act – December 2023; (2) Residential Status of Individuals – Interplay with Tax Treaty – January 2024; (3) Decoding Residential Status under FEMA – March 2023; (4) Immovable Property Transactions: Direct Tax and FEMA issues for NRIs – April 2024; (5) Emigrating Residents and Returning NRIs Part I – June 2024; (6) Emigrating Residents and Returning NRIs Part II – August 2024; (7) Bank Accounts and Repatriation Facilities for Non-Residents – October 2024; (8) Gifts and Loans – By and To Non Resident Indians Part I – November 2024; and (9) Gifts and Loans – By and To Non Resident Part -II – December 2024.

1. INTRODUCTION

A person resident outside India may hold investment in shares or securities of an Indian entity either as Foreign Direct Investment (“FDI”) or as a Foreign Portfolio Investor (“FPI”). While NRIs can make portfolio investments in permitted listed securities in India through a custodian, one of the important routes by which a Non-resident individual can invest is through the FDI Route. Individuals can invest directly or through an overseas entity under this route.

Since 1991, India has been increasingly open to FDI, bringing about time-to-time relaxations in several key economic sectors. FDI has been a major non-debt financial resource for India’s economic development. India has been an attractive destination for foreign investors because of its vast market and burgeoning economy. However, investing in shares and securities in India requires a clear understanding of the regulatory framework, particularly the Foreign Exchange Management Act, 1999 (“FEMA”) regulations. This article highlights the income tax implications and regulatory framework governing FDI in shares and securities in India and repatriation issues.

#Acknowledging contribution of CA Mohan Chandwani and CA Vimal Bhayal for supporting in the research.
#Investment in debt securities and sector specific conditionality are covered under separate articles of the series.

2. REGULATORY ASPECTS OF NON-RESIDENTS INVESTING IN INDIA

FDI is the investment by persons resident outside India in an Indian company (i.e., in an unlisted company or in 10 per cent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company) or in an Indian LLP. Investments in Indian companies by non-resident entities and individuals are governed by the terms of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). With the introduction of NDI Rules, the power to regulate equity investments in India has now been transferred to the Ministry of Finance from the central bank, i.e., the Reserve Bank of India (“RBI”). However, the power to regulate the modes of payment and monitor the reporting for these transactions continues to be with RBI. Investments in Indian non-debt securities can be made either under repatriation mode or non-repatriation mode. It is discussed in detail in the ensuing paragraph. Securities which are required to be held in s dematerialised form are held in the NRE demat account if they are invested/acquired under repatriable mode and are held in the NRO demat account if they are invested/acquired in a non-repatriable mode.

3.INVESTMENT IN NON-DEBT SECURITIES, REPATRIATION AVENUES AND ISSUES

3.1. Indian investments through repatriation route

Schedule 1 of NDI Rules permits any non-resident investor, including an NRI / OCI, to invest in the capital instruments of Indian companies on a repatriation basis, subject to the sectoral cap and certain terms and conditions as prescribed under Schedule 1. Such capital instruments include equity shares, fully convertible and mandatorily convertible debentures, fully convertible and mandatorily convertible preference shares of an Indian company, etc. Further, there will be reporting compliances as prescribed by the RBI by Indian investee entities, by resident buyers/sellers in case of transfer of shares and securities, and by non-residents in some cases, such as the sale of shares on the stock market. A non-resident investor who has made investments in India on a repatriable basis can remit full sale proceeds abroad without any limit. The current income, like dividends, remains freely repatriable under this route.

Essential to note that if a non-resident investor who has invested on a repatriation basis returns to India and becomes a resident, the resultant situation is that a “person resident in India” is holding an Indian investment. Consequently, the repatriable character of such investment is lost. As such, all investments held by a non-resident on a repatriable basis become non-repatriable from the day such non-resident qualifies as a “person resident in India”; and the regulations applicable to residents with respect to remittance of such funds abroad shall apply. When a non-resident holding an investment in an Indian entity on a repatriable basis qualifies as a “person resident in India”, he should intimate it to the Indian investee entity, and the entity should record the shareholding of such person as domestic investment and not foreign investment. Subsequently, the Indian investee entity needs to get the Entity Master File (EMF) updated for changes in the residential status of its investors through the AD bank.

If the investment by a non-resident in Indian shares or securities is made on a repatriable basis, albeit not directly but through a foreign entity, any subsequent change in the residential status of such person should not have any impact or reporting requirement on the resultant structure. In this case, an Indian resident now owns a foreign entity which has invested in India on a repatriable basis. Consequently, such investment shall continue to be held on a repatriable basis and dividend and sale proceeds thereon can be freely repatriated outside India by such foreign entity without any limit. Had the NRI or OCI directly held Indian shares and subsequently become resident, the repatriable character would have been lost, as highlighted above.

3.2. Indian investments through non-repatriation route

NRIs / OCIs are permitted to invest in India on a non-repatriable basis as per Schedule IV of NDI Rules (subject to prohibitions and conditions under Schedule IV). Such investment is treated on par with domestic investments, and as such, no reporting requirements are applicable. Essential to note that Schedule IV restricts its applicability specifically only to NRIs and OCI cardholders (referred to as OCIs hereon). Also, the definition of NRI and OCI, as provided under NDI Rules, does not include a ‘person of Indian origin’ (“PIO”) unless such person holds an OCI Card. As such, it may be considered that a PIO should not be eligible to invest in Indian shares or securities on a non-repatriable basis as per Schedule IV unless such a person is an OCI Cardholder. Permissible investment for NRIs / OCIs under Schedule IV includes investments in equity instruments, units of an investment vehicle, capital of LLP, convertible notes issued by a startup, and capital contribution in a firm or proprietary concern.

In case such NRIs / OCIs relocate to India and qualify as “person resident in India,” there is no change in the character of holding their investment. This is because such investment was always treated at par with domestic investment without any reporting requirement. Additionally, there is no requirement even for an Indian investee entity regarding the change in the residential status of such shareholders if the investment is on a non-repatriation basis. However, under the Companies Act 2013, the Indian company has to disclose various categories of investors in its annual return in Form MGT, including NRIs. It does not matter whether holding is repatriable or non-repatriable. Hence, for this purpose, the Indian company should change its record appropriately.

Typically, the Indian investee entity should collate the details of the residential status of the person along with a declaration from such investor that the investment is made on a non-repatriable basis. It is mandatory that a formal record is kept even by the Indian investee entity where an NRI / OCI, holding shares on a non-repatriable basis, transfers it by way of gift to another NRI / OCI, who shall hold it on a non-repatriable basis. In such cases, a simple declaration by the transferee to the Indian investee entity may suffice, providing that the shares have been gifted to another NRI / OCI, and such transferee shall hold investment on a non-repatriable basis.

Investment under the non-repatriation route at times is less cumbersome, not only for an NRI / OCI investor, but also for the Indian investee entity as well, considering it saves a great amount of time and effort as there is no reporting compliances, no need for valuation, etc. This route has also benefited the Indian economy, as the NRIs / OCIs have been using the monies in their Indian bank accounts to invest in Indian assets (equity instruments, debt instruments, real estate, mutual funds, etc.) instead of repatriating them out of India. Such investments on a non-repatriable basis are typically made via NRO accounts by NRIs and OCIs. RBI has introduced the USD Million scheme under which proceeds of such non-repatriable investments can be remitted outside India per financial year. The prescribed limit of USD 1 Million per financial year per NRI / OCI is not allowed to be exceeded. In case a higher amount is required to be remitted, approval shall be required from RBI. Basis practical experience, such approvals are given in very few / rare cases by RBI based on facts. However, any remittance of dividend and interest income from shares and securities credited to the NRO account will be freely allowed to be repatriated, being regarded as current income, and shall not be subject to the aforesaid USD 1 Million limit.

The repatriation by NRI / OCI from the NRO account to their NRE / foreign bank account does not contain any income element and, accordingly, should not be chargeable to tax in India. Thus, there should not be any requirement for filing both Form 15CA and Form 15CB. However, certain Authorised Dealer banks insist on furnishing Form 15CA along with Form 15CB along with a certificate from a Chartered Accountant in relation to the source of funds from which remittance is sought to be made. In such case, time and effort would be incurred for reporting in both Form 15CA and Form 15CB, along with attestation from a Chartered Accountant who would analyse the source of funds for issuing the requisite certificate.

It is essential to note that any gift of shares or securities of an Indian company by an NRI / OCI, who invested under schedule IV on a non-repatriation basis, to a person resident outside India, who shall hold such securities on a repatriation basis, shall require prior RBI approval. On the other hand, if the transferee non-resident continues to hold such securities on a non-repatriation basis (instead of holding it on a repatriation basis), no such approval shall be required.

Schedule IV also permits any foreign entity owned and controlled by NRI / OCI to invest in Indian shares/securities on a non-repatriation basis. In such a case, sale proceeds from the sale of securities of the investee Indian company shall be credited to the NRO account of such foreign entity in India. However, any further repatriation from the NRO account by such foreign entity shall require prior RBI approval since the USD 1 Million scheme is restricted to only non-resident individuals (NRIs / OCIs / PIOs) and not their entities.

3.3. Repatriation of Insurance Proceeds

While the compliances/permissibility to avail various types of insurance policies in and outside India by resident/non-resident individuals is the subject matter of guidelines as per Foreign Exchange Management (Insurance) Regulations, 2015, we have summarised below brief aspects of repatriation of insurance maturity proceeds by a non-resident individual.

The basic rule for settlement of claims on rupee life insurance policies in favour of claimants who is a person resident outside India is that payments in foreign currency will be permitted only in proportion to which the amount of premium has been paid in foreign currency in relation to the total premium payable.
Claims/maturity proceeds/ surrender value in respect of rupee life insurance policies issued to Indian residents outside India for which premiums have been collected on a non-repatriable basis through the NRO account to be paid only by credit to the NRO account. This would also apply in cases of death claims being settled in favour of residents outside India assignees/ nominees.

“Remittance of asset” as per Foreign Exchange Management (Remittance of Assets) Regulations, 2016, inter-alia includes an amount of claim or maturity proceeds of an insurance policy. As per the said regulation, an NRI, OCI, or PIO may remit such proceeds from the NRO account under USD 1 Million scheme. As such, proceeds of such insurance will have to be primarily credited to the NRO account.

Residents outside India who are beneficiaries of insurance claims / maturity / surrender value settled in foreign currency may be permitted to credit the same to the NRE/FCNR account, if they so desire.

Claims/maturity proceeds/ surrender value in respect of rupee policies issued to foreign nationals not permanently resident in India may be paid in rupees or may be allowed to be remitted abroad, if the claimant so desires.

3.4.Repatriation from LLP by non-resident partners

Non-residents are permitted to contribute from their NRE or foreign bank accounts to the capital of an Indian LLP, operating in sectors or activities where foreign investment up to 100 per cent is permitted under the automatic route, and there are no FDI-linked performance conditions.

The share of profits from LLP is tax-free in the hands of its partners in India. Further, such repatriation should typically constitute current income (and hence current account receipts) under FEMA and regulations thereunder. Recently, some Authorised Dealer (AD) banks in India have raised apprehension and have insisted on assessing the nature of underlying profits of Indian LLP to evaluate whether the same comprises current income (interest, dividend, etc.), business income, or capital account transactions (sale proceeds of shares, securities, immovable property, etc).

In relation to the evaluation of the nature of LLP profits, AD banks have been insisting i furnishing a CA certificate outlining the break-up of such LLP profits, which has to be repatriated to non-resident partners. Where the entire LLP profits comprise current income, it has been permitted to be fully repatriated to foreign bank accounts of non-resident partners. In case such LLP profits comprise of capital account transactions such as profits on the sale of shares, immovable property, etc., some AD banks have practically considered a position to allow such profits to be credited only to the NRO account of non-resident partners. The subsequent repatriation of such profits from the NRO account is permissible up to USD 1 million per financial year, as discussed above. Certain AD banks emphasise that any such share of profit received by a non-resident as a partner of Indian LLPs should be classified as a capital account transaction only and subject to a USD 1 million repatriation limit.

It is essential to note that since dividends are in the nature of current income, there are no restrictions per se for its repatriation from an Indian company to non-resident shareholders, irrespective of whether such dividend income comprises capital transactions such as the sale of shares, immovable property, etc. In such a case, where an Indian company has been converted to LLP, any potential repatriation of profit share from such LLPs will have different treatment from AD banks vis-à-vis company structure. Consequently, though both dividends from the Indian company and the distribution of the share of profits from LLP are essentially the distribution of profits, with respect to repatriation permissibility, they are treated differently. This may lead to discouraging LLPs as preferable holding cum operating vehicles for non-residents.

It may be possible that the aforesaid position was taken by some AD banks to check abuse by NRIs, as has been reported recently in news articles. Thus, the interpretation of repatriation of profit share of LLPs varies from one AD bank to another, thereby indicating that there may not be any fundamental thought process in the absence of regulation for such repatriation or some internal objection / communication from RBI with respect to share of profits from LLP as a holding structure. However, NRI / OCI investors should note the cardinal principle of “What cannot be done directly, cannot be done indirectly.” Thus, capital account transactions should not be abused by converting them into current account transactions, such as profits whereby they can be freely repatriated without any limit.

3.5. Repatriation from Indian Trusts to Non-resident Beneficiaries

Traditionally, trusts were created for the benefit of family members residing solely in India. However, with globalisation, several family members now relocate overseas, pursuant to which compliance with NDI rules between trusts and such non-resident family members as beneficiaries can become a complex web.

Setting up of family trust with non-resident beneficiaries has been the subject matter of debate, specifically in relation to the appointment of non-resident beneficiaries, settlement of money and assets in trust, subsequent distribution, and repatriation from trusts to non-resident beneficiaries. There are no express provisions under FEMA permitting or restricting transactions related to private family trusts involving non-resident family members. For most of the transactions where non-residents have to be made beneficiaries, it amounts to a capital account transaction. The non-resident acquires a beneficial interest in the Indian Trust. Without an express permissibility for the same under FEMA, this should not be permitted without RBI approval. Further, generally, RBI takes the view that what is not permissible directly under the extant regulations should not be undertaken indirectly through a private trust structure. FEMA imposes various restrictions vis-a-vis transfer or gift of funds or assets to non-residents, as well as repatriation of cash or proceeds on sale of such assets by the non-residents. As such, AD banks and RBI have been apprehensive when such transactions / repatriations are undertaken via trust structures.

If a person resident in India wants to give a gift of securities of an Indian company to his / her non-resident relative (donor and donee to be “relatives” as per section 2(77) of the Companies Act, 2013), approval is required to be taken from RBI as per NDI rules. From the plain reading of the said Regulation, a view may be considered that the said RBI approval is also required in a case where the gift of shares or securities of an Indian company is to his NRI / OCI relative who shall hold it on non-repatriation basis even though such investments are considered at par with domestic investment. The reason for the said view is NRIs / OCIs holding shares or securities of Indian companies on non-repatriation can gift to NRIs / OCIs who shall continue to hold on non-repatriation without RBI approval. Consequently, since the gift of shares by a person resident in India to a person resident outside India who shall hold it on non-repatriation is not specially covered, it is advisable to seek RBI approval in such cases. Further, up to 5% of the total paid-up capital of shares or securities can be given as gifts per year and limited to a value of $50,000. This restriction per se affects the settlement of shares and securities by a resident as a Settlor in trust with non-resident beneficiaries (The effect of the transaction is that a non-resident is entitled to ownership of Indian shares or securities via trust structure). However, certain AD banks have considered a practical position that settlement of Indian shares and securities is a transaction per se between Indian settlor and trust and ought not to have any implications under NDI rules as long as trustee/s, being the legal owner of trust assets, are person resident in India. Considering that RBI has apprehensions with cross-border trust structures, it is always advisable to apply to RBI with complete facts before execution of such trust deeds and obtain their prior comprehensive approval for both settling/contribution of assets in the trust as well as subsequent distribution of such assets to non-resident beneficiaries.

The aforesaid uncertainty for settlement of assets in the Indian trust may also occur in another scenario where the trust was initially set up when all beneficiaries were persons resident in India and subsequently became non-resident on account of relocation outside India. In such cases, a practical position may be taken that no RBI approval or threshold limit as specified above shall apply since the trust was settled with resident beneficiaries. Essential to evaluate whether any reporting or intimation is required at the time when such beneficiaries become non-residents. In this regard, a reference may be considered to section 6(5) of FEMA, which permits a person resident in India to continue to hold Indian currency, security, or immovable property situated in India once such person becomes a non-resident. This provision does not seem to specifically cover a beneficial interest in the trust. However, a practical view may be considered that as long as the assets owned by the trust are in nature of assets permissible to be held under section 6(5), there ought not be a violation of any FEMA provisions. Still, on a conservative note, one may consider intimating the AD Bank by way of a letter about the existence of the trust and subsequent changes in the residential status of the respective beneficiaries. Also, subsequent distribution to non-resident beneficiaries by such trust shall be credited to the NRO account of non-resident beneficiaries (refer to below para for detailed discussion on repatriation issues).

Repatriation of funds generated by such trust from sale of Indian assets viz shares and securities has been another subject matter of debate and there is no uniform stand by AD banks on this issue. Under the LRS, the gift of funds by Indian residents to non-residents abroad or NRO accounts of such NRI relatives is subject to the LRS limit of USD 2,50,000. Consequently, any repatriation of funds from trusts to foreign bank accounts / NRO accounts of non-resident beneficiaries is being permitted by some AD banks only up to the aforesaid LRS limit. Alternatively, a position has been taken that repatriation of funds, which predominantly consist of current income generated by trusts, should be freely permissible to be remitted without any limit, and the remaining shall be subject to LRS. In other cases, the remittance of funds from the trust to the NRO accounts of non-resident beneficiaries is considered permissible to be transferred without any limit (since subsequent repatriation from the NRO account is already subject to USD 1 Million limit per year).

3.6. Tabular summary of our above analysis on the gift of Non-debt Securities and settlement and Repatriation issues through a Trust structure

a. Settlement and repatriation issues through trust structure

Sr. No. Scenarios View 1 View 2 View 3
1. Setting up trust with non-resident beneficiaries
i. Settlement of shares and securities in trust by resident settlor Subject to prior RBI approval and threshold limits Permissible during settlement –  subsequent distribution of shares subject to  approval and threshold limit (in case RBI approval is not granted or rejected, there is a possibility that set up of trust may also be questioned) No third view to our knowledge
ii. Repatriation of funds generated by a trust from the sale of shares Subject to LRS limit irrespective of nature of trust income Only income from capital transactions is subject to the LRS limit.

 

 

 No limit on remittance to an NRO account, irrespective of the nature of the income
to a foreign bank account / NRO account of beneficiaries Current income is freely repatriable to the foreign bank account
2. Setting up trust with resident beneficiaries – subsequently, beneficiaries become non-resident.
i. Settlement of shares and securities Settlement permissible and even distribution to be arguably permissible in light of section 6(5) No second view to our knowledge –

b. RBI approval under various scenarios of gift of Non-debt Instruments

Sr. No. Gift of securities Regulation RBI approval
1. By a person resident outside India to a person resident outside India 9(1) Not required
2. By a person resident outside India to a person resident in India 9(2) Not required
3. By a person resident in India to a person resident outside India 9(4) Required
4. By an NRI or OCI holding on a repatriation basis to a person resident outside India 13(1) Not required
5. By NRI or OCI holding on a non-repatriation basis to a person resident outside India 13(3) Required
6. By NRI or OCI holdings on non-repatriation basis to NRI or OCI on non-repatriation basis 13(4) Not required

4. TAX IMPLICATIONS FOR NON-RESIDENTS ON INVESTMENT IN INDIA SECURITIES

The taxability of an individual in India in a particular financial year depends upon his residential status as per the Income-tax Act, 1961 (“the Act”). This section of the article covers taxability in Indian in the hands of NRI in relation to their investment in shares and securities of the Indian company. It should be noted that all incomes earned by an NRI / OCI are allowed to be repatriated only if full and appropriate taxes are paid before such remittance.

We have summarised below the key tax implications in the hands of NRIs under the Act on various shares or securities. For the purpose of this clause, the capital gain rates quoted are for the transfers which have taken place on or after 23rd July, 2024.

5. TAX RATES FOR VARIOUS TYPES OF SECURITIES FOR NON-RESIDENTS

In India, the taxation of shares and securities in the hands of non-residents depends on several factors, including the type of security, the nature of income generated, and the relevant Double Taxation Avoidance Agreement (“DTAA”) entered with India.

5.1 Capital Gains on the ransfer of Capital Assets being Equity Shares, Units of an Equity Oriented Fund, or Units of Business Trust through the stock exchange (“Capital Assets”):

Short-term capital gain (STCG): If a capital asset is sold within 12 months from the date of purchase, the gains are treated as short-term. As per section 111A of the Act, the tax rate on STCG for non-residents is 20 per cent (plus applicable surcharge and cess) on the gains.

Long-term capital gains (LTCG): If the capital asset is sold after holding it for more than 12 months, the gains are treated as long-term. LTCG on equity shares is exempt from tax up to ₹1.25 lakh per financial year. However, gains above ₹1.25 lakh are subject to 12.5 per cent tax (plus applicable surcharge and cess) without indexation benefit.

5.2 Capital Gains on Transfer of Capital Assets being Unlisted Equity Shares, Unlisted Preference Shares, Unlisted Units of Business Trust: Short-term capital gains:

If a capital asset is sold within 24 months from the date of purchase, the gains are treated as short-term. As per the provisions of the Act, STCG shall be subject to tax as per the applicable slab rates (plus applicable surcharge and cess).

Long-term capital gains:

If the capital asset is sold after holding it for more than 24 months, the gains are treated as long-term. LTCG on capital assets is subject to 12.5 per cent tax (plus applicable surcharge and cess) without indexation benefit.

5.3 Capital Gains on Transfer of Capital Asset being Debt Mutual Funds, Market Linked Debentures, Unlisted Bonds, and Unlisted Debentures:

As per the provisions of section 50AA of the Act, gains from the transfer of capital assets shall be deemed to be STCG irrespective of the period of holding of capital assets, and the gains shall be subject to tax as per the applicable slab rates (plus applicable surcharge and cess).

5.4 Capital Gains on Transfer of Capital Assets being Listed Bonds and Debentures:

Short-term capital gains: If a capital asset is sold within 12 months from the date of purchase, the gains are treated as short-term. As per the provisions of the Act, STCG shall be subject to tax as per the applicable slab rates (plus applicable surcharge and cess).

Long-term capital gains: If the capital asset is sold after holding it for more than 12 months, the gains are treated as long-term. LTCG on capital assets is subject to 12.5 per cent tax (plus applicable surcharge and cess) without indexation benefit.

5.5 Capital Gains on Transfer of Capital Assets being Treasury Bills (T-Bills):

T-Bills are typically held for short durations (less than 1 year), so any sale of T-Bills before maturity will result in short-term capital gains. The capital gain from the sale of T-Bills will be subject to tax at the applicable slab rates (plus applicable surcharge and cess).

5.6 Capital Gain on Transfer of Capital Assets being Convertible Notes:

If the convertible note is sold within 24 months, the gain is treated as short-term and taxed at the applicable slab rates (plus applicable surcharge and cess).

If the convertible note is held for more than 24 months, the gain is considered long-term. LTCG on convertible notes is taxed at 12.5 per cent (plus applicable surcharge and cess) without the indexation benefit.

5.7 Capital Gains on Transfer of Capital Assets being GDRs or Bonds Purchased in Foreign Currency:

If capital assets are sold within 24 months, thegain is treated as short-term and shall be taxed at the applicable slab rates (plus applicable surcharge and cess).

If a capital asset is sold after holding for more than 24 months, the gain is treated as long-term. As per the provisions of section 115AC of the Act, LTCG shall be subject to tax at the rate of 12.5 per cent (plus applicable surcharge and cess) in the hands of non-residents without indexation benefit.

5.8 Rule 115A: Rate of Exchange for Conversion of INR to Foreign Currency and vice versa:

The proviso to Section 48 of the Act specifically applies to non-resident Indians. It prescribes the methodology of computation of capital gains arising from the transfer of capital assets, such as shares or debentures of an Indian company. The proviso states that capital gain shall be computed in foreign currency by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer, and the full value of the consideration as a result of the transfer into the same foreign currency that was initially used to purchase the said capital asset. The next step is to convert the foreign currency capital gain into Indian currency.

In this connection, the government has prescribed rule 115A of the Income-tax Rules, 1962 (“the Rules”), which deals with the rate of exchange for converting Indian currency into foreign currency and reconverting foreign currency into Indian currency for the
purpose of computing capital gains under the first proviso of section 48. The rate of exchange shall be as follows:

  •  For converting the cost of acquisition of the capital asset: the average of the Telegraphic Transfer Buying Rate (TTBR) and Telegraphic Transfer Selling Rate (TTSR) of the foreign currency initially utilised in the purchase of the said asset, as on the date of its acquisition.
  • For converting expenditure incurred wholly and exclusively in connection with the transfer of the capital asset: the average of the TTBR and TTSR of the foreign currency initially utilised in the purchase of the said asset, as on the date of transfer of the capital asset.
  •  For converting the consideration as a result of the transfer: the average of the TTBR and TTSR of the foreign currency initially utilised in the purchase of the said asset, as on the date of transfer of the capital asset.
  •  For reconverting capital gains computed in the foreign currency into Indian currency: the TTBR of such currency, as on the date of transfer of the capital asset.

TTBR, in relation to a foreign currency, means the rates of exchange adopted by the State Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.

TTSR, in relation to a foreign currency, means the rate of exchange adopted by the State Bank of India for selling such currency where such currency is made available by that bank through telegraphic transfer.

5.9 Benefit under relevant DTAA:

It is pertinent to note that the way the article on capital gain is worded under certain DTAA, it can be interpreted that the capital gain on transfer / alienation of property (other than shares and immovable property) should be taxable only in the Country in which the alienator is a resident.

For example, Gains arising to the resident of UAE (as per India UAE DTAA) on the sale of units of mutual funds could be considered as non-taxable as per Article 13(5) of the India UAE DTAA subject to such individual holding Tax Residency Certificate and upon submission of Form 10F.

6. TAXABILITY OF DIVIDENDS

As per section 115A of the Act, dividends paid by Indian companies to non-residents are subject to tax at a rate of 20 per cent (plus applicable surcharge and cess) unless a lower rate is provided under the relevant DTAA. Thus, the dividend income shall be taxable in India as per provisions of the Act or as per the relevant DTAA, whichever is more beneficial. It is important to note that the beneficial rate under the treaty is subject to the satisfaction of the additional requirement of MLI wherever treaties are impacted because of the signing of MLI by India.

In most of the DTAAs, the relevant Article on dividends has prescribed the beneficial tax rate of dividend (in the country of source – i.e., the country in which the company paying the dividends is a resident) for the beneficial owner (who is a resident of a country other than the country of source).

It is pertinent to note that as per Article 10 on Dividend in India Singapore DTAA, the tax rate on gross dividend paid / payable from an Indian Company derived by a Singapore resident has been prescribed at 10 per cent where the shareholding in a company is at least 25 per cent and 15 per cent in all other cases However, Article 24 –Limitation of Relief of the India Singapore DTAA, limits / restricts the benefit of reduced/ beneficial rate in the source country to the extent of dividend remitted to or received in the country in which such individual is resident. The relevant extract of Article 24 of India-Singapore DTAA on Limitation of Relief has been reproduced below:

“Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.”

Therefore, one will have to be mindful and have to look into each case / situation carefully before availing of benefits under DTAA. In order to claim the beneficial tax rate of relevant DTAA with India (which is of utmost importance), non-resident individuals will have to mandatorily furnish the following details / documents:

  •  Tax Residency Certificate from the relevant authorities of the resident country and
  •  Form 10F (which is self-declaration — to be now furnished on the Income-tax e-filing portal).

In case dividend income is chargeable to tax in the source country (after applying DTAA provisions) as well as in the country of residence, resulting in tax in both countries, then an individual (in the country where he is resident) is eligible to claim the credit of taxes paid by him in the country of source.

Practical issue:

One should be careful in filling the ITR Form for NRIs with respect to dividends received so that the correct tax rate of 20 per cent is applied and not the slab rates. Further, the surcharge on the dividend income is restricted to 15 per cent as per Part I of The First Schedule. Practically, the Department utility is capturing a higher surcharge rate (i.e., 25 per cent) if the dividend exceeds ₹2 crores.

Taxability on Buyback of shares

Prior to 1st October, 2024, the buyback of shares of an Indian company is presently subject to tax in the hands of the company at 20 per cent under Section 115QA and exempt in the hands of the shareholders under Section 10(34A).

As per the new provision introduced by the Finance Act, 2024, the sum paid by a domestic company for the purchase of its shares shall be treated as a dividend in the hands of shareholders.

The cost of acquisition of such shares bought back by the Company should be considered as capital loss and shall be allowed to be set off against capital gains of the shareholder for the same year or subsequent years as per the provisions of the Act.

Because of these new provisions introduced by the Finance Act, two heads of income, viz. capital gains and income from other sources, are involved. It becomes important to understand, especially in the case of non-residents, to decide which article of DTAA to be referred, i.e. Capital gains or dividends.

A view could be taken that the article on dividends should be referred and the benefit under relevant DTAA, wherever applicable, shall be given to the non-residents.

7. INSURANCE PROCEEDS

a. Life Insurance Proceeds: As per section 10(10D) of the Act, any sum received under a life insurance policy, including bonus, is exempt from tax except the following:

i. Any amount received under a Keyman insurance policy.

ii. Any sum received under a life insurance policy issued on or after 1st April, 2003 but on or before 31st March, 2012 if the premium payable for any year during the term of the policy exceeds 20 per cent of the actual sum assured.

iii. Any sum received under a life insurance policy issued on or after 1st April, 2012 if the premium payable for any year during the term of the policy exceeds 10 per cent of the actual sum assured.

iv. Any sum received under a life insurance policy other than a Unit Linked Insurance Policy (ULIP) issued on or after 1st April, 2023 if the premium payable for any year during the term of the policy exceeds five lakh rupees.

v. ULIP issued on or after 1st February, 2021 if the amount of premium payable for any of the previous years during the term of such policy exceeds two lakh and fifty thousand rupees.

However, the sum received as per clause ii to v in the event of the death of a person shall not be liable for tax.

Summary of Taxability of Life Insurance Proceeds:

Issuance of Policy Premium in terms of percentage of sum assured Taxability of sum received during Lifetime Taxability of sum received on Death
Before 31st March, 2003 No restriction Exempt Exempt
From 1st April 2003 to 31st March, 2012 20% or less Exempt Exempt
More than 20% Taxable Exempt
On or After 1st April, 2012 10% or less Exempt Exempt
More than 10% Taxable Exempt
On or after 1st April, 2023, having a premium of more than ₹5 lakh NA Taxable Exempt
ULIP issued on or after 1st February, 2021, having a premium of more than ₹2.5 lakh NA Taxable Exempt

b. Proceeds from Insurance other than Life Insurance:

Where any person receives during the year any money or other asset under insurance from an insurer on account of the destruction of any asset as a result of a flood, typhoon, hurricane, cyclone, earthquake, other convulsions of nature, riot or civil disturbance, accidental fire or explosion, action by an enemy or action taken in combating an enemy, the same is covered by the provisions of section 45(1A) of the Act.

Any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” as per section 45(1A).

For the purpose of computing the profit or gain, the value of any money or fair market value of other assets on the date of receipt shall be deemed to be consideration. Further, the assessee shall be allowed the deduction of the cost of acquisition of the original asset (other than depreciable assets) from the money or value of the asset received from the insurer.

The above consideration shall be deemed to be income of the year in which such money or other asset was received.

The profit or gain shall be treated as LTCG if the period of holding the original asset is more than 24 months, or else the same shall be treated as STCG.

LTCG shall be subject to tax at the rate of 12.5 per cent, whereas STCG shall be subject to tax at the applicable slab rates (including applicable surcharge and cess).

8. CHAPTER XII-A: SPECIAL PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS

This chapter deals with special provisions relating to the taxation of certain income of NRIs. These provisions aim to simplify the tax obligations of NRIs and provide certain benefits and exemptions to encourage investments in India.

Applying the provisions of this chapter is optional. An NRI can choose not to be governed by the provisions of this chapter by filing his ITR as per section 139 of the Act, declaring that the provisions of this chapter shall not apply to him for that assessment year.

For the purpose of understanding the tax implications under this chapter, it is important to understand certain definitions:

  •  Foreign exchange assets: means the assets which the NRI has acquired in convertible foreign exchange (as declared by RBI), namely:

Ο Shares in an Indian Company;

Ο Debentures issued by or deposits with an Indian Company which is not a private company;

Ο Any security of the Central Government being promissory notes, bearer bonds, treasury bills, etc., as defined in section 2 of the Public Debt Act, 1944.

  •  Investment income: means any income derived from foreign exchange assets.
  •  Non-resident Indian: means an individual being a citizen of India or a person of Indian origin who is not a resident.
  •  “specified asset” means any of the following assets, namely:—

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

a. Section 115D – Special provision for computation of total income under this chapter:

In computing the investment income of a NRI, no deduction of expenditure or allowance is allowed.

If the gross total income of the NRI consists of only investment income or long-term capital gain income from foreign exchange assets or both, no deduction will be allowed under Chapter VI-A. Further, the benefits of indexation shall not be available.

b. Section 115E – Tax on Investment income and long term capital gain:

  •  Investment income – taxed at the rate of 20 per cent
  •  Long-term capital gain on foreign exchange asset: taxed at the rate of 12.5 per cent.
  •  Any other income: as per the normal provisions of the Act.

c. Section 115F – Exemption of long-term capital gain on foreign exchange assets:

  •  Where the NRI has, during the previous year, transferred foreign exchange assets resulting into LTCG, the gain shall be exempt from tax if the amount of gain is invested in any specified asset or national savings certificates within 6 months after the date of such transfer. Further, if the NRI has invested only part of the gain in the specified asset, then only the proportionate gain will be exempt from tax. In any case, the exemption shall not exceed the amount of gain that arises from the transfer of foreign exchange assets.

If the NRI opts for this Chapter, then he is not required to file an income tax return if his total income consists of only investment income or long-term capital gain or both, and the withholding tax has been deducted on such income.

Further, NRIs can continue to be assessed as per the provisions of this Chapter ever after becoming resident by furnishing a declaration in writing with his ITR, in respect of investment income (except investment income from shares of Indian company) from that year and for every subsequent year until the transfer or conversion into money of such asset.

CONCLUSION

As discussed in this article, the foreign exchange regulations with respect to the permissibility of non-residents investing in Indian non-debt securities and the tax laws covering the taxation of income of non-residents arising from investment in Indian securities are complex and need to be carefully understood before a non-resident makes investments in India securities. Further, implications on changes in residential status also need to be looked into carefully to appropriately comply with them.

Presentation and Disclosure in Financial Statements

WHAT IS THE ISSUE?

ICAI has issued an exposure draft (ED) — Ind AS 118, ‘Presentation and Disclosure in Financial Statements’ — in response to concerns about the comparability and transparency of entities’ performance reporting. The new requirements introduced in Ind AS 118 will help to achieve comparability of the financial performance of similar entities, especially related to how ‘operating profit or loss’ is defined and the presentation of the income statement. Additionally, the new disclosures required for some management-defined performance measures will also enhance transparency.

It will not affect how companies measure their financial performance and the overall profit figure.

KEY CHANGES

1. Structure of the statement of profit or loss

Ind AS 118 introduces a defined structure for the statement of profit or loss. The goal of the defined structure is to reduce diversity in the reporting of the statement of profit and loss, helping users of financial statements to understand the information and to make better comparisons between companies. The structure is composed of categories and required subtotals.

Categories: Items in the statement of profit or loss will need to be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations. Ind AS 118 provides general guidance for entities to classify the items among these categories — the three main categories are:

OPERATING CATEGORY

The operating category is the default or residual category for income and expenses that are not classified in other categories and:

  •  includes all income and expenses arising from a company’s operations, regardless of whether they are volatile or unusual in some way. Operating profit provides a complete picture of a company’s operations for the period.
  •  includes, but is not limited to, income and expenses from a company’s main business activities. Income and expenses from other business activities, such as income and expenses from additional activities, are also classified in the operating category, if those income and expenses do not meet the requirements to be classified in any of the other categories.

Ind AS 118 requires a company to present expenses in the operating category in a way that provides the most useful structured summary of its expenses. To do so, a company will present in the operating category expenses classified based on: a) their nature — that is, the economic resources consumed to accomplish the company’s activities, for example, raw materials, salaries, advertising costs; or b) their function — that is, the activity to which the consumed resource relates, for example, cost of sales, distribution costs, administrative expenses.

It requires companies to classify expenses in a way that provides the most useful information to investors, considering, for example: a) what line items provide the most useful information about the important components or drivers of the company’s profitability; and b) what line items most closely represent the way the company is managed and how management reports internally.

Some companies might decide that classifying some expenses by nature and other expenses by function, provides the most useful structured summary of their expenses. The standard also requires companies that present expenses classified by function to disclose the amount of depreciation, amortisation, employee benefits, impairment losses and write-downs of inventories included in each line item in the operating category of profit or loss. Allowing presentation of expenses by function is a significant change and improvement of current Ind AS 1 Presentation of Financial Statements.

INVESTING CATEGORY

This category typically includes:

  •  results of associates and joint ventures;
  •  results of cash and cash equivalents; and
  •  assets that generate a return individually and largely independently of other resources, for example, a company might collect rentals from an investment property or dividends from shares in other companies.

FINANCING CATEGORY

This category includes:

  •  all income and expenses from liabilities that involve only the raising of finance (such as typical bank borrowing); and
  •  interest expense and the effects of changes in interest rates from other liabilities (such as unwinding of the discount on a pension liability).

An entity is required to assess whether it has a specified main business activity that is a main business activity of investing in particular types of assets; or providing financing to customers, for example, insurers and banks. Income and expenses that would otherwise be classified in the investing or financing categories by most companies would form part of the operating result for such companies. Ind AS 118 therefore requires these income and expenses to be classified in the operating category.

Required subtotals:Ind AS 118 requires entities to present specified totals and subtotals: the main change relates to the mandatory inclusion of ‘Operating profit or loss’. The other required subtotal is ‘Profit or loss before financing and income taxes’, with some exceptions.

2. Disclosures related to the statement of profit or loss

Ind AS 118 introduces specific disclosure requirements related to the statement of profit or loss:

Management-defined Performance Measures (‘MPMs’):

This is a subtotal of income and expenses other than those specifically excluded by the Standard or required to be disclosed or presented by Ind ASs, that a company uses in public communications outside financial statements to communicate to investors management’s view of an aspect of the financial performance of the company as a whole. For example, measures that adjust a total or subtotal specified in Ind ASs, such as adjusted profit or loss, are management-defined performance measures.

Other measures (such as free cash flow or customer retention rate) are not management-defined performance measures. For the purpose of identifying MPMs, public communications outside the financial statements include management commentary, press releases, and investor presentations. It does not include oral communications, written transcripts of oral communications, or social media posts.

The standard requires an entity to provide disclosures for all MPMs in a single note, including:

  •  reconciliation between the measure and the most directly comparable subtotal listed in Ind AS 118 or total or subtotal specifically required by Ind ASs, including the income tax effect and the effect on non-controlling interests for each item disclosed in the reconciliation;
  •  a description of how the measure communicates management’s view and how the measure is calculated;
  •  an explanation of any changes in the company’s MPMs or in how it calculates its MPMs; and
  •  a statement that the measure reflects management’s view of an aspect of financial performance of the company as a whole and is not necessarily comparable to measures sharing similar labels or descriptions provided by other companies.

3. Enhanced requirements for aggregation & disaggregation of information

Ind AS 118 requires companies to aggregate or disaggregate information about individual transactions and other events into the information presented in the primary financial statements and disclosed in the notes.

The Standard requires companies to ensure that: a) items are aggregated based on shared characteristics and disaggregated based on characteristics that are not shared; b) items are aggregated or disaggregated such that the primary financial statements and the notes fulfil their roles; and c) the aggregation and disaggregation of items does not obscure material information.

Companies will be specifically required to disaggregate information whenever the resulting information is material. If a company does not present such information in the primary financial statements, it will disclose the information in the notes. To help companies apply the principles, Ind AS 118 provides guidance on grouping items and labelling aggregated items, including which characteristics to consider when assessing whether items have similar or dissimilar characteristics.

The guidance on aggregation and disaggregation has changed compared to Ind AS 1 Presentation of Financial Statements. This will require entities to reconsider their chart of accounts to evaluate whether their existing presentation is still appropriate or whether improvements can be made to the way in which line items are grouped and described in the primary financial statements. In addition, changes in the structure of the statement of profit or loss and additional disclosure requirements might require an entity to make significant changes to its systems, charts of accounts, mappings, investor presentations, etc. The level of operational change required by the new standard should not be underestimated, and entities should start thinking about the operational challenges as soon as possible.

EFFECTIVE DATE

It is proposed that an entity shall apply this Standard for annual reporting periods beginning on or after 1st April, 2027 and when this Standard applies, Ind AS 1 Presentation of Financial Statements, will be withdrawn.

Section 143(3) r.w.s. 148: Reopening of assessment — Assessment completed — Petitioner had explicitly sought for a personal hearing — Not granted – breach of the principles of natural justice.

25. Pico Capital Private Limited vs. Dy. CIT Circle – 8(2)(1) &Ors.

[WP(L) No. 15940 OF 2024]

Dated: 7th January, 2025. (Bom) (HC)

Section 143(3) r.w.s. 148: Reopening of assessment — Assessment completed — Petitioner had explicitly sought for a personal hearing — Not granted – breach of the principles of natural justice.

The Petitioner challenged the assessment order dated 26th March, 2024 and notice dated 31st March, 2023 disposing of objections under Section 148A(d) of the Act. However, the Court considered the challenge to the assessment order dated 26th March, 2024 on the ground that it was made in breach of the principles of natural justice.

The Petitioner, in reply to the show cause notice, had explicitly sought for a personal hearing. There is no dispute on this aspect. However, the impugned order stated video conferencing was not required.

The Court noted that though a personal hearing was sought, the same had been denied to the Petitioner on the ground that the Petitioner would have nothing further to add to the reply already filed by the Petitioner. The Court noted that such an approach, would not be appropriate. If the law requires the grant of a personal hearing, then the same should not be ordinarily denied on the grounds that nothing further could be said in the personal hearing. The Petitioner must be allowed to convince the Assessing Officer of the merits of its version. This is more so when a law provides for a personal hearing when requested by the Assessee.

Attention was invited to Circular No.F.No.225/97/2021/ITA-II dated 6th September, 2021 in the context of approval for the transfer of assessments / penalties proceedings to jurisdictional Assessing Officers. It was observed that the Circular provided that the request for personal hearings shall generally be allowed to the assessee with the approval of the Range Head, mainly after the assessee has filed a written submission to the show cause notice. Personal hearings may be allowed for the assessee, preferably through video conference. If Video Conference is not technically feasible, personal hearings may be conducted in a designated area in the Income-Tax Office. The hearing proceedings may be recorded. Given this Circular, the defence raised, or the justification offered by the Respondents’ affidavit cannot be accepted.

The Court noted that though the assessment order was appealable, however, the Court entertained the petition because a case of complete failure of natural justice was made out. No personal hearing was granted to the Petitioner, and such denial was not for valid reasons.

The impugned assessment order dated 26th March, 2024 was set aside, and remand the matter to the concerned Respondent to dispose of the show cause notice issued to the Petitioner following the law and after granting the Petitioner a personal hearing.

Section: 143(1) – Intimation – ICDS adjustment and valuation of inventory – Writ Petition – Alternate remedy – Article 226 of the Constitution of India : Assessment Year 2022-23.

24. Fiat India Automobiles Limited vs. Dy. Director of Income Tax &Ors.

[WP (L) No. 10495 OF 2023]

Dated: 15th January, 2025 (Bom) (HC)

Section: 143(1) – Intimation – ICDS adjustment and valuation of inventory – Writ Petition – Alternate remedy – Article 226 of the Constitution of India : Assessment Year 2022-23.

The Petition challenges an intimation passed under section 143(1) of the Income-tax Act, 1961 (‘the Act’), dated 26th July 2023 for Assessment Year 2022-23, whereby a demand of approximately ₹6,600 Crores was raised.

The Petitioner submitted that since a huge demand of ₹6,600 had been raised, the remedy of appeal would not be an efficacious remedy. Accordingly, the Court should exercise its writ jurisdiction. It was further submitted that prior to passing the impugned intimation order, no opportunity was given to the Petitioner. It was further submitted that on 28th March, 2024 an order under section 143(3) read with Section 144B of the Act came to be passed by the Assessing Officer accepting the return income with a rider which reads as follows :-

“3.1.4…….It is clarified that the issue of ICDS adjustment and valuation of inventory is under adjudication pending with Hon’ble High Court, therefore, no decision with regard to these issues is being taken in this order.”

It was contended that in view of the subsequent 143(3) order, and on a reading of Section 143(4) of the Act, the subject matter of 143(1) gets subsumed in 143(3) proceedings. It was further pointed out that the Petitioner had made an application under Section 154 on 31st July, 2023 for rectifying the mistake which had crept in the intimation under Section 143(1) of the Act. The said rectification application had not been disposed of on the ground that the subject matter of 143(1) was pending before the Court in the present Petition.

The Respondents, justified their action in passing 143 (1) order and submitted that since the matter was pending before this Court, the officer in the 143(3) order stated that the issue of ICDS adjustment and valuation of inventory would be subject to the outcome of this Petition.

The Hon. Court observed that at no point of time, the Hon. Court had restrained the Respondents from adjudicating any issue in the regular assessment proceedings. Accordingly, the observations made in the assessment order under Section 143(3), that since the issue of ICDS adjustment and valuation of inventory was pending before the Court, no decision with regard to this issue has been taken, was incorrect. If the officer was of the view that the ad-interim order amounted to restraining the officer from adjudicating this issue in regular assessment proceedings, then, the Respondents should have approached the Court for clarification. However, at no stage the Hon. Court had restrained the Respondents from adjudicating this issue in regular assessment proceedings.

The Court further observed that, the Petitioner had made an application on 31st July, 2023 for rectification of the intimation. The said application of the Petitioner was not decided by the Assessing Officer on the ground that issue of Section 143(1) adjustment is pending before the Court. The Hon. Court again clarified that the Respondents were not restrained by any order of the Hon. Court from passing any order to decide the rectification application filed by the Petitioner on 31st July, 2023. The Hon. Court observed that in the absence of any restraint order by the Court, the stand of the Respondents not to adjudicate the rectification application was misconceived. The officer ought to have adjudicated the rectification application in accordance with law.

The Hon. Court observed that the intimation under challenge is an appealable under Section 246A(1)(a) of the Act. It was the contention of the Petitioner that no notice was given before passing the intimation. However, in the order dated 23th August 2023, the Respondents have stated that an intimation was issued to the Petitioner on 27th May, 2023 requiring a response and since the Petitioner did not respond, the adjustment was made.

The Court held that this would require adjudication of facts whether any prior intimation was served on the Petitioner before passing the impugned intimation. This factual determination cannot be examined by the Court in the writ proceedings. However, the same can be adjudicated efficaciously before the Appellate Authority. The Court noted that in Section 246A, there is no provision of mandatory pre-deposit for admitting and entertaining the appeal. Therefore, the contention of the Petitioner that the intimation raises a huge demand of ₹6,600 crores, where the remedy of appeal is not efficacious remedy, was rejected. The Court further noted that the Petitioner had the remedy of making an application for stay of the demand and any order passed thereon, if the Petitioner was aggrieved, could be challenged in accordance with law. Therefore, although a huge demand was raised, but in the absence of any pre-deposit for admitting and entertaining the appeal, the Court cannot interfere with the impugned intimation in writ proceedings.

In view of above, the Hon. Court granted the Petitioner liberty to challenge the impugned intimation dated 26th July 2023 by filing an appeal within a period of four weeks from the date of uploading of the present order. The Appellate Authority was directed to consider the appeal on merits without recourse to limitation, since the Petitioner was bonafidely pursuing the Petition before the Court. The Respondent was directed to decide the rectification application dated 31st July 2023 within a period of two weeks from the date of uploading the order after giving an opportunity of personal hearing to the Petitioner.

Refund — Adjustment of demand — Recovery of tax — Grant of stay of demand — Powers of the AO — Instructions issued by the CBDT misconstrued — Application for rectification of order pending before Commissioner (Appeals), National Faceless Appeal Centre — Adjustment of refund without considering application for stay of demand arbitrary and illegal — Matter remanded with directions.

81. National Association of Software and Services Companies (NASSCOM) Vs. DCIT(Exemption)

[2024] 470 ITR 493 (Del.)

A. Ys. 2018-19:

Date of order: 1st March, 2024:

Ss. 154, 220(6) and 237 of ITA 1961:

Refund — Adjustment of demand — Recovery of tax — Grant of stay of demand — Powers of the AO — Instructions issued by the CBDT misconstrued — Application for rectification of order pending before Commissioner (Appeals), National Faceless Appeal Centre — Adjustment of refund without considering application for stay of demand arbitrary and illegal — Matter remanded with directions.

The Assessee filed its return of income for A. Y. 2018-19 and claimed a refund of ₹6,45,65,160 on  account of excess tax deducted at source during the year. The Assessee’s case was selected for scrutiny and assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed after making several additions which resulted into creation of demand of ₹10,26,85,633.

Against the said order, the Assessee filed an appeal before the CIT(A). The Assessee also filed application for rectification u/s. 154 of the Act for rectifying certain mistakes apparent from the face of the order. The Assessee also filed application for stay of demand. The rectification application filed by the Assessee was rejected by the Assessing Officer. Pending appeal before the CIT(A) and pending disposal of the stay application filed by the Assessee, the Department adjusted the refunds on account of excess tax deducted at source for the A. Ys. 2010-11, 2011-12 and 2020-21 towards the demand raised for the assessment year 2018-19.

The Assessee filed a writ petition challenging the action of the Department. The Delhi High Court allowed the petition and held as follows:

“i) The Office Memorandum [F. No. 404/72/93-ITCC], dated 29th February, 2016 and the Office Memorandum [F. No. 404/72/93-ITCC], dated July 31, 2017 ([2017] 396 ITR (St.) 55) and neither prescribe nor mandate 15 per cent. or 20 per cent. of the outstanding demand under section 156 of the Income-tax Act, 1961 being deposited as a precondition for grant of stay. The earlier Office Memorandum dated 29th February, 2016, specifically mentions of the discretion vesting in the Assessing Officer to grant stay subject to a deposit at a rate higher or lower than 15 per cent. depending upon the facts of a particular case. The subsequent Office Memorandum dates 31st July, 2017 merely amended the rate to be 20 per cent. and describes the 20 per cent. deposit to be the “standard rate”. The administrative circular would not operate as a fetter upon the power otherwise conferred on a quasi-judicial authority and that it would be wholly incorrect to view the Office Memorandum as mandating the deposit of 20 per cent. of the disputed demand irrespective of the facts of an individual case. The clear and express language employed in sub-section (6) of section 220 states of the Assessing Officer being empowered “in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case”. Therefore, the 20 per cent. pre-deposit stated in the Office Memorandum cannot be viewed as being an inviolate or inflexible condition. The extent of the deposit which an assessee may be called upon to make would have to be examined and answered considering the factors such as prima facie case, undue hardship and likelihood of success.

ii) The Department had proceeded on incorrect and untenable premise that the assessee was obliged to furnish evidence of having deposited 20 per cent. of the disputed demand before filing its application for stay of demand under section 220(6) could have been considered. The interpretation which was sought to be accorded to the Office Memorandum [F. No. 404/72/93-ITCC], dated 29th February, 2016 (amendment of instruction No. 1914, dated 21st March, 1996 which contained the guidelines issued by the Central Board of Direct Taxes regarding procedure to be followed for recovery of outstanding demand, including procedure for grant of stay of demand) was misconceived and untenable. The Department had erred in proceeding on the assumption that the application for consideration of outstanding demands being placed in abeyance could not have even been considered without a 20 per cent. pre-deposit of the disputed demand. On the date when the adjustments of the refund towards the demand of the assessment year 2018-19 was made, the application filed by the assessee under section 220(6) had neither been considered nor disposed of. Therefore, the adjustment of the outstanding demand for the assessment year 2018-19 against the available refunds without attending to that application was arbitrary and unfair. The intimation of adjustments being proposed would hardly be of any relevance or consequence once it was found that the application for stay of demand remained pending.

iii)The matter was remitted to the Department for considering the application of the assessee u/s. 220(6) in accordance with the observations made. The issue of the amount of refund liable to be released would abide by the decision which the Department would take pursuant to the directions”.

Recovery of tax — Company — Liability of director of private company — Order u/s. 179 — Condition precedent — Inability to recover tax dues from company.

80. Manjula D. Rita and Bhavya D. Rita vs. Pr. CIT:

[2025] 472 ITR 116 (Bom):

A. Y. 2012-13: Date of order: 19th June, 2023

Ss. 179 and 264 of ITA 1961:

Recovery of tax — Company — Liability of director of private company — Order u/s. 179 — Condition precedent — Inability to recover tax dues from company.

The petitioners are two out of the four legal heirs of one late Dinesh Shamji Rita (the deceased), who was a director of Bhavya Infrastructure India Private Limited (the company) during the A. Y. 2012-13. The other two legal heirs are married daughters of the deceased and petitioner No. 1. The petitioners are impugning an order dated 9th March, 2020 passed by respondent No. 1 u/s. 264 of the Income-tax Act, 1961 (the Act) rejecting the petitioner’s application. The order impugned came to be passed while rejecting an application filed by the petitioners impugning an order dated 7th May, 2018 passed under section 179(1) of the Act.

The company had filed its return of income for the A. Y. 2012-13 on 29th September, 2012 declaring an income of ₹62,47,290. An assessment order u/s. 143(3) of the Income-tax Act, 1961 came to be passed on March 30, 2015 by which several additions were made, i. e., a sum of ₹ 18,37,21,188 u/s. 68 of the Act for unexplained cash credit, interest on loan of ₹1,21,11,106 and disallowance u/s. 14A of the Act of ₹2,06,642. A demand of ₹8,66,76,960 was also made u/s. 156 of the Act.

The deceased applied for stay before the Assessing Officer and filed an appeal before the CIT (A). The Assessing Officer rejected the application for stay by an order dated 16th July, 2015. An application was moved by the deceased before the Additional Commissioner of Income-tax for grant of stay of the demand, which application also came to be rejected. The company, though had not accepted the additions/disallowance, voluntarily paid various amounts in October / November, 2017. Certain properties were attached but the attachment order was later vacated. The petitioner’s revision application u/s. 264 of the Act also came to be rejected.

Thereafter, the petitioners received an order dated 7th May, 2018 passed u/s. 179 of the Act against which the petitioners filed another revision application u/s. 264 of the Act. This revision application came to be rejected by the impugned order dated March 9, 2020.

The petitioners filed writ petition and challenged the order dated 9th March, 2020, passed by respondent No. 1 u/s. 264 of the Act rejecting the petitioner’s application. The Bombay High Court allowed the writ petition and held as under:

“i) It is averred in the petition that the deceased took seriously ill and was ailing for almost six months before succumbing to multiple organ failures on 6th May, 2018, a day before the order dated May 7, 2018, came to be passed u/s. 179 of the Act. The order impugned passed by respondent No. 1 u/s. 264 of the Act also is a very brief order in the sense that the only ground on which the application u/s. 264 of the Act came to be rejected is contained in paragraph 4.2 of the impugned order. Respondent No. 1, without considering any of the submissions made by the petitioners, has simply rejected the application u/s. 264 of the Act noting that the notice of the death of the deceased was not brought to the Assessing Officer by anybody and before the order u/s. 179 of the Act was signed by the Assessing Officer and, therefore, as on the date of the passing of the order, there was nothing invalid.

ii) Before passing an order u/s. 179 of the Income-tax Act, 1961, the Assessing Officer should have made out a case as required u/s. 179(1) of the Act that the tax dues from the company cannot be recovered. Only after the first requirement is satisfied would the onus shift on any director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the company.

iii) There was nothing to indicate the steps were taken to trace the assets of the company. Moreover, the order passed u/s. 179 of the Act did not satisfy any of the ingredients required to be met. In view of non-issuance of notice, the assessee had not been given an opportunity to establish that the non-recovery was not attributable to any of the three factors on his part, i.e., gross neglect or misfeasance or breach of duty.

iv) Without going into the merits on the correctness of the assessment order passed or whether the time was ripe to issue notice under section 179 of the Act, we hereby quash and set aside the order dated 9th March, 2020 passed under section 264 of the Act, so also the order dated 7th May, 2018 passed under section 179 of the Act.”

Reassessment — Notice — Validity — Seizure of cash by police — Cash produced in Magistrate Court and case registered — Proceedings u/s. 132A — Department requisitioning for release of cash — Release or custody of cash only in accordance with provisions of section 451 of Cr.PC 1973 — First proviso to section 148A applicable — Notices valid though issued non-complying with procedures u/s. 148A.

79. Muhammed C. K. vs. ACIT:

[2025] 472 ITR 161 (Ker):

A. Ys. 2020-21 to 2023-24: Date of order: 11th March, 2024:

Ss. 132A, 147, 148 and 148A of ITA 1961: and S. 451 of Code Of Criminal Procedure, 1973:

Reassessment — Notice — Validity — Seizure of cash by police — Cash produced in Magistrate Court and case registered — Proceedings u/s. 132A — Department requisitioning for release of cash — Release or custody of cash only in accordance with provisions of section 451 of Cr.PC 1973 — First proviso to section 148A applicable — Notices valid though issued non-complying with procedures u/s. 148A.

Certain amount of cash was seized from the assessee by the police and was produced before the magistrate court and a case was registered. It was stated that an application u/s. 451 of the Criminal Procedure Code, 1973 was filed before the Magistrate Court to release the money to the Department.

On a writ petition contending that the money ought to be released to him and that since the money in question was never requisitioned as contemplated by the provisions of section 132A of the Income-tax Act, 1961, the notices u/s. 148A, issued for the A. Ys. 2020-21 to 2023-24 without following the procedure prescribed u/s. 148A were illegal and unsustainable the Kerala High Court held as under:

“i) The notices had been issued without following the procedure contemplated u/s. 148A, the notices issued u/s. 148 were not illegal, since on the facts, the situation fell within the first proviso to section 148A, which provided that the procedure u/s. 148A was not applicable in a case covered by the provisions of section 132A, though the Department had filed an application u/s. 451 of the 1973 Code. Though when an item or cash, was produced before a criminal court the Department could not issue a notice u/s. 132A to the court in question, once the item was produced before the court in connection with any criminal case registered by the police or any other law enforcement agency, an application for release or for giving custody of it to the Department could only be in accordance with the provisions of the Code of Criminal Procedure and specifically section 451 of the 1973 Code thereof. That did not take away the fact that the Department had initiated proceedings u/s. 132A to requisition the amount from the police station.

ii) Therefore, the case was covered by the first proviso to section 148A and the procedure prescribed under the provisions of section 148A need not be complied with before issuing the notices u/s. 148 for the A. Ys. 2020-21 to 2023-24.”

Re-assessment — Notice after four years — Advance Ruling — Effect of — Binding only on Assessee and AO in relation to transactions in question — Notice for reassessment for subsequent years issued on the basis of rulings in another case — Transactions similar to those in respect of which ruling rendered in Assessee’s case — No change in law or new tangible material and independent formation of belief by the AO — Notices for re-opening invalid.

78. Mrs. Usha Eswar vs. ITO and Ors.

[2024] 470 ITR 200 (Bom.)

A. Ys. 1997-98 – 2000-01

Date of order: 7th July, 2023

Ss. 147, 148, 245R and 245S of ITA 1961

Re-assessment — Notice after four years — Advance Ruling — Effect of — Binding only on Assessee and AO in relation to transactions in question — Notice for reassessment for subsequent years issued on the basis of rulings in another case — Transactions similar to those in respect of which ruling rendered in Assessee’s case — No change in law or new tangible material and independent formation of belief by the AO — Notices for re-opening invalid.

The assessee was a Non-resident Indian and was regularly assessed to tax in India in respect of income which accrued or arose in India or which was received in India. The Assessee was a resident of Dubai for several years and was a resident of the United Arab Emirates (UAE) as per the definition provided in the Double Taxation Avoidance Agreement (DTAA) between India and UAE. The Assessee had made an application to the Authority for Advance Ruling (AAR) seeking tax treatment as well as the rate of tax applicable in respect of income earned by way of dividends, interest and capital gains from sources in India. The said application was not made in respect of a specific assessment year. The AAR found that the Assessee was a resident as per Article 4 of the India — UAE DTAA and that the Assessee was not liable to pay tax in UAE as there was no levy of income tax on an Individual in UAE. The AAR applied the provisions of the Act and Articles 10, 11 and 13 of the DTAA and passed a ruling to the effect that the capital gains from transfer of moveable assets in India will be governed by Article 13(3) and the same will not be taxable in India on or before 1st April, 1994. The dividend income from shares held in India would be taxed at the rate of 15 per cent and income by way of interest on debentures and bonds as well as balance in partnership firm will be taxable at 12.5 per cent. In holding so, the AAR had relied upon its earlier ruling the case of MohsinallyAlimohammedRafik (“Mohsinally”).

Subsequently, after a period of four years, the Assessing Officer issued notice u/s. 148 of the Act for the AYs 1997-98, 1998-99, 1999-2000 and 2000-01 for re-opening the assessment on the ground that the ruling of the AAR was applicable only in respect of AY 1995-96 and that the AAR, in a subsequent ruling in the case of Cyril Eugene Pereria (“Cyril”), after considering the ruling in the earlier case of Mohsinally’s case, concluded that the benefit of DTAA would not be applicable as the applicant therein was not chargeable to tax in UAE. Therefore, the Assessing Officer concluded that the ratio of the ruling in Cyril’s case would be applicable and the benefits of DTAA were wrongly given to the Assessee for the AYs 1997-98 to 2000-01.

The Assessee filed writ petition challenging the re-opening of the assessment. The Bombay High Court allowed the petitions and held as follows:

“i) Section 245S of the Income-tax Act, 1961 states that the ruling pronounced by the Authority for Advance Rulings binds the Authority under section 245R . It is binding on the applicant who has sought the ruling in respect of the transactions in relation to which the ruling has been sought for and on the Commissioner and the Income-tax authorities subordinate to him in respect of the applicant and the transaction. Sub-section (2) of section 245S provides that the ruling shall be binding unless there is a change in the law or the facts on the basis of which the advance ruling has been pronounced.

ii) The Assessing Officer had manifestly exceeded his jurisdiction in reopening the assessment relying on the subsequent ruling of the Authority for Advance Rulings in the case of Cyril Eugene Pereira, In Re [1999] 239 ITR 650 (AAR). The ruling in that case could not bind the assessee nor could it displace the binding effect of the ruling in the assessee’s case. The transaction in respect of which the assessee had sought a ruling and in respect of which the Authority for Advance Rulings had issued the ruling to the assessee was of the same nature as that for the assessment years 1997-98, 1998-99, 1999-2000 and 2000-01. There was no change in law or facts. The Assessing Officer had not personally formed the belief that income liable to tax had escaped assessment and there was no tangible material to conclude that there was any escapement of income. Therefore, the notices under section 148 were set aside. The Director (International Transactions) had ignored the relevant provisions of law. The power to reopen the assessments under section 147 could not have been invoked.”

Deduction of tax at source — Self Assessment Tax — Not required where tax deducted at source on payment — Tax deducted at source from amount received by the Assessee — Assessee entitled to benefit u/s. 205 — Assessee need not produce Form 16A.

77. Incredible Unique Buildcon Pvt. Ltd. vs. ITO:

[2024] 470 ITR 106 (Del)

A. Y. 2011-12

Date of order: 3rd October, 2023

S. 205 of ITA 1961

Deduction of tax at source — Self Assessment Tax — Not required where tax deducted at source on payment — Tax deducted at source from amount received by the Assessee — Assessee entitled to benefit u/s. 205 — Assessee need not produce Form 16A.

The Assessee provided services to an entity by the name of CAL. The value of the service provided amounted to ₹8,50,26,199. The said entity CAL deducted tax at source amounting to ₹24,96,199. Out of ₹24,96,199 deducted by CAL, only an amount of ₹69,897 was deposited towards TDS and the balance ₹24,26,302 remained to be deposited. As a result, the Department did not give full credit of TDS deducted by CAL and raised a demand.

Therefore, the Assessee filed a writ petition and challenged the non-grant of full credit TDS. The Delhi High Court allowed the writ petition and held as under:

“i) In our view, the petitioner is right inasmuch as neither can the demand qua the tax withheld by the deductor-employer be recovered from him, nor can the same amount be adjusted against the future refund, if any, payable to him.

ii) Thus, for the foregoing reasons, we are inclined to quash the notice dated 28th February, 2018, and also hold that the respondents- Revenue are not entitled in law to adjust the demand raised for the A. Y. 2012-13 against any other assessment year. It is ordered accordingly.”

The High Court dismissed the review petition filed by the Department and held follows:

“i) Under section 205 of the Income-tax Act, 1961 where the tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from his income. The bar operates as soon as it is established that the tax had been deducted at source and it is wholly irrelevant as to whether the tax deducted at source is deposited or not and whether form 16A has been issued or not. Form 16A is amongst others, a piece of evidence which can establish deduction of tax at source. That said, form 16A is not the only piece of evidence in that regard. In a case where the assessee can show reliable material other than form 16A and prima facie establish the deduction of tax at source. The assessee cannot be left at the mercy of the tax deductor, who for multiple reasons may not issue form 16A or may not deposit the deducted tax.

ii) The assessee admittedly declared in his return of income the tax deducted at source by CAL. and supported this with his ledger account. Not only this, the assessee even filed a complaint dated 25th January, 2017 with the Department alleging that CAL. had deducted but not deposited the tax deducted at source. But no action was taken on its complaint. The assessee could not be burdened with the responsibility to somehow procure form 16A to secure benefit of the provision of section 205.”

Assessment — Faceless assessment — Intimation u/s. 143 — Procedure — Corrections to returns must be intimated to assessee — Reply by assessee must be considered.

76. Northern Arc Investment Managers Pvt. Ltd. vs. Dy. DIT

[2025] 472 ITR 154 (Mad)

Date of order: 10th November, 2023

S. 143 of ITA 1961

Assessment — Faceless assessment — Intimation u/s. 143 — Procedure — Corrections to returns must be intimated to assessee — Reply by assessee must be considered.

A writ petition was filed to direct either the first respondent or the second respondent to permit the petitioner to file their rectification petition to rectify the mistake of double disallowance in the intimation dated July 29, 2023 and also to process the refunds.

The Madras High Court Held as under:

“i) A reading of section 143 of the Income-tax Act, 1961 makes it clear that if there are any corrections, errors, addition or reduction in the return of the assessee, the Department has to intimate it to the assessee. Thereafter, as per the provisions of the Act, the Department is supposed to consider the reply and make suitable modifications in the Income-tax return as requested by the assessee.

ii) The Assessing Officer had not considered the reply filed by the assessee and issued the intimation. The Faceless Assessment Officer has to consider the reply and proceed with the assessee’s case based both on the original returns filed by the assessee and the modified returns after considering the reply of the assessee.”

Glimpses of Supreme Court Rulings

18. HDFC Bank Ltd. vs. State of Bihar &Ors.

(2024) 468 ITR 650 (SC)

Prosecution — Order dated 5th October, 2021 u/s. 132(3) of the IT Act was served upon the Branch Manager of the bank directing the said branch of the bank to stop the operation of any bank lockers, bank — Subsequently, by an order dated 1st November, 2021, the Branch Manager of the said bank was directed to revoke the restraint put on the bank accounts — On 9th November, 2021, the concerned branch of the bank allowed Smt. SunitaKhemka (one of the searched person) to operate her bank locker bearing No. 462 on misinterpretation of the order dated 1st November, 2021 — FIR was registered against Smt. SunitaKhemka and the staff of the bank for the offences punishable u/s. 34, 37, 120B, 201, 207, 217, 406, 409, 420 and 462 of the IPC for breach of the order dated 5th October, 2021 — Held — FIR did not show that the appellant-bank had induced anyone since inception — Bank being a juristic person, question of mens rea does not arise — There was nothing to show that the bank or its staff members had dishonestly induced someone deceived to deliver any property to any person, and that the mens rea existed at the time of such inducement — As such, the ingredients to attract the offence u/s. 420 IPC would not be available — There was not even an allegation of entrustment of the property which the bank has misappropriated or converted for its own use to the detriment of the Income-tax Officer — As such, the provisions of sections 406 and 409 IPC would also not be applicable — Since there was no entrustment of any property with the bank, the ingredients of section 462 IPC were also not applicable — Likewise, since the offences u/s. 206, 217 and 201 of the IPC requires mens rea, the ingredients of the said sections also would not be available against the bank — FIR/complaint also did not show that the bank and its officers acted with any common intention or intentionally co-operated in the commission of any alleged offences — As such, the provisions of sections 34, 37 and 120B of the IPC would also not be applicable — Thus, continuation of the criminal proceedings against the bank would cause undue hardship to the bank — Therefore, the impugned judgment and order of the High Court and the FIR were quashed and set aside.

In October, 2021, Smt. Priyanka Sharma, Dy. Director of IT (Inv.), Unit-2 (2), (being Respondent No. 5 in the proceedings before the Supreme Court), conducted a search and seizure operation in the case of several income-tax assessees including Shri Sunil Khemka (HUF), Smt. SunitaKhemka and Smt. ShivaniKhemka at the third floor of Khataruka Niwas, South Gandhi Maidan, Patna. The said search and seizure operation was conducted based on warrants of authorisation issued u/s. 132(1) of the IT Act, 1961 (IT Act’ for short). During the search, it was found that Smt. SunitaKhemka held a bank locker bearing No. 462 in the Bank (appellant-bank before the Supreme Court) at its Exhibition Road Branch, Patna.

On the basis of the said operation, on 5th October, 2021, an order u/s. 132(3) of the IT Act was served upon the Branch Manager of the appellant-bank at its Exhibition Road Branch, Patna by the concerned Authorised Officer. The order directed the said branch of the appellant-bank to stop the operation of any bank lockers, bank accounts and fixed deposits standing in the names of Shri Sunil Khemka (HUF), Smt. SunitaKhemka and Smt. ShivaniKhemka, among several other individuals and entities, with immediate effect. It was further clarified that contravention of the order would render the Branch Manager liable u/s. 275A of the IT Act and the same would result in penal action.

In compliance of the aforesaid order, the appellant-bank stopped the operation of the bank accounts, bank lockers and fixed deposits of the individuals/entities mentioned in the order. Further, on 7th October, 2021, the appellant-bank blocked the bank accounts of the income-tax assesses named in the order and also sealed the bank locker bearing No. 462 belonging to Smt. SunitaKhemka.

Subsequently, on 1st November, 2021, Respondent No. 5 issued an order to the Branch Manager of the appellant bank at its aforementioned branch thereby directing the appellant-bank to revoke the restraint put on the bank accounts of Smt. SunitaKhemka and three other persons, in view of the restraining order dated 5th October, 2021 passed under s. 132(3) of the IT Act. Accordingly, the said persons, including Smt. SunitaKhemka, were to be allowed to operate their bank accounts. The said order was received by the concerned Branch Manager of the appellant bank of 8th November, 2021 at 4:00 p.m. However, on 2nd November, 2021 at 11:24 a.m., an email was sent to the Branch Manager which contained the same order.

Thereafter, on 9th November, 2021, the concerned branch of the appellant-bank allowed Smt. SunitaKhemka to operate her bank locker bearing No. 462 and proper entries recording the operation of the said locker were made in the bank’s records.

Subsequently, on 20th November, 2021, Respondent No. 5 conducted a search and seizure operation at the bank locker in the concerned branch of the appellant-bank, wherein it was found that Smt. SunitaKhemka had operated her bank locker with the assistance of the concerned officers of the appellant bank. This was validated by the entry made in the bank’s records and the CCTV footage of the bank. Resultantly, the concerned officials of the aforementioned branch of the appellant-bank were found to have breached the restraining order dated 5th October, 2021.

Accordingly, on 20th November, 2021, Respondent No. 5 issued summons u/s. 131(1A) of the IT Act to Abha Sinha-Branch Manager, Abhishek Kumar-Branch Operation Manager and Deepak Kumar-Teller Authoriser being the concerned officials of the appellant-bank at its aforementioned branch.

The aforementioned officials attended the office of Respondent No. 5 and their statements were recorded wherein Abha Sinha and Abhishek Kumar stated that there had been an inadvertent error on the part of the bank officials and they had misinterpreted the order dt. 1st November, 2021. Since the said order pertained to the bank accounts of the concerned individuals including Smt. SunitaKhemka, the bank officials had misread the order to understand / assume that the revocation of the restraint extended to the bank lockers as well. Having misunderstood the order, the bank officials under a bona fide assumption that bank locker had been released as well, allowed Smt. SunitaKhemka to operate the same.

The statement of Smt. SunitaKhemka had also been recorded wherein she stated that her accountant Surendra Prasad, after speaking with Deepak Kumar, had informed her that the restraint on the aforementioned bank locker had been revoked and she could operate the said locker. This was specifically denied by Deepak Kumar in his statement.

Dissatisfied with the said explanations, Respondent No. 5 submitted a written complaint to the SHO, Gandhi Maidan Police Station seeking to register an FIR against Smt. SunitaKhemka and the concerned bank officials on the ground that the order dt. 5th October, 2021 had been violated owing to the unlawful operation of the aforementioned locker.

On the basis of the said complaint, on 22nd November, 2021, an FIR being Case No. 549 of 2021 came to be registered against Smt. SunitaKhemka and the staff of the appellant-bank at its aforementioned branch for the offences punishable under ss. 34, 37, 120B, 201, 207, 217, 406, 409, 420 and 462 of the IPC at the Gandhi Maidan Police Station, Patna.

Aggrieved by the registration of the FIR, the appellant-bank preferred a Criminal Writ Jurisdiction Case thereby invoking the inherent power of the High Court u/s. 482 of the Code of Criminal Procedure, 1973 (hereinafter referred to as ‘Cr.P.C.’) for the quashing of the FIR. The High Court vide the impugned order dismissed the writ petition finding it to be devoid of merit.

Being aggrieved thereby, the appellant-bank filed the present appeal before the Supreme Court.

The Supreme Court observed that for bringing out the offence under the ambit of section 420 IPC, the FIR must disclose the following ingredients: (a) That the appellant-bank had induced anyone since inception; (b) That the said inducement was fraudulent or dishonest; and (c) That mens rea existed at the time of such inducement.

According to the Supreme Court, the appellant-bank being a juristic person the question of mens rea could not arise. However, even reading the FIR and the complaint at their face value, there was nothing to show that the appellant-bank or its staff members had dishonestly induced someone, deceived to deliver any property to any person, and that the mens rea existed at the time of such inducement. As such, the ingredients to attract the offence under s. 420 IPC would not be available.

The Supreme Court further observed that insofar as the provisions of section 409 IPC is concerned, the following ingredients will have to be made out: (a) That there has been any entrustment with the property, or with any dominion over property on a person in the capacity of a public servant or banker, etc.; (b) That the said person commits criminal breach of trust in respect of that property.

For bringing out the case under criminal breach of trust, it will have to be pointed out that a person, with whom entrustment of a property is made, has dishonestly misappropriated it, or converted it to his own use, or dishonestly used it, or disposed of that property.

According to the Supreme Court, in the present case, there was not even an allegation of entrustment of the property which the appellant-bank had misappropriated or converted for its own use to the detriment of the respondent No. 5. As such, the provisions of section 406 and 409 IPC would also not be applicable.

Since there was no entrustment of any property with the appellant-bank, the ingredients of section 462 IPC were also not applicable. Likewise, since the offences under sections 206, 217 and 201 of the IPC requires mens rea, the ingredients of the said sections also would not be available against the appellant-bank.

Further, according to the Supreme Court, the FIR / complaint also does not show that the appellant bank and its officers acted with any common intention or intentionally cooperated in the commission of any alleged offences. As such, the provisions of ss. 34, 37 and 120B of the IPC would also not be applicable.

According to the Supreme Court the present case would squarely fall within categories (2) and (3) of the law laid down by it in the case of State of Haryana &Ors. vs. Bhajan Lal &Ors. 1992 Supp. (1) SCC 335.

The Supreme Court referred to its following observations in the case of Bhajan Lal &Ors. (supra):

“102. In the backdrop of the interpretation of the various relevant provisions of the Code under Chapter XIV and of the principles of law enunciated by this Court in a series of decisions relating to the exercise of the extraordinary power under Art. 226 or the inherent powers under s. 482 of the Code which we have extracted and reproduced above, we give the following categories of cases by way of illustration wherein such power could be exercised either to prevent abuse of the process of any Court or otherwise to secure the ends of justice, though it may not be possible to lay down any precise, clearly defined and sufficiently channelised and inflexible guidelines or rigid formulae and to give an exhaustive list of myriad kinds of cases wherein such power should be exercised. (1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence or make out a case against the accused. (2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by police officers under s. 156(1) of the Code except under an order of a Magistrate within the purview of s. 155(2) of the Code; (3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused; (4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a non-cognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under s. 155(2) of the Code; (5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused; (6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party; and (7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.103. We also give a note of caution to the effect that the power of quashing a criminal proceeding should be exercised very sparingly and with circumspection and that too in the rarest of rare cases; that the Court will not be justified in embarking upon an enquiry as to the reliability or genuineness or otherwise of the allegations made in the FIR or the complaint and that the extraordinary or inherent powers do not confer an arbitrary jurisdiction on the Court to act according to its whim or caprice.”

The Supreme Court was of the view that the continuation of the criminal proceedings against the appellant-bank would cause undue hardship to the appellant-bank.

In the result, the Supreme Court passed the following order – (i) The appeal is allowed; (ii) The impugned judgment and order dt. 8th June, 2022 passed by the learned Single Bench of the High Court of judicature at Patna in Criminal Writ Jurisdiction Case No. 1375 of 2021 is quashed and set aside; (iii) The First Information Report being Case No. 549 of 2021 registered at Gandhi Maidan Police Station, Patna on 22nd November, 2021, against certain officials of the appellant-bank working at its Exhibition Road Branch, Patna for the offences punishable under ss. 34, 37, 120B, 201, 206, 217, 406, 409, 420 and 462 of the Indian Penal Code, 1860 is also quashed and set aside qua the appellant-bank.

From The President

Last month, your Society uploaded all videos from the landmark BCAS Reimagine conference to its YouTube channel. Since then, these exclusive videos have accumulated thousands of views in a short period.

In one such video, being a dialogue on ‘The Victorious’ with living-legend Viswanathan Anand, the grandmaster shares insights on his deep passion for leveraging his personal learnings and achievements towards creating a virtuous, self-propelled chess ecosystem in our country. The true impact of this endeavour revealed itself when young GukeshDommaraju, his prodigious pupil, was crowned the youngest world champion in the history of the game.

Often times we underestimate the power of a single person, the power of a single idea and the power of a single organisation. From just one grandmaster in 1987 (being ‘Vishy’ Anand himself) to more than 85 Indian grandmasters today, with 6 out of top-20 world players being Indians and 3 out of top-6 world junior rankings being Indians, it was so apt when chess legend Garry Kasparov commented: “Children of VishyAnand are on the loose”.

Anand’s initiative, being superbly supported by the local government in Tamil Nadu, schools in Chennai, local coaches, capital providers along with technology access, has ushered a new era in Indian chess; it being highly speculated that the 2026 world championship title clash will be an Indian-vs-Indian clash. It’s a moment of pride, satisfaction and inspiration when in a short-span our country leads the world-pack, in a sport that was also historically invented in our beloved country itself, thousands of years ago.

As individuals and as organisations, there remain deep lessons in driving goodness and change through small-but-focussed interventions, powered by a supportive ecosystem. The single-most important reason for this ‘renaissance’ in Indian chess has been the contribution by multiple Indian Grandmasters who are ready to give back to society by creating a further line of champions. As an organisation itself, the BCAS think-tank aligns itself and continuously draws inspiration by such thoughts whilst constantly yearning to bring positive change for the members and the community it serves.

The resurgence of Indian chess, co-incidentally also had the Finance Minister Mrs Nirmala Sitharaman highlight the rise in Indian Grandmasters during her Union Budget speech last year. Whilst a year has gone by and Indian chess has created further records, our country’s excitement to the upcoming Union Budget in 2025 remains consistent.

Union Budget 2025

By the time you read this message, the Finance Minister would also have accomplished her own record of presenting the highest number of consecutive Union Budgets. The budget for the financial year 2025-26 will mark her eighth consecutive Union Budget, a new record in India’s Parliamentary history.

The upcoming annual Union Budget on 1st February, 2025 is also the first full-year budget in the third-lap of the Modi government. In the backdrop of (a) a stable coalition government with runway for next four years, (b) no major upcoming election rush and recent positive wins in state elections and (c) buoyant all-time high tax collections with simplification expectation, seen in contrast to (x) early sluggishness spotted in economic numbers, (y) anxiety in middle-income earners towards impactful taxes and (z) impact of geo-political shifts and Trump effect, the stage is set for this Union Budget to make its presence felt.

Not having the benefit of her thought process and the fine print under the Finance Bill, 2025, I will not risk speculating on the coverage under the Union Budget, but the formal BCAS expectation from the Union Budget, through a pre-budget memorandum has been submitted to the Finance Ministry, copy of which can be accessed at the society’s website. As Chartered Accountants, it will also be of immense interest to understand the outcome of the government’s initiative attempting to simplify the Income Tax Act, 1961.

The annual BCAS Budget Analysis publication is now available for pre-booking and we will strive to roll-out the publication, as soon as possible, post the Finance Bill, 2025 being available. The much-anticipated open-for-all BCAS Public Lecture Meeting on Direct Tax Provisions under Finance Bill, 2025 is scheduled to be held on 6th February, 2025 at 6:15 pm Yogi Sabhagruh, Dadar, Mumbai by learned Shri CA. Pinakin Desai, Past President – BCAS.

NFRA Representation

Separately, the Society has submitted a representation to NFRA regarding the fraud reporting requirements for statutory auditors of regulated entities. The representation focusses on the need to eliminate the duplication of reporting to different authorities, streamline the reporting process and simplify the regulatory framework for entities like banks, insurance companies, and NBFC’s by avoiding multiple reporting.

Open-for-all sessions and the BCAS YouTube Channel

Since inception, the BCAS has endeavoured to conduct open-for-all lecture meetings each month. In the month of January, the BCAS conducted 4 (four) such open-for-all lecture meetings. These sessions on (i) Navigating the Insolvency and Restructuring Landscape, (ii) Managing Challenges in Profession Today: Gita’s Perspective, (iii) Recent Important Decisions under Income Tax and (iv) Return of Trump – What does it mean for America, India and the World, were well received by our community. Most of these open-for-all sessions are also available through the BCAS YouTube channel. Over the years the BCAS YouTube channel has grown into a treasure trove of professional content and knowledge. Last month the BCAS YouTube channel touched a record 1 million views. With an ever-increasing content repository through open-for-all sessions, members not having subscribed, may choose to subscribe the BCAS YouTube channel.

Residential courses – 2025 season

The 2025-season of Residential Refresher Courses (‘RRC’) has officially started with the successful completion of the Residential Leadership Retreat in January. Next up:

1. Members’ RRC: At Lucknow / Ayodhya from 26th February to 1st March, 2025. Registrations closed!

2. IND-AS RRC: At Lonavala from 20th March to 22nd March, 2025.

3. International Tax and Finance Conference: At Jaipur from 3rd April to 6th April, 2025.

4. GST RRC: At Kolkata in June, 2025.

The concept of RRC’s was pioneered by the BCAS. Experience the magic of top-notch learning, networking, thought-leadership and unparalleled bonding at the BCAS RRCs. Join us for your preferred RRC and we look forward to interacting at the RRCs.

Warm Regards,

 

CA Anand Bathiya

President

From Published Accounts

COMPILER’S NOTE

As per the article in the Financial Times (FT), UK (9 December 2024), ‘Accounting errors force US companies to pull statements in record numbers’. The said article mentions that in the first 10 months of 2024, 140 (up from 122 in previous comparable period) public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures. It is also mentioned that a single ‘Big’ audit firm was involved in 26 of these cases.

In the US, the said restatements have been carried out in accordance with ASC 250 ‘Accounting changes and error corrections’ and in accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements. (corresponding to IAS 8 / IndAS 8).

Given below are instances and disclosures of 10 cases of companies listed on US markets where restatement has been carried out. (portions in bold highlight the reason and impact of the restatement). For reason of conciseness, tables giving the detailed impact of the restatement are not reproduced.

1. PLBY Group Inc. (Restatement of Interim period ended 30th June, 2023)

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

Subsequent to the issuance of the condensed consolidated financial statements as of and for the quarter ended 30th June, 2023 included in the Form 10-Q originally filed with the Securities and Exchange Commission (the “SEC”) on 9th August, 2023 (the “Original Filing”), the Company identified a correction required to be made in its historical condensed consolidated financial statements and related disclosures as of and for the three and six months ended 30th June, 2023. The correction relates to the accounting treatment of impairment of a license agreement and the classification of commission expense adjustments related to all contract impairments recorded during the three months ended 30th June, 2023. In the Company’s Original Filing, the Company impaired a license agreement (which was ultimately terminated in the fourth quarter of 2023) and recorded impairment expense in relation thereto. Additionally, commission expense reversals related to contract impairments were recorded as an offset to the impairment expense.

Pursuant to the Company’s completion of its year-end audit procedures for its 2023 fiscal year, the Company determined that the accounting treatment of the license agreement, as described above, was incorrect. Rather than recording impairment expense of $3.2 million, the Company should have reduced its deferred revenue balance which related to the impaired license agreement. In addition, commission expense reversals of $1.2 million should have been recorded to the Company’s cost of sales, rather than offsetting its impairment expense. Additionally, tax expense was increased by $1.1 million to account for the aforementioned reversal of the impairment expense and changes in jurisdictional location of certain other impairment expenses.

2. Pioneer Power Solutions Inc. (Fiscal Year ended 31st December, 2022)

Note 2: Restatement Of Previously Issued Consolidated Financial Statements

In connection with the preparation of our consolidated financial statements for the years ended 31st December, 2023 and 2022, the Company identified errors related to revenue and cost recognition in its previously issued consolidated financial statements as of and for the year ended 31st December, 2022 included in its Annual Report on Form 10-K for the year ended 31st December, 2022 (the “Annual Period”).

During 2022 and 2023, the Company recognized revenues associated with customer contracts with performance obligations satisfied over time (“Over Time Contracts”) using labour hours as the measure of progress. The Company’s underlying estimates of total labour hours required to complete Over Time Contracts were materially different from the actual labour hours required, which was determined to represent an error since the information underlying the estimate was known or knowable as of the balance sheet date and, as a result, the percentage of completion used to recognize revenue in the Affected Periods is materially different from the percentage of completion using actual labour hours incurred. As a result, the Company has restated revenues during the Affected Periods to adjust the percentage of completion based upon the actual labour hours incurred to complete each Over Time Contract (the “Revenues Adjustment”).

Additionally, the Company has determined that costs from Over Time Contracts should be recognized as incurred and, as a result, the Company has recorded an adjustment to its consolidated financial statements during the Affected Periods (together with the Revenues Adjustment, the “Restatement Adjustments”), as the Company was previously incorrectly deferring costs incurred to a future period.

The Company evaluated the materiality of these misstatements both qualitatively and quantitatively in accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements, and determined the effect of correcting these misstatements was material to the Affected Periods. As a result of the material misstatements, the Company has restated its consolidated financial statements for the Affected Periods in accordance with ASC 250, Accounting Changes and Error Corrections (the “Restated Consolidated Financial Statements”).

A reconciliation from the amounts previously reported for the Affected Periods to the restated amounts in the Restated Consolidated Financial Statements is provided for the impacted financial statement line items for: (i) the consolidated balance sheet as of 31st December, 2022; (ii) the consolidated statement of operations for the year ended 31st December, 2022; (iii) the consolidated statement of changes in stockholders’ equity for the year ended 31st December, 2022; and (iv) the consolidated statement of cash flows for the year ended December 31, 2022. The amounts labelled “Restatement Adjustments” represent the effects of the Restatement Adjustments.

3. Gatos Silver Inc. (Restatement of Fiscal Year ended 31st December, 2023)

Note 3: Restatement of Previously Issued Financial Statements

During the preparation of the financial statements for the three months ended 31st March, 2024, the Company identified that the capital distributions received from its investment in affiliate classified as cash provided by investing activities on the Consolidated Statements of Cash Flows should have been classified as cash provided by operating activities. Based on management’s judgement, the Company considered the declaration of the capital distribution (in its legal form) to be the nature of the activity that generated the cash flow and, therefore, classified capital distributions as cash provided by investing activities on the Consolidated Statements of Cash Flows. On further analysis, it was determined that management should have considered the underlying source of the cash flow at the Los Gatos Joint Venture (“LGJV”) that generated the funds for the capital distributions when determining its classification on the Company’s Consolidated Statements of Cash Flows. The capital distributions received previously classified as cash flow provided by investing activities should have been classified as cash flows provided by operating activities.

The impact of the restatement on the Consolidated Statements of Cash Flows for the year ended 31st December, 2023, is presented. The Consolidated Balance Sheets and balance of cash and cash equivalents as of 31st December, 2023, and the Consolidated Statements of Income and Comprehensive Income, Consolidated Statements of Stockholders’ Equity for the year ended 31st December, 2023, are not impacted by this error.

4. Reviva Pharmaceuticals Holdings, Inc (Fiscal Year ended 31st December, 2022)

Note 2: Restatement Of Previously Issued Annual Consolidated Financial Statements for The Fiscal Year Ended 31st December, 2022.

The need for the restatement arose out of the results of certain financial analysis the Company performed in the course of preparing its fiscal year-end 2023 financial statements. Principally, the Company completed a detailed lookback analysis to compare certain estimated accrued clinical trial expenses, specifically investigator fees, from one contract research organization to its actual clinical trial expenses that were incurred for the respective periods for that contract research organization during the Restatement Periods based on review of historical invoices. In the course of its analysis of the actual information gathered through the lookback process, the Company detected differences between the estimated accrued amounts of those clinical trial expenses and the actual expenses recorded due primarily to the Company’s failure to properly review and evaluate expenses incurred in those clinical trial contracts resulting in the Company not properly accruing for clinical trial expenses that were incurred but for which invoices were not yet received. In addition, the Company determined that an effective process for evaluating the completeness of the research and development expense accrual for investigator fees and related costs, for that contract research organization, was necessary. This included estimated patient site visits not yet reported, average site visit costs and average delay in site invoicing. This provides the Company with an effective estimate of the costs incurred as there can be a lag between receiving an invoice for the services provided from that contract research organization. Management and the audit committee of the Company’s board of directors have concluded that, in the ordinary course of closing its financial books and records, the Company previously excluded certain clinical trial expenses and associated accruals from the appropriate periods as required under applicable accounting guidelines. Therefore, the Company misstated research and development expenses, and accrued clinical expenses during the Restatement Periods. The Company received FDA authorisation in early 2022 to begin clinical trials and therefore, no similar error as of 31st December, 2021, would be expected or identified. Further, management determined that any misstatements to the quarterly periods ended 31st March, 2022, and 30th June, 2022, included in its Quarterly Reports on Form 10-Q, were not material.

Therefore, the Company misstated R&D expenses and associated accrued liabilities during the Restatement Periods. The Company principally attributes the errors to a material weakness in our internal control activities due to a failure in the design and implementation of our controls to review clinical trial expenses, including the evaluation of the terms of clinical trial contracts. Specifically, we failed to properly review and evaluate progress of expenses incurred in clinical trial contracts resulting in us not properly accruing for clinical trial expenses that were incurred but for which invoices were not yet received This is disclosed in Item II, Part 9A of this Annual Report on Form 10-K. The Company has commenced procedures to remediate the material weaknesses. However, these material weaknesses will not be considered remediated until the applicable remedial actions have been fully implemented and the Company has concluded that these controls are operating effectively for a sufficient period of time.

5. Paragon 28, Inc (Restatement of Fiscal Year ended 31st December, 2023)

Note 3: Restatement of Previously Issued Consolidated Financial Statements

Subsequent to the issuance of the Company’s consolidated financial statements as of and for the year ended 31st December, 2023 and the Company’s unaudited condensed consolidated financial statements as of and for the fiscal quarter ended 31st March, 2024, the Company identified errors in the calculation of its excess and obsolete inventory reserves, as well as its accounting for inventory variances, which resulted in a net overstatement of Inventories, net as of 31st December, 2023 and a net understatement in Cost of goods sold for the fiscal year ended 31st December, 2023. The consolidated financial statements (as restated) reflect the correction of this error and include adjustments to correct certain other previously identified misstatements relating to prior periods, including the fiscal year ended 31st December, 2022, that the Company had determined to be immaterial both individually and in aggregate.

DESCRIPTION OF MISSTATEMENT ADJUSTMENTS

(a) Inventory Treatment

The Company recorded adjustments to correct the calculation of its excess and obsolete inventory reserve and valuation of purchase price variances. The corrections resulted in a decrease in Inventories, net of $8,016, an increase in the Cost of goods sold of $8,356, and a decrease in the beginning balance of Accumulated deficit of $340, respectively, as of and for the fiscal year ended 31st December, 2023.

(b) Interest Rate Swap

The Company recorded adjustments to correct certain misstatements related to its interest rate swap previously corrected out of period in Q3 2023. The adjustments recognize the correction to prior periods.

6. ArhausInc (Restatement of Interim Period ended 30th June, 2023 and 31st March, 2023)

Note 16: Revision of Previously Issued Condensed Consolidated Financial Statements (Unaudited)

As described in Note 1 – Nature of Business, the Company identified an error within the consolidated balance sheets, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the consolidated statements of cash flows. The errors impacted the unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows as of and for the three months ended 31st March, 2023 and 2022, as of and for the six months ended 30th June, 2023 and 2022, and the unaudited condensed consolidated balance sheet as of 30th September, 2022. The Company has evaluated the errors both quantitatively and qualitatively and concluded they were not material, individually or in the aggregate, to such prior period unaudited condensed consolidated financial statements and concluded to revise such prior period unaudited condensed consolidated financial statements.

In connection with the revision of the Company’s unaudited condensed consolidated financial statements, we determined it was appropriate to correct for certain other previously identified immaterial errors. The Company will effect the revision of the unaudited interim condensed consolidated financial information for the first two quarters of 2023 as part of our filing of the 2024 interim Form 10-Qs.

7. BitFarms Limited (Fiscal Years ended 31st December, 2023)

Note No. 3: Basis of Presentation and Material Accounting Policy Information

  •  Restatement of statement of cash flows:

The statement of cash flows has been restated to reclassify the cash proceeds from the sale of digital assets, which is accounted for as an intangible asset under IAS 38, from cash flows from operations to cash flows from investing activities. The Company has determined that this error was material to the previously issued consolidated financial statements and as such, has restated its consolidated financial statements, as applicable.

  •  Adjustment on accounting for 2023 Warrants:

The Company is correcting an error in the fair value recorded for the 2023 exercises of warrants issued in connection with the private placement financing in 2023 (“2023 Warrants”). The correction resulted in an increase in the share capital and net financial expenses in the restated consolidated financial statements.

8. Cellectar Biosciences, Inc. (Fiscal Years ended December 31, 2023)

Note No. 2: Summary Of Significant Accounting Policies

Restatement of Previously Issued Consolidated Financial Statements — During the third quarter of 2024, and prior to the filing of the Company’s Form 10-Q for the quarter ended June 30, 2024, the Company determined that it was necessary to re-evaluate the Company’s accounting treatment for certain previously issued warrants and preferred stock. Additionally, the Company identified certain operating costs previously as research and development expenses which should have been classified as general and administrative expenses. In accordance with Staff Accounting Bulletins No. 99 (SAB No. 99) Topic 1.M, “Materiality” and SAB No. 99 Topic 1.N “Considering the Effects of Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” the Company assessed the materiality of these errors to its previously issued consolidated financial statements. Based upon the Company’s evaluation of both quantitative and qualitative factors, the Company concluded the errors were material to the Company’s previously issued consolidated financial statements for the fiscal years ended 31st December, 2023 and 2022. Accordingly, this Form 10-K/A presents the Company’s Restated Consolidated Financial Statements for the fiscal years ended December 31, 2023 and 2022. Additionally, the Company has restated its previously filed unaudited interim condensed consolidated financial statements for the periods ending 31st March, 2023, 30th June, 2023, 30th September, 2023, 31st March, 2022, 30th June, 2022, and 30th September, 2022, contained in its Quarterly Reports on Form 10-Q.
Note No. 14: Restatement Of Previously Issued Financial Statements

As described in Note 2 and detailed below, in July 2024 the Company determined that it was necessary to re-evaluate its accounting treatment for certain previously issued warrants and preferred stock. The Company identified five areas where the historical accounting treatment applied to previously issued warrants and preferred stock required modification:

  1.  Contractual terms contained within the agreements governing the warrants issued to its investors in prior periods required further evaluation under Topic 815. After consultation with external advisors and completing an extensive review process, management concluded that the classification of certain previously issued warrants as equity was not consistent with Topic 815 and has restated them as liabilities. This also results in the requirement to account for the change in the fair value of the liability classified warrants through the Consolidated Statements of Operations at each reporting date they remain outstanding. Additionally, upon the issuance of the 2022 common warrants, pre-funded warrants, and common stock, the Company determined the fair value of each security issued and booked a charge for the amount that the fair value exceeded the proceeds received.
  2.  Upon the issuance of the Series E Preferred Stock in September 2023, the contractual language required the 2022 Pre-Funded Warrants be reclassified from equity to liability.
  3.  The Series D Preferred Stock issued in 2020 was determined to be temporary, or mezzanine equity upon issuance and was so recorded.
  4.  The accounting treatment for the Tranche A and B warrants issued as part of the September 2023 financing (See Note 6) continues to be appropriate; however, as part of the work performed for the restatement, the warrant valuation was adjusted to correct prior errors in the valuation.
  5. Certain operating costs previously recorded as research and development expenses were corrected to general and administrative expenses.

The impact on the consolidated financial statements is as follows (lettered for reference to the financial statement adjustments):

A. All the outstanding common warrants were corrected from permanent equity to Warrant Liability, and the Series D Preferred Stock was corrected from permanent equity to Mezzanine Equity as of 31st December, 2021.

B. The proceeds from the October 2022 financing were adjusted as described in Note 6. Additionally, the cost of the 2022 financing allocated to the issuance of the 2022 Warrants, which was $463,000, was removed from Additional Paid-In Capital and charged to Other Expense.

C. After the issuance of the Series E Preferred in September 2023, the 2022 Pre-Funded Warrants were corrected from Additional Paid-In Capital to Warrant Liability.

D. At each reporting period the warrants accounted for as liabilities were marked to market with the adjustment reflected in Other Income (Expense).

E. Certain operating costs previously recorded as research and development expenses were corrected to general and administrative expenses.

F. Adjusted the balance sheet as of 31st December, 2021, by reducing additional paid-in capital and increasing the accumulated deficit by $25,300,000 which was the change from the initial fair value amount of the warrants issued in 2017, 2018, and 2020 through 31st December, 2021

9. Ranger Gold Corp. (Restatement of nine months ended as on December 31, 2023)

Note F: Correction of an Error / Prior Period Restatement

During our 2022 fiscal year-end reconciliation/close-out and subsequent audit, Management discovered that Accounts Payable amounts owed to Vendors and the related expenses incurred were incorrect in 2022. Some vendors had been paid outside of the bank account and directly by the owner which should have been recorded as an addition to the Additional Paid in Capital. In addition, some unpaid vendor invoices were not billed to Accounts Payable. Per ASC 250, since the error correction is material and material to financial statements previously issued, Management promptly corrected the errors and restated previously issued financial statements.
Fiscal Year 2023:

During our most recent reconciliation/close-out and subsequent audit, Management discovered that amounts paid and owed to Vendors and the related expenses incurred were incorrect in 2023. Expenses paid by the owner, which should have been recorded as expenses and as an addition to Accounts Payable and Paid in Capital Contributions were not properly posted. Per ASC 250-10, since the error correction is material and material to financial statements previously issued, Management is promptly correcting the errors and restating previously issued financial statements.

10. Sun Communities, Inc. (Restatement of 3 months ended 31st March, 2023, 30th June, 2023 and 30th September, 2023)

Note No. 22: Quarterly Financial Data (Unaudited and Restated)

Restatement of Prior Quarterly 2023 Financial Statements (Unaudited)

During the course of preparation and review of our financial statements for the year end 31st December, 2023, it was determined that we did not identify certain factors indicative of triggering events relevant to the valuation of the UK reporting unit, including reduced financial projections and increased interest rates when preparing our previously issued unaudited interim consolidated financial statements (collectively, the “Interim Financial Statements”) as of and for the period ended 31st March, 2023, as of and for the period ended 30th June, 2023, and as of and for the period ended September 30, 2023 (collectively, the “Interim Periods”), included in our Quarterly Reports on Form 10-Q for the quarters ended 31st March, 2023, 30th June, 2023 and 30th September, 2023, respectively. Management undertook a full review of the valuations and determined that as of each of 31st March, 2023, 30th June, 2023 and 30th September, 2023. we should have recognized non-cash impairments to goodwill for the UK reporting unit within our MH segment.

Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated these misstatements, and based on an analysis of quantitative and qualitative factors, determined that the impact of misstatements related to goodwill impairments was material to our Interim Periods. Accordingly, we have restated the unaudited consolidated financial statements for the Interim Periods and have included that restated unaudited financial information within this Annual Report.

The restated quarterly unaudited consolidated financial information for the interim periods ended 31st March, 2023, 30th June, 2023 and 30th September, 2023 are provided. These adjustments have no impact on cash flows from operating activities as goodwill impairment is a non-cash adjustment to reconcile net income / (loss) to cash provided by operating activities.

Forensic Accounting & Investigation In Healthcare Industry – Challenges & Opportunities

Forensic Accounting – The word forensic accounting makes you think about frauds, misappropriation, manipulation, embezzlement, illegal activities that can be detected from the examination of financial statements, books of accounts and other such documents with the intention to detect, investigate, or prevent any fraud.
Healthcare activities covers every section of the society. Due to wide spread and complex nature of activities, fraud may occur at any given point in the cycle, starting from patient registration at a healthcare centre or a hospital to the final prescription given to the patient.

INTRODUCTION

Forensic Accounting – The name itself causes you, the reader to promptly think about frauds, misappropriation, manipulation, embezzlement, illegal activities related to finance, etc. Yes, forensic accounting is related to the examination of financial statements, books of accounts and other such documents with the intention to investigate, detect or prevent any fraud. Unlike other audits, statutory or otherwise, the forensic accounting is not mandated under any statute. However, The Institute of Chartered Accountants of India has issued the Forensic Accounting and Investigation Standards on 1st July, 2023. Also, these standards are mandatorily applicable to all the Forensic Accounting engagements conducted on or after 1st July, 2023. Hence, mostly, forensic accounting is seen as an audit similar to a statutory audit or a tax audit since it also involves the examination of financial statements and books of accounts. However, it has more facets to it.

Forensic accounting is conducted with the main aim of gathering information and acquiring minute details about the financial matters of an entity or an individual, which can be put forth as admissible evidence in a court of law. As the judicial aspect is involved, forensic accounting goes beyond the step of regular audit, towards investigation. Forensic accounting requires a comprehensive set of skills and investigative techniques to corroborate the evidence of any fraud that has been committed or instances where an entity is prone to fraud. Generally, it is said that an auditor is a ‘watchdog’ and not a ‘bloodhound’. However, it can be said that a forensic accountant is a ‘bloodhound’.

Forensic Accounting covers various areas and industries where different investigative approaches have to be curated that suit the type of industry. The approach decides the investigative techniques to be used while conducting a forensic accounting engagement. Every sector is prone to frauds. In this article I take up the Healthcare industry.

HEALTHCARE INDUSTRY & FRAUDS

Healthcare Industry has several cycles and interactions which are two way — where both provider and recipient interact. Its spread and need is pervasive. One reason for susceptibility for fraud is the cyclical nature of activities. The following may be the normal structure of the cycle:

  1.  Patient Registration
  2.  Appointments
  3.  Patient diagnosis
  4.  Utilisation of services
  5.  Billing & Coding
  6. Payment
  7. Prescription
  8.  Medical Follow-up
  9.  Insurance Claim (Reimbursement or Cashless) and back to Step 1

A fraud may occur at any given point in the cycle mentioned above, starting from patient registration at a healthcare centre to the final prescription given to the patient. It is important to note that, unlike cyber frauds where the victim is mostly the consumer, in the case of the healthcare industry, apart from the patient, fraud can be perpetrated on the healthcare provider, health insurance provider, etc., by a frivolous lawsuit, fake claim of insurance, deliberate targeting of a healthcare centre or a hospital with the intention of harming its reputation, etc. Furthermore, healthcare centres or large hospitals are also prone to organisational frauds, leading to reputational embarrassment and loss of credibility.

A number of frauds are being detected in the healthcare industry at various levels, which underlines a worrying truth, i.e., “Wealth is Health”. Frauds are committed with the sole purpose of acquiring money illegally, immorally and at the cost of human health. Frauds are committed over intricate issues which are difficult to detect or prevent without the help of forensic accounting. Even though fraud might have a negative financial impact, it is not the only issue at hand. Major consequences regarding human health are being faced by numerous patients, their relatives, etc. due to frauds perpetrated on them and the dire fact is that the healthcare system in India is under heavy risk of fraud and manipulation. Frauds in the healthcare industry may be characterized into 2 categories:

  •  Deliberate Offences
  •  Offences occurring due to ignorance / over-tolerance / lack of vigilance

Deliberate offences include fraudulent activities carried out in order to defraud an individual or an entity carrying out its operations in the healthcare industry. Fraudulent activities may include providing false information about patients and their diagnosis, mishandling of critical information about patients, false and incorrect claims lodged with insurance companies, fake prescriptions for medicines which are not at all required but made only to claim reimbursement for the same, etc.

Offences occurring due to ignorance are mostly due to the casual approach. It includes cases where medical ethics are not followed, and overbilling is tolerated just because the patient was critical, upcoding of services which were not even prescribed but have been added to the billings, and illegal supply of drugs, medicines, and other medical equipment without proper entries at the medical stores, etc.

These are just some examples which are known and have been discussed later in this article. However, the list is not exhaustive since perpetrators find various ways to commit frauds when it comes to the healthcare industry, and the lack of a strong monitoring and safeguarding system helps them get away with it.

Following are various types of frauds in the healthcare industry that have made it vulnerable and how the number of frauds is growing day by day due to a lack of a standardized and structured forensic accounting procedure, which is adding fuel to the fire.

PATIENT INFORMATION MANAGEMENT

Whenever a person registers as a patient at a healthcare centre or a hospital, his/her critical and personal information is gathered in order to make proper and accurate records. These records not only contain the health issues of the particular person but also contain the medical history of his / her family. The doctor is assisted by this information while prescribing medicines or further medical procedures or tests. Such critical information has to be stored with proper safeguards, and it has to be ensured that there is no unauthorized access to the same. However, perpetrators hack into the system, use fake user IDs to enter the system, attempt to control the system from an undisclosed location, etc., only to gain access to patient records. Once the information is accessed, the same is sold to various companies or parties for hefty prices. Another way to perpetrate the fraud is through an insider. An employee of the healthcare centre or hospital acts in an unethical way in exchange for bribes, a guarantee of promotion, or any other enticement or incentives, etc., when he/she provides access to the records without tampering with the system. In this age of digitization and advanced information technology, one of the most important aspects of human life is data privacy. Hence, data has become more valuable than money and the healthcare industry is an avenue where fraudsters can have a plethora of personal information at their hands. Forensic accounting and investigation provide a comprehensive approach where investigative techniques are used in order to find lacunas with the system or any other technological aspect of the entity which may make it prone to fraud. At the same time, it shall be conducted in a way where the findings shall be admissible as evidence in the court of law.

Furthermore, such information, which is gained unlawfully, is also utilized to make false insurance claims, leading to insurance fraud. Mostly, this is done in order to dupe the insurance companies and acquire funds in an illegal way. Insurance fraud is an area where forensic accounting and investigation can assist companies in verifying whether the claims launched are legitimate and true. A forensic accountant can apply a string of audit and investigative procedures to ensure the legitimacy of a claim, which shall protect the insurance company from falling prey to a fraudulent claim.

PRESCRIPTIONS & MEDICATIONS

In India, chemists and medical shops are allowed to sell both prescribed as well as non-prescribed drugs, medicines, etc. This is another grey area where multiple levels of frauds are perpetrated, and these are difficult to detect since the amounts involved in these frauds are negligible, but overall, they have a huge impact. Fake prescriptions are prepared in order to claim reimbursements; multiple prescriptions are collected from various doctors and medical practitioners in order to gain access to certain prescribed medicines. Once these medicines are purchased on the basis of a fake prescription, the medicines are sold illegally at exorbitant prices without any proper billings. Otherwise, there have been cases where such medicines are used for substance abuse with prescription drugs not being used for their intended medical objective.

Have you ever wondered when you visit a certain doctor / medical practitioner or a hospital, and they provide you with a prescription for medicines, those medicines are available only at the medical stores affiliated with the hospital or which are set up within the hospital premises or only in selected medical shops? One might ponder upon the thought that since these are prescription drugs, they should be available at almost every medical shop. However, this is not the case. The patient has no choice but to purchase medicines from selected medical shops or the ones within the hospital premises. What could be the logic behind this? Why is there a compulsion on the patient to purchase medicines from certain medical shops only? Why are they not provided with an option to purchase medicines from a medical shop of their own choice? It seems that the doctors / medical practitioners or the hospitals have a nexus with the medical shops where the medical shops keep such medicines in their stock in huge quantities, which the doctor/medical practitioner shall prescribe. It is pre-decided as to what brand of the medicine shall be prescribed and only that brand of medicine is ordered in wholesale by the medical shop. Due to this pre-arrangement, a patient is unable to acquire medicines from a medical shop of his/her own choice since that medical shop does not have the stock of the prescribed medicine. This stems to a whole new level of fraud since an illegal nexus has been formed where the patients are being tricked and are given no choice but to buy medicines and other medical items from selected stores only. Forensic accounting function at this level may assist in investigating the types of medicines being prescribed. It may provide a structure to prepare a database which shall duly prompt the auditor to report where a particular brand of medicine is being prescribed frequently. The reasons for the same shall be sought from the management.

Furthermore, a forensic accounting function may provide insights related to the pricing of the medicines where it can be investigated that a doctor / medical practitioner or a healthcare center or a hospital is prescribing expensive medicines in most cases, whereas medicines with similar ingredients for a same diagnosis are available in the market which are priced at lower rates. Another point of malpractice could be the rates of the medicines where certain medical shops provide medicines at their Maximum Retail Prices whereas certain medical shops apply huge discounts for the same medicines. If the patient is not given the option to purchase the medicines from the medical shop of his own choice, he / she might end up paying more since the discount scheme may not be available at the affiliated medical shop or the medical shop within the hospital premises. Yes, there is a National Pharmaceutical Pricing Authority (NPPA), a government agency responsible for setting prices of drugs and ensuring medicines are available across the country. It published an Analysis Report in 2018, which included facts that private hospitals procure medicines and other medical equipment at very low prices and sell them to patients at much higher prices, with profit margins going beyond 500 per cent for some items. However, not everything falls under the ambit of the NPPA. Items such as diagnostic services and devices do not come within the purview of NPPA and, hence, have been found to be overpriced.

In most cases, it was noted that nearly 15% of the total bill was for diagnostic services with the prices being at a higher side. The NPPA reported that profit margins for “Non-Scheduled Devices” such as syringes and catheters were “exorbitant and clearly a case of unethical profiteering in a failed market system”. In the case of a reputed private hospital, as reported by the Economic Times in December 2017 and the report of the NPPA, it was found that certain devices and medical equipment were charged to the patients at a very high price, whereas it was procured by the hospital at a very low price. For example, a bed wet wipe used to clean the patient was procured by the hospital at ₹33 per unit; however, it was charged to the patient at ₹350 per unit with a profit margin of a whopping 960 per cent. Apart from that, disposable syringes without needles used for the treatment was procured by the hospital at ₹13.60 apiece yet it was charged to the patient at ₹200 a piece, an increased markup of 1370 per cent. A thorough forensic accounting and investigation function may help curb such practices and bring to light such instances where patients are required to pay more just because it is the hospital policy to purchase medicines from selected stores only and at the prices stated by the hospitals.

OVERCHARGING FOR MEDICAL PRODUCTS & SERVICES

Generally, treatments provided in private healthcare centres or hospitals or clinics are expensive, and they charge the patients for every single service provided, including accommodation. As per the Analysis Report of the NPPA, it was found that the largest items on the hospital bills were drugs, devices and diagnostics, which comprised nearly 56 per cent of the total bill, which was higher than the charges for medical procedures and room rent which comprised around 23 per cent of the total bill. As per the “Health in India” Report from the 71st Round of the National Sample Survey, around 58% of households in rural areas and around 68 per cent of households in urban areas prefer private hospitals for in-patient treatments. Hence, the reliance of the public on private hospitals is key for such hospitals to rake up the prices for better services. There is a need for a regulator to keep a check on these issues.

As far as the law is concerned, the NPPA classifies medical items, including medicines and drugs, into 3 categories:

  •  Medicines under Price Control
  •  Medicines not under Price Control
  •  Consumables that are neither under Price Control nor under the country’s list of essential medicines

Here is the interesting part. Scheduled Medicines come under essential medicines, which ultimately are covered under the price control mechanism whereas Non-Scheduled branded medicines are not covered under the price control mechanism. Hence, the drug-making companies often bring into the market new variants of scheduled drugs as “new drugs” or “fixed drugs combinations” in order to escape the price control mechanism. The healthcare centres or the hospitals taking advantage of the same and to earn higher profits, often prescribe Non-Scheduled branded medicines instead of Scheduled Medicines. Hence, this could be another area where an effective Forensic Accounting function can investigate such matters and provide various counter-measures to ensure that instances of overcharging are avoided in the future.

KICKBACK SCHEMES

To start with, kickback in the healthcare industry is defined as an arrangement where a doctor / medical practitioner is paid for patient referrals. This payment may be in cash or kind. Cases have been found where kickbacks include payments in the form of bookings of international flights, overseas vacations, expensive appliances, five-star hoteling, etc. It can be seen in normal cases where an ENT (Ear-Nose-Throat) specialist recommends his/her patient to get certain tests done by a radiologist, a pathologist, or a doctor who recommends each of his/her patients to get their hearts checked out by a heart specialist surgeon for no concrete reason, etc. In most cases, the patients do not ignore such advice being a matter of health. Obviously, in the cases mentioned above, the doctors referring the patients to the latter receive the kickback. These are simple examples of kickback schemes that are being applied mostly in Tier 2 and Tier 3 cities of India on a large scale. Tier 1 cities are no exception either.

However, in spite of such activities, there is no law to regulate and curb such practices. In the state of Maharashtra, a recent case involved a reputed hospital, where its 11 Heads of Departments were found to be operating unauthorized bank accounts. The same was reported by the Times of India in April 2023. The amount involved ran up to ₹6 Crores, and the majority of it was spent on foreign trips, flight bookings and hotels. The inquiry was initiated in 2018 by the then Medical Education Secretary. As per the Times of India report, questionable actions were in departments such as ophthalmology, radiology and surgery. In that, the surgery department was the major recipient of “kickbacks”, with deposits being found which were made by various pharmaceutical companies.

In this background, the Maharashtra State Government had nearly finalised the draft of an Act to curb such practices of kickbacks in the healthcare industry. It was known as “The Prevention of Cut Practices Act, 2017”. However, it never passed the draft stage due to protests from the medical fraternity over the provision of harsh punishments and administrative difficulties over its implementation. Apart from the punishment for kickbacks, the draft Act also contained provisions for punishing fake complainants and those trying to deliberately malign the image of a doctor/medical practitioner. Even then, the draft has not been implemented to date.

Challenges involved in the implementation of Forensic Accounting and Investigation in the healthcare industry:

LACK OF A PROPER STATUTE

Currently, no statute requires a healthcare centre, a hospital or an individual doctor / medical practitioner to get its transactions audited by a Forensic Accountant. Hence, most of the institutions shall resist appointing such an auditor unless there is a statutory requirement to do so. Since forensic accounting is still considered to be a niche sector in India, there is no law governing the implementation of forensic accounting functions. It is recommended in various industries, however, there is no mandatory provision regarding the same.

We have various laws in place for dealing with issues of fraud, such as Section 143(12) of the Companies Act, 2013 requires the auditor to report frauds against the company being committed by the officers or employees of the company to the Central Government within the prescribed time. Apart from that, the Companies (Auditor Report) Order 2020 requires the auditor to report on the events of frauds noticed during the audit period.

Regulation 11C of the SEBI Act, 1992 empowers the SEBI to direct any person to investigate the affairs of Intermediaries or Brokers associated with the securities market whose transactions in securities are being dealt with in a manner detrimental to the investors or the securities market.

Section 43 and Section 44 of the Information Technology Act, 2000 have prescribed penalties for 6 types of offences.

Section 33 of the Insurance Act of 1938 empowers the Insurance Regulatory and Development Authority of India to direct any person (investigating authority) to investigate the affairs of any insurer.

LACK OF PUBLIC AWARENESS

There is a great need to raise public awareness about frauds in the healthcare industry and the impact of forensic accounting functions in such an environment. For that, various finance institutions may conduct public awareness programs where the public is given first-hand information about various types of frauds, their impacts and the tools of forensic accounting to detect and prevent such frauds. The Central Government could also take initiative in this matter. It can establish specialised task forces for regular mentoring of the public throughout the country.

ROLE OF HEALTHCARE PROVIDERS

The healthcare providers of the country should be willing to conduct forensic accounting functions of their medical activities. They should consider preparing a set of robust internal controls which will assist in the prevention of fraudulent activities and the same time, facilitate the conducting of forensic accounting engagement.

DATA PRIVACY CONCERNS

As mentioned earlier, data and information are vital aspects in the age of the digitised healthcare industry. Forensic accounting requires access to critical data related to patients in order to investigate. However, healthcare centres or hospitals might be hesitant to provide access to patient details. Further, the consent from a patient could also be an issue in the effective implementation of forensic accounting procedures.

COMPLEX BILLING STRUCTURE

It is a complex structure since the fees being charged are not for reaching a pre-decided conclusion. A forensic accounting engagement starts with a suspicion or doubt and ends with that suspicion or doubt being proven or otherwise. Hence, it takes a while to negotiate with the management regarding the appropriate fees for conducting the forensic accounting engagement.

TRAINING & EDUCATION

In most of healthcare centres or hospitals, the medical staff is not aware of the frauds happening in the healthcare industry, or they are simply unaware of the facts as to what is a malpractice, or a healthcare fraud is. Healthcare centres or hospitals need to train their staff in the operation of various types of fraudulent activities and urge them to avoid the same and to come forward if they witness certain fraudulent activities. An effective whistleblowing policy is recommended so that employees do not resist from reporting issues related to frauds and fraudulent activities. Simultaneously, they also need to be made aware of forensic accounting functions along with their impact on the business of the healthcare centre or hospital.

A standardized structure or an audit plan may assist in lowering certain challenges for a successful implementation of forensic accounting functions.

Opportunities for conducting forensic accounting engagement in the healthcare industry:

SUPPLIERS’ FRAUD

Healthcare centres or hospitals deal with various suppliers for medical devices, equipment, and other related services. Forensic accounting can examine contracts with suppliers, invoices, payment terms and other conditions to detect kickbacks, instances of inflated prices, excess supply or conflicts of interest arising due to the business transactions.

MEDICAL DEVICE FRAUD

With the increasing use of medical devices, there is a risk of fraud related to their procurement, usage and maintenance. Forensic accounting functions can assess the procurement process, inspect the actual usage of the device along with the price charged to the patients, and verify the ratio of stock turnover in order to get a clear idea of whether excess supply is being procured by the management.

PATIENT RECORDS MANIPULATION

Healthcare providers or hackers may alter patient records to justify unnecessary and complicated medical procedures. Forensic accounting function can assist in the analysis of electronic health records of patients for unauthorised access, tampering, or inconsistencies in documentation or prescribed medication.

DATA SECURITY BREACHES

With the digitisation of healthcare data, there is an increased risk of data breaches and unauthorised access to sensitive patient information. The auditor could provide various insights related to the maintenance of critical data of patients via data analytics, the use of Artificial Intelligence to detect and prevent frauds and to enhance the reliability of the internal controls installed by the management.

FRAUDULENT PRACTICES IN CLINICAL TRIALS

Clinical research is integral to the healthcare industry; however, fraudulent practices such as data fabrication or manipulation can compromise the integrity of clinical trials. A forensic accounting function can assist in examining trial protocols, data collection methods and participant recruitment processes to ensure compliance with ethical standards and regulatory requirements.

GOVERNMENT HEALTHCARE PROGRAMS

Government-funded healthcare programs like Ayushman Bharat face challenges related to fraud, waste and abuse. Forensic accounting can evaluate program implementation, eligibility criteria, actual existence of the patient with actual requirement for a treatment and claims processing to prevent misuse of public funds. Recently, a multi-speciality hospital1 in Ahmedabad allegedly misused Ayushman Bharat Pradhan Mantri Jan ArogyaYojana (PM-JAY) and performed unnecessary surgeries to get benefits under this scheme.

1.http://www.hindustantimes.com/cities/others/ahmedabad-crime-branch-busts-ayushman-card-fraud-linked-to-khyati-hospital-101734452205203.html

GHOST PATIENTS AND PHANTOM BILLING

Some healthcare providers may engage in phantom billing by charging for services not rendered or billing for fictitious patients. Forensic accounting function can identify discrepancies between patient records, appointment schedules, actual treatment with medicines or further procedures prescribed and billing invoices to detect such fraudulent activities.

ANTI-MONEY LAUNDERING (AML) COMPLIANCE

Healthcare centres or hospitals are susceptible to money laundering schemes, wherein illicit funds are disguised as legitimate healthcare transactions. Forensic accounting can prove to be a game changer since it can investigate and assess transactional data, monitor financial activities, and implement AML controls to prevent money laundering and terror financing.

FRAUDULENT RESEARCH GRANTS

Academic institutions and research organisations receive grants for conducting medical research and to provide valuable insights on various issues in the healthcare industry; however, there is a possibility of misuse of funds or they may engage in research misconduct. Forensic accounting functions can thoroughly examine grant expenditures, rigorous implementation of research protocols and publication records to verify the integrity and reliability of research activities and ensure proper accountability for research grant funds.

WHISTLEBLOWER ALLEGATIONS

Whistleblowers within healthcare centres or hospitals may report concerns about fraud, corruption, illegal activities or regulatory violations. Forensic accounting function can investigate whistleblower allegations, protect whistleblower confidentiality and provide evidence for legal proceedings or regulatory enforcement actions, which shall be considered as admissible in a court of law. In various whistleblower cases, it is noted that the findings are not admissible in the court since the employment provisions of the employee prevent him/her from disclosing information about the employer, or it is deemed as a conflict of interest. In some cases, a non-disclosure clause is also added to the contract of employment to prevent the employee from whistleblowing. In such cases, a forensic accounting function can go leaps and bounds to protect the rights of whistleblower employees and bring to light any fraudulent activities being carried out at healthcare centres or hospitals.

CONCLUSION

After getting through with various implications of the forensic accounting function in the healthcare industry, it can be concluded that current practices and policies are increasingly putting Wealth over Health, and that is a serious concern for the industry since almost the entire populace is integrated with the healthcare industry.

However, it may also be noted that black ships are in every profession. For a few such scrupulous people, the entire profession gets a bad name. Forensic Accounting function, in a way, helps to protect the reputation of the profession by exposing malpractices and wrong people. Lastly, forensic accounting engagement should not be visualised as a tool or a measure which has limited utility. It has the ability to go beyond the strides of frauds and ensure a healthcare industry so effective and transparent that it sets a global benchmark.

Misconduct and Punishments

Arjun: Hey Bhagwan, today, all CAs are under tremendous tension due to the fear of Regulators.

Shrikrishna: Really? How many Regulators are frightening you?

Arjun: Practically. All of them! Our Disciplinary Committees, NFRA, CBK, SFIO, EOW – all are after us. We can’t breathe freely!

Shrikrishna: Yes. I heard that many CAs are suffering from stress at a young age and a few are even dying due to the pressure of work.

Arjun: And regulators like MCA, Tax Authorities, Registrars of Co-op. Societies, RBI, SEBI. Charity Commissioners are vying with one another in sending complaints or information to the ICAI. CBI makes even the auditors as co-accused in the frauds basically committed by the management.

Shrikrishna: Yes, Parth. Today, I am told, many CAs are on bail and a few are in jail.

There is no strong agency to stand behind you firmly and strongly. There is no unity amongst you. So, many CAs are suffering harassment.

Arjun: True. Their lives have become miserable. They cannot even afford the litigation expenses, lawyer’s fees, etc. This is in addition to the loss of business since they cannot attend their office work peacefully.

Shrikrishna: Arjun, what you say is right. What are your leaders doing?

Arjun: I have no answer to this question, Lord. Anyway. You had once told the punishments prescribed for various items of misconduct. Please tell me again.

Shrikrishna: Why talk of punishments?

Arjun: I am very much worried due to the letter received by some CAs from NFRA.

Shrikrishna: What was that?

Arjun: His partner was held guilty by NFRA and punished. There was a fine, and also debarring from signing any audit for 2 years.

Shrikrishna: Oh! Then?

Arjun: Now his partner has received a letter that since the signing partner was held guilty, the quality review partner is also equally responsible. So, there is a show-cause notice against him as well!

Shrikrishna: Yes. NFRA has this power.

Arjun: They have asked him to submit a list of names and contact details of all other audits signed by him! That means they will write to all such clients! Disastrous! We will be nowhere if such things happen.

Shrikrishna: I agree; but you have to face the reality. There is a rationale behind this provision of law. This is much more severe than the punishments prescribed in your CA Act.

Arjun: What are they? Let me revise the knowledge.

Shrikrishna: For that, you need to know that there are two schedules to the CA Act. First Schedule items of misconduct are considered of lesser gravity. So, the punishments are a little milder.

Arjun: I remember now. There can be a combination of reprimand, fine up to ₹1,00,000/- and/or suspension of membership for a maximum of 3 months. Right?

Shrikrishna: Yes. But it is proposed to be doubled now. Fine up to ₹2 Lakhs and suspension up to 6 months.

Arjun: Oh! And for the Second Schedule, the same – reprimand, fine up to ₹5 lakhs and suspension for any length of time, even permanent.

Shrikrishna: Here also, the fine is proposed to be doubled. But then there is a more dangerous amendment.

Arjun: What is that?

Shrikrishna: If one partner of a firm is held guilty and within 5 years if another partner is held guilty, then the Council can directly punish the firm without any proceedings!

Arjun: Oh My God!!

Shrikrishna: But Arjun, there are many indirect punishments which are even more harsh. They are not prescribed in the Act.

Arjun: Really? What are they?

Shrikrishna: Firstly, your disciplinary proceedings last for 3 to 4 years minimum. So you need to carry that tension. Secondly, it is a stigma. Your name gets published in the official gazette and gets spread on social media.

Arjun: That is really dangerous.

Shrikrishna: Moreover, the firm is deprived of professional assignments if any one partner is held guilty. Even while the proceedings are in progress, the firm may not get any audits from C & AG, Banks, large corporates, MNCs and so on. Just consider the loss of revenue.

Arjun: Then the only alternative is the guilty partner should quit the firm! It has a demoralising effect.

Shrikrishna: So, Arjun, do your work diligently. Prevention is better than cure.

Arjun: It is easy to say so. But Lord, I feel the only way to avoid misconduct is not to do practice at all.

Ha! Ha!! Ha!!!

“OM Shanti”

This dialogue is based on the present mood of fear among the majority of practising CAs who are faced with Regulatory action, probably for their small, human lapses

Is Tax Binging On Your Earnings?

Will the FM be able to POP the CORNy tax system in the budget? These words were coined after the hullabaloo around GST on popcorn. However, this is also the state of the tax system today: not considering popcorn to be popcorn. It treats it as a staple (unpackaged food item), or namkeen (packaged) or sugary (caramelised) item to levy different tax rates.

For normal mortals — popcorn is popcorn. Fitment seems like an excuse when the difference is 5 per cent to 18 per cent. Then why would Babus think that every form of popcorn deserves a different rate with so much rate difference? One of the reasons I can think is to keep the law packed in complexity so that when it is unpacked there are high chances of litigation and collection of tax on appeal. For Babudom, litigation is akin to caramelising (pun intended), it keeps their importance intact and keeps their tax targets. Let me present another perspective to litigation as a borrowing technique.

Let us ask whether tax ligation is a borrowing technique. If one sees parts of tax collection from litigation as borrowing, you will understand that government interest to lower litigation is about 4.2 per cent (pun intended). How? Firstly, the Union Budget doesn’t factor pending litigation amounts as contingent liabilities or provisions. Secondly, there is 20 per cent pre-payment before the assessee litigates and zero percent when the government litigates. Thirdly, interest on refund of tax is 6 per cent, while interest on late payment of tax is 12 per cent. Interest on refund is taxable at, say 30 per cent. Interest on late payment if grossed up, will be about 17 per cent (as it is disallowed for tax purposes and if tax rate is assumed at 30 per cent). So net interest on refund is 4.2 per cent post-tax at a 30 per cent rate (because the government receives 1.8 out of 6 back as taxes), and you lose 17 per cent when you pay interest for late payment.  What a spread that is! This is as unfair as it is beneficial to the government, such that Sarkar will favour sitting on disputed tax money for long at a very low rate of interest. Lastly, connect another dot: amounts and appeals pending at CIT Appeals  (2024): 549,0421 appeals (₹14.2 Lac Crores), at ITAT (2022): 26,812 cases (₹3.1 Lac Crore), High Court: 29,763 cases (₹3.3 Lac Crores) and Supreme Court: 4,108 cases (₹0.3 Lac Crores). Total disputed amounts come to about ₹21 Lac Crores. Out of these disputed amounts perhaps ₹7 to 9 lac crores along with interest could become payable by the government to taxpayer. Assuming that taxes on some of these amounts are already paid, TDS collected, 20 per cent paid as prepayment for litigating and so on, the government may be sitting on ₹7-9 Lac crore of off balance sheet amounts, which may become payable. Some reports say Income Tax litigation alone is about 9.6 per cent of India’s GDP2. This is more than 64 per cent or more of the 2024 Union Budget (₹48 Lac Crore). So why would Sarkar not want to drag litigation until infinity?

1CBDT Central Action Plan 2024-25

2  Parliamentary Standing Committee Report 2024-25 dated December 2024, amounts are before VSV-2 Scheme

Common taxpayer’s acquiescence of obfuscated tax law is only a sad spectacle of helplessness and not adulation or acceptance. The taxmen, in the meantime, meet their tax targets, often by taxing every activity and even by false demands and litigation to collect money which is often put to suboptimal use, purchase of votes and of course probable future refunds. This mass delusion of over-taxation perpetuated by the finance ministry makes“आयकर” (tax on income) feels like “अतिकर” (excess of taxation) in quantum and complexity.

Over-taxing, a small minority with high rates has been the Indian tax department’s maxim and also a cause of tax evasion. In a conversational format like MrVaze uses in his columns in BCAJ, a common taxpayer (TP) asked a tax expert (TE): How come the Sarkar taxes the same money multiple times? Say I have R10,00,000. When I get it, that amount is taxed. When I spend it, it is taxed. If I spend on things like vehicles or property, the same amount becomes the basis of taxation again with other smart names like road tax or stamp duty. “Well” said the TE: “everything is taxed, including breathing because pollution in the air due to Sarkari apathy, will result in future taxes recovered from your medical treatment”. The TP said, “If I have paid lifetime road tax, why do a pay a toll to cross WorliSealink – is it not a road? The amused TE said: “no it’s a favour from politicians and Babus (who used your money to build it) that they built it for you and are allowing you to use the bridge.” Then the TP asked: “I bought a Maruti Car after saving for it worth Rs. 10.62 lacs base price. Why was I charged ₹4.76 Lacs as GST (45 per cent) and ₹1.89477 Lacs as RTO tax (18 per cent), totalling to 63 per cent on the base price of car?” TE said: Well this GST is charged because a car is considered a luxury for decades and therefore you pay sin tax rate!

A person in middle-income bracket/salary class pays Profession tax, GST, Income Tax, Stamp Duty, STT, Water tax, Road Tax, Toll Tax, Sales Tax / Excise on Fuel. The question is what total percentage should one pay as taxes by whatever name called? It also poses a question of whether one works and lives for the government as itsकरदास(tax slave) or one is really aकरदाता(taxpayer)? Should the Sarkar give a deduction of these taxes in ITR so that total taxes do not exceed a certain percentage of income for the common taxpayer? Masquerading levies by different names, such as state / central / local / road tax, etc., is a tax atrocity on middle-income group that is trying to improve the quality of their life, live with dignity, face inflation, become financially stable and bring their family out of lack.

Now, let’s come to the final point: Tax GDP ratio.SurjeetBhalla, a former EAC member of Modi 1.0 wrote an article in a national daily last week. India’s personal income tax to GDP has reached 3.9 per cent. Eastern Europe is highest at 3.4 per cent. China is at 1.1 per cent, Vietnam at 1.8 per cent, Brazil at 3 per cent and Mexico at 3.4 per cent. To counter the argument that countries find other taxes to meet their needs, he gives the total taxes (state / centre / local / wherever) to GDP ratio. There, India tops even the developed countries and is likely to cross 19 per cent of GDP. East Asia is at 13.5 per cent, China at 15.9 per cent, and Vietnam at 14.7 per cent. Countries like Korea and the US with per capita income more than eight times higher are at 20 per cent and 19 per cent of GDP, according to Bhalla.

It’s not that middle income does not want to fend for those in need. It’s also not that the government has not done a good job mostly. At the same time the government should not give the excuse of ‘compulsion’ all the time. The question to the government is best put in the words of Thomas Sowell: what exactly is ‘your fair share’ of what ‘someone else’ has worked for. To cut to the chase, we need more balanced, realistic and innovative tax system that takes care of those who pay taxes.

Finally, lets end with the debate on tax rate and tax base. We hope that some other advice of Kautilya, who is quoted by the FM will be taken this time. King should, by his orders, take from his subjects, very small amounts of taxes[ 7.129]3. The tax rate should not be detrimental to the tax base, and they should be rather conducive to the tax base. We hope that tomorrow, the FM madam will announce a Budget that will make the taxpayer feel like there is also a “Laadkaa Taxpayer Yojana” and will spill into the upcoming Income Tax Code!

3 “On the Manu-Kautilya norms of taxation: an interpretation using laffer curve analytics” – D K Srivastava, Professor at National Institute of Public Finance and Policy

 

Raman Jokhakar

Co- Chairman, Journal Committee, 31st January, 2025

Digital Arrest – A Serious Threat

We have all been reading about cyber attacks for quite some time now. Siphoning off money from the bank accounts of unsuspecting people is now part and parcel of our lives. With more and more people using digital means for making payments, more and more people are exposing their bank accounts to fraudsters through their mobile phones. Apart from this, even credit cards are being hacked with impunity.

As if all this was not enough, we now have the latest scam that is taking the world by storm — “digital arrest”. As per news reports, in India, citizens lost around ₹120 crore to digital arrest frauds in the first quarter of 2024, and according to the Ministry of Home Affairs (MHA), digital arrests have become a prevalent method of digital fraud. Many of those carrying out these frauds are based in Myanmar, Laos, and Cambodia.

So, what is “digital arrest”? In simple terms, it is a scam that thrives on the common man’s lack of knowledge and information about how regulators / government agencies work. Most people are not aware of how the police, the CBI, the tax department, or the Enforcement Department operate and how they carry out their investigations. Crooks take advantage of this lack of awareness and play on the human psyche by impersonating such official agencies.

In a “Digital Arrest” scam, the perpetrators leverage technology and fool people by simulating an official arrest scenario online and thereafter exploit the victim. The fraudsters impersonate law enforcement or government officials. They use methods like video calls, falsified documents, and other digital tactics to convince their targets that they are under some form of legal scrutiny.
The incredible thing is that a digital arrest is purely virtual, and there is no physical contact. The crooks create a scenario that resembles a real-life scenario with the help of props, and in the video call, the victim starts to believe that a real policeman or a real CBI officer has called him / her. The digital interrogation is done in such a manner that the room where the “officer” is seated very accurately resembles a real police station or a real government office.

Typically, the fraudster informs the victim that the police or the government has unearthed some wrongdoing by the victim and that he / she needs to remain online and also keep the camera switched on throughout the discussion. In many cases, the fraudster would already have collected some information about you such as Aadhaar, PAN, Bank details, etc. With such information, you will be made to believe that your Aadhaar, PAN, Mobile or Bank account has been used for illegal activities.

Then, the victim is manipulated into believing that immediate action will save him / her from severe consequences, including imprisonment. Initially, the fraudster would talk in legalese and would quote all kinds of laws / sections, etc, to sound very authentic. Then, fear would be induced in the mind of the victim by citing various penal provisions, including imprisonment, raid, etc.

Once the victim is in a state of shock and is scared enough to believe anything, the fraudster would then capitalise on the victim’s fears of legal repercussions. A “solution” would then be offered and the victim would be coaxed into transferring money to the bank account of the fraudster. Of course, the whole chain of transfer of money is arranged in such a way that it would become almost impossible to trace that transfer later. So, once the money is transferred, the victim would invariably lose that money forever.

So, a digital arrest would begin with a phone call from an unknown number. If you pick up that call, the caller would identify himself as a policeman or an investigator and would talk about some urgent matter relating to your bank account or some alleged fraud that is uncovered by the police or the investigating agency. Then, the video call begins, and you will see someone in a policeman’s uniform sitting inside what appears to be a real police station. Obviously, by now, you are scared and are convinced that the call is genuine. As the conversation progresses, you are led into believing that you have committed a crime and that crime has been discovered and that you are likely to face drastic consequences, which could include an arrest.

Then, an “arrest warrant” would be issued to take the victim to a virtual court on a Skype call while in “Digital arrest”.

Then, you would be made to believe you need to transfer the balance in your bank account to another bank account and that the same would be verified by the authorities and then returned in a few minutes. In many cases, receipts are also issued on fake letterheads of various authorities.

Thus, the fraudsters capitalise on the ignorance, fear, anxiety or blind trust of their target and with this kind of mental trauma, the victim loses the ability to think and act rationally. As per news reports, recently, the Chairman and Managing Director of a leading textile group in India was defrauded by a group posing as officials from various government agencies, and they also took him to a virtual court, where the impersonalised Chief Justice of India (CJI) was hearing the case.

Unfortunately, the digital arrest scam has already succeeded in many cases and that too even in cases of high-profile professionals. So, it is not just the common man that is being targeted now. Even educated and/or rich people are also being conned into making large payments.

The government is aware of this kind of fraud and has tried to warn citizens not to fall prey to such fraud.

The Ministry of Electronics and Information Technology, Government of India, has issued an advisory on the matter. The gist of the advisory is:

  1.  To stay calm and not to panic
  2.  To verify the Caller’s Identity
  3.  Not to share personal information with anyone
  4.  To be wary of unsolicited communications from unknown numbers
  5.  To immediately report suspicious activities
  6.  Educate yourself and others

What has the government done so far in the matter?

Government initiatives to tackle Cybercrime

  •  Indian Cyber Coordination Centre (I4C): Under MHA, it coordinates activities related to combating cybercrime in the country.
  •  CERT-In: It is the national nodal agency for responding to computer security incidents.
  •  National Cyber Crime Reporting Portal: Launched as part of I4C to enable the public to report incidents of cybercrimes.
  • National Toll-free Helpline number 1930: Operationalised to provide citizen assistance in lodging online cyber complaints.

Readers would be aware of “CERT-In”. It is the functional organisation of the Ministry with the objective of securing Indian cyberspace. It provides Incident Prevention and Response services as well as Security Quality Management Services.

If you suspect a digital arrest scam, please report it immediately to the National Cyber Crime Reporting Portal at cybercrime.gov.in or call the cybercrime helpline at 1930. Prompt reporting can help authorities take swift action against scammers.

Further, as a preventive measure, the government has launched the Chakshu portal ( https://sancharsaathi.gov.in/sfc/Home/sfc-complaint.jsp ) under the Sanchar Sathi initiative of the Department of Telecom. This portal enables citizens to report a suspected fraud communication with the intention of defrauding telecom service users for cyber-crime, financial frauds, non-bonafide purposes like impersonation or any other misuse through Call, SMS or WhatsApp.

Readers would be doing great service if they educated senior citizens (especially those above the age of 70) about this and help in preventing them from falling prey to such frauds.

Credit Notes under GST

INTRODUCTION:

An invoice is a legal document issued to the customer evidencing the supply of goods or services and generally contains various particulars, such as nature & description of supply, value of supply (taxable & otherwise), applicable tax rate, place of supply, etc. By issuing an invoice, a supplier stakes a legal claim for the value on the customer. Such invoice is recorded in the books of accounts. From a GST perspective, the law does not prescribe a format of the invoice but does list down the minimum particulars expected to be mentioned in the invoice (which is nomenclated as tax invoice). For most of the entities, the GST Law also requires that the particulars of the invoice be submitted to the Government portal for generation of Invoice Reference Number (‘IRN’), which needs to be mentioned in the invoice. The issuance of such tax invoice also triggers liability towards payment of applicable GST. In view of substantial volumes involved, most of the organizations have automated the process of generation of invoice, including the IRN and recording of the same in the books of accounts.

In a practical scenario, post the issuance of the invoice, there could be a need for a change in the particulars of the invoice or cancellation of the invoice already issued. The GST law envisages a possibility of such amendment or cancellation of invoice and prescribes detailed guideline on how to carry out such amendment or cancellation of invoice. Further, there could be situations where subsequent events like discounts or rate differences may cause a need to carry out a downward or an upward adjustment in the value or tax. The GST law suggests that such subsequent events warranting a downward or an upward adjustment in the value or tax be carried out through the issuance of a credit note or a debit note and has prescribed detailed guidelines in this regard.

An earlier article published in February 2024, examined various issues pertaining to credit notes under GST. Certain further developments have warranted an additional article in this regard covering issues which continue to grapple the trade and industry.

CANCELLATION CREDIT NOTES

While the GST law envisages a possibility of such amendment or cancellation of invoice, the IRN portal does not permit an amendment. Even a cancellation of an erroneously uploaded invoice is permitted within 24 hours. Further, most of the invoicing/accounting/ERP systems do not permit a cancellation of invoice already generated. Therefore, it is a common practice that in case of errors in generation of invoice, the cancellation of invoice is effectively carried out through the issuance of a credit note bearing the like amount and tax. As stated in an earlier article, the adjustment of tax on account of issuance of credit notes is governed by the provisions of section 34, which permits a self-adjustment of the tax in specific circumstances and within the prescribed timelines, subject to the incidence of tax not being passed on to the customer. The relevant provision is reproduced for easy reference:

34. Credit and debit notes:

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

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

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Generally, the cancellation credit notes are unilateral acts carried out by the supplier for erroneously generated invoices. In such cases, it may be possible to argue that such credit notes are indeed covered by the provisions of section 34 since the taxable value or the tax mentioned in the invoice exceeds the taxable value or the tax payable. It can be argued that effectively, no supply is effected against an erroneously generated invoice and hence there is no question of any tax payable on the same. However, disputes could arise in situations where the supply was actually effected against the tax invoice, but later on it is realized that there is an error in the mention of the details of the recipient (Wrong customer selected or Wrong GSTIN of the said customer selected). In such situations, the Department may like to argue that there is no change in the taxable value or tax and therefore the provisions of section 34 are not triggered. In defense, the taxpayer may want to contend that qua the erroneous recipient, there is no taxable supply, value or tax and therefore indeed, qua the erroneous recipient plotted in the invoice, the conditions mentioned in section 34 are indeed satisfied. Since in such situations, another invoice is raised with the correct recipient details, one may want to link the actual supply of goods or services with the fresh invoice so raised. In cases where the error is discovered at a later point of time, this may result in an allegation of delayed generation of invoice. However, this would be an independent allegation from the Department and cannot prejudice the claim of the taxpayer that qua the erroneously generated invoice, indeed there was no supply.

OTHER CREDIT NOTES

Other than the cancellation credit notes issued for erroneously generated invoices, the trade and industry also issue credit notes for passing on discounts. Section 15(3)(b) provides for an exclusion from the value of taxable supply for certain post-supply discounts, subject to the condition of reversal of input tax credit by the recipient. While section 15 deals with the substantive aspect of subsequent exclusion from taxable value and therefore a consequent reduction in the tax liability, the mechanism for self-adjustment of the consequent excess tax continues to be governed by the provisions of section 34. There could also be situations where a supply of goods is actually made but the goods are thereafter rejected by the customer, warranting the issuance of a credit note. Such credit notes are not unilateral credit notes, but bear a visibility vis-à-vis the customer as well. Since the original tax invoice was also available to the customer, it is possible that he may have claimed input tax credit and therefore, the reduction of output tax credit at the end of the supplier is dependent on reversal of input tax credit by the customer. Due to substantial volumes and time-lapse, this dependency on the customer has presented significant challenges to the suppliers. There was no uniform approach adopted by the revenue authorities to satisfy themselves about this condition of reversal of input tax credit by the customer. As an interim measure, the CBIC had therefore clarified that a certificate that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier may be sufficient evidence to this effect.

CONSEQUENTIAL IMPACT OF CREDIT NOTE ON THE RECIPIENT

While the said Circular to some extent addressed the challenges at the supplier end, the challenges at the recipient end are very different.

When GST was introduced in July 2017, a mechanism of matching transactions between supplier & recipient was proposed whereby the recipient was required to either accept, modify, reject, or keep pending transactions that are reported by the supplier. While the transactions were made available to the recipient in GSTR-2A, the matching mechanism was never implemented which resulted in substantial litigation vis-à-vis claim of input tax credit.

System-generated notices are being issued to the taxpayers alleging non-reversal of input tax credit on credit notes reflected in GSTR-2A, on a generic verification of aggregate data filed by the taxpayer. Such presumption results in needless litigation since the data available with the Department from the aggregate data filed is insufficient to conclude the non-reversal of input tax credit. Some practical examples may be considered:

  1. The recipient reversed the input tax credit on the credit notes by netting off the tax amounts against the fresh input tax credit claimed during the month in Table 4(A)(5) of GSTR-3B In such cases, the reversal is not expressly reflected on the face of the return and therefore, a system generated notice is issued. The taxpayer may respond to the said notice explaining the facts in detail, but at times, the Department is unable to verify the genuineness of the claim since the relevant data is not available in the filings.
  2.  The recipient reversed the input tax credit on the credit notes by reducing it in Table 4(B) in GSTR-3B. In such cases, a co-relation can be established (if there are no other reversals disclosed in GSTR-3B). However, there can be cases of timing difference, i.e., input tax credit on credit note may be reversed in a particular tax period & credit note may be reflected in GSTR-2A in another tax period. Demonstrating such a correlation then becomes challenging.
  3.  The challenges get compounded in case of unilaterally issued cancellation credit notes by the supplier. Since the recipient taxpayer neither has a privy to the erroneous invoice or the cancellation credit note, in all probability, he would not have claimed input tax credit and therefore the need for reversal of input tax credit does not arise. However, at times, the tax officers proceed on a presumption that the recipient has claimed the input tax credit on the invoice and not reversed the ITC on the credit note, based on (a) above, resulting in unwarranted litigation.

INVOICE MANAGEMENT SYSTEM

Recently the Government has introduced the Invoice Management System (IMS) facility on the portal. The invoices and debit notes issued by the supplier and reported in GSTR-1/ e-invoicing facility are transmitted to the recipients’ interim IMS dashboard with an option available to the recipient to either accept such documents, reject them, or keep them pending for action in a subsequent period. However, in the case of credit notes, the recipient is not permitted to keep them pending and is required to either accept or reject them. Accepted documents are transmitted to the recipient’s GSTR-2B while rejected documents are available back to the supplier to take corrective action as deemed fit. Pending documents are
carried forward for action by the recipient in the subsequent tax period. The IMS is optional and in the absence of any action taken by the recipient, all the documents are deemed to be accepted and transmitted to GSTR-2B.

The intention of IMS is to streamline the process of claim of input tax credit at the recipient end and therefore generally does not impact the tax liability of the supplier. However, in the case of credit notes, it is provided that the rejection of the credit note by the recipient will result in automatic additional tax liability (due to non-allowance of self-adjustment) to the supplier. As a corollary, acceptance of the credit note by the recipient will result in automatic reversal of input tax credit at his end.

While the introduction of IMS results in better documentation and control, the prohibitive volumes, the inability of keep action on credit notes pending and the automatic adjustment mentioned above has resulted in a widespread practical difficulty specifically in the context of unilateral cancellation credit notes. Three situations can be examined

ERRONEOUS INVOICE AS WELL AS CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

Since both the erroneous invoice as well as the cancellation credit note were unilaterally issued by the supplier, it is very likely that the documents did not become a part of the accounting records of the recipient, who is more akin to a stranger to such documents. It is therefore fitting that the recipient would reject both the erroneous invoice as well as the cancellation credit note. Interestingly, while the IMS and GSTN Portal provide for an automatic addition of tax liability in case of rejection of credit notes, no such automatic reduction of tax liability is envisaged for rejection of invoices. Therefore, in such situations, the supplier is forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax.

ERRONEOUS INVOICE KEPT PENDING BUT CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

In view of substantial volumes at the end of the recipient, it may not be possible for the recipient to differentiate cases where the invoice was erroneously raised by the supplier from cases where the supplier has genuinely raised the invoice, but the invoice is pending for processing and/or accounting at the recipient’s end. Therefore, most of the recipients avoid rejection of unmatched records and choose to keep them pending till the end of the timeline available for claim of input tax credit. However, as the credit notes are not permitted to be kept pending, the recipient may reject the credit notes. In such situations also, the supplier is forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax.

ERRONEOUS INVOICE ACCEPTED BUT CANCELLATION CREDIT NOTE REJECTED BY THE RECIPIENT

Ideally, this situation should not arise since it is not correct on the part of the recipient to accept the erroneous invoice. However, in case of substantial volumes, the recipient may have incorrectly accepted the erroneous invoice (or it could have been deemed to be accepted due to the optional nature of IMS). In most of these situations, the recipient would have temporarily or permanently reversed the credit in GSTR3B. The recipient therefore ends up rejecting the cancellation credit note. At the supplier end, he is again forced to amend both the erroneous invoice as well as the cancellation credit note to a negligible value and tax. However, this situation is slightly more challenging. Since the original erroneous invoice was accepted or deemed to be accepted by the recipient, a downward amendment in the invoice value would be permitted only of such downward amendment is accepted by the recipient. Again, acceptance of such downward amendment results in reduced input tax credit to the recipient, which he will have to compensate by reclaiming the temporarily or permanently reversed input tax credit. In essence, this scenario results in a substantial dependency on the recipient

HOW TO RESOLVE THE SITUATION?

A possible solution to address this issue of dependency would be for the supplier to review the documents before filing GSTR1 to identify erroneous invoices as well as cancellation credit notes and manually remove both documents before uploading the GSTR1. While this will result in a non-alignment of the IRN data and the GSTR1 filings, the same can be explained when the query is raised by the Department. Alternatively, if the erroneous invoice has already been uploaded in an earlier month, the supplier may choose to amend the erroneous invoice in the subsequent month to a negligible value rather than uploading the cancellation credit note. This will substantially reduce the ‘noise’ of voluminous erroneous records being uploaded on the GSTN portal.

CONCLUSION

The emphasis placed by the authorities on demonstrating whether the burden of tax has been passed on to the customer / whether the input tax credit has been reversed on credit notes or not, and the introduction of matching mechanism for credit notes, is resulting in lots of friction for taxpayers, be it from the department perspective or business perspective. The taxpayers should therefore start working on setting up a separate ecosystem for dealing with credit notes from both, outward supply as well as inward supply perspective.

Part A | Company Law

15. Mrs. Anubama

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/ANUBAMA/ADJ/S.155/2024

Date of Order: 3rd October, 2024

Adjudication order for violation of section 155 of the Companies Act 2013(CA 2013): Applying, Obtaining or possessing two DINs.

FACTS

Mrs. Anubama had submitted an Adjudication application in GNL-1dated 28th August, 2024 for violation of Section 155 of the companies Act, 2013 and also submitted a physical application. The applicant submitted that she has obtained her first DIN on 9th January, 2018. After that she was appointed as a director in multiple Companies using this first DIN but later resigned from all the companies as director, and hence she was not a director in any of the said companies thereafter. The applicant has further obtained inadvertently the second DIN on 23rd April, 2013. The applicant was also appointed as Director in some of the companies using this second DIN and later resigned from all such positions. Further, the applicant was appointed as designated partner in two LLPs and was continuing thereafter. The applicant had applied in form No DIR-5 to surrender the second DIN. However, the form was returned for resubmission with remarks stating that “the DIN holder has taken second DIN in violation of Section 155 of the CA 2013 and required to be adjudicated. The applicant further stated that Hence, submitted the adjudication application as the aforesaid contravention was not committed with any malafide intent and no prejudice is caused to any stake holders.

Based on the adjudication application, this Adjudicating Authority (AO) had issued Adjudication Hearing Notice to the Company and its officers in default. Pursuant to hearing notice issued an authorized representative of the applicant appeared before the Adjudicating Authority and made submissions that, ‘the said violation mav be adjudicated as per section 159 of the Companies Act, 2013’.

PROVISIONS OF THE ACT

Section 155: Allotment of Director identification Number. No individual, who has already been allotted a Director identification Number under section 154, shall apply for, obtain or possess another Director identification Number.

Section 159 – Penalty for Default of certain Provisions: If any individual or director of a company makes any default in complying with any of the provisions of Section 152, section 155, and Section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues.

FINDINGS AND ORDER

It is noticed that the applicant, Mrs. Anubama obtained her first DIN on 9th January, 2008 and she was appointed as a director in multiple companies using this first DIN. Further, on 23rd April, 2013, the applicant has further inadvertently obtained a second DIN. The applicant was also appointed as Director in some of the companies using this second DIN, although the applicant continues to serve as a designated partner in two LLPs.

The applicant was holding 2 DINs from 23rd April 2013. Further, Mrs. Anubama has filed e-form DIR-5 to surrender the DIN which was obtained on 23rd April 2013. The form was returned with remarks to adjudicate the violation. After that she filed the adjudication application in e-form GNL-1 on 28th August 2024. Hence, there was a violation of Section 155 of the CA 2013 till 27th August 2024. The applicant is liable for penalty under Section 159 of CA 2013.

After considering the facts, AO concluded that Mrs. Anubama has violated Section 155 of the CA 2013 and accordingly he imposed a Penalty u/s 159 of CA 2013 amounting to `19,51,000/-.

• Penalty from 1st April, 2014 to 27th August, 2024: 3802 days i.e. `50,000 + (`500*3802=19,01,000) = `19,51,000.

16. Panama Wind Energy Private Limited

Registrar of Companies, Maharashtra, Pune

Adjudication Order No. ROCP/ADJ/Sec. 203/STA(V)/23-24/ 2072 to 2075

Date of Order: 12th December, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013): Violation arising out of non-filling of the vacancy of the whole time key managerial personnel within a period of 6 months.

FACTS

Company had submitted Form GNL-1 for filing an application before ROC, Pune under Section 454 of the Companies Act 2013 for adjudication of the offence committed under Section 203 read with rule 8 and 10 (Companies Appointment & Remuneration of Managerial Personnel Rules, 2014) of the Act.

It was stated in the application that Company Secretary was appointed by the Board of Directors in its Meeting held on 30th October 2019, with effect from 19th October, 2019. The said Company Secretary tendered her resignation from the post of Company Secretaryshipw.e.f. 23rd December, 2020, after serving the notice period of 30 days, and the same was approved by the board on 18th January, 2021. The Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. Further, the Company has appointed another incumbent as Company Secretary of the Company in the meeting of its Board of Directors with effect from 1st March, 2022, with the period of default from 21st July, 2021 to 28th February, 2022.

On receipt of the aforesaid application, a notice was sent to the company and Ex-Directors vide letter dated 06th August, 2024 to which the company replied vide its letter dated 20th August, 2024.

PROVISIONS OF THE ACT IN BRIEF

Section 203(4) of the Act provides that if the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Section 203(5) of the Act provides inter alia that if any company makes any default in complying with the provisions of section 203, 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.

FINDINGS AND ORDER

  •  The company, in its reply, accepted that the company is in violation of the provisions of the Act for non-appointment of the Company Secretary as required under the Act within a stipulated period of 6 (Six) months from the date of vacancy. The erstwhile Company Secretary had resigned w.e.f. 23rd December, 2020 and the same was approved by the board on 18th January, 2021. The company has filed the required form related to the resignation of the Company Secretary wherein the date of cessation is stated as 22nd January, 2021. Subsequently, the Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. However, the company appointed a Company Secretary with effect from 1st March, 2022, thereby defaulting for a period from 21st July, 2021 to 28th February, 2022 (223 days).
  •  On reading the provision of the Act, it is stated that the Act provides for a fixed penalty on the company and its officers in default for violating Section 203(4) of the Act.
  •  Section 203(4) clearly casts the obligation for appointment of a KMP in timely manner on the Board, making the entire Board of the company liable for the period in which the default occurred. Thus, it is required to identify the officers in default for the period of violation. On perusal of the records of the company, it is seen that the directors of the company for the relevant period of time are officers in default.
  •  Thus, in exercise of the powers conferred and having considered the facts and circumstances of the case besides submissions made by the Noticee(s) and after considering the factors mentioned herein above, AO imposed the penalty on the officers in default of an aggregate amount of `12,28,000/- as under:

* Ceased to be a director w.e.f. 30th November, 2021

17. In the Matter of M/s MACQUARIE GROUP MANAGEMENT (INDIA) PRIVATE LIMITED

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No – ROC/D/Adj/Order/Section 62 (2)/MACQUARIE/4651-4654

Date of Order – 11th December, 2024

Adjudication order issued against the Company and its Director for contravention of provisions of Section 62(2) of the Companies Act, 2013 with respect to not following Statutory period i.e. dispatched notice of right issue to all existing shareholders at least three days before the opening of the issue.

FACTS

M/s MGMIPL suo-moto filed application for adjudication of offence before the office of Registrar of Companies, NCT of Delhi & Haryana i.e. Adjudication Officer (AO) with regards to violation of the provisions of the Section 62(2) of the Companies Act, 2013 stating that M/s MGMIPL had proposed the issues of shares pursuant to section 62 (1) of the Companies Act, 2013 which provides for further issue of share capital viz rights issue of 80,000,000 equity shares of ₹1/- each to its existing shareholders.

Further, it was stated that M/s MGMIPL relied on the exemption issued by Ministry of Corporate Affairs (MCA) to the Private Companies on 5th June 2015, and accordingly dispatched notice on email mentioned under sub-section (2) of section 62 of the Companies Act, 2013 on 30th June 2021, and offer was opened on 1st July, 2021. However, M/s MGMIPL was required to arrange consent from 90% of the shareholders in case where the issue was opened before three days and the fact was admitted by M/s MGMIPL that it erroneously missed to arrange for a written consent of shareholders for opening the issue ahead of the statutory period of 3 days.

Accordingly, a Show Cause Notice (SCN) was issued to M/s MGMIPL and its officers for the default under section 62(2) of the Companies Act, 2013. M/s MGMIPL in its reply, had reiterated the facts as stated in its application and informed that the default was unintentional and involuntary, occurred without mala fide intent. Further, no objections have been raised by the shareholders of the company regarding this matter throughout the Company’s proceedings.

PROVISIONS

Section 62 (Further issue of share capital)

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply.

Section 450 (Punishment where no specific penalty or punishment is provided)

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

ORDER

AO after consideration of the reply submitted by M/s MGMIPL, concluded that M/s MGMIPL had not adhered to the minimum time period of 3 days for opening of the offer [to be reckoned from the date of dispatch of the notice till the opening of the issue]. Further, by its own admission it did not take the benefit of obtaining a prior consent as per the proviso to the said sub-section so as to relax the minimum time specified therein. Hence, it had violated the provisions of Section 62(2) of the Company Act, 2013.

AO therefore imposed the penalty of ₹10,000/- on M/s MGMIPL and ₹10,000/- on each of its officers in default.

Thus, a total penalty of ₹40,000/- was imposed on M/s MGMIPL and its Directors.

Merger of Intimation under Section 143(1) With Subsequent Assessment Order under Section 143(3)

ISSUE FOR CONSIDERATION

The return of income filed by the assessee first gets processed by the CPC under section 143(1) of the Income-tax Act, 1961 (‘the Act’), and an intimation is issued to the assessee. While processing the return of income, adjustments may be made to the total income as provided in section 143(1) for the reasons as specifically provided in clause (a) of section 143(1) such as arithmetical error, incorrect claim, etc.

Thereafter, a few of the returns are also selected for regular assessment, popularly referred to as scrutiny assessment, by issue of notice under section 143(2) of the Act. The consequential order of regular assessment is then passed under section 143(3) or 144, as the case may be.

In such cases, where the intimation is issued first and then the regular assessment order is passed, the issue often arises as to whether the intimation issued u/s. 143(1) merges with the subsequent assessment order passed. This issue is relevant mainly from the point of view of maintainability of the appeal filed against the intimation issued u/s. 143(1).

In few of the cases, the tribunals have taken a view that the appeal against the intimation issued u/s. 143(1) becomes infructuous in cases where the assessment order has been passed subsequently u/s. 143(3); and that the additions made in the intimation under section 143(1) can be challenged in the appeal against the order under section 143(3). As against this, in few cases, the tribunals have taken a view that the enhancement to the income arising from the adjustments made in an intimation issued u/s. 143(1) cannot be challenged in the appeal filed against the assessment order passed u/s. 143(3), and ought to have been challenged in an appeal against the intimation under section 143(1).

ARECA TRUST’S CASE

The issue had earlier come up for consideration before the Bangalore bench of the tribunal in the case of Areca Trust vs. CIT (A) – ITA No. 433/Bang/2023 dated 26th July, 2023.

In this case, the assessee trust filed its return of income for assessment year 2018-19 on 28th August, 2018 declaring total income at Nil. The return of income was processed by the AO/CPC under section 143(1) of the Act on 28.02.2020. In the said intimation, an amount of ₹23,29,62,417 was considered as income chargeable to tax @ 10 per cent at special rate under section 115BBDA of the Act. Thereafter, the assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 23rd September, 2019. The assessment under section 143(3) was completed by assessing the total income at the same amount i.e. ₹23,29,62,420/- as per the intimation issued under section 143(1) of the Act.

Being aggrieved by the order passed under section 143(3) of the Act, the assessee filed an appeal to the CIT (A). Before the CIT (A), it was contended that the assessee earned dividend income of ₹23,29,62,417 on mutual funds registered with SEBI and hence the exemption claimed under section 10(35) r.w.s. 10(23) of the Act was to be granted. Further, it was contended that the income was assessed at 10 per cent as per the intimation under section 143(1) of the Act, whereas in the assessment completed under section 143(3) of the Act, it was treated as business profit and taxed at 30 per cent as against the special rate of 10% under section 115BBDA of the Act.

The CIT(A) held that the assessee had filed an appeal against the assessment completed under section 143(3) of the Act, wherein no separate addition was made, but which only incorporated the adjustment made under section 143(1) of the Act. Therefore, it was concluded by the CIT(A) that appeal against the order passed under section 143(3) of the Act was not maintainable, and he did not adjudicate the appeal on merits. However, the CIT(A) directed the AO to dispose of the assessee’s rectification application dated 16.06.2020 against the order passed under section 143(1) of the Act. As regards the rate of tax, the CIT(A) directed the AO to tax the income of ₹23,29,62,420 at 10 per cent as per section 115BBDA of the Act, as was done in the intimation under section 143(1) of the Act. Accordingly, the appeal of the assessee was partly allowed.

The assessee filed a further appeal to the tribunal and reiterated the submissions which were made before the CIT (A).

The tribunal held that section 246A specifically provided for an appeal against intimation issued under section 143(1) of the Act. In the case before it, total income had been assessed at ₹23,29,62,420 as per the intimation issued under section 143(1) of the Act. Therefore, according to the tribunal, the cause of action of the assessee arose from the intimation issued under section 143(1) of the Act and appeal ought to have been filed against the same. The assessment completed under section 143(3) of the Act merely adopted the assessed figures in the intimation order passed under section 143(3) of the Act. Therefore, no cause of action arose from the order passed under section 143(3) of the Act. Section 143(4) of the Act only mentioned that on completion of regular assessment under section 143(3) or 144 of the Act, the tax paid by assessee under section 143(1) of the Act shall be deemed to have been paid toward such regular assessment. That by itself did not mean there was a merger of the intimation under section 143(1) with that of regular assessment under section 143(3) / 144 (unless the issue had been discussed and adjudicated in regular assessment under section 143(3) / 144 of the Act).

Accordingly, the tribunal dismissed the appeal of the assessee, with the direction that a liberal approach may be taken for condonation of delay in filing the appeal against the intimation under section 143(1) if the same was filed by the assessee, since the assessee’s application for rectification of the intimation under section 143(1) of the Act had been filed within time and was pending for disposal.

A similar view has also been taken by the tribunal in the following cases –

  •  Epiroc Mining India Pvt. Ltd. vs. ACIT (ITA No. 50/Pun/2024) dated 14.5.2024
  •  Global Entropolis (Vizag) Private Limited vs. AO, NFAC 2023 (8) TMI 81 – ITAT Chennai
  •  Orient Craft Ltd. vs. DCIT (2024) 158 taxmann.com 1124 (Delhi – Trib.)

SOUTH INDIA CLUB’S CASE

Recently, the issue had come up for consideration of the Delhi bench of the tribunalin the case of South India Club vs. Income-tax Officer [2024] 163 taxmann.com 479 (Delhi – Trib)[22-05-2024].

In this case, the assessee society had filed its return of income for assessment year 2018-19 on 30th March, 2019, wherein it had claimed application of income for charitable purposes of ₹6,01,35,500. The return was processed u/s 143(1)(a) of the Act, wherein the exemption claimed u/s. 11 was disallowed on the ground that the total income of the trust, without giving effect to the provisions of section 11 and 12, exceeded the maximum amount which was not chargeable to tax and, therefore, the audit report in Form 10B was required to be submitted along with the return of income. Since, the assessee had not filed its audit report in Form 10B electronically along with or before filing the return of income, exemption u/s 11 was not allowed. Aggrieved with the above order, the assessee preferred an appeal before the CIT (A).

Before the CIT (A), the assessee submitted as under –

  •  The application for registration under Section 12A was submitted on 27th March, 2019. While this application was pending, the assessee filed its return of income for the Assessment Year 2018-19 on 30th March, 2019 claiming the exemption u/s. 11.
  • The intimation u/s.143(1) dated 10th November, .2019 was issued by the DCIT, CPC, wherein the exemption claimed u/s. 11 was denied as Form No. 10B was not e-filed in time.
  • The application for registration under Section 12A was rejected by CIT(E) vide his order dated 30th September, 2019. The order of the CIT(E) was appealed and the assessee received a favourable decision of Hon’ble ITAT dated 13th August, 2020 allowing its appeal and directing the CIT (Exemption) to grant registration u/s 12AA.
  • Consequent to the ITAT’s order, the CIT (Exemptions) granted registration by order dated 5th January, 2021.
  •  It was due to the reason that the registration was not granted on the date when the return of income was filed for the year under consideration, that the assessee could not submit the audit report in Form No. 10B.
  • When the CIT (Exemptions) granted registration on 05.01.2021 the income tax scrutiny assessment for the assessment year 2018-19 was pending which was completed on 8th February, 2021 denying the exemption claimed u/s. 11. The appeal was filed before the CIT (A), NFAC and the same was yet pending.
  • On the basis of the above, the assessee pleaded that when the CIT (Exemptions) granted registration to it w.e.f. Assessment year 2019-20 in accordance with sub-section 2 of Section 12A, on the basis of the application filed in March 2019, automatically the second proviso to that sub section had become applicable, granting the benefit of exemption under section 11 and 12 for pending assessments of earlier assessment years, subject only to the condition that there has been no change in objects and activities in the intervening period.
  • Since there was no change in the objects and activities of the appellant during the financial year concerned, the assessee claimed that the benefit of exemption u/s. 11 and 12 was required to be granted, and the second proviso did not prescribe any other pre-condition to become eligible for the exemption.
  • The assessee also took an alternative plea of non-taxability of the amount received during the year on the basis of the principle of mutuality.

The CIT (A) took the view that the intimation issued u/s. 143(1) merged with the subsequent order passed u/s. 143(3) and, therefore, the appeal on this issue had become infructuous. In addition to this, the CIT (A) also held that the filing of Form 10B before the filing of return was compulsory to grant exemption u/s 11 even in a case where the assessment order passed u/s. 143(3) was considered. On that basis, the CIT (A) held that the exemption could not be granted even in an appeal against the order passed u/s. 143(3) without there being any application for condonation of delay by the assessee in respect of filing of Form 10B.Against this order of the CIT (A), the assessee filed an appeal before the tribunal.
Before the tribunal, apart from contending that the exemption u/s. 11 ought to have been granted to it in view of the Second Proviso to Section 12A, the assessee also submitted that once an assessment was selected for scrutiny; notice u/s 143(2) had been issued and an order had been passed u/s 143(3), the intimation u/s 143(1) merged into the assessment order and lost its standalone existence. On this basis, it was contended that intimation u/s. 143(1) and consequential demand should be quashed. The assessee relied upon the following decisions in support of this contention —

  •  ACIT vs. GPT-Bhartia JV (I.T.A No. 13/Gty/ 2022 dated 9th June, 2023)
  •  Dura Roof Pvt. Ltd. vs. ACIT (I.T.A No. 49/Gty/ 2022 dated 14th June, 2023)
  •  M P Madhyam vs. DCIT (I.T.A No. 424 & 426/Ind/2022 dated 30th August, 2023)

On behalf of the revenue, it was argued that there was no decision of the jurisdictional High Court available with respect to the point that upon issuing of notice u/s 143(2) of the Act, passing of the order u/s 143(1) of the Act was impermissible. Further, regarding the issue of pending assessment at the time of granting of registration, it was agreed that the assessment was pending at the time of grant of registration. However, it was submitted that whether other conditions for claiming deductions u/s 11 were fulfilled or not, had to be verified.

The Delhi bench of the tribunal held that the validity of the intimation issued u/s 143(1) was limited to mere intimation of correctness and accuracy of the income declared in ROI and its accuracy based on the information submitted along with the ROI. It did not carry the legitimacy of an assessment. When the return of income was assessed under the regular assessment, then it lost its individuality and merged with the regular assessment. The tribunal concurred with the view of the CIT (A) that the intimation u/s 143(1) merged with the order passed u/s 143(3) of the Act and the appeal against the said intimation became infructuous. However, it was further held that the CIT (A) should have stopped with the above findings and should not have proceeded to decide the issue on merits, because it was brought to his knowledge that the assessee had filed an appeal against the regular assessment order. Therefore, he had travelled beyond his mandate. The issue of allowability of section 11 was already considered in the regular assessment and that issue was already in appeal before another appellate authority. Therefore, reviewing the same by the CIT(A) in an appeal against the intimation u/s. 143(1), which had become infructuous, was uncalled for. With respect to the applicability of the Second Proviso to Section 12A, the tribunal held that this issue has to be raised before the FAA in the appeal against regular assessment passed u/s 143(3).

Accordingly, it was held that the intimation passed u/s 143(1) had merged with the regular assessment passed u/s 143(3), and it did not have legs to stand on its own, once the regular assessment proceedings were initiated.
A similar view has also been taken by the tribunal in the following cases –

  •  National Stock Exchange of India Ltd. vs. DCIT (ITA No. 732/Mum/2023)
  • Lokhandwala Foundation vs. ITO (ITA No. 1702/Mum/2020)

OBSERVATIONS

The issue under consideration is whether, in a case where the regular assessment has been made, the intimation issued under section 143(1) still survives, or it loses its existence and merges with the assessment order passed after the issue of intimation.

There is no express provision under the Act providing for such merger of the intimation issued under section 143(1) with the assessment order passed subsequently either under section 143(3) or under section 144. However, there are several provisions under the Act which need to be considered for the purpose of deciding the issue under consideration, which are discussed below:

  •  Firstly, the processing of the return and issuing intimation under section 143(1) is not expressly prohibited in a case where the notice has already been issued under section 143(2) selecting the return for the purpose of scrutiny assessment. In fact, in sub-section (1D), as it stood prior to its amendment by the Finance Act, 2017, it was provided that the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2). However, by virtue of the amendment made by the Finance Act, 2017, the provisions of sub-section (1D) have been made inapplicable to the returns pertaining to AY 2017-18 and thereafter. Therefore, the Act provides for both i.e. processing of the return of income as well as making the assessment, if that is required in a particular case. Had it been intended that the intimation issued under section 143(1) should get merged with the assessment order passed subsequently, then the law would not have provided for processing of the return of income at all in a case where the case had already been selected for the scrutiny assessment and that too on a mandatory basis.
  •  Section 246 and section 246A provide for the list of orders against which the appeal can be filed by the assessee. Here, both the orders i.e. the intimation issued u/s. 143(1) and the assessment order passed u/s. 143(3) or 144 have been listed separately. Therefore, it is clear that an appeal can be filed before the Joint Commissioner (Appeals) or Commissioner (Appeals) against both; intimation as well as the assessment order. For filing the appeal against the intimation issued u/s. 143(1), section 246A does not differentiate between cases where the assessment order has been passed subsequently or not. Therefore, technically, the provisions permit filing of the appeal against the intimation issued under section 143(1), even in a case where the appeal has already been filed against the assessment order, if the delay in filing that appeal is condonable.
  •  An intimation under section 143(1) may not have been appealable at a time when no adjustments were permitted under section 143(1)(a). Now that such adjustments are permitted, the right of appeal has been restored, which indicates that such adjustments have to be agitated separately in appeal.
  •  There is no provision in the law for merger of the two appeals, if two appeals are filed separately against the intimation under section 143(1) and against the assessment order under section 143(3). Both appeals have to be adjudicated separately. Withdrawal of any one of the appeals is possible only with the permission of the Commissioner (Appeals).
  •  In civil law, the doctrine of merger is a common law doctrine that is rooted in the idea of maintenance of the decorum of the hierarchy of courts and tribunals. The doctrine is based on the simple reasoning that there cannot be, at the same time, more than one operative order governing the same subject matter. As stated by the Supreme Court in Kunhayammed vs. State of Kerala, (2000) 6 SCC 359, “Where an appeal or revision is provided against an order passed by a court, tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of the law”. However, as clarified by the Supreme Court in Supreme Court in State of Madras vs. Madurai Mills Co. Ltd.(1967) 1 SCR 732, “… doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal on revision, there is a fusion of merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisionaljurisdiction.”In this case, both the appeals are before the same level of appellate authority, and in the absence of any specific provision, the doctrine of merger of appeals should not apply.
  •  Further, the adjustments made to the returned income while processing the return under section 143(1) and the additions or disallowances made while passing the assessment order are treated differently in so far as the levy of penalty under section 270A is concerned. The former is not considered to be under-reporting of income by the assessee, whereas the latter is considered to be under-reporting of income. Therefore, the enhancement made to the total income of the assessee by way of adjustments as permissible under section 143(1) does not lead to levy of penalty under section 270A. However, the enhancement made to the total income of the assessee by virtue of the assessment order might result in levy of a penalty under section 270A, if other relevant conditions are satisfied. Section 270A(2)(a) provides that a case where the income assessed is greater than the income determined in the return processed under section 143(1)(a) is to be regarded as under-reporting. If a view is to be taken that the intimation issued under section 143(1) gets merged with the assessment order and it loses its existence, then the provisions of section 270A(2)(a)may become redundant.
  •  Also, the intimation issued under section 143(1) is deemed to be a notice of demand under section 156 in a case where any sum is determined to be payable by the assessee under that intimation. Therefore, the assessee is required to make the payment of the said demand within a period of thirty days as provided in section 220. In case if such demand has not been paid within a period of thirty days, then the consequences as provided under the Act like levy of interest under section 220(2) or levy of penalty under section 221 etc. would follow. If a view is to be taken that the intimation issued under section 143(1) gets merged with the assessment order and loses its existence, then it might be possible to also argue that the assessee will not be liable for any consequences that would have otherwise arisen for non-payment of the demand raised in the intimation within a period of thirty days.

Considering the above, it appears that the better view is that the intimation issued under section 143(1) will not lose its existence, even in a case where the assessment order has been passed subsequently. It is only the demand raised vide that intimation, if it has remained outstanding, which will get merged with the demand raised consequent to the passing of the assessment order, wherein the tax liability will be recomputed based on the income assessed finally. Therefore, appeals filed against intimations under section 143(1)(a) would have to be decided independent of the appeals against assessment orders under section 143(1)(a).

It is therefore advisable to file an appeal against adjustments under section 143(1)(a), which according to the assessee are not tenable, and such appeal should be filed independent of whether assessment proceedings under section 143(2) are initiated or not. Such adjustments need not again be the subject matter of the appeal against the assessment order under section 143(3) though retained in that assessment. Of course, as a matter of abundant precaution, till such time as the CBDT does not clarify its views on this matter, the assessee may still choose to take up such matters in the appeal, particularly if the issue has been discussed and has been examined during the assessment proceedings

Allied Laws

47. Leela and Ors. vs. Murugananthan and Ors.

Civil Appeal No. 7578 of 2023

2025 LiveLaw (SC) 8

2nd January, 2025

Will — Validity — Necessary to prove execution — Mere registration does not guarantee validity. [S. 68, Indian Succession Act, 1925; S. 68, Indian Evidence Act, 1872].

FACTS

The Respondents (first wife and children of one late Mr. Balasubramaniya) instituted a suit for partition. The Appellants (second wife and her children) contested the said partition, claiming that the deceased had already executed an unregistered Will in their favour in 1989. The Respondents — first wife and children of the deceased — contended that the suit property should be partitioned among themselves and the children of the Appellant (children of the second wife), but excluding the Appellant herself (second wife), on the ground that she is an illegitimate wife. The learned Trial Court accepted the contention of the Respondent — the first wife and declined to accept the unregistered Will propounded by the Appellant-second wife on the ground that the same was non-genuine. The same was confirmed by the Hon’ble High Court of Madras.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed several inconsistencies in the Will propounded by the Appellant-second wife. Further, the Appellants failed to establish the execution of the Will as per section 63 of the Indian Succession Act, 1925. The Hon’ble Supreme Court, relying on its decision in the case of MoturuNalini Shah vs. Gainedi Kaliprasad (dead through legal heirs) (2023 SCC OnLine SC 1488) reiterated that mere registration of a Will (let alone an unregistered Will, as in this case) does not confer validity unless its execution is duly proved.

The appeal was therefore, dismissed.

48. Vidyasagar Prasad vs. UCO Bank and Anr.

AIR 2024 Supreme Court 5464

22nd October, 2024

Insolvency Proceedings — Recovery — Limitation period of three years — Acknowledgement of debt in Balance Sheet and Audit Report — Limitation period extended from last acknowledgement made. [S.7, 238A, Insolvency and Bankruptcy Code, 2016; S. 18, Limitation Act, 1963].

FACTS

The Appellant is a suspended Director of a Corporate Debtor (Respondent No. 2). The Corporate Debtor had availed a loan from UCO Bank (Respondent No. 1) and other consortium banks in 2012. The said loan was defaulted by the Corporate Debtor and was declared a Non-Performing Asset. Subsequently, in 2019, Respondent No. 1 – UCO Bank had filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate a corporate insolvency resolution process against the Corporate Debtor. It was contended by the Appellant-Director that the application was barred by limitation, as it was filed after the expiration of the three year limitation period, leaving no remedy available. However, the argument was rejected by the Hon’ble National Company Law Tribunal as well as Hon’ble National Law Company Appellate Tribunal. It was held by both the authorities that the debt had been duly acknowledged by the Corporate Debtor in its financial statements and Auditor’s report, thereby extending the limitation period in accordance with Section 18 of the Limitation Act, 1963 (Limitation Act).

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court examined the balance sheet of the Corporate Debtor as of 31st March, 2017 and found a clear acknowledgement of the default in loan repayments. Further, the Court noted entries indicating the balance loan payable by the Corporate Debtor. The Court dismissed the argument that the balance sheet did not specifically name the creditor bank to whom the loan was owed, stating that such specificity was not required. Relying on a series of precedents, the Hon’ble Supreme Court held that entries in the balance sheet constituted an acknowledgement of debt as per Section 18 of the Limitation Act, 1963, thereby extending the limitation period for initiating recovery actions.

The Appeal was therefore dismissed.

49. Central Warehousing Corporation and Anr vs. Sidhartha Tiles & Sanitary Pvt Ltd.

SLP(c) No. 4940 of 2022 (SC)

21st October, 2024

Arbitration and Conciliation- Lease agreement —Dispute — To be resolved by arbitration mechanism only. [S. 11, Arbitration and Conciliation Act, 1996; Public Premises (Eviction of Unauthorised Occupants, 1971].

FACTS

A lease agreement was entered into between the Appellant — a statutory body incorporated under the Warehousing Corporations Act, 1962 and operating under the administrative control of the Ministry of Consumer Affairs and the Respondent — a company engaged in the business of trading. As per the lease agreement, the Appellants were to provide warehouse space to the Respondent-Company for a period of three years at a mutually agreed rate. The agreement included an arbitration clause for resolving disputes arising during the lease term. Subsequently, the Appellant unilaterally increased the lease rent and informed the Respondent that non-payment of the revised rate would result in eviction, and the Respondent’s occupancy being deemed illegal. In response, the Respondent approached the High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), seeking the appointment of an arbitrator to resolve the dispute. The Appellant however, contended that the Respondent-Company was illegally occupying the storage premises and that the matter fell under the ambit of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 (Public Premises Act). The High Court declined to accept the contention of the Appellant and proceeded to appoint an arbitrator.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that the dispute arose between the parties during the existence of a lease agreement. Further, all the disputes emerging out of the said agreement must strictly be resolved through an Arbitration mechanism as per the said agreement. Rejecting the Appellant’s contention, the Court relied on its decision in SBI General Insurance Co. Ltd vs. KrishSpinning [2024 SCC OnLine SC 1754] and held that the provisions of the Public Premises Act cannot override the provisions of the Arbitration Act.

The appeal was therefore dismissed along with a cost of ₹50,000/- to the Appellant.

50. Purnima BhanuprasadGohil vs. State of Maharashtra and Ors.

AIR 2024 Bombay 370

3rd October, 2024

Registration — Settlement deed — Registration within four months from execution — Period for determination of stamp duty value by the stamp authority to be excluded. [S. 23, Registration Act, 1908; S. 34, Maharashtra Stamps Act, 1958].

FACTS

The Appellant and her ex-husband had executed a settlement deed on 20th December, 2011, following a long-drawn legal battle in the family court.

The said deed was deposited with the family court until both parties fulfilled their respective obligations. Subsequently, the family court issued a decree on 17th February, 2012. Subsequently, on 6th June, 2012, the Appellant filed an application before the Superintendent of Stamps for determination of stamp duty payable on the settlement deed for registration. The said application was processed by the authority on 28th August, 2012, and the stamp duty that was determined was paid within two days. Upon compliance with the settlement deed, the Appellant requested the family court to return the original deed on 12th September, 2012, for affixing the requisite stamps under the Bombay Stamp Act. It was received the following day. The Appellant then lodged the deed for registration on 16th November, 2012. However, the stamp authority refused to register the settlement deed on the ground that the deed was executed on 20th December, 2011, and as per Section 23 of the Registration Act, 1908, documents must be presented for registration within four months of execution.

Aggrieved, a petition was filed under Article 227 of the Constitution before the Hon’ble Bombay High Court.

HELD

The Hon’ble Bombay High Court held that from 20th December, 2011 (date of execution) till 17th February, 2012 (i.e. till the date of passing of decree), the period must be excluded as per the proviso to section 23 of the Registration Act. Further, relying on its earlier decision in the case of KritiJagdish vs. State of Maharashtra and Ors [Writ Petition No. 2662 of 2012], the Hon’ble Court held that for the purpose of calculating the period of four months, the period from 6th June, 2012 (date of application for determination of stamp duty) till 13th September, 2012 (receipt of settlement deed from the family court) must also be excluded. This was because such a period cannot be attributable to the Applicant. Therefore, after such period was excluded, it was observed that the Petitioner had lodged the settlement deed for registration within four months of execution.

The petition was therefore allowed.

51. KumudMahendra Parekh vs. National Insurance Company., Kochi and Ors.

AIR 2024 KERALA 189

17th July, 2024

Insurance — Medical insurance for travel —Hospitalisation — Claim of insurance — Mention of pre-existing disease in discharge papers —Non-disclosure of disease at the time of issuance of policy — Rejection of claim — Disease during childhood, 30 years ago and cured thereafter — No existing disease since last 30 years — Claim allowed. [S. 45, Overseas Medical Insurance for Trip].

FACTS

The Petitioner, a septuagenarian had availed medical insurance for her overseas travel after undergoing a detailed medical examination. During her trip, she fell ill with fever and shortness of breath, requiring hospitalisation for three days. Upon returning to India, she submitted an insurance claim, which the Respondent (insurance company) initially approved, and requested for hospitalisation documents for the claim processing. However, during the review, it was discovered that the discharge summary mentioned a history of bronchial asthma, which had not been disclosed at the time of availing medical insurance. Since the form specifically required the disclosure of any pre-existing diseases, the Respondent rejected the claim on the grounds that the Petitioner had withheld vital information regarding her medical history.

The Petitioner, however, maintained that she did not suffer from any existing disease. Further, discharge papers cannot be held as conclusive proof of any pre-existing disease. Furthermore, it was stated that the Petitioner suffered from bronchial asthma in her childhood and was cured almost 30 years ago therefore, the same was not needed to be disclosed. However, the Respondent, Grievance Cell of the Respondent as well as the Insurance Ombudsman, rejected the claim of the Petitioner.

Aggrieved, a petition was filed before the Hon’ble Kerala High Court (Eranakulam).

HELD

The Hon’ble Kerala High Court observed that, under the Overseas Mediclaim Insurance Policy for Business & Holiday Travel, a ‘pre-existing disease’ is defined as any ailment the insured had within 48 months prior to the issuance of the policy. It was undisputed that the Petitioner had bronchial asthma 30 years ago, well beyond the 48 month limit prescribed. Further, the condition had been cured, and therefore, there was no question of disclosure of any existing disease. Accordingly, the Hon’ble Court held that the insurance company was liable to accept the Petitioner’s claim.

The Petition was thus allowed.

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

11 [2024] 165 taxmann.com 603 (Delhi – Trib.)

Income Tax Officer vs. Tata Teleservice Ltd

ITA No: 1393 (Delhi) of 2023

A.Y.: 2016-17

Dated: 21st August, 2024

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

FACTS

For FY 2015-16, the assessee had made interest payments to M/s. China Development Bank (‘CDB’), a tax resident of China without deducting taxes under Section 195. As per the assessee, CDB was wholly controlled by the Government of China. Therefore, in terms of source rule exemption as provided in Article 11(3) of India-China DTAA, the interest received by CDB was not taxable in India.

While the appeal related to AY 2016-17, in 2018, India and China subsequently executed a Protocol to DTAA, and the amended Protocol explicitly mentioned that ‘CDB’ was a qualified entity for Article 11(3).

According to the TDS officer, CDB was not eligible for exemption since the Government of China held only a 36.45 per cent stake in CDB. Therefore, he treated the assessee as an ‘assessee in default’ for not deducting taxes on interest payments. The officer did not grant an exemption since the protocol amendment entered into effect only on 17th July, 2019. The CIT(A) held that CDB qualified for the benefit of exemption.

Aggrieved by the order of CIT(A), the Department appealed to ITAT.

HELD

  •  The Ministry of Finance of China directly held 36.45 per cent stake in CDB. Four other entities, which were controlled by other state-owned entities or limited liability companies or funds established under the law of the People’s Republic of China held the remaining stake in CDB.
  •  Audited financial statements of CDB clearly showed that entities that owned CDB were funded either by the Administration of Foreign Exchange or the State Council of China.
  •  The erstwhile Article 11(3) provided the benefit to financial institutions wholly owned by the Government of China, and such provision was expansive in nature.
  •  The newly inserted Article 11(3) vide Notification No.S.O.2562(E)(No.54/2019/F.No.503/02/2008-FTD-II dated 17th July, 2019) provides similar benefit to financial institutions.
  •  Further, the protocol amended vide notification dated 17th July, 2019 specifically included CDB in the list of financial institutions eligible for benefit under Article 11(3).
  •  Under the existing and amended Article 11(3), CDB was a financial institution wholly owned by the Chinese Government and, therefore, it was entitled to the benefit of exemption. Hence, the Assessee could not be treated as ‘assessee in default’.

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

10 [2024] 165 taxmann.com 683 (Delhi – Trib.)

Coursera Inc vs. ACIT (International Taxation)

ITA No: 2416 & 3646 (Delhi) of 2023

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

Dated: 21st August, 2024

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

FACTS

The Assessee, a tax resident of the USA, provided access to online courses and degrees offered by educational institutions and universities through its global online learning platform. The Assessee earned fees for enabling Indian institutions to access its platform. According to the assessee, in terms of Article 12 of India-USA DTAA, such fees were not taxable in India, either as royalties or fees for included services (‘FIS’).

According to the AO, the receipts were in nature of FIS under Article 12(4) due to the following assertions:

  • The services rendered were not confined to ‘content service’ but included a range of user-specific services that involved significant human intervention.
  • Training element was involved in navigating the features of the platform.
  • Since the assessee was not an education institution, the exception made in Article 12(5) was not applicable.

DRP directed the AO to verify the specific agreement and pass a speaking order. In his order passed pursuant to directions of DRP, the AO treated the receipts as FIS.

Being aggrieved, the assessee appealed to ITAT.

HELD

  •  The educational institutions create the courses and conduct examinations, not the Assessee. The competition certificate issued by the university bears the logo of the Assessee.
  •  The Assessee only provides access to the content created by the universities and does not create any content on their own. Upon payment of fees, the users access the content/study materials through the Assessee’s online platform. The Assessee acts as a facilitator between the universities and users. Hence, the Assessee was an aggregation service provider. The Assessee does not render any technical services while providing users with access.
  •  The AO brought no evidence on record to prove that the Assessee rendered technical services. Even assuming that services are technical in nature, the same could not be regarded as FIS unless the ‘make available’ condition was satisfied. Mere customisation of the webpage does not regard the service as technical. The burden was on the revenue to prove that the assessee had transferred technical knowledge, know-how, or skill as envisaged under Article 12(4).
  •  Relying on the rulings in the case of Elsevier Information Systems GmbH vs. Dy. CIT (IT) [2019] 106 taxmann.com 401 (Mumbai) andRelx Inc. ACIT [2023] 149 taxmann.com 78 (Delhi – Trib.), the ITAT held that receipts towards granting of access to data / information through the platform are towards ‘copyrighted article’. Hence, the same cannot be regarded as royalty.
  •  Further, providing access to data to users of the database does not involve any human intervention and, hence, cannot be regarded as fees for technical services as held by the Supreme Court in Bharati Cellular Ltd 330 ITR 239.

S. 17(3) — Voluntary severance compensation received by an employee for loss of employment could be regarded as capital receipt not subject to tax as profits in lieu of salary under section 17(3).

66 (2024) 168 taxmann.com 369(Ahd. Trib)

Sudhakar Ratan Shanker Gautam vs. ITO

ITA No.: 1033(Ahd) of 2024

A.Y.: 2018-19

Dated: 3rd October, 2024

S. 17(3) — Voluntary severance compensation received by an employee for loss of employment could be regarded as capital receipt not subject to tax as profits in lieu of salary under section 17(3).

FACTS

The assessee, an individual, was employed with “Y” which was subsequently acquired by “E”. Following this acquisition, the assessee’s employment was terminated on 26th October, 2017 on account of redundancy, and he received a severance compensation of ₹15,50,905. This amount was claimed as a capital receipt not chargeable to tax in the return of income filed for AY 2018-19 on 31st August, 2018.

The AO treated this amount as “profits in lieu of salary” under section 17(3) and added it to the total income of the assessee. On appeal, CIT(A) observed that since the compensation received by the assessee was related to the termination of employment, it should be treated as “profits in lieu of salary” under section 17(3)(i), thereby confirming the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that–

(a) Gujarat High Court [in Arunbhai R. Naik vs. ITO, (2015) 64 taxmann.com 216 (Guj)] and various ITAT decisions have consistently held that voluntary severance payments made without contractual obligation are capital receipts and not subject to tax as profits in lieu of salary.

(b) The severance payment received by the assessee was paid for the loss of employment and not for past services. It is consistently held that payments, when not tied to services rendered, are capital in nature and not taxable as salary income. Since the employer had no obligation to pay further amounts upon termination, the compensation should be deemed a capital receipt and thus not taxable under Section 17(3).

(c) Under section 17(3), “profits in lieu of salary” is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified. This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt.

(d) Section 56(2)(xi), w.e.f. 1st April, 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards and not to the case in question.

Accordingly, the Tribunal held that severance compensation received by the assessee was a capital receipt, not chargeable to tax under section 17(3).

Where the assessee was not only for the benefit of its members but also for benefit of insurance consumers from the general public, it was regarded as engaged in charitable activity in the nature of advancement of object of general public utility and therefore, principle of mutuality could not be applied. Where participation in the annual meet of the assessee was free of cost, it was not a case of rendering of any service for a fee and therefore, proviso to section 2(15) did not apply.

65 Insurance Brokers Association of India vs. ITO

ITA No. 3955 & 3958 / Mum / 2024

A.Ys.: 2016-17 & 2018-19

Date of Order: 13th November, 2024

Section 2(15), principle of mutuality

Where the assessee was not only for the benefit of its members but also for benefit of insurance consumers from the general public, it was regarded as engaged in charitable activity in the nature of advancement of object of general public utility and therefore, principle of mutuality could not be applied.

Where participation in the annual meet of the assessee was free of cost, it was not a case of rendering of any service for a fee and therefore, proviso to section 2(15) did not apply.

FACTS

The assessee was a company registered under section 25 of the Companies Act, 1956 in 2001 and was registered as a charitable organization under section 12A of the Act. For AY 2016-17 and 2018-19, the assessee filed its return of income claiming exemption under section 11 of the Act.

For AY 2016-17 and AY 2018-19, the case of the assessee was selected for scrutiny. Relying on Circular No. 11/2008 dated 19th December, 2008, the AO held that the assessee cannot claim exemption under section 11 of the Act since 1st proviso to section 2(15) of the Act was applicable and also held that the principle of mutuality was applicable in assessee’s case and brought to tax the interest income and other income.

CIT(A) confirmed the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

On the question of applying the principle of mutuality, the Tribunal observed that-

(a) It was not in dispute that the assessee was a charitable organisation since it was registered under section 12A of the Act and that the tax department till now had not held the assessee to be otherwise.

(b) A perusal of the financial statements of the assessee showed that the income consisted of subscription fee from members, sponsorship fees for annual event, and bank interest. Further, a perusal of the brochure of the annual event showed that the event was held for the benefit of insurance consumers and brokers and that the events were conducted without collecting any fees.

(c) The assessee was not only for the benefit of members but was also for the benefit of insurance consumers from general public and therefore, the assessee could be regarded as engaged in charitable activity in the nature of advancement of object of general public utility.

Therefore, the Tribunal held that the principle of mutuality was not applicable in the assessee’s case.

On the question of the applicability of proviso to section 2(15), the Tribunal observed that the income of the assessee did not contain any revenue from any activity in the nature of trade, commerce or business. Further, the participation in the annual meet for which the sponsorship fees was received was free of cost and therefore, it could not be held to be a service for a fee for rendering services. Relying on observations of the Supreme Court in ACIT vs. Ahmadabad Urban Development Authority, (2022) 143 taxmann.com 278 (SC), the Tribunal held that the AO was not correct in denying the benefit of section 11 by invoking proviso to section 2(15).

Accordingly, the appeals of the assessee were allowed.

Ss. 12AB, 2(15) – Where the objects and activities of the trust showed that its charitable activities were for the general public at large and not only for the alumni and faculty of the university, it was entitled to registration under section 12AB.

64 (2024) 168 taxmann.com 526 (AhdTrib)

Indus Alumni Association vs. CIT(E)

ITA No.: 916 (Ahd) of 2024

A.Y.: N.A.

Dated: 4th November, 2024

Ss. 12AB, 2(15) – Where the objects and activities of the trust showed that its charitable activities were for the general public at large and not only for the alumni and faculty of the university, it was entitled to registration under section 12AB.

FACTS

The assessee was a trust registered under Gujarat Public Trusts Act, 1950. The main objects of the trust were educational, medical relief and charitable in nature. It was created for the benefit and advancement of the whole mankind of the society without discrimination of caste, creed, sex and religion of any person.

The assessee obtained provisional approval for registration under section 12AB in 2022 and thereafter, applied for final registration under section 12AB by filing Form 10AB on 23rd September, 2023.

After considering the details filed by the assessee, CIT(E) held that the objects of the trust were for the benefit / welfare / interest of the members of the association only, namely alumni and faculty members of Indus University and not for the benefit of the public at large. Accordingly, the trust does not fall within the ambit of charitable purposes as defined under section 2(15) and is not eligible for registration under section 12AB.

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

HELD

The Tribunal observed that-

(a) Looking into the objects of the trust, it cannot be held that the assessee had been formed only for the benefit of a particular set of public, namely alumni and faculty members of the University.

(b) Perusal of the activities carried out by the trust, namely — food donation, blood donation, women empowerment, English learning, awareness of ecological concept, new library for the under privileged school children in a village clearly demonstrate that the trust was not doing charitable activities only for the alumni members of the University but for the general public at large.

(c) In any case, this aspect should be considered at the time of grant of exemption under section 11 and the provisions of section 13 should not be invoked at time of grant of registration under section 12AB.

The Tribunal also observed that this view was supported by decision of co-ordinate bench in Parul University Alumni Association vs. CIT(E),(2024) 162 taxmann.com 98 (AhdTrib).

Accordingly, the appeal of the assessee was allowed and the impugned order was set aside with a direction to CIT(E) to grant final registration under section 12AB to the assessee-trust.

Annual value of vacant flats held as stock-in-trade is not chargeable as `Income from House Property’.

63 Palm Grove Beach Hotels Pvt. Ltd. vs. DCIT

ITA No. 3858/Mum./2024

A.Y. : 2017-18

Date of Order : 11th October, 2024

Sections: 22, 23

Annual value of vacant flats held as stock-in-trade is not chargeable as `Income from House Property’.

FACTS

The assessee, engaged in the business of development of housing complexes, industrial parks and running five star hotels at Kodaikanal, e-filed the return of income for A.Y. 2017-18, declaring total income to be a loss of ₹1,22,20,66,420/-. While assessing the total income of the assessee under section 143(3) of the Act, the Assessing Officer (AO) inter alia taxed deemed annual letting value of finished property held in stock.

Aggrieved, the assessee filed an appeal before learned CIT(A), who partly allowed the assessee’s appeal by reducing the estimated annual value to 2.5 per cent as against 8.5 per cent determined by the AO in the assessment order.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal, at the outset, observed that the main point for consideration is as to whether the flats held by the assessee as stock-in-trade, be treated as income from house property. The Tribunal noted that the issue is no more res integra and that in this connection the observations made by the Bombay High Court in the case of PCIT, Central 1 vs. Classique Associates Ltd (order dated 28th January, 2019) are important. The Tribunal considered the observations of the court in paragraphs 3 to 5 of the order of the Bombay High Court. The Bombay High Court has, in its decision, considered the ratio of the decision of the Gujarat High Court in the case of CIT vs. Neha Builders (296 ITR 661) and of the Apex Court in Chennai Properties and Investments Ltd. vs. CIT (377 ITR 673). The Tribunal having reproduced the observations of the Bombay High Court found it futile to reproduce the observations of the Gujarat High Court and the Supreme Court. It also observed that the co-ordinate bench in the assessee’s own case by common order dated 1st July, 2021 passed in ITA NO. 1973/MUM/2019 and 1974/MUM/2019 for A.Y. 2014-15 and 2015-16 respectively.

The allotment letter issued by developer is to be construed as an ‘agreement’ for the purpose of section 56(2)(vii)(b). Consequently, benefit of proviso to section 56(2)(vii)(b) will be available and valuation of the property as on the date of allotment letter will need to be considered and not the valuation as on the date of conveyance.

62 Tamojit Das vs. ITO

ITA No. 1200/Kol./2024

A.Y.: 2015-16

Date of Order: 3rd October, 2024

Sections :56(2)(vii)(b)

The allotment letter issued by developer is to be construed as an ‘agreement’ for the purpose of section 56(2)(vii)(b). Consequently, benefit of proviso to section 56(2)(vii)(b) will be available and valuation of the property as on the date of allotment letter will need to be considered and not the valuation as on the date of conveyance.

FACTS

In the course of assessment proceedings, for AY 2015-16, the Assessing Officer (AO) noticed that the assessee has purchased a residential flat jointly with his wife Smt. Gargi Das through Deed of Conveyance, which was registered on 28th October, 2014 before District Sub-Registrar-II, South 24-Parganas. The value of the said transaction was declared by the assessee at ₹24,05,715/- as against stamp duty valuation of ₹38,74,500/-.

When assessee was confronted with, then the assessee submitted that he has booked this flat with Greenfield City Project LLP and first payment was made on 08.06.2010. In support of his contention, he filed (i) copy of receipt from Greenfield City Project LLP, (ii) letter of allotment by Greenfield City Project LLP dated 10.06.2010 and (iii) copy of typical floor plan purported to be allotment of flat to the assessee.

The AO did not equate the allotment letter and payment of the installment by the assessee through account payee cheque as an agreement contemplated in proviso appended to sub-Clause (2) of section 56(1) of the Income-tax Act, 1961. He made the addition of the difference between the transaction value and the stamp duty value i.e. ₹14,68,785/- as a deemed gift within the meaning of section 56(2)(vii)(b)(ii) of the Act.

Aggrieved, the assessee filed an application under section 154 wherein he emphasised that the letter given by the developer demonstrating the booking of the flat amounts to an agreement. The AO rejected the application.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the dispute is whether the allotment letter by the developer is to be construed as an agreement or not. The Tribunal perused the copy of the allotment letter. It also noted that the payments of amounts starting from 1st June, 2010 have been made through account payee cheques and that part payment has been made before issuance of the allotment letter.

The Tribunal held the interpretation by both the lower authorities to be incorrect. It held that the allotment letter is be equated to an agreement to sale. The agreement is not required to be a registered document. The only requirement in the law is that agreement should be followed by payments through banking channel, so that its veracity cannot be doubted. It observed that in the present case, the assessee has established the genuineness of the allotment letter by showing that payments were made through account payee cheques. Therefore, the valuation date for the purpose of any deemed gift is the date when first payment was made, in this case it happened around June, 2010. It held that the AO has erred in taking the valuation of the property as on 28th October, 2014.

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Android: https://bit.ly/3CC93TK

Learning Events at BCAS

1. Webinar on Transforming Tax Practice with AI: A Practical Approach for Professionals on Automating Compliance, Litigations and Drafting held on Thursday, 19th December, 2024 @ Virtual

The Technology Initiatives Committee of BCAS conducted this webinar and it was aimed at enlightening the participants on how to improve a CA Firm’s tax practice management techniques through the use of technology. It was a highly informative session that attracted participants from more than 65 different cities. Led by the speaker CA Vijay Srinivas Kothapalli, the webinar focused on how artificial intelligence (AI) is revolutionising the tax profession and practice. The session highlighted the growing role of AI in automating various aspects of tax compliance, litigation processes, and document drafting, offering practical strategies for professionals to leverage these advancements. As tax regulations become increasingly complex, the integration of AI into routine tasks is emerging as a game changer for efficiency and accuracy.

A significant portion of the webinar covered the automation of Income Tax (IT) and Goods and Services Tax (GST) notices using AI. This technology allows tax professionals to quickly generate responses, manage compliance deadlines, and process notices with greater precision. Additionally, AI-powered tools for Income Tax Return pre-scrutiny were discussed, which can help identify potential issues before submission, reducing errors and enhancing the quality of tax filings. The session also delved into documentation demonstrating how AI streamlines the preparation and filing process while ensuring adherence to legal requirements. Managing compliance calendars with AI tools was another key area covered, allowing professionals to stay on top of critical dates and avoid penalties.

Overall, the webinar provided tax professionals with practical insights on how to harness AI to streamline their work, reduce manual errors, and stay competitive in an increasingly digital landscape and received active participation from more than 330 participants.

2. Suburban Study Circle Meeting on “Navigating GST Reforms: Updates and Opportunities under the Amnesty Scheme on Thursday, 5th December, 2024 at C/o Bathiya& Associates LLP, Andheri

The meeting brought together tax professionals and GST enthusiasts to deliberate on the recent GST reforms, including key changes introduced as part of the Amnesty Scheme and was led by Group Leader CA Akshay Sharma and chaired by CA Janak Vaghani.

The speaker provided detailed insights into recent GST Council recommendations, including procedural simplifications, rate revisions, and compliance relief measures under the Amnesty Scheme. The session Chairman provided valuable guidance and support to the session leader, offering relevant examples to enhance the discussion on the topic.

KEY AREAS COVERED INCLUDED:

  1.  Analysis of GST Reforms — A comprehensive overview of the latest changes and their practical implications for businesses.
  2.  Opportunities under the Amnesty Scheme — Strategies to leverage this scheme for pending returns, late fee waivers, and compliance restoration.
  3.  Challenges in Implementation — A discussion on resolving ambiguities and preparing for future reforms.

The meeting was well received and participants actively engaged in the Q&A session, seeking clarity on various provisions and discussing sector-specific challenges.

3. Lecture Meeting on Deciphering The Current State of Indian Capital Markets held on Wednesday, 4th December, 2024@ Virtual.

The Bombay Chartered Accountant Society (BCS) organised a lecture meeting on 4th December, 2024, marking the conclusion of its 75th anniversary celebrations. The session, titled “Deciphering the Current State of Indian Capital Markets,” was presented by Mr. Nilesh Shah, Group President and Managing Director of Kotak Mahindra Asset Management Company.

During the insightful discussion, Mr. Shah delved into significant trends shaping global and Indian capital markets. He highlighted challenges such as rising debt levels in major economies, uneven economic growth within India, and the critical role of domestic investors in sustaining market resilience amidst Foreign Portfolio Investor (FPI) movements.

KEY TAKEAWAYS INCLUDED:

  •  Global Dynamics: The economic leverage seen in global powerhouses like the US and China, underscoring their implications for interest rates and global trade.
  •  Indian Economy: Despite its robust growth trajectory, India faces challenges of uneven development and employment generation. Mr. Shah pointed out structural reforms and sectoral opportunities necessary for sustaining long-term growth.
  • Market Analysis: He offered an optimistic view on corporate earnings and advised moderation in return expectations for equity markets due to high valuations. He also shared insights into sectoral opportunities, emphasising private banking and telecom, while cautioning about sectors like capital goods and infrastructure.

The session concluded with a lively Q&A, where participants engaged on topics like asset allocation, sectoral outlooks, and strategies for navigating the current investment landscape. Mr. Shah’s data-driven insights, combined with his ability to weave economic trends with relatable analogies, made the session highly impactful.
The meeting was well appreciated by 200 plus participants.

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4. The Non-Profit Organization (NPO) Conclave 2.0, 2024 held on Friday, 29th November, 2024 at the Mayor’s Hall, All India Institute of Local Self Government, Andheri West

This event was organised by Finance, Corporate and Allied Laws Committee along with Internal Audit Committee of Bombay Chartered Accountants’ Society.

The details of the program are as follows:

  •  The sessions focused on balancing regulatory compliance with continued growth and uninterrupted charitable work. Key takeaways included actionable steps to stay compliant with evolving regulations, safeguard resources, and ensure financial transparency in the NPO sector.

The program was well received and attended by 70+ participants

5. 7th Long Duration Course on Goods and Services Tax held on 16th August, 2024 to 29th November, 2024 @ Virtual

The 7th Long Duration Course on GST- 2024 was conducted by BCAS Virtually (Online mode) and was spread across 10 live sessions designed on a panel discussion format covering theoretical as well as practical aspects of GST.

The course covered 27 pre-recorded training videos of 90-120 minutes duration each conducted by the proficient faculty having immense expertise in the field of indirect taxation. The pre-recorded videos were made available in advance to the participants. Listening to pre-recorded videos helped the participants to have an interactive session by highlighting various issues in GST before the faculties. The live session covered the queries posted by the participants as well as drafted by the moderators. The presence of multiple faculties at the same time enabled sharing of thoughts and detailed deliberations. The course covered various concepts such as supply, valuation, ITC, place of supply, returns, registration, refunds and litigations etc.

The course received a very good response having 200 + participants enrolled from across the nation. The participants appreciated the program structure, course content and its’ execution.

6. Indirect Tax Law Study Circle — Blocked Credits under GST — clause (c) & (d) of section 17 (5) of CGST Act, 2017 held on Monday, 25th November, 2024 @ Virtual

Group leader, CA Yash Shah prepared case studies covering various contentious issues around clauses (c) & (d) of Section 17(5) of the CGST Act, 2017, especially in light of the recent decision of the Hon’ble Supreme Court in the case of Safari Retreats Private Limited. The discussion was ably supported by insights from mentor-
CA Naresh Sheth

The presentation covered the following aspects for detailed discussion:

  1.  Availability of ITC on goods & services used for construction of hotels, cold storage facilities, theatres (single screen / multi-screen), auditorium, recreation parks, etc.
  2.  Availability of ITC on transfer fee paid to industrial corporations and lease owner in case of assignment of lease when the lease hold land is used for construction of a Mall / manufacturing facility for own use.
  3.  Availability of ITC on goods and services used for construction of a R&D department.
  4.  Interplay between section clause (c) & (d) of section 17 (5) and availability of ITC to the extent used for construction of premises to be leased out.
  5.  Is vivisecting a contract an option to seek exclusion from the scope of clauses (c) & (d)?

Around 75 participants from all over India benefitted and took an active part in the discussion. Participants appreciated the efforts of the group leader & group mentor.

7. Full Day Workshop on Recent Developments in GST held on Saturday, 23rd November, 2024 @ BCAS.

The workshop was organized to cover various judicial & legislative developments in the field of GST.

CA Sunil Gabhawalla covered the legislative amendments and took the participants through the proposed amnesty u/s 128A, amendments relating to section 16 (5) of the CGST Act, 2017 and RCM related amendments from the perspective of time of supply.

CA DivyeshLapsiwalla covered the procedural amendments, such as the introduction of Invoice Management System, TDS on Metal Scrap, etc.

As the due date for filing of annual returns for FY 2023-24 is approaching, CA Chirag Mehta took the participants through the various issues revolving around the filing of annual returns and specific care to be taken in the same.

A panel comprising of CA S S Gupta & CA A R Krishnan moderated by CA Mandar Telang covered recent decisions (Safari Retreats, Mineral Area Development Authority, Creative Infocity, L&T IHI Construction, etc.) under the GST Law.

The participants appreciated the content of the workshop. The workshop was conducted in a hybrid mode with 50 participants attending physically and around 100+ participants attending virtually across India.

8. Finance, Corporate & Allied Laws Study Circle meeting on “All About Fast track merger” held on 18th November, 2024@ Virtual.

Group Leader CA Ankit Davda gave an overall perspective of Fast Track Merger (including demerger).

He covered the applicable provisions under the Companies Act 2013 with the help of case studies. The learned speaker highlighted key elements of a Scheme of Arrangements, key provisions and procedures, broad timelines and critical points for consideration in respect of fast track merger. He touched upon other aspect which have an effect on such mergers in areas of Income tax, GST, Stamp duty, Transfer premium, Other charges and Change of control.

He satisfactorily responded to all the queries of the participants. In limited time, he dealt with all the aspects of Fast Track Merger in a lucid manner. The program was attended by 85+ participants.

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9. International Economics Study Group – Impact Analysis of Trump’s victory on Geo-economics & Geopolitics held on Monday, 18th November, 2024 @ BCAS

The Participants deliberated following points:

A. Geopolitics:

  •  Ukraine-Russia Conflict: Trump’s victory could result in a shift in the U.S. stance towards Ukraine.
  • Middle East Tensions: Trump may take a more aggressive approach against Iran and its proxies (Hamas, Hezbollah & Houthi).
  • Heightened tensions with China are expected.
  • Russia and NATO Expansion: Trump’s policies could challenge NATO’s expansion in Eastern Europe.
  • India and Neighbouring Challenges: India’s relationship with the U.S. could be impacted favorably over troubled neighbours like China, Pakistan and Bangladesh.

B. Geo-economics:

  • Trade War with China: The likelihood of a second trade war under Trump could result in higher tariffs on Chinese goods, worsening trade relations, and impacting global supply chains.
  • Immigration Restrictions: With a focus on reducing illegal immigration, there may be tighter border controls, potentially affecting labour markets and demographic dynamics in the U.S.
  • Tax Cuts and Healthcare: Trump’s tax policies may reduce taxes, but with concerns about rising deficits and the challenge of controlling government spending.
  • Economic Impact on India: Economic fallout from tariffs, restrictions on immigration, and shifts in U.S. economic policies could create uncertainties for India’s export-driven economy.

All the Participants, Co-Convener CA Harshad Shah put up their points for discussions.

BCAS in News – BCAS as one of the stakeholders have been quoted in various news for its views, the below is link of the news articles where the Society was quoted. Also, our various other events and alliances are released in press too. Our readers can view these articles through this QR code. and You can then just provide list of articles.

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

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SME IPOS: Regulatory Challenges and Proposed Reforms

BACKGROUND

Small and Medium Enterprises (SMEs) have long been considered the backbone of the global economy, driving innovation, creating jobs, and contributing significantly to economic growth. In India, SMEs are a critical segment of the business ecosystem, and over the past few years, many SMEs have turned to public markets to raise capital and expand their operations. The advent of the Small and Medium Enterprises (SME) Platform on stock exchanges, particularly the BSE SME Platform and the NSE SME Emerging Platform, has provided these companies with an opportunity to access a broader pool of investors, enhancing their growth prospects. However, as these companies increasingly tap into public investments, the risk of fraudulent activities and mismanagement has also grown, raising concerns over the integrity of the process. Additionally, that SME’s are promoter driven or family-run business with minimal private equity, which limits checks on promoter influence.

A striking example of this trend is the case of Trafiksol ITS Technologies Ltd., a company that specializes in providing intelligent transportation systems and automation solutions. Trafiksol filed its Draft Red Herring Prospectus (DRHP) for an Initial Public Offering (IPO) in May 2024, offering 64.10 lakh equity shares with the aim of raising funds for various purposes, including the purchase of software for its operations. However, soon after the subscription period, a complaint raised serious doubts about the company’s financial practices and the legitimacy of its business dealings, particularly its procurement of software from a vendor with questionable credentials. This led to a series of regulatory investigations and the subsequent halting of the company’s IPO listing.

The allegations against Trafiksol revealed the other side of the SME IPO market, where issues such as misleading prospectus disclosures, fraudulent vendor relationships, and concealment of material facts can lead to severe investor losses and erode trust in the market. As the investigation into Trafiksol unfolded, it became clear that the company had relied on a third-party vendor (TPV) with dubious financials, raising alarms about potential misuse of IPO proceeds and the company’s failure to conduct adequate due diligence.

This case serves as a stark reminder of the need for robust and urgent regulatory oversight in SME IPOs, as well as for greater transparency from companies seeking to raise public capital.

REGULATORY CONCERNS AND PROPOSED CHANGES TO THE SME IPO FRAMEWORK

The increasing participation of investors in Small and  Medium Enterprises (SMEs) listed on stock exchanges, coupled with growing regulatory concerns, has prompted the Securities and Exchange Board of India (SEBI) to  review and propose changes to the SME IPO framework. Investor participation in SME offerings has surged significantly, with the applicant-to-investor ratio rising from 4X in FY 2022 to 46X in FY 2023 and 245X in FY 2024. However, concerns have arisen about the governance practices of SME listed companies, many of which are promoter-driven and exhibit a high concentration of shareholding. There have been instances of fund diversion, revenue inflation, and circular transactions involving related parties, shell companies, and connected parties. SEBI has taken action against such companies in the past, but the issue of related party transactions (RPTs) remains a point of concern. SEBI has found that one in two SME listed entities have undertaken RPTs of over ₹10 crores, with one in seven involving more than 50 per cent of the company’s consolidated turnover. These risks underline the need for more stringent scrutiny of SMEs, with the ultimate goal of protecting investors’ interests.

To address these issues, SEBI has worked with stock exchanges, merchant bankers, and its Primary Market Advisory Committee (PMAC) to propose reforms aimed at strengthening both the regulatory framework for SME IPOs and the governance norms for these companies. These proposals focuses on the IPO process and migration from the SME platform to the Main Board, along with corporate governance norms and post-listing disclosures for SME-listed companies.

KEY PROPOSALS AND RATIONALES

  1. Increase in Minimum Application Size: SEBI has proposed raising the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh, or even ₹4 lakh, to reduce the risk of investor losses in high-risk SME stocks. This change would attract more informed, risk-taking investors rather than smaller retail investors who may be less prepared to deal with the risks inherent in SME investments. This proposal also aims to enhance the credibility of the SME segment by limiting participation to those with more risk tolerance.
  2. NII (Non-Institutional Investor) Allocation: To align SME IPOs with main-board IPOs, SEBI recommends that the NII category be split into two sub-categories: one for investments up to ₹10 lakh and another for amounts above ₹10 lakh. Additionally, it suggests moving from proportional allotment to a “draw of lots” method for the NII category, similar to the retail category. This aims to provide a more equitable distribution of shares in the case of oversubscription.
  3. Increase in Minimum Allottees: Currently, SME IPOs require a minimum of 50 allottees to be considered successful. SEBI proposes increasing this threshold to 200 to ensure broader investor participation and enhance the stability of the listing, which would help build investor confidence.
  4. Phased Lock-In for Promoters: The lock-in period for promoters’ holdings in excess of the minimum promoter contribution (MPC) is proposed to be phased, with 50 per cent remaining locked in for two years after the IPO and the remaining 50 per cent for one year. This gradual release is intended to prevent rapid exit by promoters after listing, ensuring they have a long-term interest in the company’s performance. SEBI also suggests extending the lock-in period to 5 years for the minimum promoter contribution for SME IPOs.
  5. Restriction on Offer for Sale: It is suggested to put restriction on OFS part of SME IPO to 20 per cent of issue size as OFS proceeds are not forming capital of issuer and they may limit for OFS in issue size as well as threshold may be prescribed for selling shareholders also which shall not exceed more than 20 per cent of their pre-issue shareholding on fully-diluted basis.
  6. Monitoring of Issue Proceeds: Mandatory Appointment of monitoring agency shall be applicable for issuer company if fresh issue size is higher than 20 Crore or for specified objects. They will certify on utilisation of proceeds and will ensure funds are used for the purposes disclosed in the offer document, thus reducing the risk of misuse or diversion. This will also bring more transparency for investors and accountability for issuer.
  7. Increased Tenure of Promoter Lock-In: Since, SME companies are mostly promoter driven, it is necessary to ensure that promoter continues to have certain skin in the game until the company is on the SME Exchange. It is proposed that lock-in on minimum promoter contribution (MPC) in SME IPO shall be increased to 5 years. Additionally, lock-in on promoters’ holding held in excess of MPC shall be released in phased manner i.e. lock-in for 50 per cent holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 year.
  8. Eligibility for SME IPO: To improve the quality of companies listed on SME exchanges, SEBI proposes stricter eligibility criteria. For instance, companies should only be allowed to list if they have an operating profit of ₹3 crore in at least two of the last three financial years. Additionally, the promoter group of the issuing company should not have been involved in any fraudulent activities, like being debarred from the capital markets or being labelled as wilful defaulters or fugitive economic offenders.
  9. Disclosure of Firm Arrangement for Financing: In cases where a project is partially funded by a bank or financial institution, SEBI suggests requiring issuers to disclose the details of the sanction letters and appraisals in the offer document. This will provide additional transparency and safeguard investor interests by ensuring the financial feasibility of projects.
  10. Public Availability of Offer Documents for Comment: Unlike main-board IPOs, which require a 21-day public comment period for the Draft Red Herring Prospectus (DRHP), SME IPOs currently lack such a provision. SEBI now proposes to extend this requirement to SME IPOs, ensuring that investors have ample opportunity to review and comment on the offer documents before they are filed with stock exchanges. This increase in transparency would allow for a more informed investor base and help identify potential issues early on.
  11. Convertible Securities: Similar to main-board IPOs, SEBI recommends that SME companies convert all outstanding convertible securities into equity before filing for an IPO. This would offer investors a clearer picture of the company’s capital structure.
  12. Applicability of RPT norms to SME: Applying RPT norms under LODR Regulations to SME listed entities would contain the risks of siphoning of funds through related parties. In view of the above, it is proposed that the applicability of RPT norms under LODR Regulations should be extended to SME listed entities other than those which have paid up capital not exceeding ₹10 crores and net worth not exceeding ₹25 crores. This will harmonize the applicability of RPT norms between SME listed entities and Main Board listed entities. However, materiality threshold under Regulation 23(1) of LODR Regulations for approval by shareholders for RPT shall be only for transactions exceeding 10 per cent of annual consolidated turnover, and not lower of ₹1,000 crore or 10 per cent annual consolidated turnover since SMEs may not enter into high value transactions exceeding ₹1,000 crores.
  13. Merchant Banker Due-Diligence Certification: SEBI proposes that Merchant Bankers must submit a due-diligence certificate to stock exchanges at the time of filing the draft offer document, aligning this requirement with the practices for main-board IPOs. This will help ensure that proper due diligence is conducted before the offering, providing more protection for investors.
  14. Post-Listing Exit Opportunity for Dissenting Shareholders: SEBI suggests introducing provisions for post-listing exit opportunities for dissenting shareholders in case there are changes in the objects or terms outlined in the offer document. This will ensure that investors are not unfairly impacted by such changes after the IPO.
  15. Clarification on Price Adjustments for Corporate Actions: SEBI has noted cases where issuers conduct corporate actions like bonuses or stock splits shortly before an IPO, resulting in a mismatch between the actual value of shares and the issue price. To address this, SEBI proposes that the price per share for determining eligibility for minimum promoters’ contribution should be adjusted for such corporate actions, ensuring consistency and fairness in the IPO process.

Out of the proposed changes, SEBI in its 208th board meeting conducted on 18th December, 2024 reviewed SME framework under SEBI (ICDR) Regulations, 2018, and applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies approved the following amendments to SEBI (ICDR) Regulations, 2018 and SEBI (LODR) Regulations, 2015:-

  • An issuer shall make an IPO, only if the issuer has an operating profit (earnings before interest, depreciation and tax) of ₹1 crore from operations for any 2 out of 3 previous financial years at the time of filing of its draft red herring prospectus (DRHP).
  • Offer for sale (OFS) by selling shareholders in SME IPO shall not exceed 20 per cent of the total issue size and selling shareholders cannot sell more than 50 per cent of their holding.
  • Lock-in on promoters’ holding held in excess of minimum promoter contribution (MPC) to be released in phased manner i.e. lock-in for 50 per cent promoters’ holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 years.
  • Allocation methodology for non-institutional investors (“NIIs”) in SME IPOs to be aligned with methodology used for NIIs in main board IPOs.
  • Amount for General Corporate Purpose (GCP) in SME IPO shall be capped to 15 per cent of amount being raised by the issuer or ₹10 crores, whichever is lower.
  • SME issues shall not be permitted, where objects of the issue consist of Repayment of Loan from Promoter, Promoter Group or any related party, from the issue proceeds, whether directly or indirectly.
  • DRHP of SME IPO filed with the Stock Exchanges to be made available for 21 days for public to provide comments on DRHP, by making public announcement in newspaper with QR code.
  • Further issue by SME Companies to be permitted without migration to Main Board subject to the issuer undertaking compliance of the provisions of SEBI (LODR) Regulations, 2015 as applicable to the companies listed on the Main Board.
  • Related party transaction (RPT) norms, as applicable to listed entities on Main Board, to be extended to SME listed entities, provided that the threshold for considering RPTs as material shall be 10 per cent of annual consolidated turnover or ₹50 crore, whichever is lower.

While the SME IPO market plays a crucial role in enabling small and medium enterprises to access capital and expand their operations, recent incidents have exposed the vulnerabilities within this space. The concerns regarding transparency, corporate governance, and the potential misuse of IPO proceeds highlight the need for stronger oversight and regulatory reforms. The proposed regulatory changes by SEBI aim to enhance investor protection, bolster corporate governance practices, and improve market transparency. By focusing on tightening eligibility criteria, implementing phased lock-in regulations, and conducting more stringent scrutiny of promoters, SEBI seeks to create a more secure and reliable environment for SMEs to raise funds, while protecting retail investors from unnecessary risks.

For SMEs to truly reach their full potential, it is essential that companies maintain the highest standards of accountability and governance. By fostering a transparent, investor-friendly ecosystem, we can ensure that legitimate, growth-driven businesses thrive without the threat of exploitation or fraud. This will not only safeguard investor interests but also cultivate a sustainable, long-term investment landscape that supports the ongoing growth and success of SMEs in India.

Regulatory Referencer

I. DIRECT TAX : SPOTLIGHT

1. Extension of due date for furnishing return of income in the case of an assessee who is required to furnish a report referred to in section 92E for the A Y 2024-25 from 30th November, 2024 to 15th December, 2024 – Circular No. 18/2024 dated 30th November, 2024

2. Guidance Note 2/2024 on provisions of the Direct Tax Vivad se Vishwas Scheme, 2024 – Circular No. 19/2024 dated 16th December, 2024

3. Safe Harbour Rules prescribed for a foreign company engaged in diamond mining and selling of raw diamonds and insertion of Form 3CEFC- Income-tax (Tenth Amendment) Rules, 2024- Notification No. 124/ 2024 dated 29th November, 2024

II. FEMA READY RECKONER

Central Govt. notifies pension fund schemes as ‘financial products’ under IFSCA Act, 2019:

The International Financial Services Centres Authority has notified the ‘schemes operated by a pension fund’ as a ‘financial product’ for the purposes of the International Financial Services Centres Authority Act, 2019. This has been made effective from the date of publication of the notification.

{NOTIFICATION NO. S.O. 5241(E)[F. NO. 3/15/2022-EM-PART (1)], dated 5th December, 2024}

IFSCA renews recognition of ‘India International Bullion Exchange’ as Bullion Exchange & Clearing Corp till 8th December, 2025:

The IFSCA has renewed the recognition of India International Bullion Exchange IFSC Limited, Gujarat, as Bullion Exchange and Bullion Clearing Corporation for one year, commencing on the 9th day of December 2024 and ending on 8th day of December 2025 in respect of bullion contracts.

[NOTIFICATION NO. IFSCA-PMTS/9/2023-PRECIOUS METALS, dated 5th December, 2024]

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.26/2024-Central Tax dated 18th November, 2024

By above notification, extension of time is granted for furnishing of return in Form GSTR 3B for tax payers registered in State of Maharashtra and Jharkhand. The extension was up to 21st November, 2024 for above returns.

ii) Notification No.27/2024-Central Tax dated 25th November, 2024

Above notification seeks to amend Notification No. 02/2017-Central Tax, dated the 19th June, 2017. This notification is regarding powers of Central Tax Authorities and the Table in original notification is substituted.

iii) Notification No.28/2024-Central Tax dated 27th November, 2024

Above notification seeks to appoint common adjudicating authority for Show-cause notices issued by DGGI.

iv) Notification No.29/2024-Central Tax dated 27th November, 2024

By above notification due date for furnishing Form GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the State of Manipur, was extended till 30th November, 2024.

v) Notification No.30/2024-Central Tax dated 10th December, 2024

By above notification the due date for furnishing FORM GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the district of Murshidabad in the state of West Bengal is extended up to 11th December, 2024.

vi) Notification No.31/2024-Central Tax dated 13th December, 2024

Above notification seeks to appoint common adjudicating authority for show cause notices issued by officers of DGGI.

B. CIRCULARS

Clarifications of amendment in circular – Circular no. 239/33/2024-GST dated 4th December, 2024.

By above circular amendments are done in Circular No. 31/05/2018-GST dated 9th February, 2018 which is about ‘Proper officer under sections 73 and 74 of CGST Act and under IGST Act.

C. ADVISORY

i) Vide GSTN dated 13th November, 2024, information is given about Supplier View of Invoice Management System (IMS).

ii) Vide GSTN dated 12th November, 2024, information regarding IMS during initial phase of its implementation, is given.

iii) Vide GSTN dated 8th November, 2024, information about Waiver Scheme under Section 128A, is given.

iv) Vide GSTN dated 16th November, 2024, information relating to generation of GSTR-2B and IMS, is given.

v) Vide GSTN dated 26th November, 2024, information regarding Reporting of TDS deducted by scrap dealers in October, 2024, is given.

vi) Vide GSTN dated 27th November, 2024, information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Madhya Pradesh, is given.

vii) Vide GSTN dated 9th December, 2024, information about difference in value of Table 8A and 8C of Annual Returns FY 2023-24, is given.

viii) Vide GSTN dated 4th December, 2024, information regarding sequential filing of GSTR-7 returns as per Notification No.17/2024, is given.

D. ADVANCE RULINGS

Time of Supply vis-à-vis RCM

Deccan Cements Ltd. (AR Order No. RAJ/AAR/2024-25/08 dated 26th June, 2024 (Raj)

The applicant is a Limited Company incorporated under the Companies Act, 1956 and is in the business of manufacturing and selling of cement in south India having corporate office in Hyderabad. The applicant is having its manufacturing plant in the State of Telangana.

To expand its business activities in manufacturing and trading in cement throughout India, the applicant intended to start manufacturing unit in the State of Rajasthan. For this purpose, the applicant participated in Tender process for E-Auction of mining lease floated by Rajasthan Government.

Applicant is selected as Preferred Bidder and as a Preferred bidder, applicant has to pay some upfront amount as first installment.

Thereafter, the applicant has to pay second installment as upfront amount. Thereafter, the applicant has to furnish performance security for total amount of auction amount.

The performance security amount is to be adjusted every five years as per auction rules. The applicant has then to pay balance amount, where after the Mining lease agreement is entered into with Government of Rajasthan.

With above background, the applicant has raised following questions before the ld. AAR.

“(i) Whether the applicant is liable to pay any GST on the Mining Lease payments (applicability of GST on the Royalty payment of Mining Lease to Government of Rajasthan under Reverse Charge Mechanism).

(ii) If the applicant is liable to pay GST on the above, what will be the applicable rate of GST.

(iii) If GST is applicable, whether the applicant is liable to pay GST on the payment of Upfront Payments as per the Tender Documents which are paid in installments much before issuing LOI and after issuing LOI but before entering in to the Lease Agreement.

(iv) If GST is applicable, whether the applicant can pay GST from the State of Telangana or to apply for registration in the State of Rajasthan and pay GST.

(v) Whether the GST paid is eligible to be claimed as Input Tax Credit or not.”

The applicant was of the view that the lease agreement is entered into only after making all payments and hence it is the time of supply and it becomes liable to RCM at such point of time. The ld. AAR referred to relevant provisions of Act.

Regarding question (1) and (2), the ld. AAR referred to entry at Sl.No.17 of Notification No.11/2017-Central Rate dated 28th June, 2017 as amended from time to time and observed that Licensing services for the right to use minerals including its exploration and evaluation is covered under SAC 997337 and it is subject to levy of GST.

The ld. AAR also referred to Serial no. 5 of Notification No.13/2017-Central Rate dated 28th June, 2017 and observed that the Applicant, being recipient of service, is liable to pay GST under RCM.

The ld. AAR also determined that the applicant is liable to pay GST @ 18 per cent (SCST 9 per cent & CSGT 9 per cent).

Regarding question three about the time of supply, the ld. AAR referred to definition of ‘consideration’ given in section 2(31) of CGST Act.

To determine the time of supply of services, the ld. AAR also referred to Section 13 (3) of the CGST Act, 2017 which stipulates that: –

“In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be earlier of the following dates:

(a) The date of payment as entered in the books of account of the recipient or the date on which the payment debited in his bank account, whichever is earlier; or

(b) The date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be date of entry in the books of account of the recipient of supply.“

The ld. AAR observed that there is difference between advance payment and advance deposit amount. The ld. AAR observed that the advance payment is adjusted towards goods or services or both to be supplied, whereas advance deposit money is received only as security. The ld. AAR further observed that, generally security is not used by the supplier in the course of supply of goods or services but can be forfeited in case of violation of terms and conditions, as mentioned in tender document. The ld. AAR noted that in this case, as per point 13.1 of Tender Document, the upfront payment paid by the Successful Bidder will be adjusted in full at the earliest against the amount to be paid under sub-rule (3) of rule 8 of Auction Rules on commencement of production of mineral, which shows that advance payment made by the Applicant shall be adjusted towards future payments to be made by them.

The ld. AAR also noted that no where there is clause of refund of upfront payment in tender documents after allotment of mines on lease and therefore upfront payment made to the State Govt. is no more deposit but advance which shall be adjusted towards future payments of revenue share amount.

Accordingly, the ld. AAR held that the Applicant is liable to pay GST on the upfront payments made to the State Govt., under Reverse Charge Mechanism (RCM) in terms of Serial No.5 of Notification No. 13/2017-Central Rate Dated 28th June, 2017.

Regarding fourth question, the ld. AAR, referred to section 24 of CGST Act and held that the RCM should be paid in Rajasthan by obtaining registration in said State.

For last question, the ld. AAR held that the recipient will be eligible to ITC subject to fulfillment of conditions of section 16 of CGST Act. The ld. AAR thus disposed of the application.

Government Entity and RCM on Legal Services

THDC India Ltd. (THDCIL) (AR No. 02/2024-25 in Application No.01/2024-25 dated 19th June, 2024 (Uttarkhand)

The facts are that the Applicant i.e. THDCIL is a Public Sector enterprise and registered as a Public Limited Company under the Companies Act, 1956 and has been conferred ‘Mini Ratana-Category-I Status’ and upgraded to Schedule ‘A’ PSU by the Government of India.

The Equity of Company was earlier shared between Govt. of India and Govt. of Uttar Pradesh in the ratio of 75:25. However, pursuant to the strategic sale, the Share Purchase Agreement was executed between NTPC Limited and President of India on 25th March, 2020, for acquisition of legal and beneficial ownership of equity held by the President of India in THDC India Limited and after strategic sale, Equity in THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent.

The applicant has to pay legal fees to Advocates including Senior Advocate or Firm of Advocate. Applicant expected exemption from payment of RCM on such legal fees under Entry 45 of the Notification No.12/2017- C.T. (Rate) dated 28th June, 2017.

However, for purpose of legal guidance following questions were raised before the ld. AAR.

“1. Whether the Applicant i.e. the THDCIL is a Government Entity or not?

2. If yes, can Legal Services provided by the advocates including Senior Advocate or firm of Advocate is exempt from GST for THDCIL i.e. THDCIL does not need to pay tax under RCM?”

The ld. AAR held that since at present the equity or control of the Government is less than the stipulated 90 per cent, the applicant cannot be categorized and considered as “Governmental Entity” and cannot be eligible to exemption from payment of RCM.

The prime contention of the applicant was that since before transfer of shares to ONGC, shareholding was between Government of India and Government of UP; it remains Government Company even after change in ratio of shareholding. To support its plea the applicant relied on Uttarkhand AR in case of Application No.11/2018-19 – 2018-VIL-284-AAR.

The ld. AAR referred to Notification No. 31/2017-Central Tax (Rate), dated 13th October, 2017, which amended the Notification No 11/2017 – Central Tax (Rate), dated 28th June, 2017 and defined the “Governmental Entity” as under:

““x. “Government Entity” means an authority or a board or any other body including a society, trust, corporation,

i) set up by an Act of Parliament or State Legislature; or

ii) established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.””

The ld. AAR analysed the above definition and observed that, to be “Government Entity”, following conditions are to be met and fulfilled independently:

“- must be an authority or a board or any other body including a society, trust, corporation,

– established by any Government,

– with 90 per cent. or more participation by way of equity or control,

– to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The ld. AAR further observed that the applicant fulfills the first two conditions i.e. an authority or a board or any other body including a society, trust, corporation, and established by any Government. However, the ld. AAR held that the applicant falls short of fulfilling the third condition, which prescribes, “with 90 per cent. or more participation by way of equity or control,”. The ld. AAR observed that as on the date of filing of the application dated 1st May, 2024 for the present proceedings, the Equity in the applicant company i.e. THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent, which is less than the stipulated 90 per cent of equity and therefore, the applicant is not a Government Entity. The ld. AAR observed that earlier status has changed due to change in shareholding ratio. The ld. AAR opinioned that the usage of the word “Government” in relation to any organisation / firm / entity / company, signify and indicate that the Government has a controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company. It further observed that where the equity holding of the Government is zero, there would not and cannot be any controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company and in such a case it cannot be said to be a Government Entity.

Classification – “Vanilla Mix”

VRB Consumer Products Pvt. Ltd. (AR No.RAJ/AAR/2024-25/16 dated 31st July, 2024 (Raj)

The facts are that VRB Consumer Products Private Limited, applicant, intends to manufacture and supply dried softy ice cream mix (low fat) in vanilla flavour (“Vanilla Mix”) at its manufacturing unit (factory) located at Plot SP3-7, RIICO Industrial Area, Tehshil Kotputli, Keshwana, Jaipur, in Rajasthan.

The said product contains following ingredients:

The manufacturing process is explained as under:

“a. Procurement of raw materials — Firstly, raw materials such as milk solids, sugar, stabilizers, anti-caking agents etc. will be procured. Upon receipt thereof, applicant will undertake rigorous scrutiny and inspection of such raw materials. Thereafter, the raw materials which will meet the quality standards of applicant than these materials will be stored under appropriate conditions.

b. Mixing of ingredients— The raw materials sourced and stored above will be weighed, sieved and subsequently, mixed with each other in required proportion for the required time and speed in a mechanical mixer.

c. Quality check — The mixture obtained above will thereafter be subjected to sensory evaluation,
metal detection and moisture determination. Mixtures, which will pass the evaluation, shall be proceed ahead for packing.

d. Packing and dispatch– Mixtures, which will be received after a quality check, will undergo the primary packing and thereafter will be packed in cartons. The cartons will, subsequently, be stored in godown from where they will be dispatched after micro-testing.”

The applicant submitted question about correct classification of above product.

The applicant has submitted that Vanilla Mix is liable to be classified under Heading 0404 as mentioned at Sr. No. 10 of Schedule I to Rate Notification, attracting tax @ 2.5 per cent (CGTS, 2.5 per cent SGST).

Applicant interpreted that Heading 0404 seeks to cover within in its ambit, products which consist of natural milk constituents and therefore, so long as any product contains natural milk constituents, it shall be classified under Heading 0404.

The Department submitted to classify the product under heading 2106.

After discussion of submissions of both sides, the ld. AAR observed as under:

“7) In view of above discussion, we find that the product in question i.e. “Vanilla Mix”

– dried softy ice cream mix (low fat) in vanilla flavour comprise of several ingredients

and each ingredient play a vital role in the product. Since this product is intended to use for making of soft serve, each ingredient has a specific role to make the soft serve smooth and creamy in texture. Further, it is also conclusive that not only the contents of the product in question but the processing done in the soft serve machine also play a vital role in giving the smooth and creamy texture characteristic of soft serves.

8) In view of above, we find that the submissions made by the applicant are not enable and the product in question does not fall under the Heading 0404.

9) Further, we find that Chapter 21 of the First Schedule to the Tariff Act covers ‘Miscellaneous edible preparations’ which is clearly distinguishable from “products of animal origin”, the basic difference being the nature of products in question. While Chapter 4 covers products of animal origin which means that the products are normally natural or near to natural in their nature and not much processing has been done thereupon, on the other hand Chapter 21 covers prepared foodstuffs which means that those items of animal origin have been subjected to some processing which and the resultant product has acquired the nature of being prepared foodstuff etc.”

Accordingly, the ld. AAR held that the product i.e. “Vanilla Mix” — dried softy ice cream mix (low fat) in vanilla flavour is classifiable under Heading 2106 90 99 of the First Schedule to Tariff Act attracting tax at the rate of 9 per cent of CGST and 9 per cent of SGST.

E-commerce operator – Scope

Medpiper Technologies Pvt. Ltd. (AR Order No. KAR-ADRG-41/2024 dated 13th November, 2024 (Kar)

The facts are as under:

“5.1 The applicant gets in contract with companies to provide diagnostic labs and wellness services to the employees of the company or any group of people that the company decides, through third-party labs and wellness providers. The contract can be between an insurance company and the applicant to provide the said services to a specific group of people. These employees or groups of people can select a specific date, time and a specific diagnostic and lab tests to be done from diagnostic lab and wellness providers from the list the applicant provides. The medium of interaction between these employees and group of people with the applicant and with diagnostic labs can be through a mobile app developed by the applicant or Whatsapp or e-mail or telephonic conversation. The diagnostic labs will be providing medical reports to these employees or group of people through the medium of their choice.”

Thus, the applicant acts as an aggregator for diagnostics and labs for companies, insurance companies and insurance brokers.

In above background following questions were put for determination before the ld. AAR.

“a. Whether the assesse need to collect GST on the diagnostic and lab services provided through third party diagnostic labs? If yes, Whether GST has to be collected for the whole invoice amount or on the margin on the supply alone and what will be the applicable tax rate and which SAC to be used?

b. Whether TCS needs to be collected?

c. Whether the assesse fall under the definition/meaning of an “Insurance Agent” if invoiced to an insurance company, If yes how is GST applicable? “

The applicant interpreted that, it is E-commerce Operator and not required to collect tax under GST.

It also interpreted that it provides health care services and hence exempted under Notification 12/2017-Centre Tax.

The ld. AAR referred to definitions of ‘E-Commerce’ and ‘E-Commerce Operator’ given in section 2(44) and 2(45) of CGST Act.

The ld. AAR held that as per definitions, the Electronic Commerce Operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce i.e. for the supply of goods or services or both, including digital products over digital or electronic network.

Noting the process of applicant, the ld. AAR observed that the service is not being provided by the labs to the recipients, through the App / Mobile platform, but through the applicant. The ld. AAR observed that the applicant merely provides the platform for the recipients so as to enable them to select the lab from whom the services are to be procured and once the selection is over, the labs, after the tests, provide the reports directly to the recipients. The invoices are raised by the labs on the applicant. The ld. AAR, therefore held that the applicant doesn’t qualify to be an e-commerce operator.

The ld. AAR also observed that the applicant is neither acting as an agent of the client company to whom the services are provided nor of the diagnostic labs / wellness providers from whom the services are procured, as the applicant is not carrying the business of supply of services on behalf of another party but on his own account.

The ld. AAR also held that the applicant, add mark up on the cost of the services procured from the diagnostic labs / wellness providers and raises invoices on their clients with the marked-up value and in such scenario, the applicant has to charge GST on the whole invoice amount, being the transaction value and not merely on the mark-up value, in terms of Section 15(1) of the CGST Act 2017.

The ld. AAR also examined the contention of applicant that its services are falling in health care services covered by SAC 9993. In this regard the ld. AAR referred to entry number 74 and also paras 2(zg) & 2(s) of the Notification 12/2017-Central Tax (Rate) dated 28th June, 2017 and SAC 9993.

The ld. AAR held that, to avail the said exemption, the following two conditions have to be fulfilled.

“(i) The services being provided must be covered under health care services.

(ii) The service provider must qualify to be a clinical establishment.”

The ld. AAR held that the services being provided by the applicant are covered under healthcare services and held that the first condition is fulfilled.

However, the ld. AAR held that the applicant does not fulfill the second condition as the applicant does not qualify to be “a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India”. Holding so the ld. AAR held that since second condition is not fulfilled, the applicant is not entitled to avail the aforesaid exemption and the applicant is liable to collect GST on the diagnostic and lab services provided through third party diagnostic labs to their clients.

The ld. AAR also held that since the applicant is not an E-Commerce Operator, it is not liable to TCS. The ld. AAR also negated the contention of the applicant as being an insurance agent, since the services provided by the applicant are not connected, not even remotely, with the sale of insurance policies and hence, the applicant does not fall under the definition / meaning of the “Insurance Agent”. The ld. AAR held that the applicant has to raise invoice at par with the other companies.

Accordingly, the ld. AAR held that applicant is liable to discharge GST @ 18 per cent under SAC 9993 without any liability for TCS

Goods And Services Tax

I SUPREME COURT

77 2024-TIOL-121-SC-CX — M/s. Bharti Airtel Ltd. Vs. The Commissionerof Central Excise, Pune
Dated: 20thNovember, 2024

Hon. Supreme Court resolves conflicting interpretation on applicability of CENVAT credit on telecom towers.

FACTS

Appellant operates as a Mobile Service Provider (MSP) by supplying Sim cards to provide wireless telecom services. They usually own and operate infrastructure such as cell towers, Base Transceiver System (BTS) along with accompanying network equipment and structures like PFBs electricity generating sets, battery backup and stabilizers. A separate set of assessees offer passive infrastructure services including towers and incidental equipment to telecom companies at completely various sites. Telecom towers and shelters were fabricated offsite and supplied in a completely Knocked Down Condition (CKD) form and thereafter fastened to civil foundation for operational stability.

CENVAT credit availed on mobile towers as well as Pre-Fabricated Buildings (PFBs) was the centre point of dispute since the Bombay High Court in Bharti Airtel (earlier Bharti Televentures Limited vs. Commissioner of Central Excise, Pune) 2014-TIOL-1453-HC-MUM-ST had ruled against allowing CENVAT credit on the following grounds:

  •  Mobile Towers, their parts and PFBs are not capital goods as they are neither mentioned in Rule 2(a)(A) nor are components, spares and accessories of goods falling under any of the Chapters or Headings of the first Schedule of the Central Excise Tariff Act, 1985 (Tariff Act) and as specified in Rule 2(a)(A).
  •  Further, these items become part of immovable property once they are fastened and fixed to the earth.
  •  Also, these items cannot be construed as ‘inputs’ as these items are immovable, non-marketable and non-excisable goods.

As against the above Delhi High Court in the Vodafone Mobile Services vs. CST Delhi 2019 (27) G.S.T.L. 481 (Del) decided that towers and other associated structures like PFBs are covered by the definition of capital goods and are also ‘inputs’ as defined under CENVAT Credit Rules and hence, MSPs are entitled to CENVAT credit on excise duty paid on installation of mobile towers and PFB.

The decision of both the High Courts were challenged by the aggrieved parties before the Supreme Court.

HELD

Upholding the judgment in the case of Vodafone (supra), Apex Court held as follows:

Mobile Towers and PFBs do not become immovable property by their mere attachment to the earth as it is not intended to be permanent. The attachment is done to only provide support and effective functioning to the antenna. They can be easily dismantled and moved to another place without any substantial damage. Hence they are ‘goods’ and would come within the definition of ‘input’ as defined in Rule 2(k)(ii) of CENVAT Credit Rules. Hence, the Hon. Supreme Court while referring to Gujarat High Court’s decision in Industrial Machinery Manufacturers Pvt. Ltd. vs. State of Gujarat, (1965) 16 STC 380 (Guj), held that towers and PFBs though are themselves not electrical equipment, they are essential for proper functioning of antenna and thus, they are essential for rendering output service of mobile telephony and are inputs.

  • Alternatively, mobile towers and PFBs can be considered as accessory to antenna as they are necessary to provide height and stability to the antenna for ensuring uninterrupted and seamless service to subscribers. Hence they can be construed as accessory to antenna and PFBs which are “capital goods” falling under Chapter 85 of the Schedule to Central Excise Tariff. Thus, they are also “capital goods”.

Accordingly, by ruling that the CENVAT credit of excise duties paid on mobile towers and PFBs is allowed, Hon. Apex Court ended a decade long dispute.

Note: Under GST law, section 17(c) and (d) of CGST Act restrict input tax credit on the construction of immovable property, except for plant and machinery. The definition of “plant and machinery” expressly excludes telecommunication towers. However, it requires to be noted that the said definition of “plant and machinery” is relevant only for section 17(5)(c) and (d). If any goods under question do not become immovable property, this definition of plant and machinery is not required to be referred to. The expression “plant and machinery” is also used in section 16(3), 18(6) and 29(5) of the CGST Act, 2017 without making any reference to immovable property. Hence, though telecom towers are excluded from plant and machinery, they are not implied as “immovable property”. In the scenario, it will be interesting to note that mere exclusion of telecom towers would not affect input tax credit in respect of goods and services not becoming immovable property.

II HIGH COURT

78 [2024] 169 taxmann.com 152 (Kerala) Rejimon Padickapparambil Alex vs. UOI
Dated: 26th November, 2024

Where the assessee inadvertently claimed IGST credit as CGST and SGST credit in GSTR-3B, the mistake being only a procedural error, the order confirming the demand for recovery of such CGST and SGST credit is liable to be set aside. The Hon’ble Court praised the Central Tax Officer who passed favourable order in some other matter involving similar issue for rendering timely and effective justice and emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration.

FACTS

During the assessment year for the inter-state inward supplies, on which IGST (Integrated Goods and Services Tax) was paid by the supplier, the appellant, instead of showing the IGST component in the eligible credit details in Form GSTR-3B, inadvertently showed the IGST component as nil. Further, the appellant added the bifurcated CGST and SGST components of IGST to the existing figures showing eligible CGST and SGST credit. This resulted in a mismatch between Form GSTR 2A and Form GSTR 3B maintained in relation to the assessee. It is undisputed that the aggregate amount shown as CGST and SGST in GSTR-3B was matching with IGST amount shown in GSTR-2A. The department raised demand towards CGST & SGST ITC treating the same as unavailable credit which was used for payment of output tax of CGST and SGST. The petitioner, relied upon an Order passed by Assistant Commissioner of Central Tax, East Division-6, Bengaluru in identical matter, allowing the credit to the assessee in that case.

HELD

The Hon’ble Court reproduced the favourable order relied upon by the petitioner and acclaimed the said officer for passing such a judicious order and rendering timely and effective justice in our country which is known for its huge backlog of cases. The Hon’ble Court stated that at a time when the justice dispensation system is looking for ways and means to reduce litigation generally (especially in the field of taxation where delays can affect the nation’s economy), orders such as the one extracted above come as a welcome breath of fresh air, and are to be duly appreciated and encouraged. The Hon’ble Court also emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration. On merits, the Hon’ble Court held that the only mistake committed by the appellant was an inadvertent and technical one, where he had omitted to mention the IGST figures separately in Form GSTR 3A. Accordingly, the demand is liable to be set side. The Court further held that respondent State who may have lost its legitimate share of IGST, may represent before the GST Council and the GST Council shall issue necessary directions to resolve the issue by taking note of the declaration in this judgment.

79 [2024] 169 taxmann.com 24 (Delhi) Xiaomi Technology India (P.) Ltd vs. Additional Commissioner, CGST Delhi West Commissionerate
Dated: 29th October, 2024

Mere allegation of mismatch between GSTR-1 and GSTR 3B cannot be the grounds of invoking Section 74.

FACTS

Petitioner was served with a notice intimating a huge difference between the GSTR 1 and GSTR 3B filed. The department had given many opportunities to the noticee to rebut the allegations, but the noticee had not submitted any documents. The department owing to a doubt of fraud/misstatement, invoked section 74.

HELD

Provisions of section 74 would not be attracted on a mere allegation of mismatch between GSTR-3B and GSTR-1 as said provision would itself be liable to be invoked only if it be alleged that a case of fraud, wilful misstatement or suppression of facts is made out.

80[2024] 169 taxmann.com 22 (Madras) Sri Kaleeswari Stores vs. Assistant Commissioner
Dated: 14th October, 2024

Confirming demand higher than the demand proposed in the SCN for a particular issue would tantamount to travelling beyond the show cause notice which is in violation of Principle of Natural Justice.

FACTS

The petitioner filed its returns for the period 2019-20 and discharged appropriate taxes as self-assessment. An audit was conducted on the petitioner and a show-cause notice was issued proposing demand under the head / defect “GSTR 2A and GSTR 3B (ITC Discrepancies)”, alleging that there is an excess ITC to the extent of ₹97,010/- under the CGST and SGST Act respectively. However, while passing the impugned order of adjudication, the entire ITC claimed during the period was disallowed. There were three more issues in respect of which also the demand was confirmed by the same order.

HELD

As regards to the primary dispute viz. discrepancy between GSTR 2A and GSTR 3B which constitutes 90 per cent of the demand liability, the Hon’ble Court held that the impugned order traversed beyond SCN in violation of natural justice as party was denied opportunity to put forth its case. As regards the other three issues the Hon’ble Court observed that the order records a finding that reply filed by the petitioner was not supported by documentary evidence. In these circumstances, the Hon’ble Court remanded the matter back for adjudication with a direction to the petitioner to deposit tax in respect of the other three issues and file its objections within a period of 4 weeks.

81[2024] 169 taxmann.com 9 (Punjab & Haryana) J.S.B. Trading Co vs. State of Punjab
Dated: 4th November, 2024

Once the proceedings are dropped after a valid conclusion that no tax was payable, reinitiating the same proceedings are bad in law and the impugned order is to be set aside.

FACTS

A notice under section 61 of Punjab CGST/SGST Act, 2017 was issued to the petitioner for scrutiny of the return by the Proper Officer to explain the ITC claimed on certain purchases from four different firms, whose registration had already been cancelled. Therefore, the petitioner was directed to prove the genuineness of the claim regarding ITCs. The petitioner submitted its reply to the notice and was intimated, vide GST ASMT-12 that their reply was found satisfactory and no further action was required in the matter. However, an intimation under Rule 142(1)(A) in Form GST DRC-01A was issued to the petitioner stating that the reply to the notice in Form ASMT-10 was not satisfactory and raised the demand. Hence, this petition.

HELD

The Hon’ble Court observed that the same officer has expressed two different views; one dropping the proceedings under section 61(2) and the other intimating liability. The Court held that once the authority reaches the conclusion that no additional demand was payable, dropping the proceedings, the fresh proceeding after passing of such order, stands vitiated in law and therefore, same is liable to be set aside.

82 (2024) 23 Centax 161 (Del.) A.R. Enterprises vs. Additional Commissioner, Central Goods and Service Tax (Appeals)
Dated: 19th September, 2024

Appellate Authority has the power to condone the delay beyond the permissible time limit of 30 days where delay was due to circumstances beyond the petitioner’s control.

FACTS

Petitioner, belatedly filed an appeal on 16th August, 2023 against order in original received on 27th March, 2023 beyond the stipulated time and also permissible condonation limit. Petitioner attributed the delay to financial hardships as well critical medical condition of their Managing Director requiring bed rest as evidenced by a medical certificate. Appellate authority rejected to admit the appeal on the grounds that it lacked the authority to condone a delay beyond the 30-day period allowed under section 107(4) of the CGST Act, 2017 vide its order dated 8th December, 2023. Being aggrieved by order refusing to allow the appeal by appellate authority, petitioner preferred this writ before this Hon’ble High Court.

HELD

The Hon’ble High Court after considering petitioner’s financial difficulties and Managing Director’s illness as valid and reasonable grounds for the delay. The High Court relied on the case of Central Industrial Security Forces, FGUTPP Unit vs. Commissioner of Central GST and Central Excise,[2018 (14) G.S.T.L. 198 (All.) dated 23rd May, 2018] where it was held that delays caused by circumstances beyond the petitioner’s control should be considered for condonation in the interest of justice by ignoring the limitation aspect. Consequently, impugned order passed by respondent was set aside and remanded back for consideration on merits, by disregarding the limitation period, and after providing an opportunity for a hearing.

83(2024) 22 Centax 575 (A.P.) Apco Arasavalli Expressway Pvt. Ltd. vs. Assistant Commissioner, State Tax
Dated 19th September, 2024

Time of supply for Annuity received for construction and maintenance of a national highway shall be taxable earlier of issuance of invoice or receipt of payments of annuity as per CBIC Circular No. 221/15/2024-GST Dated: 26th June, 2024.

FACTS

Petitioner was engaged in the construction of roads and highways, and entered into a concession agreement with National Highway Authority of India on 18th January, 2018 for construction and maintenance of National Highway No.16 on a Hybrid Annuity Mode (HAM) under design, build, operate, and transfer model. As per agreement, petitioner was to be paid consideration during the construction period and subsequently on an annuity basis for the concession period. While GST on the initial construction payments was settled, a dispute arose regarding the time of supply for GST on the annuity payments. Respondent passed an order stating that petitioner is liable to pay GST on all the annuity installments at the very inception of the concession period which was confirmed by appellate authority on further appeal. Hence, this writ petition. .

HELD

The Hon’ble High Court held that in case of HAM contract, the time of supply shall be as per clarification provided in CBIC Circular No. 221/15/2024-GST dated 26th June, 2024. Accordingly, GST is payable on annuity at the time of invoice issuance or payment receipt, whichever is earlier where invoices are issued prior to completion of milestone as per the agreement and not when concession agreement was entered into. Consequently, the order was set aside, and respondent was directed to collect tax in accordance with the CBIC circular.

84(2024) 22 Centax 132 (Kar.) Bosch Automotive Electronics India Pvt. Ltd. vs. State of Karnataka
Dated 29th July, 2024

ITC claim on GST paid under RCM cannot be denied without considering the clarification issued by CBIC Circular No. 211/5/2024-GST, supporting the timely availment of ITC.

FACTS

Petitioner paid GST under RCM after doing self-invoice on 31st May, 2023 and availed ITC of IGST amounting to ₹3,92,52,317 in respect of manpower supply services received for the period July 2017 to March 2023. Impugned SCN was issued under section 73(1) alleging that the petitioner was ineligible to claim the ITC as there was a delay in taking the credit beyond the stipulated period as specified under section 16(4) of CGST Act, 2017 and the same should be reversed along with interest and penalty. However, petitioner pointed out that CBIC Circular No. 211/5/2024-GST dated 26th June, 2024 was not considered while raising the demand of tax, interest and penalty. Being aggrieved by such impugned SCN, Petitioner filed a writ petition before Hon’ble High Court.

HELD

The Hon’ble High Court observed that Circular No. 211/5/2024-GST dated 26th June, 2024 which supports the claim of petitioner is squarely applicable in the case at hand and hence, no demand can be made on account of belated claim of ITC. Moreover, it relied on the decision of Supreme Court in the case of K.P. Varghese vs. ITO [1981] 7 Taxman 13, AIR 1981 SC 1922 where it was held that CBIC circular is binding upon respondent. Since SCN was issued prior to the release of the aforementioned circular, the Court directed the respondent to consider the objections raised by the petitioner and pass a reasoned order in light of the aforesaid circular. Accordingly, the petition was disposed-off.

85(2024) 23 Centax 76 (Uttarakhand) New Jai Hind Transport Service vs. Union of India
Dated: 27th September, 2024

Value of free fuel provided by service recipient shall not be treated as consideration for providing GTA service and would be included in value of service for charging GST.

FACTS

Petitioner was engaged in business of providing GTA Services. It had entered into a contract where it was agreed between the parties that service recipient will provide free diesel in order to enable petitioner to provide GTA service. However, in order to seek clarification as to whether value of free diesel provided by service recipient would be included in the value of GTA service for the levy of GST, petitioner filed an application for Advance Ruling. However, both AAR and AAAR ruled against the petitioner. Hence, the writ petition.

HELD

The Hon’ble High Court by placing reliance on the decisions of Supreme Court in Commissioner of Service Tax vs. Bhayana Builders Private Limited [2018 (10) G.S.T.L. 118 (S.C.)] and Jayhind Projects Ltd. vs. Commissioner of Service Tax, Ahmedabad [(2023) 13 Centax 32 (S.C.)] where it was held that cost of free diesel provided by service recipient cannot be added to the value of GTA service for the purpose of levying GST as well as providing free diesel cannot be constituted as consideration for rendering GTA service. Accordingly, the petition was disposed of in petitioner’s favour.

86(2024) 22 Centax 576 (All.) — Allahabad High Court Arpit Agarwal vs. State of U.P.
Dated 18th September, 2024.

Proceedings cannot be initiated in the name of partnership firm once it ceases to exist.

FACTS

Petitioner was a partner in a partnership firm consisting of two partners (Arpit Agarwal & Arvind Jain). During the COVID-19 period, Arvind Jain passed away, resulting in dissolution of the partnership firm. The said fact was informed to GST authorities during search operations. However, respondent issued a Show Cause Cum Demand Notice thrice on 16th December, 2023, 19th December, 2023, and 23rd April, 2024. Vide an Order dated 28th April, 2024, tax was confirmed from the partnership which was already dissolved. Being aggrieved by issuance of SCN and subsequently the order confirming tax demand, petitioner filed this writ petition.

HELD

The Hon’ble High Court after perusing section 94 of CGST Act, 2017 observed that once the firm is dissolved, the proceedings with respect to taxes and assessment should be carried out against the partners as well as legal heirs of the partners to the extent of his share. Accordingly, the Court set aside the order in the name of non-existent firm as
the same is nullity in the eyes of law. However, the Court has granted liberty to the respondent to proceed against the petitioner and other legal heirs of deceased partner.

87(2024) 22 Centax 220 (Guj.) Ketan Stores vs. State of Gujarat
Dated: 9th August, 2024

Recovery proceedings and provisional attachment cannot be initiated solely on the basis of Summary Order in Form DRC-07 where order itself was non-existent.

FACTS

Petitioner received a summary of order in Form GST DRC-07 dated 13th August, 2019 confirming demand of ₹94,71,738/- based on mismatch between GSTR 3B and GSTR 2A for the period from April 2018 to September 2018 with reference to an order dated 14th June, 2019. Petitioner stated that there was no such order dated 14th June, 2019, which formed the basis for the summary of order issued in Form GST DRC-07. However, respondent initiated recovery proceedings based on such summary order in Form DRC-07 and provisionally attached the bank accounts of petitioner. Being aggrieved, petitioner filed this writ petition.

HELD

The Hon’ble High Court observed that summary of order dated 13th August, 2019 in Form GST DRC-07 is only for the purpose of quantification of demand and has no value in the eye of law where there was no order itself in existence. Accordingly, High Court quashed summary order dated 13th August, 2019 and the consequent actions for recovery, as well as directed the respondents to lift the attachment of the bank accounts of the petitioner immediately.

Miscellanea

1. TECHNOLOGY AND AI

#World-first’ AI camera targets drink-drivers

Motorists under the influence of alcohol or drugs could be caught by a pioneering AI camera which is being tested for the first time in Devon and Cornwall. The state-of-the-art Heads-Up machine can detect road use and behaviour consistent with drivers who may be impaired by drink or drugs.

Police further up the road can stop the vehicle, talk to the driver and do a roadside test for alcohol and illegal drugs. Geoff Collins, UK general manager of camera developer Acusensus, said: “We are delighted to be conducting the world’s first trials of this technology right here in Devon and Cornwall.”

The camera can be moved quickly to any road in either county, without warning, with drivers unaware they have been spotted until police pull them over. “We are all safer if we can detect impairment before it causes an incident that could ruin lives,” said Mr. Collins.

Acusensus cameras have previously been used to help police catch drivers using mobile phones at the wheel or not wearing seat belts. With drink-drivers six times more likely to be involved in a fatal crash, Devon & Cornwall Police are hoping the Heads-Up system will help to save lives.

“Our officers cannot be everywhere,” said Supt Simon Jenkinson, whose team polices the 14,000 miles of roads in the two counties. As members of the Vision Zero South West road safety partnership, we’re committed to doing everything we can to reduce the number of
people killed and seriously injured on our roads. Embracing emerging technology such as these cameras is vital in that quest. The trial is taking place throughout December to coincide with other drink-driving campaigns.

(Source: bbc.com dated 14th December, 2024)

#THE 12 GREATEST DANGERS OF AI

In his new book Taming Silicon Valley, the AI expert Gary Marcus shared what he sees as the greatest dangers of AI and gave a list of 12 immediate dangers of AI in Silicon Valley.

1. Deliberate, automated, mass-produced political disinformation.

“Generative AI systems are the machine guns (or nukes) of disinformation, making disinformation faster, cheaper, and more pitch perfect,” says Marcus. “During the 2016 election campaign, Russia was spending $1.25 million per month on human-powered troll farms that created fake content, much of it aimed at creating dissension and causing conflict in the United States.”

2. Market manipulation.

He argues, “Bad actors won’t just try to influence elections; they will also try to influence markets. I warned Congress of this possibility on 18th May, 2023; four days later, it would become a reality: a fake image of the Pentagon, allegedly having exploded, spread virally across the internet,” which made the stock market briefly buckle.

3. Accidental misinformation.

“Even when there is no intention to deceive, LLMs can spontaneously generate (accidental) misinformation. One huge area of concern is medical advice. A study from Stanford’s Human-Centered AI Institute showed that LLM responses to medical questions were highly variable, often inaccurate,” notes Marcus.

4. Defamation.

“A special case of misinformation is misinformation that hurts people’s reputations, whether accidentally or on purpose,” notes Marcus. “In one particularly egregious case, ChatGPT alleged that a law professor had been involved in a sexual harassment case while on a field trip in Alaska with a student, pointing to an article allegedly documenting this in The Washington Post. But none of it checked out.”

5. Nonconsensual deepfakes.

Marcus explains that “Deepfakes are getting more and more realistic, and their use is increasing. In October 2023 (if not earlier) some high school students started using AI to make nonconsensual fake nudes of their classmates.”

6. Accelerating crime.

Marcus argues that Generative AI is already being used for impersonation scams and spear-phishing. “The biggest impersonation scam so far seems to revolve around voice-cloning. Scammers will, for example, clone a child’s voice and make a phone call with the cloned voice, alleging that the child has been kidnapped; the parents are asked to wire money, for example, in the form of bitcoin.”

7. Cybersecurity and bioweapons.

“Generative AI can be used to hack websites to discover ‘zero-day’ vulnerabilities (which are unknown to the developers) in software and phones, by automatically scanning millions of lines of code—something heretofore done only by expert humans,” explains Marcus.

8. Bias and discrimination.

“Bias has been a problem with AI for years. In one early case, documented in 2013 by Latanya Sweeney, African American names induced very different ad results from Google than other names did, such as advertisements for researching criminal records.”

9. Privacy and data leaks.

Marcus points to Shoshana Zuboff’s book The Age of Surveillance Capitalism, where she argued that companies are spying on all of us and that surveillance capitalism “claims human experience as free raw material for translation into behavioral data [that] are declared as proprietary behavioral surplus, fed into [AI], and fabricated into prediction products that anticipate what you will do now, soon, and later.” Marcus adds: “and then sold to whoever wants to manipulate you.”

10. Intellectual property taken without consent.

A lot of what AI will “regurgitate is copyrighted material, used without the consent of creators like artists and writers and actors,” notes Marcus. “The whole thing has been called the Great Data Heist — a land grab for intellectual property that will (unless stopped by government intervention or citizen action) lead to a huge transfer of wealth — from almost all of us — to a tiny number of companies.”

11. Overreliance on unreliable systems.

Marcus explains: “In safety-critical applications, giving LLMs full sway over the world is a huge mistake waiting to happen, particularly given all the issues of hallucination, inconsistent reasoning, and unreliability we have seen. Imagine, for example, a driverless car system using an LLM and hallucinating the location of another car. Or an automated weapon system hallucinating enemy positions. Or worse, LLMs launching nukes.”

12. Environmental costs.

The training of LLMs requires enormous amounts of energy, which has implications for the environment. “Generating a single image takes roughly as much energy as charging a phone. Because Generative AI is likely to be used billions of times a day, it adds up,” explains Marcus. Additionally, he notes that the trend among AI companies is to train bigger and bigger models, which requires astronomical amounts of energy.

(Source: Forbes.com dated 9th November, 2024)

2 HEALTH

#Elon Musk’s Neuralink announces study to connect brain implant to robotic arm

Elon Musk’s brain-computer interface implant startup Neuralink announced on X that it received approval to launch a new feasibility study, CONVOY, which will test the use of its wireless brain-computer interface (BCI), or N1 implant, to control an investigational assistive robotic arm.

“This is an important first step towards restoring not only digital freedom, but also physical freedom. More info to come, but the CONVOY study will enable cross-enrolling participants from the ongoing PRIME study,” Neuralink said in a post.

Neuralink’s PRIME study (short for Precise Robotically Implanted Brain-Computer Interface) involves the placement of a small, cosmetically invisible implant in the area of a person’s brain that plans movements. The N1 implant is designed to interpret one’s neural activity to assist them in operating a computer or smartphone by simply intending to move.

The ongoing medical device clinical trial is designed to provide individuals with quadriplegia the ability to use digital devices with their thoughts, and the company is continuing to seek individuals to participate in the study.

Neurolink’s BCI device was first implanted into 29-year-old quadriplegic Noland Arbaugh in February, resulting in Arbaugh having the ability to play chess and video games hands-free.

In July, Elon Musk joined Neuralink to give a live update on patients implanted with the Telepathy device. “Let’s say somebody has lost their arms or legs, we could actually attach an Optimus arm or Optimus legs to a Neuralink implant so that the motor commands from your brain that would go to our biological arms now go to your robot arms or robot legs, and you’d basically have cybernetic superpowers,” Musk said.

Optimus, also known as the Tesla Bot, is a general-purpose robotic humanoid that was initially announced by Musk in 2021, with a prototype shown in 2022. Musk showcased the robot’s progress at Tesla’s “We, Robot” event at Warner Bros. Studio last month in Los Angeles.

Neuralink recently announced it received approval from Health Canada to perform a clinical trial on its N1 brain implant and R1 robot, which is used to place the implant into the brain. The “Canadian Precise Robotically Implanted Brain-Computer Interface” (CAN-PRIME) study will be performed by the University Health Network (UHN) hospital at its Toronto Western Hospital.

Last month, the company received FDA breakthrough device designation for Blindsight, an implant that aims to restore vision in individuals who are blind. Blindsight implants a microelectrode array into the visual cortex of a person’s brain. The array then activates neurons, which then provide the individual with a visual image.

(Source: www.mobihealthnews.com dated 27th November, 2024)

Input- Output Ratio

A Chartered Accountant’s client wanted to sell his large immovable property. It was ancestral, and there were 3 to 4 co-owners. A client approached the CA and entrusted the assignment to him. The client said that he would also prefer to have a good lawyer in the picture.

The CA, as usual, was overly sincere and desired to save income tax for the client. He gave him several lawful advice. He broad-based the ownership structure so as to divide the capital gains. Internal gifts did not attract income tax. He also tried to save stamp duty. Different individual members of the family could claim different exemptions legitimately. The client was very happy.

The CA asked for some initial payment of fees. The client said — Sir, you are aware I have no money. That is why I am selling my property.

The CA met the purchaser many times. Meetings were held in the CA’s office, and the CA spent liberally on hospitality. Then, they approached the lawyer selected by the client. On three or four occasions meetings with the lawyer got postponed after waiting for more than one or two hours, as he was held up in a Court. After meeting the lawyer, the lawyer tried to understand the facts and delegated the work to his junior. The lawyer took advance fees, which the client instantly paid. He assured the CA that he would pay him later.

The lawyer’s office drafted the deed — standard format for all co-owners. It was mailed to the CA’s office. The CA took printouts of all agreements and corrected errors. He realised that despite his specific instructions, an appropriate clause of HUF was not added. So, he made corrections in the context of tax provisions, section 50-C, section 56, and so on. Virtually, he had to re-write the agreements from the tax perspective.

Purchasers insisted on the updation of ownership records in the society of plot owners. The CA followed up by doing all the paperwork.

The client received a good amount of advance from the buyer, but the CA advised him to make immediate investments to save tax. The client had ‘no money’ to pay fees to the CA.

Finally, the deal was over. The CA had saved a sizeable amount of tax for the client through proper tax planning and ensured that the deal would happen smoothly. He also guided him on advance tax, exemptions under sections 54, 54F, and 54EC by researching case laws.

However, when CA demanded his fees, he had to face a hard bargain and reduce his fees substantially, whereas, the lawyer was paid handsomely, not to mention a hefty two percent brokerage of the deal amount charged by the broker.

That is the input-output ratio!

Letter To The Editor

The Editor,
BCAJ,
Mumbai

Dear Shri Mayurbhai,

Re: BCAJ Editorials

I always look forward to reading your Editorials first thing upon receiving my copy of the Journal.

I find the Editorials very well researched, meaningful, contemporary, relevant, and mature, and the language employed is very well-balanced.

I only hope the message reaches the policy / decision makers in New Delhi and the State Capitals and favourably impact their Policy Decisions.

Please keep up the good work you are doing.

Sincerely,

CA. Tarunkumar Singhal

Property Owned By Hindu Females

INTRODUCTION

Is the property of a Hindu Female always her absolute property or does she have a limited rights in certain situations? Does not the Hindu Succession Act,  1956 (“the Act”) empower every Hindu female to own property?

It is interesting to note that these questions are not as completely settled as they appear and the issues have travelled all the way to the Supreme Court on numerous occasions and met with different responses! Thus, while it is quite easy to understand in theory that right to property is a vested right of a Hindu female under the Hindu Succession Act, it becomes quite difficult to understand its implications given the facts and circumstances of a particular case. The issue is thrown into sharper focus by the seeming dichotomy under sub-sections (1) and (2) of section 14 of the Hindu Succession Act, 1956, which deal with property of a Hindu female.

A recent two-Judge Supreme Court decision in the case of Tej Bhan (D) Through LR vs. Ram Kishan (D) through LRs, Civil Appeal No. 6557 of 2022, Order dated 9th December, 2024 has realised this difference of opinions amongst various decisions of the Apex Court and has directed the Court Registry to place the order before the Hon’ble Chief Justice of India for constituting an appropriate larger bench for reconciling the principles laid down in various judgments of the Supreme Court and for restating the law on the interplay between sub-section (1) and (2) of Section 14 of the Hindu Succession Act.

SECTION 14 OF THE ACT

The Act governs the position of a Hindu intestate, i.e., one dying without making a valid Will. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to such property and the order of preference among them.
S.14 which is the crux of the issue needs to be studied closely.

S.14(1) states that any property possessed by a female Hindu, whenever it may be acquired by her, shall be held by her as full owner thereof and not as a limited owner. Thus, the Act lays down in very clear terms that in respect of all property possessed by a Hindu female, she is the full and absolute owner and she does not have a limited / restricted right in the same. The explanation to this sub-section defined the term, “property” to include both movable and immovable property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by gift (from any person, whether a relative or not, before, at or after her marriage), or by her own skill or exertion, or by purchase or by prescription, or in any other manner whatsoever. Thus, an extremely wide definition of property has been given under the Act. Property includes all types of property owned by a female Hindu although she may not be in actual, physical or constructive possession of that property — Mangal Singh & Ors vs. Shrimati Rattno, 1967 SCR (3) 454. The critical words used here are “possessed” and “acquired”. The word “possessed” has been used in its widest connotation and it may either be actual or constructive or in any form recognised by law. In the context in which it has been used in s.14(1) it means the state of owning or having in one’s hand or power – Gummalapura Taggina Matada Kotturuswami vs. Setra Veerayya and Ors. (1959) Supp. 1 S.C.R. 968.The use of the words ‘female Hindu’ is also very wide in scope and is not restricted only to a ‘wife’ — Vidya (Smt) vs. Nand Ram Alias Asoop Ram, (2001) 1 MLJ 120 SC.

In Dindyal & Anr. vs. Rajaram, (1971) 1 SCR 298, it was held that, before any property can be said to be “possessed” by a Hindu woman as provided in s.14(1), two things are necessary (a) she must have a right to the possession of that property and (b) she must have been in possession of that property either actually or constructively. However, this section cannot make legal what is illegal. Hence, if a female Hindu is in illegal possession of any property, then she cannot validate the same by taking shelter under this section.

S.14(2) of the Act carves out an exception to s.14(1) of the Act. It states that nothing contained in sub-section (1) of s.14 shall apply to any property acquired by way of gift or under a will or any other instrument or under a decree or order of a civil court or under an award where the terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate in such property. Thus, if a female Hindu acquires any property under any instrument and the terms of acquisition, as laid down by such instrument, itself provided for a restricted or a limited estate in the property then she would be treated as a limited owner only. In such an event, she cannot have recourse to s.14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of s. 14 apply to a particular case depends upon the facts of the case — Seth Badri Pershad vs. Smt. Kanso Devi, (1969) 2 SCC 586. In this decision, it was further held that sub-section (2) of Section 14 is more in the nature of a proviso or an exception to Sub-section (1). It can come into operation only if acquisition in any of the methods indicated therein is made for the first time without there being any pre-existing right in the female Hindu who is in possession of the property. It further approved of the observations of the Madras High Court Rangaswami Naicker vs. Chinnammal, AIR 1964 Mad 387 that s.14(2) made it clear that the object of s. 14 was only to remove the disability on women imposed by law and not to interfere with contracts, grants or decrees etc. by virtue of which a women’s right was restricted.

DECISIONS ON S.14

Several decisions of the Supreme Court have analysed s.14(1) and s.14(2) in depth. Some of the important (and conflicting) ones are discussed below.

R.B.S.S. MUNNALAL AND OTHERS VS. S.S. RAJKUMAR,AIR 1962 SC 1493

The Supreme Court held that by s.14(1) the legislature converted the interest of a Hindu female, which under the customary Hindu law would have been regarded as a limited interest, into an absolute interest and by the Explanation thereto gave to the expression “property” the widest connotation. The Court held that the Act conferred upon Hindu females full rights of inheritance, and swept away the traditional limitations on her powers of dispositions which were regarded under the Hindu law as inherent in her estate. She was under the Act regarded as a fresh stock of descent in respect of property possessed by her at the time of her death.

NIRMAL CHAND VS. VIDYAWANTI, (1969) 3 SCC 628

If a lady is entitled to a share in her husband’s properties then the suit properties must be held to have been allotted to her in accordance with s.14(1), i.e., as an absolute owner in spite of the fact that the deed in question mentioned that she would have only a life interest in the properties allotted to her share.

ERAMMA VS. VERRUPANNA, 1966 (2) SCR 626

The Supreme Court held that mere possession of property by a female does not automatically attract s. 14(1) of the Act.

MST. KARMI VS. AMRU, AIR 1971 SC 745

A person died leaving behind his wife. His son pre-deceased him. He gave a life interest through his Will to his Wife. It was held that the life estate given to a widow under the Will of her husband cannot become an absolute estate under the provisions of the Act. S.14(2) would apply to such a situation and it would not become an absolute estate. The female having succeeded to the properties on the basis of her husband’s Will she cannot claim any rights over and above what the Will conferred upon her. This is one of the important decisions which have gone against the tide of conferring absolute ownership on the Hindu female.

V. TULSAMMA VS. SESHA REDDI, (1977) 3 SCC 99

In this landmark case, the Supreme Court clarified the difference between sub-sections (1) and (2) of Section 14, thereby restricting the right of a testator to grant a limited life interest in a property to his wife. case involved a compromised decree arising out of a decree for maintenance obtained by the widow against her husband’s brother in a case of intestate succession. The compromise allotted properties to her as a limited owner. The Supreme Court held that this was a case where properties were allotted in lieu of maintenance and hence, s.14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting sub-section (2)was that this subsection should be applicable only to cases where the acquisition of property is made by a Hindu female for the first time without any pre-existing right. Where, however, property is acquired by a Hindu female at a partition or in lieu of her pre-existing right to maintenance, such acquisition would be pursuant to her pre-existing right not be within the scope and ambit of s.14(2) even if the instrument allotting the property prescribes a restricted state in the property. Sub-section (2) must, therefore, be read in the context of sub-section (1) so as to leave as large a scope for operation as possible to sub-section (1) and so read, it must be confined to cases where property is acquired by a female Hindu for the first time as a grant without any pre-existing right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted state in the property. It further held that a Hindu woman’s right to maintenance is a personal obligation so far as the husband is concerned, and it is his duty to maintain her even if he has no property. If the husband has property then the right of the widow to maintenance becomes an equitable charge on his property and any person who succeeds to the property carries with it the legal obligation to maintain the widow. Though the widow’s right to maintenance is not a right to property, it is undoubtedly a pre-existing right in the property, i.e. it is a jus ad rem not jus in rem and it can be enforced by the widow who can get a charge created for her maintenance on the property either by an agreement or by obtaining a decree from the civil court.

SMT. GULWANT KAUR VS. MOHINDER SINGH, AIR 1987 SC 2251 / GURDIP SINGH VS. AMAR SINGH, 1991 SCC (2) 8

The provisions of Section 14(1) of the Act were applied because it was a case where the Hindu female was put in possession of the property expressly in pursuance to and in recognition of the maintenance in her / where the wife acquired property by way of gift from her husband explicitly in lieu of maintenance. This decision was affirmed by a three-Judge bench in Jaswant Kaur vs. Major Harpal Singh, (1989) 3 SCC 572

THOTA SESHARATHAMMA VS. THOTAMANIKYAMMA, (1991) 4 SCC 312

The Apex Court dealt with a life estate granted to a Hindu woman by a Will as a limited owner and the grant was in recognition of pre-existing right. Thulasmma’s decision was followed and s.14(1) was held to apply. The Supreme Court also held that the contrary decision in the case of Mst. Karmi cannot be considered an authority since it was a rather short judgment without adverting to any provisions of Section 14(1) or 14(2) of the Act. The judgment neither made any mention of any argument raised in this regard nor there was any mention of the earlier decisions on this issue.

NAZAR SINGH VS. JAGJIT KAUR, (1996) 1 SCC 35/ SANTOSH VS. SARASWATHIBAI, (2008) 1 SCC 465 / SUBHAN RAO VS. PARVATHI BAI, (2010) 10 SCC 235

Applying Thulasamma’s decision it was held that lands, which were given to a lady by her husband in lieu of her maintenance, were held by her as a full owner thereof and not as a limited owner notwithstanding the several restrictive covenants accompanying the grant. According to the Court, this proposition followed from the words in sub-section (1) of s.14, which insofar as is relevant read: “Any property possessed by a female Hindu … shall be held by her as full owner and not as a limited owner”

SHAKUNTALA DEVI VS. KAMLA AND OTHERS, (2005) 5 SCC 390

A Hindu wife was bequeathed a life interest for maintenance by her husband’s Will with a condition that she would not have power to alienate the same in any manner. As per the Will, after death of the wife, the property was to revert back to his daughter as an absolute owner. It was held that u/s.14(1) a limited right given to the wife under the Will got enlarged to an absolute right in the suit property.

SADHU SINGH VS GURDWARA SAHIB NARIKE, (2006) 8 SCC 75 / SHARAD SUBRAMANAYAN VS. SOUMIMAZUMDAR (2006) 8 SCC 91

The Supreme Court in these well-considered decisions held that the antecedents of the property, the possession of the property as on the date of the Act and the existence of a right in the female over it, however limited it may be, are the essential ingredients in determining whether sub-Section (1) of Section 14 of the Act would come into play. Any acquisition of possession of property by a female Hindu could not automatically attract s.14(1). That depended upon the nature of the right acquired by her. If she took it as an heir under the Act, she took it absolutely. If while getting possession of the property after the Act, under a devise, gift or other transaction, any restriction was placed on her right, the restriction will have play in view of s.14(2) of the Act. Therefore, there was nothing in the Act which affected the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act did not stand in the way of his separate properties being dealt with by him as he deemed fit. His Will could not be challenged as being hit by s.14(1) of the Act. When he validly disposed of his property by providing for a limited estate to his wife, the widow had to take it as the estate devolved on her. This restriction on her right so provided, was really respected by s.14(2) of the Act. Thus, in this case where the widow had no pre-existing right, the limited estate granted to her under her husband’s Will was upheld u/s. 14(2).

Any acquisition of possession of property (not right) by a female Hindu after the coming into force of the Act, cannot normally attract Section 14(1) of the Act. The Court distinguished Tulsamma’s decision as follows:

“….., it is clear that the ratio in V. Tulasamma vs. Shesha Reddy ………has application only when a female Hindu is possessed of the property on the date of the Act under semblance of a right, whether it be a limited or a pre-existing right to maintenance in lieu of which she was put in possession of the property. Tulasamma ………ratio cannot be applied ignoring the requirement of the female Hindu having to be in possession of the property either directly or constructively as on the date of the Act, though she may acquire a right to it even after the Act.

……….when a male Hindu executes a will bequeathing the properties, the legatees take it subject to the terms of the will unless of course, any stipulation therein is found invalid. Therefore, there is nothing in the Act which affects the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act does not stand in the way of his separate properties being dealt with by him as he deems fit. His will hence could not be challenged as being hit by the Act.”

The Court concluded that when a male validly disposed of his property by providing for a limited estate to his heir, the wife, she took it as the estate devolved on to her. This restriction on her right, was respected by the Act. It provided in Section 14(2) of the Act, that in such a case, the widow is bound by the limitation on her right and she could not claim any higher right by invoking Section 14(1) of the Act. In other words, conferment of a limited estate which was otherwise valid in law was reinforced by this Act by the introduction of Section 14(2) of the Act and excluding the operation of Section 14(1) of the Act.

JUPUDYPARDHASARATHY VS. PENTAPATI RAMA KRISHNA, (2016) 2 SCC 56

After analysing a host of decisions and the legal principles, the Supreme Court in Jupudy’s case held that the bequest under the Will to the 3rd wife was in the nature of maintenance even though the express words maintenance were not mentioned in the Will. She was issueless and the husband was duty bound to maintain her. Hence, he gave her the house and access to incidental facilities. Accordingly, s.14(1) applied and the limited right stood enlarged into an absolute estate by virtue of a pre-existing right of maintenance. The Court observed that no one disputed the genuineness of the Will and the fact that the 3rd wife continued to enjoy the said property in lieu of her maintenance.

TEJ BHAN’S CASE

A person purchased property under a sale deed executed by the wife of one Kanwar Bhan, the testator, who was the original owner of the property. Kanwar Bhan executed a will that created a life estate in favour of his wife. It stated that she was entitled to maintain herself out of the proceeds from the same but she was not be entitled to mortgage or sell the said land. Once she got the property after her husband’s demise, she executed a sale deed. This was objected to by other claimants under the Will. The lower Courts relied on decision in Tulsamma’s case and held that the property given to the wife of Kanwar Bhan was in the nature of maintenance and such a pre-existing right enlarged into a full estate. Accordingly, it upheld the right of the widow to sell the property. The High Court rejected this stand and held that the widow only had a limited right and hence, the correct principle was as laid down in the case of Sadhu Singh (supra).

CONCLUSION

The Supreme Court in Tej Bhan concluded that there were a large number of decisions which were not only inconsistent with one another on principle but have tried to negotiate a contrary view by distinguishing them on facts or by simply ignoring the binding decision. Accordingly, it was of the view that there must be clarity and certainty in the interpretation of Section 14 of the Act.

S.14(1) is a very important piece of legislation when it comes to ensuring protection of a Hindu female’s rights over property. It ensures that a lady is an absolute owner in respect of her property. However, it is also essential that this provision is used as a shield and not a sword. S.14(2) ensures that what was originally acquired as a limited owner does not automatically enlarge into absolute ownership. One important principle which emerges from the numerous Court cases is that applicability of these two sub-sections has to be tested on the facts of each case and there cannot be one straight-jacketed approach to all cases. One hopes that a Larger Bench of the Apex Court will conclusively settle this issue once and for all.

Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IASB has published an Exposure Draft (ED), to make certain changes to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Similar changes should be anticipated for Ind AS standards as well. In this article we discuss some of the important changes and an example of how the ED relates to climate commitments, with a simple example.

The IASB’s proposed amendments aim to clarify the requirements for the present obligation criterion, and to change the timing of the recognition of some provisions, in particular, levies. The IASB has proposed to update the definition of a liability to match the 2018 Conceptual Framework for Financial Reporting (Conceptual Framework). The updated wording would replace the current requirement for an obligating event with three distinct conditions: obligation, transfer and past-event.

The proposed amendments include separate sections of requirements to support each of the conditions. The proposed amendments would also replace the requirements in IFRIC 21 Levies, which would be withdrawn. The accounting for levies would be aligned with the general requirements for provisions. However, new requirements are proposed for levies when they are triggered only after two or more specific actions (or events) or once a specific threshold is exceeded.

Entities would need to recognise a provision after the first action or event if they have no practical ability to avoid the second event. The proposed amendments would supersede the requirements in IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment, which would be withdrawn. The proposed amendments would clarify the requirements for restructuring provisions in order to eliminate potentially misleading terminology. Nevertheless, they are not intended to change the outcome of applying the requirements for restructuring provisions.

Change in definition of provision

Existing provision Proposed Amendment

A provision is a liability of uncertain timing or amount.

 

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

 

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

A liability is a present obligation of the entity resource to transfer an economic resource as a result of past events.

The following paragraphs have been added.

Paragraph 14A

The first criterion for recognising a provision is that an entity has a present obligation (legal or constructive) to transfer an economic resource as a result of a past event.

 

This criterion (the present obligation recognition criterion) comprises three conditions: (a) an obligation condition — the entity has an obligation (paragraphs 14B —14H); (b) a transfer condition — the nature of the entity’s obligation is to transfer an economic resource (paragraphs 14I–14L); and (c) a past-event condition — the entity’s obligation is a present obligation that exists as a result of a past event (paragraphs 14M–14U).
Obligating condition

 

Paragraph 14B

The first condition for meeting the present obligation recognition criterion is that the entity has an obligation. An entity has an obligation if:

 

(a) a mechanism is in place that imposes a responsibility on the entity if it obtains specific economic benefits or takes a specific action; (b) the entity owes that responsibility to another party; and (c) the entity has no practical ability to avoid discharging the responsibility if it obtains the specific economic benefits or takes the specific action.
Paragraph 14C reiterates the obligation can be legal or constructive.
Paragraph 14D

The economic benefits the entity obtains could be, for example, cash, goods or services. The action the entity takes could be, for example, operating in a specific market, causing environmental damage or other harm to another party, owning specific assets on a specific date, or constructing an asset that will need to be decommissioned at the end of its useful life.
Paragraph 14E (this is derived from the current standard)

An obligation is always owed to another party. It is not necessary for an entity to know the identity of the party to whom the obligation is owed. The other party could be a person or another entity, a group of people or other entities, or society at large
Paragraph 14F

An entity has no practical ability to avoid discharging a responsibility:

(a) in the case of a legal obligation, if: (i) the other party has a legal right to act against the entity if the entity fails to discharge the responsibility — for example, to ask a court to enforce settlement, charge the entity a financial penalty or restrict the entity’s access to economic benefits; and (ii) as a result of that right, the economic consequences for the entity of not discharging the responsibility are expected to be significantly worse than the costs of discharging it; or

 

(b) in the case of a constructive obligation, if the entity’s pattern of past practice, published policy or sufficiently specific current statement creates valid expectations in other parties that the entity will discharge the responsibility
14G (this is derived from current standard)

If details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. In this Standard, such an obligation is treated as a legal obligation. Variations in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted

 
14H (this is derived from current standard)

An obligation requires an entity to have no practical ability to avoid discharging a responsibility. Therefore, a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to create a valid expectation in those affected that the entity will discharge its responsibility.

 
Transfer condition

 

14I

The second condition for meeting the present obligation recognition criterion is that the nature of the entity’s obligation is to transfer an economic resource. To meet this condition, the obligation must have the potential to require the entity to transfer an economic resource to another party.

 

14J

For that potential to exist, it does not need to be certain, or even likely, that the entity will be required to transfer an economic resource — the transfer may, for example, be required only if a specified uncertain future event occurs.

 

14K

Consequently, the probability of a transfer does not affect whether an obligation meets the present obligation recognition criterion — an obligation can meet that criterion even if the probability is low. However, the probability of a transfer could affect: (a) whether the obligation meets one of the other criteria for recognising a provision — a provision is recognised only if it is probable (more likely than not) that the entity will be required to transfer an economic resource to settle the obligation (see paragraphs 14(b) and 23); and (b) whether the entity discloses a contingent liability if the obligation does not meet all the criteria for recognising a provision (see paragraph 23).

 

14L

An obligation to exchange economic resources with another party is not an obligation to transfer an economic resource to that party unless the terms of the exchange are unfavourable to the entity. Accordingly, the obligations arising under an executory contract — for example, a contract to receive goods in exchange for paying cash — are not obligations to transfer an economic resource unless the contract is onerous.
Past-event condition

14M

The third condition for meeting the present obligation recognition criterion is that the entity’s obligation is a present obligation that exists as a result of a past event.

 

14N

An entity’s obligation becomes a present obligation that exists as a result of a past event when the entity: (a) has obtained specific economic benefits or taken a specific action, as described in paragraphs 14B and 14D; and(b) as a consequence of having obtained those benefits or taken that action, will or may have to transfer an economic resource it would not otherwise have had to transfer.
14O

If the economic benefits are obtained, or the action is taken, over time, the past-event condition is met, and the resulting present obligation accumulates, over that time.

 
14P

In some situations, an entity has an obligation to transfer an economic resource only if a measure of its activity in a period (the assessment period) exceeds a specific threshold. In such situations, the action that meets the past event condition is the activity that contributes to the total activity on which the amount of the transfer is assessed. At any date within the assessment period, the present obligation is a portion of the total expected obligation for the assessment period. It is the portion attributable to the activity carried out to date. The entity recognises a provision if the recognition criteria in paragraphs 14(b) and 14(c) are met — that is, if: (a) it is probable that the entity’s activity will exceed the threshold and the entity will be required to transfer an economic resource (see paragraph 14(b)); and (b) a reliable estimate can be made of the amount of the obligation (see paragraph 14(c)).
14Q

In some situations, an entity has an obligation to transfer an economic resource only if it takes two (or more) separate actions, and the requirement to transfer an economic resource is a consequence of taking both (or all) these actions. In such situations, the past-event condition is met when the entity has taken the first action (or any of the actions) and has no practical ability to avoid taking the second action (or all the remaining actions).
14R

A decision to prepare an entity’s financial statements on a going concern basis implies that the entity has no practical ability to avoid taking an action it could avoid only by liquidating the entity or by ceasing to trade.

 
Interactions between the obligation and past-event conditions

 

14S

The enactment of a new law is not in itself sufficient to create a present legal obligation for an entity. A present legal obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the law applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

 

14T

Similarly, having an established pattern of past practice, publishing a policy or making a statement is not in itself sufficient to create a present constructive obligation for an entity. A present constructive obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the practice, policy or statement applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

 

14U

[Derives from former paragraph 21] An action of the entity that does not give rise to a present obligation immediately might do so at a later date,

because a mechanism is introduced that imposes new responsibilities on the entity — a new law might be enacted, an existing law might be changed or the entity might establish a pattern of practice, publish a policy or make a statement that gives rise to a constructive obligation. For example, if an entity causes environmental damage, it might have no obligation to remedy the damage at the time of causing it. However, the  causing of the damage will be the past event that has created a present obligation if, at a later date, a new law requires the existing damage to be rectified, or if the entity accepts responsibility for rectification in a way that creates a constructive obligation.

 

Example 15 — Climate-related commitments

In 20X0 an entity that manufactures household products publicly states its commitments: (a) to gradually reduce its annual greenhouse gas emissions, reducing them by at least 60 per cent of their current level by 20X9; and (b) to offset its remaining annual emissions in 20X9 and in later years by buying carbon credits and retiring them from the carbon market.

To support its statement, the entity publishes a transition plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60 per cent reduction in its annual emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing petroleum-based product ingredients and packaging materials with lower-carbon alternatives.

Management is confident that the entity can make all these modifications and continue to sell its products at a profit. In addition to publishing the transition plan, the entity takes several other actions that publicly affirm its commitments. Having considered all the facts and circumstances of the entity’s commitments — including the actions it has taken to affirm them — management judges that the entity’s statement has created a valid expectation in society at large that the entity will fulfil the commitments, and hence that it has no practical ability to avoid doing so (paragraph 14F(b)).

The entity is preparing financial statements for the year ended 31st December, 20X0. Present obligation to transfer an economic resource as a result of a past event three conditions specified in paragraph 14A of IAS 37 are not all met:

Obligation condition Met

The entity’s public statement of its commitments imposes on the entity responsibilities: (a) to operate in the future in a way that reduces its annual greenhouse gas emissions; and (b) to offset its remaining emissions if it emits greenhouse gases in 20X9 and later years (paragraph 14B(a)). The entity owes those responsibilities to society at large (paragraph 14B(b)). The entity has no practical ability to avoid discharging its responsibilities (paragraph 14B(c)). The obligations meet the definition of a constructive obligation (paragraph 10).
Transfer condition Not met Obligation to reduce emissions

The entity’s obligation to operate in the future in a way that reduces its greenhouse gas emissions is not an obligation to transfer an economic resource. Although the entity will incur expenditure in changing the way it operates, it will receive other economic resources — for example, property, plant and equipment, energy, product ingredients or packaging materials — in exchange, and will be able to use these resources to manufacture products it can sell at a profit (paragraph 14L).
Transfer condition Met Obligation to offset remaining emissions

The entity’s obligation to offset its remaining annual greenhouse gas emissions in 20X9 and later years is an obligation to transfer an economic resource. The entity will be required to buy and retire carbon credits without receiving any economic resources in exchange (paragraph 14I).
Past event condition Not met Obligation to offset remaining emissions

The entity has not yet taken the action (emitting gases in 20X9 or in a later year) as a consequence of  which it will have to buy and retire carbon credits it would not otherwise have had to buy or retire (paragraph 14N).

Conclusion — No provision is recognised at 31st December, 20X0.

If the entity emits greenhouse gases in 20X9 and in later years, it will incur a present obligation to offset these past emissions when it emits the gases. If, at that time, the entity has not settled the present obligation and it is probable that it will have to transfer an economic resource to do so, the entity will recognise a provision for the best estimate of the expenditure required.

Although the entity does not recognise a provision for its constructive obligations at 31st December, 20X0, the actions it plans to take to fulfil the obligations could affect the amounts at which it measures its other assets and liabilities (for example, its property, plant and equipment), and the information it discloses about them, as required by various IFRS Accounting Standards.

As can be seen from the above example, the ED provides much more clarity on whether a provision is required and in a very methodical and step-by-step manner. Similar changes can be expected under Ind AS.

Section 148 — Reassessment — On deceased person — Not permissible

23 Mary Gene Gracious vs. ITO Ward 20(1)(1), Mumbai
[WP(L) 3460 OF 2024
Dated: 10th December, 2024, (Bom-HC)

Section 148 — Reassessment — On deceased person — Not permissible

The Petitioner challenged the action as resorted by the respondents against Mr. Gene Gracious, the husband of the petitioner by issuance of notice under Section 148 of the Act dated 29th July, 2022, which was preceded by a notice issued under Section 148A(b) dated 26th May, 2022, and an order passed thereon under Section 148A(d) dated 29thJuly, 2022.

The case of the petitioner is that the impugned notice under Section 148 and the action prior thereto as initiated by respondent no.1 are non-est and illegal in as much as Mr. Gene Gracious against whom these notices were issued, passed away on 09 November 2016. A Death Certificate issued by Department of Health, Municipal Corporation of Greater Mumbai.

The Petitioner relying on various decisions contended that the petition is required to be granted as respondent no. 1 could not have resorted to impugned action by issuance of notices underSection 148A(b) and 148, and passing an order under Section 148A(d), against a deceased person.

The Court observed that the Supreme Court has held it to be the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given reasonable opportunity to defend himself (UMC Technologies Private Limited vs. Food Corporation of India &Anr., Civil Appeal No. 3687 of 2020, decided on 16th November, 2020). This basic jurisprudential principle becomes applicable when any action of such nature was being initiated against Mr. Gene Gracious. Once Mr. Gene Gracious passed away, there was no question of his defending such action or being heard so as to accord any sanctity to such order, and the consequential notice under Section 148 of the Act. The entire action under clause (b) and clause (d) of Section 148A of the Act were of no consequence being non-est. In this situation, even the legal heirs cannot be bound by such order which is non-est, void ab initio.

Also, the scheme of provisions of Section 148A read with Section 148 as applicable in the facts of the present case (AY 2015-16) rests on a foundation that no notice under Section 148 could have been issued without a prior show-cause notice being issued to an assessee. Further, a hearing would need to be granted to the assessee on such show cause notice and thereafter an order could be passed. All this is certainly not possible to be undertaken against a deceased person and / or even against a non-existing entity [refer Principal Commissioner of Income-Tax, New Delhi vs. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375 (SC).]

Once such mandatory legal compliance itself could not be achieved, on such sole ground, the notice issued under Section 148 preceded by earlier actions is required to be held to be non-est and void ab initio. The department cannot maintain issuance of the notice as impugned to a deceased person.

In the present case, admittedly, the concerned assessee Mr. Gene Gracious passed away on 9th November, 2016, the show cause notice under Section 148A(b) of the IT Act was issued on 26th May, 2022 and an order thereon was passed on 29th July, 2022 under Section 148A(d), as also the impugned notice under Section 148 was also issued on 29th July, 2022. All this has happened after the said assessee, Mr. Gene Gracious had passed away.

In view of the above, the petition deserves to be allowed.

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

22 HDFC Bank Ltd. (formerly, Housing Development Finance Corporation Ltd.) vs. The DCIT Spl. Range – 15
[ITXA No. 58 OF 2006]
Dated: 13th November, 2024. (Bom) (HC) [Arising from ITAT order dated 12th September, 2005]
Assessment Year: 1993-94

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

The appellant is inter alia engaged in the business of providing long term finance in the course of which, various securities are held as stock in trade. These securities are purchased from time to time, which carry interest. The purchase price includes the component of interest for the broken period. The securities which remain unsold at the end of the year are shown in the closing stock at cost. However, while computing the income, the assessee claims deduction on account of interest for the broken period in respect of unsold securities since according to assessee, the entire interest income accrues to the assessee on the fixed date falling after the end of previous year. However, the assessee offered the interest income in respect of such securities in the next year either when the securities were sold or when interest is received.

The Assessing Officer rejected the claim of the assessee and disallowed the sum. The reason for disallowance was that broken period interest formed part of the price of the asset purchased, which has already been debited to Profit & Loss Account and, therefore, question of allowing deduction did not arise in view of the Supreme Court judgment in the case of Vijaya Bank Ltd. vs. Additional Commissioner of Income-tax [1991] 187 ITR 541 (SC).

The Commissioner of Income-tax (Appeals) also agreed with the Assessing Officer and confirmed the order passed by the Assessing Officer. Against such order passed by the CIT(A), the appellant carried the matter to the Tribunal. The Tribunal also did not accept the contentions as urged on behalf of the assessee that the interest on securities is taxable as business income, since securities are held as stock in trade. As the interest paid on purchase of securities would be on revenue account, the same would entitle the assessee to claim a revenue loss, being the consistent accounting method followed by the assessee. The Tribunal, while rejecting the assessee’s contention, was of the view that when the securities are purchased by the appellant along with interest thereon, the price paid becomes the cost of the asset which is to be debited to Profit & Loss Account. The Tribunal observed that the assessee debited the entire cost of the purchase including broken period interest to Profit & Loss Account as per the commercial practice. Hence, if the security is sold, then profit would form part of the Profit & Loss Account as sales would be credited. It was observed that when such security was not sold, then as per the settled principle of accountancy, it has to be shown in the closing stock either at cost or market price whichever is lower. There is no other method of accounting for computing business profit. The Tribunal rested its view referring to the decision of Supreme Court in Chainrup Sampatram vs. Commissioner of Income-tax [1953] 24 ITR 481 (SC). It is for such reason the Tribunal was of the considered opinion that the question of allowing any deduction separately did not arise.

On further appeal, the Assessee relied on the orders passed by the Division Bench of this Court in American Express International Banking Corporation vs. Commissioner of Income-tax [2002] 258 ITR 601 (Bombay) wherein similar questions as the present questions were raised for the consideration of the Division Bench. The key issue which fell for consideration there was with regard to the correct treatment of the broken period interest and whether the broken period interest (net) paid by the assessee at the time of purchase of securities was a part of the capital costs of the investment. The Court considered the Revenue’s contention that the payment for the broken period interest (net) cannot be claimed as a revenue expenditure. It was the assessee’s contention that the banks were valuing the securities/interest held by it at the end of each year and offered to tax, the appreciation in their value by way of profits/interest earned. In answering such question, the Court considered the decision of the Supreme Court in Vijaya Bank Ltd. (supra), and the question was answered in favour of the assessee.

The decision of the Division Bench in American Express International Banking Corporation (supra) was assailed before the Supreme Court in the proceedings of Special Leave to Appeal (Civil) CC.301-303/2004, which came to be rejected by an order dated 27th January, 2004.

The Assessee further relied on the order passed by the Hon Court in ITA No. 278 of 1997 in the case of Citi Bank N.A. vs. Commissioner of Income Tax wherein similar issues had arisen for consideration of the Court, when the Court answered the questions in favour of the assessee. The order dated 16 April, 2003 passed by the Division Bench was carried to the Supreme Court in the proceedings of Civil Appeal No. 1549 of 2006 in Commissioner of Income Tax vs. Citi Bank N.A. The Supreme Court rejected the Revenue’s appeal by its judgment dated 12 August, 2008 where the Supreme Court, while referring to the decision in Vijaya Bank Ltd. vs. Additional Commissioner of Income Tax, Bangalore (supra), as also the decision in case of American Express (supra), rejected the Revenue’s appeal. Similar view was taken by the Supreme Court in dismissing another appeal filed by the Revenue in the case of Commissioner of Income Tax vs. Citi Bank N.A., for AY 1982-83.

The Court’s attention was also drawn to a recent decision of the Supreme Court in case of Bank of Rajasthan Ltd. vs. Commissioner of Income-tax (2024) 167 taxmann.com 430 (SC) wherein the Supreme Court affirmed the view taken by this Court in Citi Bank N.A. (supra), American Express International Banking Corporation(supra) as also in HDFC Bank Ltd. vs. CIT (2014) 49 taxmann.com 335.

In view of the above, the questions of law were answered in affirmative in favour of the assessee and against the Revenue.

Insofar as the other question of law, the same pertains to a deduction in respect of the expenditure incurred by the assessee on the issue of Fully Convertible Debentures. The assessee had made a ‘rights issue’ of Fully Convertible Debentures (FCDs) and in such connection, had incurred expenditure on account of printing expenses, advertisement, professional fees, stamp duty and filing fees, bank charges, packages, etc. This expenditure was claimed as a deduction in view of the decision of the Supreme Court in India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC). The assessee’s claim for deduction was rejected by the Assessing Officer on the ground that the real intention of the assessee was to increase its capital and not to raise borrowed capital. On appeal, CIT(A) confirmed the disallowance made by the Assessing Officer inter alia following the decision of the Supreme Court in Brooke Bond India Ltd. vs. CIT (1997) 225 ITR 798. It is against such decision of the CIT(A), the assessee approached the Tribunal. The Tribunal in confirming the order passed by the CIT(A) observed that there was no dispute on the entire issue on share capital in parts. It was observed that the true intention was not to raise a loan, but to raise share capital to increase its capital base. The Tribunal opined that it was therefore necessary to apply the ratio of the decision of Supreme Court in Brooke Bond India Ltd. (supra). Accordingly, the expenditure incurred on such public issue was not allowed as a deduction confirming the order passed by the CIT(A), against which the present appeal has been filed.

In assailing such orders of the Tribunal, assessee firstly relied on the decision of the Delhi High Court in Commissioner of Income Tax vs. Ranbaxy Laboratories Ltd. ITA No. 93 of 2000 dated 13th September, 2013 wherein one of the issues which fell for consideration was whether the Tribunal was legally correct in allowing debenture issue expenses on the issue of convertible debentures. In answering such issue in favour of the assessee and against the Revenue, the Delhi High Court observed that the said question would stand covered by the decision of Delhi High Court in CIT vs. Havells India Ltd. (2013) 352 ITR 376 (Del.), which followed the decision of the Supreme Court in India Cements Ltd.(supra) and the decision in Commissioner of Income Tax vs. Secure Meters Ltd. (2010) 321 ITR 621 (Raj.). In Ranbaxy Laboratories Ltd. vs. Deputy Commissioner of Income Tax, the Delhi High Court has taken a similar view. A similar view was also taken in case of The Commissioner of Income Tax- 6 vs. M/s. Faze Three Ltd. Income Tax Appeal No. 1761 of 2014 decided on 16th March, 2017.

In answering such question in favour of the assessee and against the Revenue, the Court held that the expenditure incurred thereon was revenue in nature, referring to the decision in Secure Meters Ltd. (supra), as also in Havells India Ltd. (supra) wherein it was held that as the debentures were to be converted in the near future into equity shares, the expenditure incurred needs to be allowed as revenue expenditure on the basis of the factual position as reflected by the accounts and which was the consistent view being accepted by the Courts. The Court also observed that the Revenue has not been able to show any reason which would require the Court to take a different view from the one taken by the various High Courts in the country on an identical issue.

In the light of the above discussion, the question of law also needs to be answered in affirmative in favour of the assessee and against the revenue.

Resultantly, the Appeal stands allowed .

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

21 Bloomberg Data Services (India) Pvt. Ltd. vs. Pr. DCIT Circle – 6(1)(2) &Ors.
[WP (L) No. 31412 OF 2024]
Dated: 2nd December, 2024 (Bom) (HC)]

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

The Petitioner being aggrieved by the Revenue’s inaction of the refund being not granted to the petitioner for the Assessment Year 2016-17 and 2013-14, and which was being adjusted for the refund for 2023-24, approached the Court. The Petitioner claimed that a large sum of refund of ₹77,64,71,629/- was not being granted to the Petitioner. The Revenue department filed their reply affidavit.

The Court noted that after the earlier orders were passed by the Court, on 29th November, 2024 a refund of ₹77,64,71,629/- was granted in the proportion of ₹45,84,30,382/- for A. Y. 2016-17 and ₹31,80,41,247/- for the A.Y. 2013-14. However, an interest of ₹1,83,37,215/- for A.Y. 2016-17 and ₹1,27,21,649/- for A.Y. 2013-14, totalling to an amount of ₹3,10,58,865/- (₹3.10 crores) was due and payable to the Petitioner which was not granted.

The Court observed that in these situations, payment of interest is an unwarranted burden required to be borne by the Government of India. The Hon. Court was concerned with several similar proceedings reaching the Court. The Court observed that it was not aware as to whether the income tax department has any procedure of any internal control / checks in such matters, in which the interest burden keeps increasing purely for departmental reasons, which may be either negligence or a casual approach on the part of the officials, not taking prompt and timely steps on such issues. Secondly, whether there is any routine audit, as to who would become accountable for such huge interest amounts being required to be paid by the Government of India, when there are refund amounts which are admittedly payable to the assessee’s. Any delay being caused in making payments of such refund and the interests payable thereon, is attributable wholly to the officials of the department, as it is they who are not taking prompt actions.

The Hon Court observed that the petition brings to the fore a serious concern in the laxity of the Respondent-department in the matter of refund of tax to the petitioner and which is an admitted amount. The Court also observed that routinely cases are reaching the Court where refunds for no rhyme or reason are stuck, they are either not being processed or if even processed, they are not being released and in such cases the interest burden on the Government of India / Public exchequer keep mounting every passing day. Once the tax payer is entitled to the refund and when there are no proceedings against the assessee in that regard are intended to be taken by the Revenue, the refund of the tax amount ought to be immediately granted to the assessee. If this is being followed in breach, merely on account of negligence / laxity on the part of the department, it results into an unwarranted interest burden being imposed on the public exchequer. It may be quite easy for the tax officials not to be serious on such issue, however, it cannot be forgotten that such interest payment goes from the taxpayers’ pockets.

The Court observed that why this laxity or lack of prompt and appropriate communication between two authorities / departments, should result in Government of India being unwarrantedly saddled with huge interest amounts is the issue. This can certainly be avoided by an effective mechanism, by having a meaningful and prompt flow of instructions between the concerned officers, handling the assessee’s case. Such unwarranted interest amounts being required to be paid, if saved can be utilised for other essential public expenditures. It is the citizens of the country who are being deprived of the benefits of such amounts instead of the same being paid to the assessee’s, on account of the negligence and / or the fault of the officers of the department. The Court observed that it is routinely seen that when the matters reach the Court, the Revenue instantly takes a position that the refund would be credited to the assessee, without disputing the claim of the assessee for refund, as in such cases there is no defence to such petitions, as it is a statutory obligation on the part of the Revenue to refund that amounts and on such refunds huge interest amounts are paid to the assessee.

The Court directed the Respondent to place an affidavit on record, after taking appropriate instructions from the CBDT and after confirming such affidavit from the CBDT, as to approach the concerned officials are required to follow, in such situations so as to avoid burdening the public exchequer with interest payments.

The Court further observed that if already the rules are not in place, such rules would be required to be framed. If any rules are already framed, as to why such rules are not being strictly adhered. The mechanism by which accountability needs to be fixed on the particular officers, whose actions are increasing the burden on the Government of India, is required to be immediately looked into.

The Court also noted that it was equally conscious that the delayed payment of refunds not only burdens the public exchequer with such interest amounts being required to be paid, but it also brings about a situation that the assessees’ are deprived of these amounts causing them a serious prejudice. Also, the Government of India would not be in a clear position to utilise such funds for any public purpose, as these funds are required, to be in any case paid to the assessee. Thus, any situation of an unjust enrichment is not acceptable. The situation in hand is of a delay, by which a serious prejudice to both the revenue and to the assessee is caused.

Trust — Educational institution — Registration — Validity — Application for registration erroneously made while charitable institution continued to be registered — Assessee permitted to withdraw application filed inadvertently:

75 Purandhar Technical Education Society vs. CIT(Exemption)
[2024] 468 ITR 711 (Bom)
A.Ys. 2022-23 to 2026-27
Date of order: 8th July, 2024
Ss. 12A, 12AA and 12AB of ITA 1961

Trust — Educational institution — Registration — Validity — Application for registration erroneously made while charitable institution continued to be registered — Assessee permitted to withdraw application filed inadvertently:

The assessee was a trust engaged in educational activities and was granted registration u/s. 12A of the Income-tax Act, 1961. The assessee stated that it could not trace the certificate and although it availed of the benefits for certain number of years without any objection from the Department, the authorities called upon the assessee to produce the registration certificate. Hence, the assessee made an application on 14th October, 2019 to obtain a duplicate certificate of registration u/s. 12A but was not responded. The assessee made a fresh application on 19th April, 2022. The assessee contended that both the applications were not decided and the duplicate certificate was also not issued. On 25th March, 2022, the assessee applied for a fresh provisional certificate u/s. 12A(1)(ac)(i) in the prescribed form 10A as per rule 17A of the Income-tax Rules, 1962, that although the application for provisional registration was made on 4th April, 2022, an order on form 10AC u/s. 12A(1)(ac)(i) for the A. Y. 2022-23 to 2026-27 was passed by the competent authority thereby granting registration to the assessee. Thereafter, the assessee inadvertently applied for registration under the same provision in form 10AB on 30th September, 2022. The Commissioner (Exemption) issued notices requiring the assessee to submit copy of the provisional registration granted u/s. 12AB and the assessee furnished the necessary details. Another notice was received by the assessee on 9th March, 2023 to which the assessee failed to submit a reply. On 31st March, 2023, the Commissioner (Exemption) passed an order rejecting the assessee’s mistaken application on the ground that the assessee did not possess a copy of the provisional registration granted u/s. 12AB.

The assessee filed a writ petition contended that the Commissioner (Exemption) might take further actions to cancel the registration dated 4th April, 2022, of the assessee and seeking to be fully protected under the decision of the Supreme Court in CIT vs. Society for the Promotion of Education [2016] 382 ITR 6 (SC) and to permit withdrawal of the application inadvertently filed u/s. 12A(1)(ac)(i) :

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

“i) The assessee having already been granted registration u/s. 12A(1)(ac)(ii) read with section 12AB(1)(a) of the 1961 Act on April 1, 2022, for a period of five years, i.e., from the A. Y. 2022-23 to 2026-27, there was no need to make a fresh application on September 30, 2022 under which the order rejecting the application for registration had been passed.

ii)Hence the assessee could withdraw its application filed u/s. 12A(1)(ac)(i) , dated September 30, 2022 rendering the order dated March 31, 2023 of no consequence.”

Return — Delay in filing return — Application for condonation of delay — Limitation — Period to be computed with reference to date on which return had been filed

74 Vivek Krishnamoorthy vs. Pr. CIT
[2024] 469 ITR 605 (Kar)
A. Y. 2013-14
Date of order: 2nd November, 2023
S. 119 of ITA 1961

Return — Delay in filing return — Application for condonation of delay — Limitation — Period to be computed with reference to date on which return had been filed

The assessee had to file his Income-tax return before 31st March, 2015 but the Income-tax return was filed on 22nd August, 2015, and because Income-tax return was belated by about five months, an application was filed on 15th November, 2021 under section 119(2)(b) of the Income-tax Act, 1961, for condonation of delay in filing the Income-tax return. The application was rejected on the ground of limitation.

The assessee filed a writ petition against the order. The Karnataka High Court allowed the writ petition and held as under:

“i) In the case of a delay in filing an application to condone delay in filing returns according to the terms of Circular No. 9 of 2015 dated June 9, 2015 ([2015] 374 ITR (St.) 25) the period of six years will have to be computed with reference to the date when the belated Income-tax return is filed.

ii) The assessee’s application for condonation of delay in filing the Income-tax return on August 22, 2015 was to be restored for consideration in the light of the reasons offered to explain the delay between March 31, 2015 and August 22, 2015 and with the directions to consider the application within a reasonable period from the date of receipt of a certified copy of this order.”

Recovery of tax — Stay of recovery during first appeal — Requirement of deposit — Discretion to forgo requirement and grant stay — Debatable issue — Direction for stay of recovery proceedings without deposit

73 Chaitanya Memorial Educational Society vs. CIT(Exemption)
[2024] 469 ITR 571 (Telangana)
A. Y. 2018-19
Date of order:9th October, 2023
S. 220(6) of ITA 1961

Recovery of tax — Stay of recovery during first appeal — Requirement of deposit — Discretion to forgo requirement and grant stay — Debatable issue — Direction for stay of recovery proceedings without deposit

The Commissioner (Exemption) while deciding a stay application u/s. 220(6) of the Income-tax Act, 1961, pending an appeal challenging the assessment order for the A. Y. 2018-19, allowed the application subject to the assessee depositing an amount of ₹35 lakhs out of the total outstanding demand of ₹2,50,33,530.

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

“i) In considering whether a stay of demand should be granted, the court is duty bound to consider not merely the issue of financial hardship, if any, but also whether a strong prima facie case raising a serious triable issue has been raised which would warrant dispensation of deposit.

ii) The contention of the assessee was that the assessee had been availing of the exemption from payment of Income-tax on account of the fact that the assessee was a charitable institution and the works executed by it again were with a charitable purpose. Since the assessee availed of the benefits all along prior to the issuance of the demand notice and even in the subsequent years as well, no prejudice was going to be caused if the stay application u/s. 220(6) of the Act, was decided in favour of the assessee. Moreover, though the appeal was filed as early as on April 17, 2021 and the rectification application also was filed on March 20, 2021, both the rectification application and the appeal were still pending consideration or were undecided for more than 2½ years. The Assessing Officer should have allowed the application u/s. 220(6).

iii) In view of the same, we are inclined to allow the writ petition. The impugned order dated September 4, 2023 for the reasons stated above stands set aside/quashed. It is ordered that there shall be stay of the recovery of the entire demand raised by respondent No. 4 dated March 19, 2021 till the disposal of the appeal filed by the petitioner on April 17, 2021.”

Offences and prosecution — Wilful evasion of tax — Deletion of penalty with regard to same issues on ground that there was no concealment of income — Prosecution not valid.

72 RohitkumarNemchandPiparia vs. Dy. DIT(Investigation)
[2024] 469 ITR 593 (Mad)
A. Y. 2008-09
Date of order: 16th November, 2023
S. 276C(1) of ITA 1961

Offences and prosecution — Wilful evasion of tax — Deletion of penalty with regard to same issues on ground that there was no concealment of income — Prosecution not valid.

The assessee was a non-resident for more than 40 years. The respondent lodged a complaint for the offence u/s. 276C(1) of the Income-tax Act, 1961 alleging that during the course of the enquiry by the Investigation Wing, it was noticed that in the bank account maintained by the petitioner, there was unusual credit of large amount through real time gross settlement and funds were debited for investment in the stock market. The petitioner had entered into 165 share transactions during the financial year 2007-08 and filed his return of income for the A. Y. 2008-09 on February 5, 2009 declaring a taxable income of ₹3,10,226. However, the petitioner has not disclosed any capital gains in the return of income filed for the financial year 2007-08 relevant to the A. Y. 2008-09. Further, the petitioner entered into 165 share transactions to the tune of ₹155.20 crores and short-term capital gains arose from the said transactions is ₹52.13 crores. Though tax has been deducted, it was not fully deducted and the petitioner did not disclose in his return of income under the head “Capital gain” and paid the tax. Thus, the petitioner failed to show the same in his return of income and attempted to evade payment of tax. Only after deduction by the Income- tax Department, the petitioner had share transactions during the relevant financial year and accepted the same. Therefore, the petitioner committed the offence punishable u/s. 276C(1) of the Income-tax Act, 1961.

The assessee filed a Criminal writ petition for quashing the proceedings. The Madras High Court allowed the petition and held as under:

“i) The Commissioner (Appeals) held in the appeal that the assessee was under the bona fide belief that there was no tax liability to be discharged by him on account of his residential status as non-resident external accounts and the deduction of tax at source made by the bank. Thus, the intention to conceal income by furnishing inaccurate particulars was not established. Therefore, the Assessing Officer was directed to delete the penalty imposed on the assessee.

ii) Therefore, once the penalty on the assessee was deleted, the prosecution initiated by the respondent could not be sustained.”

Income from House Property and Business Income — Difference — Finding by Tribunal that the Assessee Company had been formed with the object of developing Commercial Properties — Rental income from such properties is assessable as business income

71 Pr. CIT vs. M. P. Entertainment and Developers Pvt. Ltd.
[2024] 469 ITR 421 (MP)
A. Ys. 2011-12 to 2014-15
Date of order: 16th April, 2024
Ss. 22 and 28 of ITA 1961

Income from House Property and Business Income — Difference — Finding by Tribunal that the Assessee Company had been formed with the object of developing Commercial Properties — Rental income from such properties is assessable as business income

The Assessee had constructed a shopping cum entertainment mall in the name of Malhar Megha Mall and declared the nature of business as carrying on the business of purchase for development of the land, estates, structure and rented income from immovable properties. In the scrutiny assessment for the A. Ys. 2011-12 to 2014-15, the Assessing Officer observed that only part of the construction of the mall was complete and the assessee had started deriving rent from shops and other space in the mall and showed such income under the head Business & Profession. However, as per the Assessing Officer, the Assessee should have bifurcated under the head Income from House Property and Income from Business. Accordingly, the Assessing Officer restricted the claim of depreciation at the rate of 51.6 per cent of the occupied area of the Mall.

The CIT(A) deleted both the additions made by the Assessing Officer. The CIT(A) held that income from letting out properties were essentially required to be computed as Income from Business u/s. 28 and cannot be treated as Income from House Property. The Tribunal dismissed the appeal of the Department and held that where the letting of the property is the main object of the Assessee, its income has to be computed under the head Income from Business and it cannot be treated as Income from House Property.
The Madhya Pradesh High Court dismissed the appeal of the Department held as follows:

“i) In determining whether a particular income is income from house property or business income, in the case of Sultan Brothers Pvt. Ltd. vs. CIT [1964] 51 ITR 353 (SC) the Supreme Court held that each case has to be looked at from the businessman’s point of view to find out whether the letting was the doing of business or exploitation of the property by the owner.

ii) The Tribunal had found that the main object of the assessee was the business of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling out or leasing multiplexes, cineplexes, cinema halls, theatres, shops, shopping malls, etc., according to its memorandum and articles of association. The income was liable to be categorised as income derived from the shopping mall under the head of “Income from business” u/s. 28 of the Income-tax Act, 1961. The Assessing Officer did not find any material against the assessee to come to the conclusion that sub-leasing of the premises was only a part of its predominant object. The assessee right from the construction of the mall till the matter was taken into scrutiny had been offering income from the business of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling out or leasing multiplexes, cineplexes, cinema halls, theatres, shops, shopping malls, etc., sub-licensed by it under the head “Profits and gains of business or profession”.

iii) Therefore, the Commissioner (Appeals) as well as the Tribunal had rightly set aside the order of the Assessing Officer treating the income as one from house property.”

Company — Computation of Book Profits — Scope of section 115JB — Disallowance u/s. 14A — Amount disallowed cannot be taken into consideration when computing book profits

70 Pr. CIT vs. Moon Star Securities Trading and Finance Co. Pvt. Ltd.
[2024] 469 ITR 15 (Del.)
A. Y. 2011-12
Date of order: 11th March, 2024
Ss. 14A and 115JB of ITA 1961

Company — Computation of Book Profits — Scope of section 115JB — Disallowance u/s. 14A — Amount disallowed cannot be taken into consideration when computing book profits

The assessee earned dividend income of ₹58,09,619. In respect of the dividend income, the Assessee made disallowance u/s. 14A of the Income-tax Act, 1961. However, in the scrutiny assessment, the AO enhanced the disallowance u/s. 14A to ₹12,65,71,862 computed as per section 14A r.w.r. 8D and made addition under the normal provisions as well as to the book profits computed under the provisions of section 115JB of the Act.

The CIT(A) partly allowed the appeal of the Assessee and restricted the disallowance to ₹2,08,72,836 as against the disallowance of ₹12,65,71,862 determined by the Assessing Officer. The Tribunal deleted the disallowance on the ground that there was no satisfaction recorded by the Assessing Officer. Further, the Tribunal held that the disallowance u/s. 14A of the Act could not be made while computing book profits u/s. 115JB of the Act.

The Delhi High Court dismissed the appeal of the Department and held as follows:

“i) Section 115JB of the Income-tax Act, 1961, by virtue of a deeming fiction, considers book profits as the total income of the assessee which is calculated post authorised adjustments to the profits shown in audited Profit and loss account of the assessee. A bare perusal of the provisions would signify that sub-section (1) prescribes the mode and manner of computing the total income of the assessee u/s. 115JB of the Act.

ii) Clause (f) of Explanation 1 only alludes to the amounts of expenditure relatable to any income to which section 10 (excluding provisions contained in clause (38) thereof) or section 11 or section 12 apply. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115JB. The scheme of section 115JB, particularly in relation to clause (f) of Explanation 1 therein, does not envisage any addition of disallowance computed u/s. 14A of the Act to calculate the minimum alternate tax as per section 115JB of the Act. Rather, the two provisions stand separately as no correlation exists between them for the purpose of determining the taxable income.”

Charitable institution — Exemption — Scope of sub-sections (1), (2) and (3) of section 11 — Explanation to section 11 cannot be applied — Accumulated income — Donations to extent of 15 per cent. of surplus income accumulated to other charitable institutions for short period — Not permanent endowments made or donations imbued with some degree of permanency — Donations reversed — Exemption could not be denied

69 CIT(Exemption) vs. Jamnalal Bajaj Foundation
[2024] 468 ITR 723 (Del)
A. Y. 2009-10
Date of order: 31st May, 2024
S. 11 of ITA 1961

Charitable institution — Exemption — Scope of sub-sections (1), (2) and (3) of section 11 — Explanation to section 11 cannot be applied — Accumulated income — Donations to extent of 15 per cent. of surplus income accumulated to other charitable institutions for short period — Not permanent endowments made or donations imbued with some degree of permanency — Donations reversed — Exemption could not be denied

The assessee was a charitable institution registered u/s. 12AA of the Income-tax Act, 1961. The assesseeutilised the accumulated fund to extend corpus donations to other charitable institutions in the A. Y. 2009-10. The Assessing Officer was of the view that extending donations to other charitable trusts would amount to utilisation of the funds for a purpose other than those for which the surplus was accumulated u/s. 11(2) which was violative of section 11(3)(c) and section 11(3)(d).

Before the Commissioner (Appeals) the assessee contended that the surplus accumulated income to the extent of 15 per cent. was handed out as donations to other charitable institutions for a temporary period of less than two months and that since the contravention was for a very short period, the exemption u/s. 11(2) should not be withdrawn. The Commissioner (Appeals) held in favour of the assessee on the issue of accumulation of 15 per cent. u/s. 11(2) and his order was affirmed by the Tribunal.

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

“i) Donations extended to other charitable institutions would meet the test of application of income for charitable purposes. Section 11(3)(c) and (d) of the Income-tax Act, 1961 deals with situations where the income so accumulated is either not utilised or applied for a charitable purpose. It is only in such a situation that the deemed income would lose the sheen of protection of exemption which would otherwise be applicable by virtue of section 11.

ii) In terms of the Finance Act, 2002 ([2002] 255 ITR (St.) 9), an Explanation was appended to section 11(2) which gets attracted in a situation where income referable to clauses (a) or (b) of section 11(1) and so accumulated or set apart is credited or paid to institutions specified therein, not being liable to be treated as application of income for charitable or religious purposes. Explanation 1 to section 11(1) applies to situations where the income applied to charitable causes falls short of 85 per cent. of the income derived. Section 11(2) on the other hand constitutes a gateway which enables the charity to stave off the spectre of the income which is not applied for a charitable purpose coming to be included in the total income of the assessee.

iii) The donations, to the extent of 15 per cent. of the accumulated surplus income, made by the assessee in the A. Y. 2009-10 would not be hit by Explanation 2, inserted by the Finance Act, 2017 ([2017] 393 ITR (St.) 1) with effect from 1st April, 2018 since Explanation 2 applied only to amounts credited or paid to certain categories of institutions and those being in the nature of a contribution accompanied by a direction that the amounts extended would form part of the corpus of those entities. Although the donations were made out of the accumulated income, the money was retrieved within two months.

iv) Section 11(3) and the adverse consequences would have been attracted provided the accumulated income was diverted for a purpose other than charitable or religious, or where it was not utilised for the purpose for which it was so accumulated or set apart during the period of five years contemplated u/s. 11(2)(a). The assessee did not make a permanent endowment or one where the donation stood imbued with some degree of permanency. It also was not that the money was lost or became unavailable to be applied. Since the donations were reversed and had been advanced only for an extremely short duration, the Tribunal had not erred in allowing deduction u/s. 11(1) to the extent of 15 per cent on the deemed income u/s. 11(3)(c) or section 11(3)(d) and for justifiable reasons, had answered the issue in favour of the assessee.”

Capital gains — Transfer — Possession taken in part performance of contract — Agreement must be registered — Joint Development Agreement — Not registered — Ownership of capital asset retained by Assessee throughout — Possession clauses suggesting possession to be parted with for limited purpose of development — Unregistered agreement not effecting transfer of property u/s. 2(47)

68 Prithvi Consultants Pvt. Ltd. vs. Dy. CIT
[2024] 470 ITR 37 (Bom.)
A.Ys. 2005-06 to 2011-12
Date of order: 5th September, 2023
S. 2(47)(v) of ITA 1961, Ss. 17(1A) of Registration Act, 53A of Transfer of Property Act 1882

Capital gains — Transfer — Possession taken in part performance of contract — Agreement must be registered — Joint Development Agreement — Not registered — Ownership of capital asset retained by Assessee throughout — Possession clauses suggesting possession to be parted with for limited purpose of development — Unregistered agreement not effecting transfer of property u/s. 2(47)

In December 2008, the Assessee entered into two Joint Development Agreements (JDA) in respect of two plots of land. These agreements were not registered as required u/s. 17(1A) of the Registration Act. A search and seizure action was carried on in the case of one Mr. PK and others, where the said two JDAs were found. The Department issued notice u/s. 153C of the Act requiring the Assessee to file return of income for the AY 2009-10. Subsequently, notices were issued u/s. 153A and 142(1) for the AYs 2005-06 to 2010-11 as well as notice u/s. 143(2) for AY 2011-12 to conduct inquiry and the assessment of the Assessee’s income. In response to the notices, the Assessee filed response submitting that the Assessee had not received any consideration under the two JDAs. Further the transaction did not constitute transfer u/s. 2(47) of the Act. In March 2013, the Assessee cancelled the two JDAs because of non-performance by the Developer. However, in the assessment, the Assessing Officer concluded that the two JDAs constituted transfer u/s. 2(47) of the Act. He referred to the minimum guaranteed amounts reflected in the JDAs and concluded that additional income had accrued to the Assessee even though the Assessee may not have received any amount.

The CIT(A) allowed the appeal of the Assessee. On Department’s appeal before the Tribunal, the order of the CIT(A) was set aside and the assessment order was restored.

On appeal by the Assessee the High Court framed the following questions for consideration:

“i) Whether in the light of section 17(1A) read with section 49 of the Registration Act, 1908, the unregistered agreement dated December 31, 2008, can be construed as a document effecting transfer of the subject properties in terms of section 2(47) of the Income-tax Act, 1961?

ii) Whether in the absence of income having accrued to the appellant in terms of the agreement dated December 31, 2008, the appellant can be made liable to pay tax on capital gains in terms of section 45 read with section 48 of the Income-tax Act, 1961?”

The Bombay High Court decided the above questions of law in favour of the Assessee and held as follows:

“i) The Registration and Other Related Laws (Amendment) Act, 2001 made simultaneous amendments in section 53A of the Transfer of Property Act, 1882, and sections 17 and 49 of the Registration Act, 1908. By these amendments, the words “the contract, though required to be registered, has not been registered, or” in section 53A of the Transfer of Property Act, 1882, have been omitted. Simultaneously, sections 17 and 49 of the Registration Act, 1908 , were also amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of section 53A of the Transfer of Property Act, 1882, is registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

ii) The joint development agreements dated December 31, 2008, were not registered, though they were required to be compulsorily registered under section 17(1A) of the Registration Act, 1908, post the introduction of this provision by the Registration and Other Related Laws (Amendment) Act, 2001. In the JDAs the ownership of the capital asset was retained by the assessee throughout. The clauses relating to parting of possession, besides being unclear, suggested that at the highest, possession was to be parted with for the limited purpose of development. The unregistered agreement dated December 31, 2008, could not be construed as a document effecting transfer of the subject properties in terms of section 2(47) of the Act.”

Glimpses of Supreme Court Rulings

15 Addl CIT vs. Ericsson India Pvt. Ltd
(2024) 468 ITR 2 (SC)

Jurisdiction to impose penalty- No Penalty can be imposed by the TPO u/s. 271G in respect of default that has occurred prior to the date of amendment conferring jurisdiction on TPO (i.e. 1st October, 2014).

For the assessment year 2011-12, the assessee filed its returns together with transfer pricing report. A notice was issued by the Transfer Pricing (TPO) on 18th February, 2014 to produce some documents by 25th March, 2014. The assesee did not comply with the said notice. On 5th December, 2014, TPO issued notice alleging default and proposing penalty u/s. 271G. TPO passed order on 16th January, 2015 proposing certain transfer pricing adjustment and imposing penalty of ₹64,43,03,352 u/s. 271G. A draft assessment order was passed on 22nd June, 2015.

On writ petition being filed before the High Court, the High Court noted that till 1st October, 2014, the jurisdiction and authority to impose penalty u/s. 271G was with the Assessing Officer (AO) as defined in section 2(7A). This changed with enactment of the Finance (No. 2) Act, 2014. The amendment expanded the jurisdiction of the TPO, who was for the first time authorized to inflict penalty for non-compliance of the notice.

The High Court following the judgment in Brij Mohan vs. CIT (1979) 120 ITR 1 (SC) and Varkey Chacko vs. CIT (1993) 203 ITR 885 (SC) quashed the order imposing penalty by holding that ‘event of default’ occurred in March, 2014, that is, well prior to the date of coming into force the amendment (from 1st October, 2014) and hence the order passed by TPO in respect of such default was without jurisdiction.

The Supreme Court dismissed the SLP as the issue was covered by its decision in Varkey Chacko vs. CIT (supra).

16 ITO vs. Tia Enterprises Pvt. Ltd
(2024) 468 ITR 10 (SC)

Statutory approvals — Approval granted by the statutory authorities, as required under the provision of the Act, has to be furnished to an assessee along with the reasons to believe — the statutory scheme encapsulated in the Income-tax Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

The Petitioner challenged the notice dated 30th March, 2018 issued under section 148 of the Act and the order dated 6th December, 2018 disposing of the objections of the Petitioner to the issuance of the aforesaid notice on one singular ground, namely, that the reassessment proceedings were commenced without the approval of the specific authority.

The High Court observed that the approval has a two-stage process. The satisfaction with regards to commencement of reassessment proceedings is required to be recorded by the Additional Commissioner of Income-tax (ACIT); and by Principal Commissioner of Income Tax (PCIT).

The High Court noted that the ACIT had made an endorsement that he was satisfied that it was a fit case for issue of notice u/s. 148, but the PCIT had not made any noting and merely signed the Form of Recording Reasons without a date. The High Court also noted that the reasons recorded by the Assessing Officer on 30th March, 2018, were approved by ACIT and PCIT on the same date and the notice was also issued on 30th March, 2018.

The Petitioner had alleged that this was a case of mechanical approval without application of mind and was contrary to law.

In counter affidavit, the respondent made an assertion that the PCIT had conveyed the approval to AO via letter F No. Pr. CIT-Delhi/148/2017-18 dated 30th March, 2018, but the said letter was not annexed.

The High Court held that the approval granted by the statutory authorities, as required under the provisions of the Act, has to be furnished to an assessee along with the reasons to believe. The statutory scheme encapsulated in the Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

According to the High Court, the second condition requiring Assessing Officer to obtain prior approval of the specified authority was not fulfilled, as otherwise, there were no good reasons to not to furnish the same to the Petitioner along with the document which contained the Assessing Officer’s reasons for holding the belief that income otherwise chargeable to tax had escaped assessment.

The High Court therefore set aside the impugned notice and the impugned order.

The Supreme Court dismissed the SLP in view of the categorical finding recorded in paragraph 13 by the High Court and opining that in the facts of the case, no case for interference was made out by the Revenue.

17 PCIT vs. Nitin Nema
(2024) 468 ITR 105 (SC)

Reassessment — Gross Receipts of Sale consideration and income chargeable to tax are not same — Notice issued treating the sale consideration as asset which has escaped assessment is not sustainable.

A notice u/s. 148A(b) was issued observing that the amount of ₹72,05,085 was received by the assessee as a result of export transaction. The assessee had not filed return of income. Hence, a sum of ₹72,05,084 had escaped assessment. Since the amount of ₹72,05,084 was more that ₹50 lakhs, the said income was amenable to proceedings u/s. 148 and 148A.

Assesee filed his objections to the notice issued u/s. 148A(b). After considering the said reply, an order u/s. 148A(d) was passed rejecting the objections of the assessee and consequentially a notice u/s. 148 was issued.

The assesssee challenged the order dated 25th March, 2023 passed u/s. 148A(d) of the Act deciding that it was a fit case for issuance of a notice u/s. 148 for assessment/ reassessment of income which had escaped assessment for the assessment year 2016-17. The assesee further challenged the consequential notice u/s. 148 of the Act.

The High Court observed that neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 gave any indication that the amount of ₹72,05,084 alleged to be income escaping assessment, included land/building/shares/equities/loans/ advances, etc.

The High Court noted that the assessee had filed a rely to the notice u/s. 148A(b) explaining that the said amount of ₹72,05,084 was gross receipt of sale consideration of 16 scooters. Along with the reply, the details of items sold and payment receipt, computation of total income and computation of tax on total income was worked out.

The High Court observed that the said amount of ₹72,05,084 was the total sale consideration receipt of the transactions in question and not income chargeable to tax, which would obviously be less than the said amount.

The High Court noted the decision of the Karnataka High Court in Sanath Kumar Murali vs. ITO (2023) 455 ITR 370 (Kar) which held that the entirety of sale consideration does not constitute income.

According to the High Court, in passing the order u/s. 148A(d) the Respondent had adopted highly casual and perfunctory approach and elementary aspect of clear distinction between consideration of sale and income chargeable to tax was overlooked.

The High Court opined that had the Revenue arrived at the correct figure of income chargeable to tax instead of gross receipts / consideration, possibility of the amount of ₹72,05,084 coming
down to a figure below ₹50 lakhs could not be ruled out.

The High Court quashed the order u/s. 148A(d) and the notice u/s. 148 with costs.

The Supreme Court dismissed the SLP observing that it was not inclined to interfere with the impugned judgment and order of the High Court.

From Published Accounts

COMPILER’S NOTE

I. Interesting Key Audit Matters in Independent Auditors’ Report:

Assessing Carrying value of Inventory Oberoi Realty Limited (31st March 2024)

Key audit matters

 

 How our audit addressed the key audit matter

 
Assessing the carrying value of Inventory 

(as described in note 1.2.15 of the standalone financial statements)

As at March 31, 2024, the carrying value of the inventory of ongoing and completed real-estate projects is Rs. 9,18,507.87 lakhs. The inventories are held at the lower of the cost and net realisable value (“NRV”).

The determination of NRV involves estimates based on prevailing market conditions and taking into account the stage of completion of the inventory, the estimated future selling price, cost to complete projects and selling costs.

We identified the assessment of the carrying value of inventory as a key audit matter due to the significance of the balance to the standalone financial statements as a whole and the involvement of estimates and judgement in the assessment.

Our audit procedures included, among others:

• We evaluated the design and operation of internal controls related to testing recoverable amounts with carrying amount of inventory, including evaluating management processes for estimating future costs to complete projects.

• As regards NRV, for a sample of selected projects, compared costs incurred and estimates of future cost to complete the project with costs of similar projects and compared NRV to recent sales or to the estimated selling price.

MATERIAL ACCOUNTING POLICIES

1.2.15 INVENTORIES

i. Construction materials and consumables

The construction materials and consumables are valued at lower of cost or net realisable value. The construction materials and consumables purchased for construction work issued to construction are treated as consumed.

ii. Construction work in progress

The construction work in progress is valued at lower of cost or net realisable value. Cost includes the cost of land, development rights, rates and taxes, construction costs, borrowing costs, other direct expenditure, allocated overheads and other incidental expenses.

iii. Finished stock of completed projects

Finished stock of completed projects and stock in trade of units is valued at lower of cost or net realisable value.

iv. Food and beverages

Stock of food and beverages are valued at lower of cost (computed on a moving weighted average basis, net of taxes) or net realisable value. Cost includes all expenses incurred in bringing the goods to their present location and condition.

II. Business Combination – Acquisition of business from Raymond Consumer Care Limited

Godrej Consumer Product Limited (GCPL) (31st March 2024)

Key audit matters

Business Combination – Acquisition of business from Raymond Consumer Care Limited

(refer Note 55 to standalone financial statements)

How our audit addressed the key audit matter

 
The Company has completed the acquisition of FMCG business of Raymond Consumer Care Limited effective 8th May 2023 pursuant to a business transfer agreement at a total consideration of ` 2,825 crores.

The Company has accounted for such acquisition as a business combination as per Ind AS 103 ‘Business Combinations’ by recognizing identifiable assets and liabilities at fair value.

The measurement of the identifiable assets and liabilities acquired at fair value is inherently judgmental.

Fair value of brands was determined by the Company with the assistance of an external valuation expert using income approach (royalty relief method), considering the assets being measured.

Given the complexity and judgement involved in fair value measurements and magnitude of the acquisition made by the Company, this is a key audit matter.

 Our audit procedures included:

• We have read the business transfer agreement to understand the key terms and conditions of the acquisition;

• We have evaluated the accounting treatment followed by the Company with reference to Ind AS 103;

• We have evaluated the design and implementation and tested the operating effectiveness of key internal controls related to the Company’s valuation process;

• We have involved our valuation specialists;

• to gain an understanding of the work of the experts by examining the valuation reports.

• to critically evaluate the key assumptions (including revenue projections, royalty rate, terminal growth rate and discount rate) and purchase price allocation adjustments.

• to evaluate the valuation of acquired tangible and intangible assets based on our knowledge of the Company and the industry.

• We have assessed the adequacy of the Company’s disclosures in respect of the acquisition in accordance with the requirements of Ind AS 103.

NOTE 55: BUSINESS COMBINATION

ACQUISITION OF RAYMOND CONSUMER CARE BUSINESS

On 8th May, 2023, the Company acquired the FMCG business of Raymond Consumer Care Limited (“RCCL”) through a slump sale for consideration of ₹2,825 crores which included the intellectual property rights of brands like ‘Park Avenue’ and ‘Kamasutra’.

The acquisition date is determined to be 8th May, 2023, i.e. The date on which the Company obtained control of the business since the consideration was transferred and the business transfer agreement was executed on 8th May, 2023.

The acquisition was in line with company’s strategy to build a sustainable and profitable personal care business in India by leveraging the categories of personal grooming and sexual wellness. RCCL was one of the key players in these categories with brands such as ‘Park Avenue’ and ‘Kamasutra’ which comprised of a wide product portfolio.

The acquisition had been accounted for using the acquisition accounting method under IND AS 103- “Business Combinations”. All identified assets acquired, and liabilities assumed on the date of acquisition were recorded at their fair value.

The transactions cost of ₹87.83 crores that were not directly attributable to the identified assets are included under exceptional items in the standalone statement of profit and loss comprising mainly stamp duty expenses, legal fees and due diligence costs.

For eleven months ended 31st March, 2024, the RCCL acquired business contributed revenue from sales of products of ₹466 crores. If the acquisition had occurred on 1st April, 2023, the management estimates that combined standalone revenue from sales of products would have been ₹8,336.04 crores. In determining these amounts management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1st April 2023. The profit or loss since acquisition date and combined standalone profit or loss from the beginning of annual reporting period cannot be ascertained as the acquired business is already integrated with the existing business of the company, thereby making it impracticable to do so.

a. Purchase consideration transferred:

The total consideration was ₹2,825 crores which was cash settled. (Net of cash acquired)

b. Details of major assets acquired, and liabilities assumed:

Particulars

 

 Amounts  

(In Crores)
Specified Tangible Asset

 
Property, Plant and Equipment

 
Owned Assets 4.10
Specified Intangibles Assets

 
Brands 2,199.69
Other Assets
Trade and other receivables 62.70
Inventories 44.30
Cash and cash equivalents 95.86
Bank Balances other than cash and cash equivalents 12.85
Others 18.40
Total identifiable assets (A) 2,437.90
Specified liabilities
Trade payables 70.60
Other liabilities 47.38
Other Provisions 61.22
Total identifiable liabilities (B) 179.20
Total identifiable net assets acquired (A)-(B)=(C) 2,258.70
Total Consideration (D) 2,825.00
Goodwill (D-C) 566.30

c. Measurement of fair values:

i. Specified Intangible Assets – Brands:

Brands were valued based on an independent valuation using the relief from royalty approach, which values the intangible asset by reference to the discounted estimated amount of royalty the acquirer would have had to pay in an arm’s length licensing arrangement to secure access to the same rights.

ii. Inventories:

The fair value is determined based on the estimated selling price in the ordinary course of business less the estimated cost of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventory.

iii. Acquired Receivables:

The gross contractual value and fair value of trade and other receivables as at the dates of acquisition amounted to R62.70 crores which is expected to be fully recoverable.

d. Goodwill:

Goodwill amounting to ₹566.30 crores arising from acquisition has been recognised as the difference between total consideration paid and net identifiable assets acquired as shown above.

The goodwill is mainly attributable to the expected synergies to be achieved from integrating the business into the Company’s existing personal care business. None of the goodwill recognised is expected to be deductible for tax purposes.

III. The direct access of certain overseas foreign agents to fund collected on account of freight and other charges

Shipping Corporation of India Limited (31st March, 2024)

Key audit matters How our audit addressed the key audit matter
The direct access of certain overseas foreign agents to fund collected on account of freight and other charges:
Liner division of the Company has been carrying out its vessel’s operations and container marketing activities at various ports in India and abroad through its agency network. Agents perform various activities such as marketing, booking, clearing of cargo, port calls of vessels & also collection of freight on behalf of the Company.

 

The Company depends on its agents for the operation of Liner segment business.

Since all the activities are performed by the agents, there is a requirement of funds. The collection of income is done directly by agents and subsequently remitted to the Company. Therefore, it involves a risk on the part of the Company and hence is identified as a Key Audit Matter

 We assessed the Company’s process to evaluate Agents on timely basis to identify the impact on the revenue and collection of funds.

 

• The Company has obtained bank guarantee from major agents & also reviewed the same periodically to confirm its validity and completeness with respect to risk exposure on revenue due to direct access to agents.

 

• The Company has provided Statement of Account (SOA) obtained from these foreign agents for confirmation of transactions and closing balance.

IV. Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

Brigade Enterprises Limited (31st March, 2024)

Key audit matters How our audit addressed the key audit matter

 
Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

 
As at 31st March, 2024, the carrying value of the inventory of real estate projects is ₹395,591 lakhs and land advances/deposits is ₹39,944 lakhs respectively.

The inventories are carried at lower of cost and net realisable value (‘NRV’). The determination of the NRV involves estimates based on prevailing market conditions and taking into account the estimated future selling price, cost to complete projects and selling costs.

Deposits paid under joint development arrangements, in the nature of non-refundable amounts, are recognised as land advance under other assets and on the launch of the project, the same is transferred as land cost to work-in-progress. Further, advances paid by the Company to the seller/ intermediary towards outright purchase of land is recognized as land advance under other assets during the course of transferring the legal title to the Company, whereupon it is transferred to land stock under inventories.

The aforesaid deposits and advances are carried at the lower of the amount paid/payable and net recoverable value, which is based on the management’s assessment including the expected date of commencement and completion of the project and the estimate of sale prices and construction costs of the project.

We identified the assessment of the carrying value of inventory and land advances/deposits as a key audit matter due to the significance of the balance that involves estimates and judgement.

 Our procedures in assessing the carrying value of the inventories and land advances/deposits included, among others, the following:

• We read and evaluated the accounting policies with respect to inventories and land advances/deposits.

• We assessed the Company’s methodology applied in assessing the carrying value under the relevant accounting standards including current market conditions in assessing the net realisable value
having regard to project development plan and expected future sales.

• We made inquiries with management with respect to inventory of properties on test check basis to understand key assumptions used in determination of the net realisable value/ net recoverable value.

• We enquired from the management regarding the project status and verified the underlying documents for related developments in respect of the land acquisition, project progress and expected recoverability of advances paid towards land procurement (including refundable deposits paid under JDA) on test check basis.

• We obtained and tested the computation involved in assessment of carrying value and the net realisable value/ net recoverable value on test check basis.

V. Accounting and valuation of Hedging Instrument

Dishman Carbogen Amcis Limited (31st March, 2024)

Key audit matters How our audit addressed the key audit matter

 
Accounting and valuation of Hedging Instrument 

 
The Company hedges its foreign currency risk and interest rate risk through derivative instruments and applies hedge accounting principles for derivative instruments as prescribed by Ind AS 109. Receivable pertaining to derivative instruments as at March 31, 2024 is amounting to R9.69 Crores and debit balance of Cash Flow Hedge Reserve of R28.09 Crores as on that date.

These contracts are recorded at fair value and cash flow hedge accounting is applied, such that gains and losses arising from fair value changes are deferred in equity and recognised in the standalone statement of profit and loss when hedges mature and / or when the hedge item occurs.

The valuation of hedging instruments and consideration of hedge effectiveness has been identified as a key audit matter as it involves a significant degree of complexity and management judgment and are subject to an inherent risk of error.

 Our procedures included the following:

• Obtained understanding of the Company’s overall hedge accounting strategy, forward contract valuation and hedge accounting process from initiation to settlement of derivative financial instruments including assessment of the design and implementation of controls and tested the operating effectiveness of those controls.

• Assessed Company’s accounting policy for hedge accounting in accordance with Ind AS.

• Tested the existence of hedging contracts by tracking to the confirmations obtained from respective counter parties.

• Tested management’s hedge documentation and contracts, on sample basis.

• Involved our valuation specialists to assist in reperforming the year end fair valuations of derivative financial instruments on a sample basis and compared these valuations with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

 

VI. Jai Balaji Industries Limited

Key audit matters How our audit addressed the key audit matter

 
Accounting Software and Audit Trail

 
Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 for maintaining books of account using accounting software which has a feature of recording audit trail (edit log) facility is applicable to the Company with effect from April 1, 2023, and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014. We have examined that the company is using customised software and audit trail is enabled but the software and its trail need to be strengthen more.

The Company is in process of implementing more advance and latest ERP Software which will prove to be more efficient and effective for the company. with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

 

GMR Airports Infrastructure Limited

Key audit matters How our audit addressed the key audit matter

 
Accounting for Business combination – composite scheme of amalgamation and arrangement among GMR Airports Limited (GAL), GMR Infra Development Limited (‘GIDL’) and the Company 

 

(refer note 2.2(u) for the accounting policy and note 48 for disclosures of the accompanying standalone financial statements)
Subsequent to year end, the composite scheme of amalgamation and arrangement (the ‘Scheme’) amongst GAL, GIDL and GIL as under Sections 230 to 232 of the Companies Act, 2013 (“Scheme”) was approved by the Hon’ble National Company Law Tribunal (‘NCLT’), Chandigarh bench (‘‘the Tribunal’’) vide its order dated 11th June 2024 (formal order received on 2nd July 2024). Such NCLT order was filed with the Registrar of Companies by GAL, GIDL and GIL on 25th July, 2024 thereby making the Scheme effective from such date.

Pursuant to the NCLT order, GAL and GIDL have been merged with the Company and all the assets, liabilities, reserves and surplus of the transferor companies have been transferred to and vested in the Company. Considering, the transaction is a common control business combination, these Standalone Financial Statements have been prepared by giving effect to the Scheme in accordance with Appendix C of Ind AS 103 by restating the financial statements from the earliest period presented consequent to receipt of approval to the Scheme from NCLT, as further disclosed in Note 48.

The determination of appropriateness of the accounting treatment and the complexities with respect to the control assessment and implementation of the terms of the approved Scheme required significant auditor attention. Accordingly, this matter is identified as a key audit matter for the current year audit.

Further, owing to the significant and pervasive impact of the merger on the accompanying standalone financial statements as disclosed in Note 48, the matter is also considered fundamental to the understanding of the users of the accompanying standalone financial statements.

 Our audit procedures to assess the appropriateness of the accounting treatment of the business combination, included, but were not limited to the following:

•       Obtained and read the Scheme and final order passed by the NCLT and submitted with the ROC to understand its key terms and conditions.

• Evaluated the design and tested the operating effectiveness of the internal financial controls relevant for recording the impact of the Scheme and related disclosures.

• Assessed the appropriateness of accounting policy of business combination of entities under common control by comparing with applicable accounting standard and that approved in the Scheme which involved assessment of control pre and post-merger.

• Tested the management’s computation for arriving at the value of fully paid-up equity shares to be issued and treatment of reserves as per the Scheme;

• Tested the management’s computation of the amount determined to be recorded in the amalgamation adjustment reserve; and

• Assessed the adequacy and appropriateness of the disclosures made with respect to the accounting of the transaction under the Scheme in note 48 to the accompanying standalone financial statements, as required by the applicable Indian Accounting Standards.

Material Accounting Policies

Note 2.2(u): Revised financial statements after approval of scheme of merger

The standalone financials of the Company for the year ended 31st March, 2024 were earlier approved by the Board of directors at its meeting held on 29th May, 2024 and reported upon by the statutory auditors vide their report dated 29th May, 2024. The said standalone financial statement did not include the effect of scheme of merger of GAL with GIDL followed by merger of GIDL with the Company which was approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11th June, 2024 (Certified copy of the order received on 2nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25th July, 2024 thereby the Scheme becoming effective on that date from the appointed date of 1st April, 2023 for merger. As a result, the aforesaid standalone financial statements have been revised by the Company so as to give effect to the Composite scheme of amalgamation and arrangement (‘Scheme’) in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). Further, the subsequent events so in far it relates to the revision to the standalone financial statements are restricted solely to the aforesaid matter relating to the scheme and no effects have been given for any other events, if any, occurring after 29th May, 2024 (being the date on which standalone financial statements were first approved by the board of directors of the company). Also refer note 48 to the standalone financial statements.

Note 48: Business Combination – Common control transaction

a. The Board of directors in its meeting held on 19th March, 2023 had approved, a detailed Scheme of Merger of GAL with GIDL followed by merger of GIDL with the Company referred herein after as Meger Scheme. Subsequent to year ended 31st March, 2024, the Merger Scheme has been approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11th June, 2024 (Certified copy of the order received on 2nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25th July, 2024 thereby the Scheme becoming effective on that date.

Accordingly, GAL merged with GIDL and merged GIDL stands merged into the Company with an appointed date of 1st April, 2023 and the standalone Financial Statements of the Company have been prepared by giving effect to the Composite scheme of amalgamation and arrangement in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). The difference between the net identifiable assets acquired and consideration paid on merger has been accounted for as capital reserve on merger.

Pursuant to the Scheme of amalgamation, 3,41,06,14,011 equity shares and 65,111,022 Optionally Convertible Redeemable Preference Shares (OCRPS) will to be issued to Groupe ADP by the Company. These equity shares was presented under equity share capital pending issuance and OCRPS pending issuance respectively for the current period and comparative period. As part of the Scheme, the equity shares held by the Company in merged GIDL stands cancelled.

Accounting of amalgamation of the Merged GIDL with the Company

i. On the Scheme becoming effective on 25th July, 2024 (“Effective Date”), the Company has accounted for the amalgamation in accordance with “Pooling of interest method” laid down by Appendix C of Ind AS 103 (Business combinations of entities under common control) notified under the provisions of the Companies Act, 2013.

ii. The cumulative carrying amount of investments held by the company in Merged GIDL in form of equity shares and OCRPS shall stand cancelled together with the cumulative corresponding unrealised gain recognised in FVTOCI reserve, and related deferred tax liability.

iii. The Company has recorded all the assets, liabilities and reserves of the Merged GIDL, vested in the Company pursuant to the Scheme, at their existing carrying amounts.

iv. The loans and advances or payables or receivables or any other investment or arrangement of any kind, held inter se, between the Merged GIDL and the Company have been cancelled.

v. The difference between the book value of assets, liabilities and reserves as reduced by the face value of the equity shares and OCRPS issued by the Company and after considering the cancellation of inter-company investments was recorded in other equity of the Company.

The book value of assets, liabilities and reserves acquired from Merged GIDL as at 1st April, 2023 were:

Particulars

 

 Amount

(In Crores)
ASSETS

 
Non-current assets
Property, plant and equipment 2.43
Capital work-in-progress 46.49
Right of use assets 3.62
Financial assets
Investments 47,082.91
Loans 808.10
Other financial assets 37.16
Income tax assets (net) 22.73
Deferred tax assets (net) 107.28
Other non-current assets 20.01
Total 48,130.73 
Current assets
Financial assets
Investments 445.45
Trade receivables 74.80
Cash and cash equivalents 41.20
Bank balances other than cash and cash equivalents 4.86
Loans 147.82
Other financial assets 222.89
Other current assets 33.17
Total 970.19
49,100.92
LIABILITIES
Non-current liabilities
Financial liabilities
Borrowings 1,949.99
Lease liabilities 3.71
Other financial liabilities 143.39
Provisions 9.54
Deferred tax liabilities (net) 9,198.74
Other non current liabilities 20.67
Total 11,326.04 
Current liabilities
Financial liabilities
Borrowings 3,122.18
Lease liabilities 0.07
Trade payables 102.75
Other financial liabilities 494.04
Other current liabilities 50.27
Provisions 4.46
Total 3,773.77 
Total liabilities 15,099.81
Net assets acquired 34,001.11 
Less: Investment in merged entity (net off fair valuation and deferred tax effect thereon) -4,456.57 
  29,544.54 
Particulars

 

 (` in crore)
Represented by:

 
Fair valuation through other comprehensive income (’FVTOCI’) 33,207.01
Special  Reserve  u/s  45IC of  Reserve Bank  of  India  (’RBI’)  Act 81.05
Securities Premium 1,251.36
Retained earnings -2,228.82
Capital reserve 0.23
Equity share pending issuance 341.06
OCRPS pending issuance 260.44
Amalgamation adjustment deficit account -3,367.81

b. The Board of Directors of the Company vide their meeting dated 17th March, 2023 had approved the settlement regarding Bonus CCPS B, C and D between the Company, erstwhile GMR Airports Limited (GAL) and Shareholders of erstwhile GAL wherein cash earnouts to be received by Company were agreed to be settled at ₹550.00 crore, to be paid in milestone linked tranches and conversion of these Bonus CCPS B, C and D will take as per the terms of settlement agreement. Further, the Company, erstwhile GAL and Shareholders of erstwhile GAL had also agreed on the settlement regarding Bonus CCPS A whereby erstwhile GAL will issue such number of additional equity share to the Company and GMR Infra Developers Limited (‘GIDL’) (wholly owned subsidiary of the Company) which will result in increase of shareholding of Company (along with its subsidiary) from current 51 per cent to 55 per cent in erstwhile GAL. The settlement was subject to certain conditions specified in the settlement agreements. As part of the settlement agreement, the Company has received 4 tranches of ₹400.00 crore towards the sale of these CCPS till 31st March, 2024. Subsequent to balance sheet date, on completion of conditions precedent the Company has received last tranche of ₹150.00 crore towards the sale of these CCPS. On 17th July, 2024 the board of directors of erstwhile GAL has approved the conversion of CCPS A, B, C and D into equity shares of erstwhile GAL.

c. On 10th December, 2015, the Company had originally issued and allotted the 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 300 Mn due 2075 to Kuwait Investment Authority (KIA) and interest is payable on annual basis.

Pursuant to the Demerger of the Company’s non-Airport business into GMR Power and Urban Infra Limited (GPUIL) during January 2022, the FCCB liability was split between the Company and GPUIL. Accordingly, FCCBs aggregating to US$ 25 Mn. were retained and redenominated in the Company and FCCBs aggregating US$ 275 Mn. were issued to KIA by GPUIL. As per applicable RBI Regulations and the terms of the Agreements entered into between KIA and the Company, the Company had the right to convert the said FCCBs into equity shares at a pre-agreed SEBI mandated conversion price. Upon exercise of such conversion right, KIA would be entitled to 1,112,416,666 equity shares of the Company.

Subsequent to 31st March, 2024, the US$ 25 Mn. 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs), issued by the Company to KIA have been transferred by KIA to two eligible lenders i.e., Synergy Industrials, Metals and Power Holdings Limited (“Synergy”) (US$ 14 Mn) and to GRAM Limited (“GRAM”) (US$ 11 Mn).

The 7.5 percent US$ 25 Mn. FCCBs have been converted dated 10th July, 2024 into 111,24,16,666 number of equity shares of ₹1/- each, proportionately to the above-mentioned two FCCB holders, as per the agreed terms and basis receipt of a conversion notice from the said FCCB holders. As the FCCB holders are equity investors, and as a part of the overall commercials between the parties, the outstanding interest on the FCCB’s of ₹100.43 crore was waived.

Waiver Scheme

Equity and Taxation are considered as aliens to each other. Successive Governments have introduced amnesty, dispute resolution, waiver and / or trade facilitation schemes for benefit of taxpayers. Legal ambiguity, legacy laws, tax augmentation, administrative backlog, etc. have been the primary drivers for such schemes. While every scheme is open to criticism for being detrimental to the interest of tax diligent persons, being a policy decision and beneficial to a litigant class, they have not been challenged on the grounds of equality. However, these optional schemes are subject to strict application of the law, with Courts inclined to examine the intent only in case of any ambiguity in the law. This implies that applicants or cases which are not expressly included in the scheme cannot take shelter under such schemes. One such scheme has been proposed by way of insertion of Section 128A to CGST Act, 2017.

Though the scheme has been understood by many as an ‘amnesty’, it should be appreciated that the scheme neither provides for any haircut in ‘tax payments’, nor does it provide for immunity from prosecution, late fees, redemption fines, etc. The waiver is conditional and limited only towards interest and penalty payable under specific disputes. It would be inappropriate to term this as a ‘dispute resolution’ since the scheme does not preclude the revenue from agitating the matter even on conclusion of the order. Moreover, in case the taxpayer is denied the benefit of the scheme, the taxpayer is entitled to continue with the dispute before appropriate appellate forums and seek remedial action. It would hence be appropriate to classify the scheme as a ‘conditional waiver scheme’, where the waiver is extended to only interest and penalty, subject to the taxpayer discharging the disputed tax and abandoning its right to litigate the said matter.

BROAD CONTOURS

This scheme has been implemented, pursuant to the decision of the 53rd GST Council, by insertion of Section 128A providing for conditional waiver of interest or penalty relating to tax demands raised u/s 73 for the FY 2017-18 to FY 2019-20. Considering the difficulties in initial stages of GST implementation, tax demands pursuant to genuine legal disputes (such as GSTR-2A v/s. 3B difference, rate classification, taxability, etc) are attempted to be settled on full payment of tax reported in the notice or order on or before the notified date1. One cannot seek redressal over the merits of the matter and opting for the scheme does not imply acceptance of the legal proposition canvassed in the dispute. The waiver also does not cover demands of erroneous refund and those pertaining to the tax period from FY 2020-21. Rule 164 has also been inserted prescribing procedures and forms related to the waiver. The CBIC has issued Circular No. 238/32/2024 dt. 15th October, 2024 clarifying many aspects of the scheme.

1 31.03.2025 for S.73 cases and 6 months in cases subsequently converted into S.73

SCOPE OF SCHEME

Section 128A under ‘Chapter 19 — Offences and Penalties’ grants a conditional waiver of interest and penalty on payment of the tax payable arising from the said proceedings in the following situations:

i.Show Cause notice (DRC-01) has been issued u/s 73 and such notice is pending adjudication;

ii. An adjudication order u/s 73(9) (DRC-07) has been issued and no appellate order has been passed against such order;

iii. An appellate order has been passed by the first appellate authority and no further appellate order (second appellate authority onwards) has been passed against the said appellate order.

CONDITIONS OF SCHEME

The above interest and penalty waiver is subject to certain conditions:
i. Full amount of tax payable as per the notice / order is discharged on or before the notified date;

ii. Demands raised u/s 74 (unless converted into Sec. 73 pursuant to a specific appeal) or any other sections2 are not covered under the scheme;

iii. Issue of recovery of erroneous refund is not covered under the scheme;

iv. Appeal / writ petition should be withdrawn on or before the notified date;

v. On favourable conclusion of the scheme, the underlying order cannot be continued in appeal or writ.

2 Section 52, 76, 122, 123, 124, 125, 127, 129 or 130

PROCEDURE FOR AVAILMENT OF SCHEME

The scheme would be implemented through the GSTN Portal and eligible persons would have to follow a defined process:

a) Preparatory Stage

STEP 01: Check the eligibility of the scheme based on the applicable notice/ order (i.e. DRC-01 or DRC-07 or APL-04), period involved and the issues which are covered under the scheme. File a letter with the appropriate authority to upload the said notice / order in case the same is not visible on the electronic portal;

STEP 02: Withdraw the appeal or petition filed by making an application in APL-01W and obtain a withdrawal order from the appropriate authority — one need not await the withdrawal order for proceeding further;

STEP 03: Quantify the tax payment (year wise). Discharge the tax payment in full for the demand quantified in the said demand notice / order vide DRC-03 with appropriate narration of the notice/ demand reference number (including demand for erroneous refund) — exclusion may be made for input tax now available pursuant to introduction of section 16(5);

STEP 04: Once the demand is available on the common portal, apply for mapping the DRC-03 with the relevant demand order uploaded on the common portal with the proper officer in form DRC-03A — verify the mapping of the said payment with demand order in the electronic credit ledger.

b) Application Stage

STEP 05: Where the tax demand is proposed in DRC-01, file an application in SPL01 reporting the details of the DRC-01 and the corresponding tax payments details (if any) in DRC-03;

STEP 05A: Alternatively, in case of confirmed demand u/s 73 or 107 appeal proceedings, an application in SPL02 reporting the corresponding demand order and the tax payment details in Electronic Liability Ledger or DRC-03 & 3A would be reportable;

STEP 06: Upload the self-certified copy of relevant notice / order along with the withdrawal application / order and any order documents (such as order of High Court, communication with officers etc) and establish mapping the tax payment with the demand notice along with application in SPL-01/02.

c) Processing Stage

STEP 07: The officer would issue a notice in SPL-03 in cases where the application is ineligible for the scheme, granting an opportunity for appearance. A response to the said notice in SPL-04 would be submitted;

STEP 08: In case the application is accepted, the officer would issue an order in SPL-05 concluding the proceedings under the scheme. The liability proposed in DRC-01 would be considered as recovered in full and the liability demanded in DRC-07 or APL-04 would be accordingly modified in PMT-01.

d) Redressal Stage

STEP 09: In case the application is rejected3, officer would issue an order in SPL-07 mentioning the reasons for rejection. The said order is subject to appeal u/s 107 before first appellate authority.

STEP 10: In case the tax payer does not file an appeal u/s 107 against the order of rejection (in SPL-07), the original appeal (on merits) would stand automatically restored. In case the matter was pending before the High Court, the petitioner would have to make an application for restoration before the appropriate court.

3 On account of incomplete payment; payment made after the date notified in Section 128A; Notice/ Order pertaining to sections other than section 73; appeal/ writ petition filed before Appellate Authority/ Appellate Tribunal/High Court/ Supreme

e) Post Processing Stage

STEP 11: In case the tax payer files an appeal u/s 107 against the order of rejection (in SPL-07), the ‘128A waiver appeal’ would be examined by the appropriate appellate authority and an appropriate decision would be made. Where such appeal is admitted and allowed, the appellate authority would issue an order in SPL-06 concluding the proceedings and also directing payment of any shortfall in interest or penalty not covered under the scheme. Where the ‘128A waiver appeal’ is dismissed and the appellant decides give-up any further remedy, the ‘original appeal’ on merits would be restored and matter would follow the regular course of appellate remedy on merits.

STEP 12: The conclusion of the proceeding is subject to payment of the demand specified in SPL-05/06 within the specified time frame.

STEP 13: In the eventuality of a rejection order in SPL-07, an appropriate appeal would have to be filed in terms of the appeal provisions u/s 107/112 and in case the appeal is not sought to be preferred at any stage, a declaration may be filed stating its intention so that the appeal on merits stands restored.

f) Restoration Stage

STEP 14: Once the appeal against the wavier order has attained finality, the original appeal on merits would be restorable and the applicant would be permitted to argue the case on merits despite having made the entire tax payment under the scheme. The liability under the Electronic Payment ledger would be maintained as it is.

Particulars Timelines Remarks
Payment of Tax demanded pursuant to notice/ order u/s 73 Notified date 31st March, 2025
Withdrawal of appeal (if any) Before SPL-02 30th June, 2025
Application in SPL-01/02 3 months 30th June, 2025
Rejection notice in SPL-03 3 months from SPL-01/02 Mapped to application
date
Response in SPL-04 1 months from SPL-03 Mapped to SPL-03
Acceptance Order in SPL-05 3 months from SPL-01/02 No SPL-03 cases
3 months from SPL-044 Reply filed in SPL-04
4 months from SPL-033 No reply filed in SPL-04
Rejection order in SPL-07 Same as above3 Same as above
In case of Appeal against SPL-07 3 + 1 months as specified in appellate section 107/112 Regular appeal provisions apply to rejection order
Appellate acceptance in SPL-06 No time limit NA
Appellate rejection in APL-04 No time limit NA
Shortall in payments of tax, interest or penalty 3 months of demand In cases of departmental appeal, revision, etc
128A application for S. 74 notices/ orders which are subsequently converted into S.73 6 months from 73 order and the subsequent sequence of events above would follow suit Pursuant to application of 75(2) appellate/ court proceedings 
4 In cases where the withdrawal order is not uploaded, the time limit from date of application in SPL-02 till the date of filing the withdrawal order would be excluded for purpose closure of the proceedings

Note – If no acceptance order is issued within the timelines for SPL-05, the application would be deemed to be approved and the proceedings are concluded with necessary modifications carried out in the Electronic Liability Register.

PROCEEDINGS EXCLUDED FROM THE SCHEME

The stages of notices or proceedings are excluded if the same are not converted into a proceeding under section 73.

Stages / Forms Covered
ASMT-10 (Scrutiny) No
ADT-01 / ADT-02 (Audit) No
INS-01 (Inspection / Search) No
MOV-09 (E-Way Bill Interception without DRC-01 or DRC-07 u/s 73) No
MOV-09 (E-Way Bill Interception with DRC-01 or DRC-07 u/s 73) Yes
Only Penalty – DRC-01 / DRC-07 u/s 122 only Yes
Only Interest – DRC-01 / DRC-07 u/s 50 only Yes

 

In such scenarios, the taxpayer would have to filter out the frivolous / clarificatory matters through its legal submission and urge the officers to proceed with the matter into adjudication — which typically would be performed u/s 74 in view of the expired time limit of section 73.

FAQS / COMMON QUESTIONS IN RESPECT OF THE SCHEME

Q1 – Can the applicant cherry pick a particular issue or year from within a notice / order for closure u/s 128A?

Pick a particular issue — Section 128A(1) states that the scheme would be available only on full payment of the tax liability under the notice/ order. Since the scheme is designed qua the notice or order, the applicant cannot cherry pick any issue for waiver and seek appellate remedy for the rest. In view of specific wordings, the scheme has been designed for closure of the entire notice / order and there is no window for authorities to conclude the notice / order partially. Even in cases where a particular issue pertains to erroneous refunds, it has been specified in the rules that the applicant would have to settle the tax demands from such erroneous refunds to be eligible for the scheme (Rule 164(3) and Q5 of Circular).

Pick a particular year – Where notices have been issued for a larger assessment period, with the scheme being limited to the first 3 years, one would have to settle the tax, interest and penal liability for the years 2020-21 onwards. Once again, the taxpayer is not permitted (in view of Rule 164(4) r.w. Q6 of Circular) to cherry pick any particular year from among the notice / order period. Taxes for all the years would have to be discharged including those which are not covered under the scheme prior to application of the scheme. To tabulate the above issue:

Consolidated Notice/ Order 2017-18 Apply for scheme
2018-19
2019-20
2020-21 No appellate remedy for next 2 years — consequential tax, interest and penalty to be paid
2021-22
Notice for each year is separately issued 2017-18 Apply for Scheme or choose to appeal
2018-19 – same as above –
2019-20 – same as above –
2020-21 Appeal remedy
2021-22 Appeal remedy

A careful SWOT assessment and numerical analysis of the proceeding would have to be performed to address such dilemma. Alternatively, taxpayer can seek the intervention of the court which have directed the revenue authorities to split the SCNs year wise and permitted the taxpayer to avail the scheme.

Q1A – As a follow-up issue, can applicant seek a direction from the High Court for splitting the issue year-wise or issue-wise and then pick / choose a particular matter for closure under the scheme?

Section 73/74 does not bar the proper officer to consolidate all the tax issues for multiple assessment period in one show cause notice. But courts have recognised that each financial year is a separate assessment unit and hence there does not seem to be much difficulty in obtaining separate notices / orders for each assessment year by a direction from the High Court.

The open-ended wordings of section 73/74 also do not bar multiple issues in one single notice / order. Conversely it does not also bar the proper officer separate the issues in separate notices and consequently separate orders. This leaves the proper officer with significant discretion for adjudication proceedings. Is the discretion at the officer’s end determinative of the eligibility of taxpayer under the scheme? The answer unfortunately appears to be in the affirmative for reasons discussed below.

By now we are aware that Section 128A has been legislated for the notice / order in totality. But if one where to examine the fundamentals of taxability and its recovery through adjudication proceedings, each outward and inward supply stands on its own merits. GST law being a ‘transaction-based tax’, each supply would have to be independently examined for all the taxable aspects (such as taxability, rate of tax, time of supply, place of supply, etc) and hence any short payment or non-payment would be a separate proceeding even if they are contained in a single notice / order. Similarly, availability of input tax credit is also linked to each inward supply and its eligibility (including its usage) is to be analysed on an input invoice basis. Having said this, equity demands that 128A ought to have been designed keeping in perspective this fundamental principle of taxation.

5 Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] 159 taxmann.com 162 (Madras) & Veremax Technologie Services Ltd. & ACT Bengaluru [2024] 167 taxmann.com 332 (Karnataka)

Historically, adjudication proceedings were ‘issue specific’ and notice on a particular issue did not preclude another notice on a distinct issue. Assessments, on the other hand, were ‘period specific’ in so far as the assessment involved conclusion for the assessment year as a whole. The practical experience of adjudication seems to have overtaken the academic essence of assessments and the GST Council / Legislature, have thought it fit in their wisdom (keeping the administrative hurdles) to design the waiver scheme for the adjudication proceeding as a ‘whole’ and refrain from entering into granular aspects. The defence for such an approach would be that optional schemes are the prerogative of the legislature and any grievance on this aspect may not be sustainable even before Constitutional Courts. If one were to invoke the fundamental principles of equity, Courts may treat both the taxpayers (one with a consolidated proceeding vis-à-vis individual proceeding) as unequals from the perspective of adjudicative and administrative procedure, which is the primary bedrock for introduction of this scheme. While an issue wise fragmentation may be tested before Courts, it would defeat the very purpose of even approaching this scheme as it would add another layer of a litigation to a dispute resolution-oriented approach of the taxpayer.

Q2 – Are Section 74 notices / demands totally barred from relief under this scheme?

Section 128A has been designed to grant relief vis-à-vis a specific proceeding and implicitly excludes all other proceedings under the Act. Taxes payable u/s 74 is one such implicit exclusion u/s 128A or rule 164. Considering the grievance of taxpayers who have received SCNs alleging fraud / suppression, etc u/s 74 even on issues of genuine misclassification, numerical discrepancies, legal ambiguity, etc, the scheme has provided for a separate window for clearance of such proceeding.

Section 75(2) provides that in cases where the appellate authority overturns the grounds of fraud/ suppression, etc, the proper officer would have to conclude the proceedings u/s 73(9) within 2 years from appellate order u/s 75(3). The scheme recognises this and extends the waiver even to such scenarios, permitting the taxpayer to apply in SPL-02 subsequent to the revised adjudication order u/s 73 of the Act. In effect, the scheme would come into operation only after the adjudication order u/s 73 is passed in favour of the taxpayer.
Curiously, this mis-action by the department would lead to multiple advantages to the taxpayer:

– Firstly, the taxpayer now possesses the flexibility of applying for the scheme and making the requisite tax payment only after the revised adjudication order u/s 73(9); effectively giving the taxpayer an indefinitely long time period to make the tax payment without any additional interest or penal implications;

– Secondly, the taxpayer also has the opportunity to argue the issues on merits and seek redressal of any patently unsustainable tax demands which would otherwise not be available to an applicant subjected to 73 proceedings on similar issues;

– Thirdly, the taxpayer is also benefited by exclusion of tax demands which are barred by the period of limitation on account of conversion of proceedings from section 74 to 73;

– Fourthly, the taxpayer can advance arguments for splitting a single order into multiple orders and treatment of each of the same independently under the legal provisions;

While the scheme would apply in entirety for recipients of SCNs u/s 73, other applicants who are initially subject to proceedings u/s 74 can avail the scheme at their option after the appellate authority delivers its decision on the grounds of fraud, suppression, etc. Barring cases of circular trading, fake bill cases and tax fraudulently collected, it appears that multiple taxpayers would explore the opportunity to avail the benefit of these scheme at a later point in time, enjoying the interest arbitrage.

Q3 – While the applicant cannot file an appeal, can the department file an appeal or revise an order subsequent to conclusion of under the scheme?

Yes, the scheme functions as a waiver scheme and is limited only to wavier of interest or penalty but does not provide any immunity from assessment/ appeal of the subject period. The conclusion of the proceedings by virtue of SPL05/06 is to the extent of the adjudication process and not further. The revenue can separately initiate proceedings including filing an appeal or revision under the respective sections against the underlying adjudication or appellate order (including SPL-05/06) which has been subjected to the scheme. A particular issue, which was previously dropped or not examined appropriately, can theoretically be agitated in departmental appeal or revisionary proceedings. Unfortunately, the applicant would have to discharge the additional tax quantified under the scheme within 3 months from the date of the enhanced order. Where the applicant believes that the enhancement is not in order, the next appellate remedy would have to be pursued and depending on the outcome, the enhanced tax would be liable to be discharged (Q8. of Circular). The
silver lining would be that the taxpayer would be eligible for the waiver of interest and penalty for the additional tax liability which was demanded by virtue of this process.

Q4 –Can parallel proceedings initiated (either before or after the scheme) abate by virtue of this scheme?

As stated above, the scheme does not place any bar on the department to initiate proceedings on the similar subject matter or any other subject matter. Moreover, the conclusion of the proceeding is not with reference to the merits of the matter, rather only with respect to the adjudicative / appellate process governing the notice / order. For example, an applicant obtains conclusion for an adjudication order (in DRC-07) in respect of numerical differences in input tax credit in GSTR-2A v/s 3B. Pursuant to an inspection or scrutiny proceedings, the tax department discovers that some vendors have failed to discharge their output taxes and have escaped the issue in the original adjudication. Invoking the adjudication powers, fresh notices can be issued against the applicant, and the said proceedings would be independently viewed and cannot be clubbed to be covered / admitted in the original adjudication proceedings. In essence, the department is not precluded from initiating proceedings on the very same issue or rake up fresh issues by virtue of the closure order issued under the scheme. Even if parallel proceedings are underway on similar subject matter by the corresponding administration, the scheme would achieve closure only in so far as the notice / order which has subjected to the scheme and the parallel proceedings would be governed by regular provisions of the Act.

Q5 – Whether appeal should be filed for orders which are anyway being withdrawn as part of waiver scheme?

There are cases (especially for 2019-20) where orders are passed or due to be passed before February 2025. Filing an appeal and withdrawing the same for purpose of application of the scheme may seem a futile exercise. Yet, it is advisable to file the appeal and withdraw on three counts:

(a) the scheme covers cases where an adjudication order has been passed and no appellate order has been passed. The provision does not explicitly state whether an appeal proceeding should be pending as on the date of the application. Though, the condition has been worded in the negative, revenue can very well interpret that pendency of appeal is implicit, since only in such scenarios one can state that an appellate order is due to be passed. To address this technical interpretation, filing an appeal may be an advisable option.

(b) In the eventuality the waiver application is rejected, the scheme mandates that the original appeal in merits (which was withdrawn) would be re-instituted. This presupposes that an appeal was originally filed. The scheme does not in anyway permit fresh filing of appeal (on merits) after rejection of the waiver application. Neither does it grant an exclusion in the time period for the time spent in processing of the wavier application. Thus, in order to protect one’s interest in pursuing the appellate remedy, it would be suitable to file an appeal and subsequently withdraw the same prior to an application before the waiver scheme.

(c) More importantly, the waiver application may take time to process and conclude. Till the time of the favourable conclusion of the waiver application, there is a risk of recovery proceedings being initiated and if such proceedings are initiated, the taxpayer will have no recourse but to knock the doors of the High Court.

Q6 – Who is the proper officer for application of the scheme?

Rule 164 prescribes that the proper officer would be the authority who is under law entitled to recover the tax, interest and penalty arising from the order u/s 79. Where the waiver is in respect of the notice itself, the proper officer would be the officer who has issued the notice u/s 73.

Q7 – Whether the recipient of output invoice is eligible for input tax credit for tax payments under thescheme?

Supplier applicants who have been alleged with short payment of tax are entitled to the scheme on differential output tax paid since the tax paid would be considered as part of proceedings u/s 73. For example, automobile OEM suppliers who have been subject to intense litigation on the applicable rate for parts are considering opting for the scheme and passing on the said
burden to the manufacturers/ dealers for availment of the input tax credit by issuance of a ‘supplementary invoice’. This is possible in B2B transactions as the customer would be eligible for input tax credit and the same would not be barred under the provisions of section 17(5)(i).

Q8 – Whether orders / notices limited to interest or penalty are eligible under the scheme?

Section 128A specifies that notices/ order which report a ‘tax payable’ are eligible for waiver under the scheme. Though this phrase ‘tax payable’ is adopted, the rules and circular indicate that taxes already paid (in part or full) would also be adjusted under the scheme (Q1, 2 & 4 of Circular). Though tax liability is a sine-qua-non for invocation of the rights under the scheme, the tax need not be unpaid as on the date of the scheme. However, the circular makes a mention that ‘self-assessed taxes’ which are paid would not be eligible for the scheme and the interest or penalty would be payable in such scenarios.

CONCLUSION

The scheme clearly has all the ingredients of the experience of the Government administration from earlier amnesty and dispute resolution scheme. Old disputes of mapping tax demands, lack of appellate remedy and restoration, time frame under a quasi-judicial process, etc which were missing in the legacy schemes are eminently visible in this current format. The circular issued by the Government is also progressive and granted the relief to advance the object of the scheme. In the midst of the everlasting debate of equity in such schemes, on may state that the approach of the Government for launching this scheme is fairly commendable.

Part A | Company Law

12 In the Matter of:

M/s. Venkatramana Food Specialities Limited

Registrar of Companies, Puducherry

Adjudication Order No. ROC/PDY/Adj / Sec.203 / 02550/ 2024

Date of Order: 9th October, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013) by the Company: Failure to fill the vacancy arising from the resignation of the whole time Company Secretary within a period of 6 months.

FACTS

The company had appointed a Whole-time Company Secretary on 15th April 2019 as required under the provisions of Section 203(4) read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Subsequently, the said Secretary resigned and moved out of the company from 26th December, 2019.

The company was required to appoint a whole-time company secretary on or before 20th June, 2020 i.e. within 6 months from the date of resignation (26th December, 2019). However, the company appointed a whole-time secretary who joined w.e.f. 9th December, 2023. Thus, there was a delay of 1442 days in the appointment of the Company
Secretary. (From 27th December, 2019 to 8th December, 2023).

The show-cause notice was issued and hearing was fixed. The authorised representative explained that due to Covid it was not possible to appoint any CS even after many advertisements and it was difficult to appoint a whole time Company Secretary. However, the default was accepted for the adjudication.

PROVISIONS OF THE ACT IN BRIEF:

Section 203(4) of CA 2013:

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Note: Section 203(1) requires certain classes of companies to have a whole-time key managerial personnel which includes a Company Secretary.

Section 203(5) of CA 2013:

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.

FINDINGS AND ORDER

Considering the default and acceptance of the same by the company, the Adjudication Officer, imposed a Penalty of ₹20 Lakhs as under:

Penalty imposed on  Calculation Amount ( R)
Company As per the provisions of Section 203(5) 5,00,000
Each of the 3 directors [50,000+(R1000 per day for 1442 days) Subject to Maximum of R5 Lakhs per Director] X 3 15,00,000
Total 20,00,000

13 In the Matter of M/s. Shunmugam Traders Private Limited

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/SHUNMUGAM/ADJ/S.137/2024

Date of Order: 16th September, 2024

Adjudication order for violation of section 137 of the Companies Act 2013(CA 2013) by the Company: Non-Filing of Financial Statements.

FACTS

It was observed from the MCA records that the company has filed its financial statements only up to the financial year 2014-2015. Since the company and its directors have not filed its financial statements up to date, Section 137 of the Companies Act, 2013 has been contravened and the defaulters are liable for action under section 137 (3) of the Companies Act, 2013. Accordingly, on submission of the inquiry report by the officer, Regional Director, Ministry of Corporate Affairs, Chennai had directed to take necessary action against the defaulters under the provisions of the Companies Act, 2013 for the financial year 2015-2016 to till date.

(i.e. FY 2022-23)

PROVISIONS OF THE ACT IN BRIEF:

Section 137 of the Companies Act, 2013-

Copy of financial statement to be filed with the Registrar:

(1) A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly, adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed.

(2) Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under subsection(l), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed
(3) If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the periods specified therein, the company shall be liable to a penalty often thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the Directors of the company, shall be liable to a penalty often thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that no response was received from the company, the Adjudication Officer concluded that the company and its directors have violated Section 137(3) of the companies Act, 2013. For the purposes of levy of penalty, date of AGM was considered as 30th September of the respective financial year.

Financial Year for which
Penalty was levied		 Final Penalty imposed on the Company and the Officers in default (Amount in R)
2015-16 4,50,000
2016-17 4,50,000
2017-18 4,50,000
2018-19 4,35,800
2019-20 3,99,200
2020-21 3,62,700
2021-22 3,26,200
2022-23 2,38,200
Total 33,12,100

Further, in exercise of Section 454 (3) (b) of the Companies Act,2013 the company was directed to rectify the default by filing Financial Statements for the remaining periods i.e. from 2015-16 onwards and intimate the details of filings along with SRNs within 30 days from the date of the order.

14 In the Matter of M/s. Subh Laabh Polymers Private Limited,

Registrar of Companies, Cum Official Liquidator, Chhattisgarh

Adjudication Order No/ Reference no. to Show Cause Notice:ROC-cum-OL-C.G./008625/ATR/Adj/140/1/2024/611

Date of Order: 13th September, 2024

Adjudication order issued against Statutory Auditor of the Company for delay in filing of Resignation Notice in the prescribed e-form ADT-3 under provisions of Section 140 (2) of the Companies Act 2013.

FACTS

An inquiry under Section 206(4) of the Companies Act,2013 was carried into the affairs of M/s SLPPL and it was observed that M/s SLPPL had appointed M/s R.K.S.A as the Statutory Auditor of M/s SLPPLunder Section 139(1) of the Companies Act, 2013 for the period starting from 1st April, 2016 to 31st March, 2021 and M/s SLPPL had informed the same to ROC by filing form ADT-1 on 21st October, 2016, after receiving the consent letter from the Auditor on 20th August, 2016 and in between this period, M/s SLPPL further had appointed M/s NC&A as the Statutory Auditor for the period of 1st April, 2017 to 31st March, 2022.

Therefore, in accordance with Section 140(2) of the Companies Act, 2013, the auditor who had resigned from the Company must within a period of thirty days file in e-form ADT-3 his / her resignation with Registrar of Companies (ROC).The same was not complied by M/s R.K.S.A.

Thereafter on the direction of the Regional Director (RD), a Show Cause Notice (SCN) was issued to M/s R.K.S.A on 14th August 2024 and M/s R.K.S.A replied to the SCN via letter dated 4th September, 2024 which stated that the auditing firm was going through a constitution change in the Institute of Chartered Accountants of India by way of conversion into a Limited Liability Partnership (LLP) and name change. Due to engagement on the above matter, the auditing firm missed out on the filing of a notice of resignation in form ADT-3 to the Registrar of Companies. The firm realised its default in the year 2023 and soon after, the firm filed the ADT-3 form along with the applicable fees in addition to the applicable late filing fees.

PROVISIONS

“As per Section 140(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub- section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

ORDER

AO after consideration of facts and admission made by Auditor that the filing of ADT-3 form was delayed by period of 2077 days. Hence concluded that the auditor had violated the provisions of Section 140(2) read with Section 140(3) of the Companies Act, 2013 for which penalty of ₹2,00,000 (Rupees Two Lakhs only) was imposed.

Closements

Reassessment provisions, applicability of TOLA and way forward in light of the decision in the case of Rajeev Bansal – Part II

INTRODUCTION

7.1 As stated in Part I of this write-up (BCAJ December, 2024), considerable amendments were made in the reassessment provisions by the Finance Act, 2021. Prior to these amendments, a notice could be issued under section 148 of (the ‘old regime’) within the time limits of 4 years (in all cases) / 6 years (escaped income of ₹ 1 lakh or more) / 16 years (asset outside India) as provided in section 149 of the Act if the Assessing Officer (‘AO’) had reason to believe that income chargeable to tax had escaped assessment. Considerable amendments in the provisions dealing with reassessment proceedings (the ‘new regime’) as stated in para 1.4 of Part I of the write-up were brought about by the Finance Act, 2021. The entire procedure for issuance of a reopening notice was revamped by introducing section 148A(d). The erstwhile time limits were also modified and the ‘new regime’ provided for time limit of 3 years in all cases and 10 years in cases where escaped income represented in the form of asset was more than ₹50 lakhs.

7.2 As stated in para 1.3 of Part I of the write up, the time limit to issue notice under section 148 of the Act, granting sanction or approval, etc. was extended by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA’) and the subsequent Notifications issued under TOLA. In short, the time limits for doing the above acts which were expiring during the period from 20th March, 2020 to 31st March, 2021 were extended upto 30th June, 2021. These Notifications contained an Explanation effectively clarifying that the ‘old regime’ will continue to apply for issuing reassessment notices despite the amendments made by the Finance Act, 2021.

7.3 As stated in paras 1.5 and 1.6 of Part 1 of the write-up, reassessment notices issued after 1st April, 2021 for the assessment years 2013 — 14 to 2017 — 18 relying upon the time extension granted by TOLA and following the procedure as per the ‘old regime’ were struck down by several High Courts and the Explanation issued under the Notifications were also struck down.

7.4 As stated in para 1.7 of Part I, the decisions of the High Courts were upheld by the Supreme Court in UOI vs. Ashish Agarwal (444 ITR 1). However, invoking powers under Article 142 of the Constitution of India, the Supreme Court deemed the notices issued under section 148 of the Act to be show cause notice issued under section 148A(b) of the Act under the ‘new regime’ and issued directions to the AOs to provide material and information for reopening to assessee and then pass an order under section 148A(d) after considering assessee’s submissions. Supreme Court kept all the defences available to the assessee under section 149 and / or under the Finance Act, 2021 and in law and rights available to the AOs under the Finance Act, 2021 open. Thereafter, as stated in para 1.8 of Part I of the write-up, the Central Board of Direct Taxes (‘CBDT’) issued Instruction no. 1 of 2022 dated 11th May, 2022 stating the manner of implementation of the judgment of the Supreme Court in Ashish Agarwal.

7.5 Thereafter, as stated in para 1.9 of Part I of the write up, fresh notices were issued under section 148 of the Act after following the directions contained in the decision of the Supreme Court in Ashish Agarwal pertaining to assessment years 2013 – 14 to 2017 – 18. These notices issued between July to September, 2022 were challenged by the assessees before several High Courts and the same were quashed by the High Courts. A brief gist of these decisions is provided in Part I of the write-up. As stated in para 1.10 of Part I of the write-up, the Supreme Court in Rajeev Bansal’s case (and connected matters) adjudicated on the issues raised by the Revenue in appeals filed against such high court judgments.

UOI vs. Rajeev Bansal (469 ITR 46 – Supreme Court)

8.1 In a challenge by the Revenue to the correctness of the views taken by the High Courts in favour of the assessee, the Supreme Court was called upon to decide two primary issues – (1) whether TOLA and notifications issued thereunder would apply to reassessment notices issued after 1st April, 2021 and (2) whether the reassessment notices issued under section 148 of the ‘new regime’ post Ashish Agarwal’s decision between July and September 2022 were valid.

8.2 Before the Supreme Court, the Revenue contended that TOLA was a free-standing legislation and that section 3(1) of TOLA which applied “notwithstanding anything contained in the specified Act” overrides the time limits for issuing a notice under section 148 read with section 149 of the Act. It was further submitted that TOLA did not extend the life of the ‘old regime’ but merely provided a relaxation for the completion or compliance of actions following the procedure laid down under the ‘new regime’. It was urged that section 2 of TOLA defined “specified Act” to mean and include the Income-tax Act and that TOLA would continue to apply to the ‘new regime’ which became a part of the Income-tax Act from 1st April, 2021. The Revenue contended that invalidation of notices issued under the ‘new regime’ post the Supreme Court decision in Ashish Agarwal on the ground that the same were beyond the time limit specified under the Act read with TOLA will completely frustrate the exercise undertaken by the Supreme Court in Ashish Agarwal.

8.2.1 The Revenue submitted that the first proviso to section 149 [refer para 1.4(iv) of Part I of the write-up] did not expressly bar the application of TOLA and once the first proviso to section 149(1)(b) was read with TOLA, the following would be the position for the different years:

   Assessment  year (1) Within 3 years (2) Expiry of limitation read with TOLA \ for (2) (3) Within 6 years (4)

 

 Expiry of limitation read with TOLA for (4) (5)
2013 – 14 31-3-2017 TOLA not applicable 31-3-2020 30-6-2021
2014 – 15 31-3-2018 TOLA not applicable 31-3-2021 30-6-2021
2015 – 16 31-3-2019 TOLA not applicable 31-3-2022 TOLA not applicable
2016 – 17 31-3-2020 30-6-2021 31-3-2023 TOLA not applicable
2017 – 18 31-3-2021 30-6-2021 31-3-2024 TOLA not applicable

The Revenue conceded that for the assessment year 2015-16, all notices issued on or after 1st April, 2021 will have to be dropped as they will not fall for completion during the period provided under TOLA. It seems that this is, possibly, on the ground that last date for issuing notice under section 148 was 31st March, 2022 (6 years time limit) under the ‘old regime’ and that was outside the limitation period covered by TOLA (refer para 7.2 above) for extension.

8.3 On the other hand, the assessee submitted that TOLA applied in cases where the period of limitation expired between 20th March, 2020 and 31st March, 2021 and, therefore, recourse could not be taken to the extended timelines provided under TOLA with respect to the notices issued under section 148 of the ‘new regime’ which came into effect from 1st April, 2021. Assessee further submitted that TOLA did not amend section 149 of the ‘old regime’ but merely extended the specified time limits and that the first proviso to section 149(1)(b) of the ‘new regime’ only referred to the period of limitation as specified under the erstwhile section 149(1)(b) of the ‘old regime’. Assessee contended that Notification no. 38 of 2021 issued on 27th April 2021 to extend the time limits expiring under section 149(1)(b) of the ‘old regime’ till 30th June, 2021 could not be read into the ‘new regime’ once the ‘old regime’ was repealed and substituted by the ‘new regime’.

8.3.1 Assessee categorized the notices post Ashish Agarwal’s decision under the following four categories and submitted as under:

a. First category — notices for AY 2013–14 and 2014–15 issued after 1st April, 2021 would be barred by limitation as the six-year time limit in terms of section 149 expired on 31st March, 2020 and 31st March, 2021 respectively.

b. Second category – notices for AY 2015–16 issued under the ‘old regime’ after 31st March, 2020 but before 1st April, 2021. It was submitted that these notices issued for AY 2015–16 after a period of 4 years which expired on 31st March, 2020 under the ‘old regime’ were bad in law as sanction under section 151 of the ‘old regime’ was not properly obtained.

c. Third category — notices for AY 2016–17 and 2017–18 for which the three-year period as per the ‘new regime’ expired on 31st March, 2020 and 31st March, 2021 respectively. Assessee submitted that the notices were issued after 1st April 2021 after taking sanction of authorities prescribed in section 151(i) instead of those specified in section 151(ii) [refer to in para 1.4 (v) of Part I of the write-up].

d. Directions in the Supreme Court decision in Ashish Agarwal were not intended to apply to assessees who did not challenge the reassessment notices before the High Court or the Supreme Court in the first round.

8.3.2 Assessee further submitted that the applicability of the first proviso to section 149(1)(b) of the ‘new regime’ had to be tested on the date of issuance of notice under section 148 of the ‘new regime’. Assessee also urged that even if TOLA is read into the Income-tax Act, the time limits for completion of actions could be extended till 30th June, 2021 and that the notices issued under the ‘new regime’ from July 2022 to September 2022 were beyond the extended time limits. Assessee further contended that the decision of Ashish Agarwal could not be interpreted in a manner to exclude the entire period from April 2021 to September 2022 and that the directions issued under Article 142 of the Constitution could not contravene the substantive provisions contained in the Act. With respect to the grant of sanction under section 151, assessee submitted that TOLA applied only to provisions that specified time limits and, therefore, section 151 which did not prescribe any time limits was out of ambit of TOLA.

8.4 After considering the rival contentions and referring to relevant provisions of the Act, the Supreme Court proceeded to decide the relevant issues.

8.4.1 Initially, the Court broadly discussed the relevant legislative and judicial background dealing with various principles relating to : (i) Assessment as a quasi-judicial function, (ii) Assessment as an issue of jurisdiction, (iii) Principles of strict interpretation and workability and (iv) Principle of harmonious construction.

8.4.2 The Court then proceeded to discuss and consider the impact of first proviso to Section 149 under the `new regime ‘ and summarised the position of law in that regard in para 53 as under:

“The position of law which can be derived based on the above discussion may be summarized thus: (i) Section 149(1) of the new regime is not prospective. It also applies to past assessment years; (ii) The time limit of four years is now reduced to three years for all situations. The Revenue can issue notices under Section 148 of the new regime only if three years or less have elapsed from the end of the relevant assessment year; (iii) the proviso to Section 149(1)(b) of the new regime stipulates that the Revenue can issue reassessment notices for past assessment years only if the time limit survives according to Section 149(1)(b) of the old regime, that is, six years from the end of the relevant assessment year; and (iv) all notices issued invoking the time limit under Section 149(1)(b) of the old regime will have to be dropped if the income chargeable to tax which has escaped assessment is less than Rupees fifty lakhs.”

8.4.3 The Court also observed that notices will have to be judged based on the law existing on the date the notice is issued. The Court then referred to the proviso to section 149(1)(b) of the ‘new regime’ and observed that the Revenue can issue reassessment notices for past assessment years only if the time limit of 6 years as per section 149(1)(b) of the ‘old regime’ survives. Court then recorded in para 52 a concession made by the Revenue as under:

“……..MrVenkataraman has also conceded on behalf of the Revenue that all notices issued under the new regime by invoking the six year time limit prescribed under Section 149(1)(b) of the old regime will have to be dropped if the income chargeable to tax which has escaped assessment is less than Rupees fifty lakhs.”

8.4.4 After noting that Finance Act, 2021 substituted the ‘old regime’, Court then referred to the legislative practice of amendment by substitution which involves repeal of an earlier provision and its replacement by a new provision and observed that after an amendment by substitution any reference to a legislation must be construed as the legislation as amended by substitution. In the context of application of extended time limit under TOLA to the ‘new regime’, the Court in para 63 observed as under:

“TOLA extended the time limits for completion or compliance of certain actions under the specified Act, which fell for completion during the COVID-19 outbreak. The use of the expression “any” in Section 3(1) indicates that the relaxation applies to “all” or “every” action whose time limit falls for completion from 20 March 2020 to 31 March 2021. Section 3(1) is only concerned with the performance of actions contemplated under the provisions of the specified Acts. Consequently, the amendment or substitution of a provision under the specified Acts will not affect the application of TOLA, so long as the action contemplated under the provision falls for completion during the period specified by TOLA, that is, 20 March 2020 to 31 March 2021.”

8.4.5 With respect to the applicability of TOLA to the ‘new regime’ after 1st April, 2021, the Court in para 68 held as under:

“On 1 April 2021, TOLA was still in existence, and the Revenue could not have ignored the application of TOLA and its notifications. Therefore, for issuing a reassessment notice under Section 148 after 1 April 2021, the Revenue would still have to look at: (i) the time limit specified under Section 149 of the new regime; and (ii) the time limit for issuance of notice as extended by TOLA and its notifications. The Revenue cannot extend the operation of the old law under TOLA, but it can certainly benefit from the extended time limit for completion of actions falling for completion between 20 March 2020 and 31 March 2021.”

8.4.6 Furthermore, the Court referred to the non-obstante clause in section 3(1) of TOLA and observed that the same will override section 149 to the extent of relaxing the time limit for issuance of reassessment notices under section 148 of the Act which fell between 20th March, 2020 and 31st March, 2021.

8.4.7 With respect to application of TOLA to grant of sanction under section 151 of the Act, the Court held that the specified authority under section 151 of the Act is directly co-related to the time when a notice is issued. Court further held that TOLA will extend the time limit for grant of sanction by the authority specified under section 151 of the Act.

8.4.8 While dealing with one of the issues raised by the assessee that whether the directions in Ashish Agarwal applied to all the reassessment notices issued under the ‘old regime’ post 1st April 2021 or only those which were challenged by way of writ petitions before the High Courts, after considering the relevant paras of that decision, the Court observed as under at end of para 90:

“The purpose of this Court in deeming the reassessment notices issued under the old regime as show cause notices under the new regime was two-fold: (i) to strike a balance between the rights of the assesses and the Revenue which issued approximately ninety thousand reassessment notices after 1 April 2021 under the old regime; and (ii) to avoid any further appeals before this Court by the Revenue on the same issue by challenging similar judgments and orders of the High Courts (arising from approximately nine thousand writ petitions).”

On this issue, the Court finally held that the decision in Ashish Agarwal would apply PAN India to all the reassessment notices issued between 1st April, 2021 and 30th June, 2021 under the ‘old regime’.

8.4.9 The Court then considering the validity of reassessment notices issued between July to September 2022 post the decision in Ashish Agarwal broke down the period into three parts — (i) period upto 30th June, 2021 – covered by the provisions of the Act read with TOLA, (ii) period from 1st July, 2021 to 3rd May 2022 — period before the decision in Ashish Agarwal and (iii) period after 4th May, 2022 – period covered by the directions issued in Ashish Agarwal. Court then referred to the third proviso to section 149 of the Act which excludes (i) the time allowed under section 148A(b) and (ii) the period during which the proceedings under section 148A are “stayed by an order or injunction of any Court”. Thereafter, the Court at paras 105 to 106 explained the legal fiction created by Ashish Agarwal and held as under:

“105. … During the period from the date of issuance of the deemed notice under Section 148A(b) and the date of the decision of this Court in Ashish Agarwal (supra), the assessing officers were deemed to have been prohibited from passing a reassessment order. Resultantly, the show cause notices were deemed to have been stayed by order of this Court from the date of their issuance (somewhere from 1 April 2021 till 30 June 2021) till the date of decision in Ashish Agarwal (supra), that is, 4 May 2022.

106. … A show cause notice is effectively issued in terms of Section 148A(b) only if it is supplied along with the relevant information and material by the assessing officer. Due to the legal fiction, the assessing officers were deemed to have been inhibited from acting in pursuance of the Section 148A(b) notice till the relevant material was supplied to the assesses. Therefore, the show cause notices were deemed to have been stayed until the assessing officers provided the relevant information or material to the assesses in terms of the direction issued in Ashish Agarwal (supra). ”

8.4.10 Referring to exclusion of time granted to the assessee to respond to the notice and total time to be excluded under the third proviso to section 149 of the Act, the Court in para 107 stated as under:

“… Hence, the total time that is excluded for computation of limitation for the deemed notices is: (i) the time during which the show cause notices were effectively stayed, that is, from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information or material by the assessing officers to the assesses in terms of the directions in Ashish Agarwal (supra); and (ii) two weeks allowed to the assesses to respond to the show cause notices.”

8.4.11 In the context of time limit for issuing notice under section 148 and deciding validity of such notices issued post the decision in Ashish Agarwal, the Court further stated in para 111 as under:

“The clock started ticking for the Revenue only after it received the response of the assesses to the show causes notices. After the receipt of the reply, the assessing officer had to perform the following responsibilities: (i) consider the reply of the assessee under Section *149A(c); (ii) take a decision under Section *149A(d) based on the available material and the reply of the assessee; and (iii) issue a notice under Section 148 if it was a fit case for reassessment. Once the clock started ticking, the assessing officer was required to complete these procedures within the surviving time limit. The surviving time limit, as prescribed under the Income Tax Act read with TOLA, was available to the assessing officers to issue the reassessment notices under Section 148 of the new regime.”

* This should be 148A

8.4.12 Supreme Court then held that the reassessment notices issued under Section 148 of the ‘new regime’ ought to be issued within the time limit surviving under the Income Tax Act read with TOLA and that a reassessment notice issued beyond the ‘surviving period’ will be time barred. Supreme Court explained the ‘surviving period’ as was available to the Assessing Officers for issuing the reassessment notices under the ‘new regime’ by way of an example in para 112:

“Let us take the instance of a notice issued on 1 May 2021 under the old regime for a relevant assessment year. Because of the legal fiction, the deemed show cause notices will also come into effect from 1 May 2021. After accounting for all the exclusions, the assessing officer will have sixty-one days [days between 1 May 2021 and 30 June 2021] to issue a notice under Section 148 of the new regime. This time starts ticking for the assessing officer after receiving the response of the assessee. In this instance, if the assessee submits the response on 18 June 2022, the assessing officer will have sixty-one days from 18 June 2022 to issue a reassessment notice under Section 148 of the new regime. Thus, in this illustration, the time limit for issuance of a notice under Section 148 of the new regime will end on 18 August 2022.”

8.4.13 Finally, Supreme Court set aside the judgments of various High Courts to the extent of the observations made in its present decision.

8.4.14 With respect to the way forward post its decision in Rajeev Bansal, the Supreme Court in its Record of Proceedings dated 3rd October, 2024 (unreported) stated in para 3 as under:

“The assessing officers will dispose of the objections in terms of the law laid down by this Court. Thereafter, the assessees who are aggrieved will be at liberty to pursue all the rights and remedies in accordance with law, save and except for the issues which have been concluded by this judgment.”

Conclusion

9.1 In view of the decision of the Supreme Court, the applicability of TOLA to the provisions of the ‘new regime’ has now been settled. However, the validity of reassessment proceedings initiated for assessment years 2013–14 to 2017–8 will now have to be decided afresh on a case to case basis as per the principles laid down by the Supreme Court in its decision. While doing so, one may also bear in mind that the High Court decisions have been set aside only to the extent of the observations made by the Supreme Court in its decision.

9.2 With respect to reassessment proceedings initiated for AYs 2013–14 and 2014–15, the primary point that will have to be considered is as to whether the reopening notices were issued within the ‘surviving period’ as explained by way of an example by the Supreme Court in para 112 of the judgment (refer para 8.4.12 above). Depending on the date on which the 148 notices were issued under the ‘old regime’, it is possible that some of the notices issued for the assessment years 2013–14 and 2014–15 could be barred by limitation. For instance, if the 148 notice under the ‘old regime’ was issued on say 21st June 2021, the AO would have 10 days (days between 21st June, 2021 and 30th June, 2021) to issue notice under the ‘new regime’ which would start after receiving the response of the assessee. Assuming that the assessee submitted his response on 9th June 2022 post the decision in Ashish Agarwal, the AO ought to have issued the 148 notice under the ‘new regime’ by 19th June 2022. If the notice is issued after 19th June, 2022, the same would be barred by limitation. For further clarity on this, discussions appearing at paras 8.4.9 to 8.4.11 above is also useful.

9.2.1 In the above example, had the 148 notice under the ‘old regime’ been issued on 29th June, 2021, the time available to the AO for issuing notice under the ‘new regime’ being less than 7 days should be extended to 7 days as per the fourth proviso (as at the time of introduction) to section 149(1) of the Act [refer para 1.4(iv) of Part I of the write-up].

9.2.2 In an event where no response was filed by the assessee pursuant to the information supplied by the AO as per the directions in Ashish Agarwal, the time for issuing 148 notice under the new regime in the above example would start from the end of the date by which the response ought to have been filed by the assessee.

9.2.3 Further, what is envisaged by the third proviso to section 149(1) is exclusion of the time or extended time allowed to the assessee to file a response. In a case where the AO suomotu extends the time to file the response without any request by the assessee such time should not be excluded while computing the period of limitation. In this regard, useful reference may be made to the decision of the Bombay High Court in Godrej Industries Ltd. vs. ACIT Cir. 14(1)(2) [2024] 160 taxmann.com 13 (Bombay).

9.2.4 With respect to reassessment proceedings for AYs 2016–17 and 2017–18 where income alleged to have escaped assessment is less than R50 lakhs, one can contest the validity of such notices after considering the example of the ‘surviving period’ and considering the dates in each case. In such cases also, the position mentioned in paras 9.2 to 9.2.3 above will be relevant. Further in the context of applying ₹50 lakhs limit, it is worth noting that gross sales consideration is not the income. There is distinction between the two. For this useful reference may be made to the M.P. High Court judgment in the case of Nitin Nema[ (2023) 458 ITR 690] against which Revenue’s SLP is recently dismissed [(2024) 468 ITTR 105-SC]
9.3 With respect to the reassessment proceedings for assessment year 2015–16 initiated on or after 1st April. 2024 the same ought to be dropped by the Assessing Officers in light of the concession made by the Revenue recorded in para 19(f) of the Supreme Court judgment (refer para 8.2.2 above) to this effect (also refer para 8.4.3 above). For this useful reference may also be made to tribunal decisions referred to next para 9.4.

9.4 Reference may be made to a decision of the Mumbai Tribunal in ITO 10(3)(1) vs. Pushpak Realities Pvt. Ltd. (ITA no. 4812, 4814 and 4816/ Mum/2024) where the Tribunal was dealing with the appeal filed by the Revenue challenging the order of the CIT(A) quashing the reassessment proceedings for AY 2013–14 to 2015–16. Tribunal followed the ratio laid down in Rajeev Bansal’s case while deciding the matter. Tribunal held that the notices issued for AY 2013–14 on 29th July 2022 and for AY 2014–15 on 31st July, 2022 were barred by limitation even under TOLA. Tribunal also quashed the 148 notice for AY 2015–16 issued on 28th July, 2022 after noting Revenue’s concession before the Supreme Court that TOLA did not apply to AY 2015–16 and held that the same was barred by limitation under the new provisions of section 149(1). It is worth noting that in this case relevant facts for determining the ‘surviving period’ to find out time limit available for issuing notice under section 148 post Ashish Agarwal’s decision is not available from the ITAT decision. It may be noted that this is ex-parte decision and nobody appeared for the assessee. In the context of AY 2015-16, similar view is also taken by the Mumbai Tribunal in ACIT vs. Manish Financial (ITA nos. 5050 and 5055/ Mum/ 2024) where the reopening notice dated 29th July 2022 for AY 2015-16 is quashed.

9.5 In appropriate cases, based on the facts, the validity of the reassessment notices will have to be seen based on whether the approval of the specified authority under section 151 was validly obtained. In this regard, the example given by the Supreme Court in para 78 is of paramount importance. Supreme Court observes — “For example, the three year time limit for assessment year 2017-2018 falls for completion on 31st March, 2021. It falls during the time period of 20th March, 2020 and 31st March, 2021, contemplated under Section 3(1) of TOLA. Resultantly, the authority specified under Section 151(i) of the ‘new regime’ can grant sanction till 30th June, 2021.” From this, it would appear that while TOLA applied for the purposes of section 151 of the ‘new regime’ as well, however, the authority specified in section 151(i) of the ‘new regime’ could grant sanction only upto 30th June 2021 and not beyond that. The 148 notices issued post Ashish Agarwal’s decision were all issued in 2022. In such an event, with respect to 148 notices issued under the ‘new regime’ for AYs 2016–17 and 2017–18, the sanction ought to have been obtained from the authority specified under section 151(ii) after 30th June, 2021. If the sanction is not so obtained, the reopening notices for these AYs should be bad in law. In the case of ACIT vs. Manish Financial (ITA nos. 5050 and 5055/ Mum/ 2024) before the Mumbai Tribunal, for AY 2016-17, reassessment notice was issued on 30th July 2022 under the ‘new regime’ post the directions in Ashish Agarwal. The said notice was issued after obtaining sanction of PCIT-19, Mumbai i.e. authority specified u/s. 151(i) of the Act. Tribunal held that the 148 notice was invalid and liable to be quashed as the notice was issued beyond a period of three years and that the approval ought to have been taken from an authority specified u/s. 151(ii) of the Act.

9.6 As stated in para 9.1 above, the decisions of the High Courts are set aside only to the extent of the observations made by the Supreme Court in Rajeev Bansal’s case. As stated in para 5.5 of Part 1 of the write-up, Bombay High Court in the decision of Siemens while adjudicating on the validity of the reassessment proceedings, had also held that the concept of ‘change of opinion’ will apply even under the ‘new regime’. Supreme Court may be considered to have impliedly approved the above decision of the High Court on the point of change of opinion.

9.7 In the above Rajeev Bansal’s case, the Court has disposed of large number of appeals involving different assessment years and facts by adjudicating on common legal issues. Therefore, each case will have to be finally decided on it’s facts applying the legal position decided by the Supreme Court on given issues. As such, one more round of litigation in many cases can’t be ruled out for the re-assessment notices originally issued during 1st April, 2021 to 30th June, 2021. This set of provision, which was undoubtedly well intended and beneficial to the assessees in the area of reassessments, met with such kind of litigation up to the highest court twice and still cases involved are not concluded with a possibility of further litigation. This reflects the state of affairs in the Country with regard to repetitive and long drawn unending litigation in tax matters leading to uncertainty. Unfortunately, such trend may also continue in future if the past experience of tax litigation is any guide. This also affects the investments and growth prospects of overall economy which is against the interest of every one. As such, some drastic steps are needed to remedy this situation and more importantly, mind set and approach of All Stake Holders need to change in this regard and that is perhaps the need of the hour in overall national interest. Let us be positive and hope for the sunrise.

9.8 Further amendments have been made in the provisions dealing with reassessment proceedings such as sections 148, 148A, 149, 151 etc. by the Finance (No.2) Act, 2024 w.e.f. 1st September, 2024. Therefore, reassessment notice issued from 1st September, 2024 will be governed by these amended provisions.

Climate Change and Its Impact on Financial Statement

This article explores the critical intersection of climate change and corporate finance. As the world grapples with the urgent need to address climate change, driven by the UN Sustainable Development Goals (SDGs) and the growing emphasis on Environmental, Social, and Governance (ESG) factors, companies are increasingly recognising the financial implications of their environmental impact. From rising operational costs and disrupted supply chains to changing consumer preferences and increased regulatory scrutiny, climate change poses significant risks and opportunities for businesses. This article will delve into how these climate-related factors can impact a company’s financial statements, highlighting the crucial role of ESG reporting frameworks like the Business Responsibility and Sustainability Reporting (BRSR) in navigating this evolving landscape.

WHAT IS CLIMATE CHANGE?

Our planet is experiencing a dramatic shift in its climate, largely due to human activities over the past couple of centuries. By burning fossil fuels like coal, oil, and gas, we’ve released a massive amount of greenhouse gases into the atmosphere. These gases act like a blanket, trapping heat and causing our planet to warm up. This warming trend isn’t just about rising temperatures. It’s disrupting our weather patterns, leading to more intense heatwaves, stronger storms, and a significant rise in sea levels as glaciers and ice caps melt. These changes threaten our ecosystems and have devastating consequences for people and economies around the world.

India, unfortunately, is particularly vulnerable to these impacts. We’re already seeing a surge in extreme weather events like floods, droughts, and scorching heatwaves. These events disrupt lives, damage infrastructure, and threaten our agricultural productivity. To tackle this crisis, we need a two-pronged approach:

  •  Mitigation: We must drastically reduce our greenhouse gas emissions to prevent further warming.
  • Adaptation: We must also adapt to the changing climate by implementing measures to protect our communities and infrastructure from the inevitable impacts.

The effects of climate change are not confined to the environment. They are deeply intertwined with our financial systems. Extreme weather events can devastate businesses, damaging assets, disrupting supply chains, and increasing operational costs. The transition to a low-carbon economy also presents challenges, such as the need for significant investments in renewable energy and the risk of stranded assets. Recognising these risks, financial regulators and standards-setting bodies are now demanding greater transparency around climate-related issues. The International Accounting Standards Board (IASB), for example, recently issued an exposure draft addressing the disclosure of climate risks in financial statements underscoring their relevance to financial stability.

By understanding and disclosing these risks, companies can better manage them and make more informed decisions. It’s time for businesses to acknowledge their role in addressing climate change and to embrace sustainable practices that safeguard their long-term viability.

CLIMATE-RELATED RISKS AND OPPORTUNITIES

Climate related financial information has an increased demand for decision making by the investors, lenders, insurance underwriters and other stakeholders. However, the improved disclosures of the climate-related information would assist the investors, lenders, insurance underwriters and other stakeholders to analyse the potential financial impacts due to climate change. These improved disclosures would include climate-related risks and opportunities which will be the handbook to evaluate such disclosures.

The TCFD (Task Force on Climate-Related Financial Disclosures) has identified that there are several frameworks for climate-related disclosures in different jurisdictions to favour the growing demand of such information disclosure, however, it is significant to have a standardised framework that will align all the jurisdictions including G20 and other existing regimes and look for an opportunity to provide the common framework for climate-related disclosures.

The important elements of such climate-related disclosure framework is the categorisation of the disclosures into climate-related risks and opportunities. Hence, the TCFD has defined their categories. These recommendations has resulted in encouraging the businesses to make such disclosures as a part of their annual reports highlighting issues that are more pertinent to their business activities.

The main climate-related risks and opportunities are given below followed by their brief descriptions:

1. Climate-related Risks

The TCFD has divided the Climate-related Risks in two sub-categories each having further divisions in its type of risk. The two major sub-categories of risks are: (a) risks related to the transition to a lower- carbon economy, and (b) risks related to the physical impacts of climate change. Further, the detailed sub-categories are as under:

(a) Transition Risks

Transition to a lower-carbon economy can have extensive policy & legal, technology, market and reputational changes to adopt the mitigation and adaptation requirements related to the climate changes. These transitional risks can result in varying levels of financial and reputations risk to the organisation depending on the nature, speed, and focus of these changes.

(i) Policy and Legal Risks:

The policy and legal risks refers to the challenges that are faced by the companies due to the changes in the policies, regulations, frameworks and other legal changes that are aimed at addressing the climatic challenges. These kind of risks arise from governmental and regulatory bodies as they are the ones who implement these new laws, standards and policies to transit towards a low-carbon economy and mitigate the impact of climate changes. In case of failure to comply and adopt these changes, it will lead to financial losses, legal liabilities, and reputational damages.

Policy Risks are the ones that are linked to changes in governmental policies and regulatory frameworks related to climate change mitigation and adaptation. Some of these examples include: Stricter Limitations on Emissions, Subsidy Reforms, Energy Efficiency Regulations, Carbon Pricing and Taxes, Ban on Certain Activities, etc.

Legal Risks are the fines / penalties imposed on the businesses due to non-compliance with evolving climate-related regulations or failure to meet disclosure and sustainability standards. Such legal risks includes litigation for non-compliance, increased disclosure requirements, contractual obligations, securities fraud or misrepresentation, liability for environmental harm, etc.

(ii) Technology Risk

Such risks refer to the potential disruptions and challenges due to shifts in technology aiming towards reduction in carbon emissions and enhancing sustainability. These risk arises when the companies transit towards low-carbon energy-efficient technologies to adhere to the regulatory changes, market demands, or several environmental objectives.

Technology Risks includes certain key aspects, such as: Use of outdated technology, investment cost for adopting greener technologies, and competitive market in terms of adapting climate-friendly technologies, temporary operational disruptions while introducing new technologies, changing regulatory requirements, etc.

Managing such risks requires strategic planning, investment in innovation, and staying aware of technological and regulatory developments.

(iii) Market Risk

Financial impact that arises from the shift in supply and demand due to the transition to low-carbon economy are identified as the Market Risks. Under this factor, the transitions to low-carbon economy are driven by the factors such as new climate policies,  technological advancements, or changes in consumer behaviour.

The key components of market risks includes: Demand shifts, changes in prices of commodities, devaluation of assets, fluctuation in investor behaviour, supply chain impacts, etc.

(iv) Reputation Risk

This risk has a potential harm to a Company in terms of damage to public image, brand value, or stakeholder trust due to its perceived or lack of response to climate change and sustainability expectations. This occurs when companies fail to address climate-related demands from customers, regulators, investors, or the general public, which can negatively affect Company’s reputation and market positioning.

The manifested reputation risks includes: Failure to adapt to regulatory changes, environmental negligence, changes in customer preferences, greenwashing accusations, investors’ pressure, etc.

(b) Physical Risks

Physical Risks are the potential harm or disruptions to the businesses, economies, and ecosystems caused by the physical impacts of climate change. There risks resulting from climate changes can either be event drive (acute) or longer-term shifts (chronic) in climate patterns. They can significantly affect the operations, assets, supply chains, and financial performance of the Company.

(i) Acute Physical Risk

These risks are the immediate or short-term consequences of the extreme weather events that are caused due to climate change. Such risks includes sudden and severe climate- related incidents, such as: Floods, Storms, Hurricanes, Heatwaves, Wildfire, etc.

Acute Risks can disrupt company operations, harm supply chains, damage assets, and affect the communities. To face and mitigate such risks, companies shall plan for resilience, disaster recovery, and other mitigation strategies to manage the potential impacts.

(ii) Chronic Physical Risk

Chronic Risk refers to the long-term changes in environmental and climatic conditions that could affect the businesses, its infrastructure, and societies. Unlike acute physical risks, that are associated with short-term, severe weather events, chronic physical risks are gradual and has persistency in climate patterns that can disrupt normal operations and productivity.

These risks include examples such as: Rising global temperatures, long-term droughts or shift in rainfall, sea-level rise, soil degradation, etc.

2. Climate-related Opportunities

Climate-related Opportunities refer to the potential benefits and positive impacts that the companies get which arise from the transition to a low-carbon economy and from proactive approaches to managing climate risks. Companies that recognise and leverage these opportunities can enhance their competitiveness, drive innovation, and contribute to sustainability.

Climate-related Opportunities are further classified as under:

(a) Resource Efficiency

Resource Efficiency under climate-related opportunities refers to effective utilisation of resources such as energy, water, material and land, in a way that it minimises waste generation and reduces negative environmental impact while maximising the productivity and profitability.

Embracing the resource efficiency could provide various benefits such as: Lower operation cost, gain competitive advantage, risk mitigation, adoption of innovative technologies, improved brand image, complying with environmental regulations, etc.

(b) Energy Source

Energy Source can be referred to the potential benefits that occurs from a transition to cleaner, renewable, and more efficient energy solutions to reduce the negative environmental impact and other greenhouse gas emissions.

The Companies that invest in the sustainable solutions can benefit from financial, operational, and reputational advantages. The transitional journey may include key aspects such as: Adoption of Renewable Energy Sources, Implementing Energy-efficient Technologies, Investing in Clean Energy Solutions, Offering Green Products in the Market, etc.

(c) Products & Services

Products & services refers to the creation, innovation, and adaptation of sustainable practices in the business offerings that helps the businesses and customers to transit to low-carbon sustainable economy. Such sustainable offerings benefits the businesses in generating new revenue streams by addressing the environmental risks and challenges.

The key examples here includes, development of low-carbon products, sustainable packaging, green financial products, adapting renewable energy services, energy efficiency solutions, carbon credits and reforestation programs, etc.

(d) Markets

The new or growing sectors, regions, and types of assets where businesses can gain a competitive advantage by adapting the practices to transit to low-carbon economy can be referred to as Markets. These markets offer potential growth and diversification by aligning with sustainability and decarbonisation goals.

The key aspects of these markets include: Sustainable Financing like investing in Green Bonds, Impact Investing; Low-Carbon Infrastructure, Renewable Energy Production, Collaborations with Governments & Development Banks, Carbon Trading & Offsetting Markets, etc.

(e) Resilience

It is a business’s ability to adapt and withstand to climate change challenges. This is merely focused on transitioning the climate-related risks to climate-related opportunities by minimising disruptions and enhancing adaptive capacity. Opportunities that are related to resilience includes, efficiency improvements, innovative products / processes, supply chain adaptation and investment in long-term sustainability projects, etc.

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED RISKS

The financial impacts are basically the economic consequences faced by the companies due to both transition and physical risks posed by climate change. These impacts includes effects on the company’s operations, liabilities, assets and costs in several ways.

Below are the key areas where financial impacts may arise:

Type

 

 Climate-Related Risks

 

 Potential Financial Impacts

 
Transition Risks

 

Policy and Legal

Increased costs related to greenhouse gas (GHG) emissions pricing

• Increased obligations for emissions reporting

• Regulatory mandates on existing products and services

• Heightened risk of litigation

  

 

Higher operating expenses, including compliance costs and increased insurance premiums

• Asset write-offs, impairments, or early retirements due to policy shifts

• Elevated costs or reduced demand for products and services as a result of fines and legal judgments

 
Technology

 

Replacement of current products and services with lower-emission alternatives

• Unsuccessful investments in developing or adopting new technologies

• Expenses incurred in transitioning to low- emission technologies

  

 

 

• Asset write-offs and premature retirement of existing infrastructure

• Decline in demand for current products and services

• Increased research and development (R&D) expenses for new and alternative technologies

• Capital investments and cost required for developing new technologies and adopting & implementing new practices and processes
Market
• Shifts in customer preferences and behavior

• Uncertainty in market trends and signals

• Rising costs of raw materials

 • Declining demand for products and services as consumer preferences shift

• Higher production costs due to fluctuating input prices (e.g., energy, water) and stricter output regulations (e.g., waste management)

• Sudden and unforeseen increases in energy costs

• Altered revenue streams and mix, potentially leading to lower overall revenues

• Revaluation of assets such as fossil fuel reserves, land, and securities
Reputation

 

• Changes in consumer preferences

• Negative perception or stigmatisation of the industry

• Heightened stakeholder concerns or adverse feedback from stakeholders

  

• Decline in revenue due to reduced demand for goods and services

• Loss of revenue from disruptions in production capacity (e.g., delays in planning approvals or supply chain interruptions)

• Decreased revenue from challenges in workforce management, such as difficulties in attracting and retaining employees

• Limited access to capital due to increased exposure to physical risks
Physical Risks

 

 Acute

Heightened intensity of extreme weather events, including cyclones and floods.

 

Chronic

 

• Alterations in precipitation patterns and increased variability in weather conditions

• Increasing average temperatures

• Rising sea levels

 

  

Reduced revenue from diminished production capacity (e.g., challenges in transportation and supply chain disruptions)

• Decreased revenue and elevated costs due to adverse workforce impacts (e.g., health risks, safety issues, and absenteeism)

• Asset write-offs and early retirement of existing assets resulting from damage in “high-risk” locations

• Increased operating costs due to insufficient water supply for hydroelectric plants or cooling systems for nuclear and fossil fuel plants

• Heightened capital expenditures driven by facility damage

• Lower revenues resulting from decreased sales and output

• Rising insurance premiums and potential restrictions on coverage for assets situated in “high-risk” areas

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED OPPORTUNITIES

Though the companies navigate the challenges / risks posed by climate-change, it also identifies significant opportunities to drive growth and enhance resilience. These opportunities can lead to various positive financial impacts, such as:

Type Climate-related Opportunities Potential Financial Impacts
Resource Efficiency

 

Adoption of more energy-efficient transportation methods

• Implementation of streamlined production and distribution processes

• Increased focus on recycling and resource recovery

• Transition to energy-efficient and sustainable buildings

• Reduction in water consumption and improved water management practices

 • Lower operating costs achieved through efficiency improvements and cost reductions

• Enhanced production capacity, leading to higher revenues

• Increased asset value, such as energy-efficient buildings with higher ratings

• Positive impact on workforce management, including improved health, safety, and employee satisfaction, resulting in reduced costs
Energy Source

 

 • Adoption of low-emission energy sources

• Utilisation of supportive policy incentives

• Integration of innovative technologies

• Participation in carbon trading markets

• Transition to decentralised energy generation systems

 • Lower operating cost through cost-effective emissions reduction measures

• Reduced vulnerability to future increases in fossil fuel prices

• Decreased exposure to GHG emissions, minimising sensitivity to carbon pricing changes

• Enhanced returns on investments in low- emission technologies

• Improved access to capital as investors increasingly prioritise low-emission businesses

• Reputational gains leading to higher demand for products and services
Products

& Services

 • Expansion and innovation in low-emission products and services

• Creation of climate adaptation and insurance risk management solutions

• Development of new offerings through research, development, and innovation

• Opportunities to diversify business operations

• Capitalising on shifting consumer preferences toward sustainable products and services

 • Increased revenue driven by growing demand for low-emission products and services

• Revenue growth from offering innovative solutions to climate adaptation needs (e.g., insurance and risk management products)

• Enhanced competitive advantage by aligning with evolving consumer preferences, leading to higher revenues
Markets

 

 • Entry into               new markets and expansion opportunities

• Utilisation of regulatory incentives and support

• Access to new assets and locations requiring insurance coverage

 • Increased revenue opportunities through entry into new and emerging markets (e.g., collaborations with governments and development banks)

• Enhanced diversification of financial assets (e.g., investments in green bonds and sustainable infrastructure)
Resilience

 

 • Engagement in renewable energy initiatives and implementation of energy-efficiency strategies

• Diversification and substitution of resources

• Enhanced market valuation through strategic resilience planning (e.g., infrastructure, land, and buildings)

• Greater supply chain reliability and operational continuity under diverse conditions

• Increased revenue from new products and services designed to support resilience and adaptability

EFFECTS OF CLIMATE-RELATED MATTERS ON FINANCIAL STATEMENTS

Ind AS Standards Impact
Ind AS – 1

Presentation of Financial Statements

• Companies must disclose significant climate-related matters that could materially impact their financial performance. This includes uncertainties related to future cash flows, asset impairment, and decommissioning obligations. These disclosures should help investors understand the potential impact of climate change on the company’s financial health.

• Disclose key assumptions and judgments used in financial reporting, particularly those related to climate-related uncertainties. This includes how climate-related factors are considered in areas like impairment testing, the determination of cash-generating units, and the estimation of future cash flows.

• Disclose the sensitivity of financial results to different climate-related scenarios. This helps investors understand how changes in climate conditions or policy responses could impact the company’s financial performance.

• Assess and disclose the company’s ability to continue as a going concern, considering the potential impact of climate-related risks. This includes evaluating the potential impact of climate change on the company’s operations, market demand, and access to resources.
Ind AS – 2

Inventories

 • Climate-related events can significantly impact the value of a company’s inventory. For example, extreme weather events can damage inventory, rendering it obsolete. Changes in consumer preferences due to climate change can also reduce the selling price of inventory or increase the costs associated with completing and selling it.

• When the cost of inventory is no longer recoverable, IAS 2 requires companies to write down the inventory to its net realisable value. Net realisable value represents the estimated selling price of the inventory in the current market, minus the estimated costs of completion and sale.

• Companies must use the most reliable evidence available to estimate the net realisable value of their inventory. This may include market prices, recent sales data, and expert opinions.
Ind AS – 12

Income Taxes

 • Ind AS 12 allows companies to recognise deferred tax assets for tax losses and temporary differences that can be used to reduce future tax bills. However, these assets can only be recognised if it’s likely that the company will generate enough future taxable profits to utilise these tax benefits.

• Climate-related issues can significantly impact a company’s future taxable profits. For example, extreme weather events can disrupt operations, leading to lower profits and potentially preventing the company from utilising its deferred tax assets. Conversely, climate change mitigation efforts, such as investments in renewable energy, can impact future tax liabilities and therefore the value of deferred tax assets.
Ind AS – 16

Property, Plant and Equipment &

Ind AS – 38

Intangible Assets

 • Climate change can significantly impact a company’s research and development (R&D) activities. This may lead to increased expenditures on developing new technologies, such as renewable energy solutions, or adapting existing products to mitigate climate risks. These R&D costs may be capitalised as assets under certain accounting standards, depending on their nature and expected future benefits.

• Companies must disclose the amount of R&D costs recognised as an expense during each reporting period. These expenses may be impacted by climate-related changes, such as increased spending on climate-related R&D projects or adjustments to existing R&D programs due to changing market conditions or regulatory requirements.

• Companies are required to regularly review and adjust the estimated useful lives and residual values of their assets. This includes considering the potential impact of climate change. For example, climate-related events like extreme weather can shorten the useful life of certain assets, while changing regulations related to greenhouse gas emissions can render some assets obsolete.

• Companies must disclose the expected useful lives of each class of asset and any changes to these estimates. These disclosures should include the impact of climate-related factors, such as asset obsolescence or changes in regulatory requirements, on the estimated useful lives and residual values of assets.
Ind AS – 36

Impairment of Assets

 • Companies are required to regularly assess whether their assets, such as goodwill, property, plant and equipment, and intangible assets, have lost value. Climate-related factors, such as reduced demand for products that emit greenhouse gases or significant environmental changes, can signal potential impairment. For example, changes in environmental regulations or shifts in consumer preferences towards more sustainable products can lead to a decline in the value of certain assets.

• When assessing asset impairment, companies must estimate the future cash flows that the asset is expected to generate. These estimates should consider the potential impact of climate-related factors on the company’s future operations and market conditions. It’s crucial to base these projections on reasonable and supportable assumptions that reflect management’s best estimate of future economic conditions, taking into account potential climate-related risks.

• IAS 36 prohibits the inclusion of cash flows arising from future restructuring or performance enhancement activities in the impairment assessment. This ensures that the impairment test reflects the intrinsic value of the asset under normal operating conditions.

• Companies must disclose the events and circumstances that led to any impairment losses.
This includes disclosing the impact of new legislation on emission reductions, changes in consumer preferences, or other climate-related factors. Additionally, companies must disclose the key assumptions used in their impairment assessments and the potential impact of reasonably possible changes to these assumptions.
Ind AS – 37

Provisions, Contingent Liabilities and Contingent Assets and Appendix “C” Levies

 

 • Climate change can significantly impact a company’s liabilities. This includes potential liabilities arising from government fines for failing to meet climate-related targets, costs associated with environmental remediation, and expenses related to restructuring efforts to adapt to a low-carbon economy. Additionally, existing contracts may become onerous due to changes in climate-related legislation or regulations.

• IAS 37 requires companies to disclose the nature of provisions and contingent liabilities. This includes any uncertainties related to the timing and amount of expected future cash outflows. Companies must also disclose the major assumptions made about future events when determining the amount of provisions, particularly when these assumptions are significantly influenced by climate-related factors.
Ind AS – 107

Financial Instruments

 • Ind AS – 107 requires companies to disclose information about their financial instruments and the associated risks. Climate change can significantly impact these risks, such as by affecting the likelihood of borrowers defaulting on loans (credit risk) or by impacting the value of investments in sectors vulnerable to climate change. Companies must disclose how these climate-related factors may affect their financial instruments.

• For companies holding investments in other companies, Ind AS – 107 requires disclosure of investments by industry or sector. This helps investors understand the company’s exposure to industries that may be more vulnerable to the effects of climate change, such as those heavily reliant on fossil fuels or those operating in regions prone to extreme weather events.
Ind AS – 109

Financial Instruments

 • Climate change can significantly impact the accounting for financial instruments. For example, loan agreements may include clauses that link interest rates or repayment schedules to a company’s progress in meeting climate-related targets. This can complicate the accounting for these loans, as lenders need to carefully assess whether the cash flows received are solely interest payments or include performance-based components.

• Climate-related factors can increase the risk of borrowers defaulting on loans. Extreme weather events like wildfires or floods can disrupt a borrower’s operations, impacting their ability to repay debt. Changes in climate regulations can also significantly impact a borrower’s financial performance, increasing the risk of default. Additionally, the value of collateral used to secure loans may be diminished due to climate change impacts, such as the inaccessibility or non-insurability of certain assets.

• When assessing the likelihood of borrowers defaulting on loans (credit risk), lenders must consider all relevant factors, including climate-related risks. Ind AS – 109 requires the use of all reasonable and supportable information in estimating expected credit losses. This means that lenders must incorporate potential climate-related impacts into their economic forecasts and credit risk assessments.
Ind AS – 113

Fair Value Measurement

 • Climate change can significantly impact the fair value of a company’s assets and liabilities. For example, the introduction of new climate-related regulations can change how market participants perceive the value of certain assets or liabilities, potentially impacting their market price.

• Fair value measurements, particularly those based on less observable inputs (Level 3 of the fair value hierarchy), are highly sensitive to underlying assumptions. These assumptions must consider the potential impact of climate-related risks, such as the likelihood of extreme weather events, changes in consumer preferences, and shifts in regulatory landscapes.

• Ind AS – 113 mandates companies to disclose the key inputs used in their fair value measurements, especially for assets and liabilities classified within Level 3 of the fair value hierarchy. They must also explain how changes in these unobservable inputs, including those related to climate change, could significantly affect the fair value measurement.
IFRS 17

Insurance Contracts

(Ind AS 117 is yet to be issued)

• Climate change can significantly impact insurance companies. As climate change intensifies, we can expect to see more frequent and severe weather events, such as hurricanes, floods, and wildfires. This increases the likelihood and severity of insured events like property damage, business interruptions, and health claims, which in turn can impact the insurance company’s financial obligations.

• IFRS 17 requires insurance companies to accurately measure and disclose their insurance liabilities. Climate change introduces significant uncertainties into these calculations. Companies must carefully consider how climate change may impact the frequency and severity of insured events when determining their liabilities.

• Companies must disclose significant judgments made in applying IFRS 17. This includes how they account for the potential impact of climate change on the likelihood and severity of insured events. They must also disclose how they manage the risks associated with these climate-related events and how sensitive their insurance liabilities are to changes in these risks.

PROPOSED ILLUSTRATIVE EXAMPLES

The International Accounting Standards Board (IASB) has recently issued an Exposure Draft titled “Climate-related and Other Uncertainties in the Financial Statements.” This draft introduces eight illustrative examples to enhance the application and disclosure of climate-related and other uncertainties in financial statements. These examples aim to improve the quality and consistency of climate-related disclosures by providing practical guidance on how to apply existing International Financial Reporting Standards (IFRS) to various scenarios. Two of the examples are given below, for reference:

Example 1 – Materiality Judgements Leading to Additional Disclosures (IAS 1/IFRS 18)

Scenario: A manufacturer with a climate-related transition plan, including investments in energy-efficient technology and changes in manufacturing methods.

Disclosures: The entity discloses that its transition plan has no material effect on its current financial position and financial performance.

Basis for Disclosure

  •  The entity determined that the transition plan does not currently impact the recognition or measurement of assets, liabilities, income, and expenses.
  •  However, the entity recognises that the absence of this information could mislead users, as they might expect some financial impact from the planned changes.
  •  Considering the detailed disclosure of the transition plan outside the financial statements and the industry’s known exposure to climate-related transition risks, the entity concludes that this disclosure is necessary to provide a complete picture to financial statement users.

Example 2 – Disclosure of Assumptions: Specific Requirements (IAS 36)

Scenario: A company operates in an industry with significant greenhouse gas emissions and is subject to existing and anticipated future emissions regulations.

Disclosures: The entity discloses that future emission allowance costs are a key assumption in its impairment testing of a cash-generating unit.

Basis for Disclosure:

  •  IAS 36 requires disclosure of key assumptions used in impairment testing, particularly those with a significant impact on the recoverable amount.
  •  Future emission allowance costs are identified as a key assumption due to their potential impact on the cash flows of the cash-generating unit.

CONCLUSION

Climate change is no longer just an environmental issue; it’s a significant financial risk that companies cannot afford to ignore. The increasing frequency and severity of extreme weather events, growing pressure from regulators, and shifting consumer preferences are all impacting businesses. These factors directly affect a company’s bottom line, influencing revenues, costs, and the value of its assets.

As companies are increasingly required to disclose climate-related risks and opportunities in line with regulations like SEBI LODR and other frameworks, it’s crucial to connect this information to their financial performance. Simply put, companies need to understand how climate change impacts their finances. ESG reporting provides a structured way to do this, helping companies bridge the gap between their environmental and social impacts and their financial performance.

This approach aligns with the principles outlined in IFRS S2, which emphasises the importance of connecting financial and non-financial information. By understanding how climate risks and opportunities influence both their financial performance and broader sustainability objectives, companies can gain deeper insights into their overall business health. Embracing ESG principles allows companies to navigate this evolving landscape more effectively, building long-term resilience and positioning themselves for sustainable success.

REFERENCES

Business Succession Planning: The Strategic Role of Chartered Accountants and Creating Value beyond Compliance

Many Indian businesses are family-owned and operated. Statistics suggest that only a few such businesses (and the wealth created through them) survive and thrive for generations to come. Succession Planning thus becomes an important issue in the survival, maintenance and growth of businesses and wealth. The Author of this article highlights some of the critical aspects of Succession Planning and the role of Chartered Accountants in it. Succession Planning can become an attractive area for practice as CAs are trusted business advisors, are close to family members and have the skills to balance legal nuances with commercial acumen and feasibility.

INTRODUCTION

The Indian MSME sector, comprising over 63 million enterprises and contributing approximately 30 per cent to India’s GDP, stands at a critical juncture. As the first-generation entrepreneurs of post-independence India start ageing, the question of business continuity and succession looms large. According to a 2021 survey on Indian Family Businesses, only about 30 per cent of family businesses survive to the second generation, approximately 13 per cent make it to the third generation, and merely 4 per cent survive beyond that.

These statistics become more alarming, considering their economic impact. The Credit Suisse Family 1000 Report 2018 highlights that family-owned businesses account for approximately 79 per cent of India’s organised private sector. Family businesses contribute significantly to India’s GDP and employment generation, as reported by the FICCI and ISB’s ‘Indian Family Business Report 2022’. They employ approximately 49% of the country’s workforce. Family-owned enterprises contribute to 63 per cent of India’s industrial output. These businesses are responsible for 90 per cent of India’s industrial units. Furthermore, the report indicates that 96 per cent of all companies in India are family-owned, underlining their crucial role in the nation’s economic fabric. Despite this outsized impact, the low survival rate across generations poses a significant risk to economic stability and growth. Yet, most entrepreneurs postpone succession planning until it’s too late, often leading to value erosion or complete business dissolution during generational transitions.

The contrast with Japan presents a compelling case for structured succession planning. Japan has over 33,000 businesses that are more than 100 years old. According to research by Shinise (long-established Japanese companies) studies, over 3,100 companies have survived for more than 200 years, with some continuing successfully for over 1,000 years. Remarkably, about 90 per cent of these long-lasting businesses are small and medium-sized enterprises with fewer than 300 employees. The oldest existing independent company in the world is Kongō Gumi, a Japanese construction company founded in 578 AD, which operated continuously for 1,428 years.

This stark contrast in business longevity between Indian and Japanese enterprises can be attributed to several factors, but at the core lies Japan’s systematic approach to succession planning, which is deeply embedded in their business culture. Their concept of ‘shinise’ emphasises preserving business value across generations through well-defined succession practices, strong governance mechanisms, and clear leadership transition protocols.
While large corporations like the Tatas, Birlas, Ambanis, and, more recently, the Adani Group have formalised their succession planning, the vast majority of small and medium enterprises remain unprepared for a leadership transition, potentially risking the very existence of enterprises built through decades of entrepreneurial effort.

For professional practitioners serving these enterprises — chartered accountants and lawyers — this presents both a challenge and an unprecedented opportunity. Having served as trusted advisors, often across generations, these professionals are uniquely positioned to evolve from their traditional role of compliance specialists to strategic consultants in succession planning.

UNDERSTANDING BUSINESS SUCCESSION PLANNING: A STRATEGIC IMPERATIVE

Succession planning transcends the conventional understanding of mere ownership transfer through wills or trusts. For professionals advising SMEs, it is crucial to first internalise and then effectively communicate that succession planning encompasses a comprehensive framework addressing four crucial dimensions: ownership transition, management succession, control mechanisms, and operational continuity.

Professional’s Perspective

From a technical standpoint, succession planning integrates multiple disciplines, including personal laws, corporate restructuring, tax planning, family governance, and business continuity planning. It requires professionals to analyse various legal structures, evaluate the tax implications of different transition mechanisms, and design governance frameworks that separate ownership from management. The complexity increases when dealing with multi-locational businesses, diverse asset classes, and cross-border implications.

The implementation demands a thorough understanding of various tools and techniques, from family constitutions and business governance frameworks to management transition mechanisms and wealth distribution structures. Central to this understanding is the recognition that succession planning isn’t merely a legal or financial exercise, but a complex interplay of business, family, and individual aspirations.

Communicating with Clients

When explaining succession planning to clients, professionals need to translate these technical concepts into relatable business scenarios. The approach begins with fundamental questions about business continuity beyond the promoter’s active involvement, naturally progressing to discussions about the client’s vision for their business and family’s future.

Real-Life Scenarios and Professional Intervention

Scenario 1: The Unequal Siblings

Imagine an established family business where the elder son joined straight out of college, learning the ropes from the ground up over ten years. The younger son, having just completed his MBA, is eager to join but feels he deserves an equal say in decision-making.

Without Succession Planning: Tensions rise as the elder son resents his brother’s equal authority despite less experience. The younger son feels his education is undervalued. Family dinners become battlegrounds for business disputes. The business suffers as operational decisions get delayed and employees receive conflicting instructions.

With Professional Intervention: The professional advisor facilitates structured family discussions to achieve consensus on a clear organisational framework. Their role encompasses conducting individual sessions with both siblings, designing role definitions that acknowledge the elder son’s experience while utilising the younger son’s fresh perspectives, creating objective performance metrics for leadership roles, and establishing a family council for major decisions.

Scenario 2: The Diverging Paths

Consider a family where the daughter has been actively involved in the business while the son pursues a different career path. The business forms the bulk of family assets.

Without Succession Planning: The daughter feels overburdened with business responsibilities, while the son feels disconnected from the family legacy. No clear mechanism exists to “cash out” the son’s share without straining business finances.

With Professional Intervention: The professional advisor architects a balanced solution by structuring ownership and management rights separately, creating a fair valuation methodology, and designing a phased buy-out mechanism that maintains business stability.

Scenario 3: The Reluctant Heirs

A successful entrepreneur’s children have chosen different career paths – one a doctor, another an artist, and the third in tech overseas. None show interest in the family business.

Without Succession Planning: The promoter continues running the business well into their seventies, becoming increasingly stressed. The business stagnates due to delayed investments and decisions. When finally forced to sell, the business receives significantly discounted valuations due to its key-person dependency.

With Professional Intervention: The professional advisor helps implement a comprehensive transition
strategy focusing on developing strong second-line management, documenting systems and processes, and exploring various exit options while maintaining business value.

VALUE CREATION THROUGH STRATEGIC SUCCESSION PLANNING

Transforming Professional Practice

The traditional role of professionals serving SMEs has predominantly centredaround compliance, taxation, and dispute resolution — services that clients often view as necessary obligations rather than
value-adding propositions. Succession planning presents an opportunity to transcend this perception,  positioning professionals as strategic advisors who help preserve and enhance business value across generations.

The Hub and Spoke Model of Service Delivery

In the complex landscape of succession planning, the professional advisor acts as the central hub, coordinating with various specialists who form the spokes of the service delivery wheel. This model recognises that no single professional can possess expertise in all required domains. The primary advisor orchestrates the contributions of legal experts, valuation specialists, family business consultants, wealth managers, and other professionals while maintaining oversight of the entire process and preserving their position as the client’s trusted advisor.

Technical Framework: Integration of Tax and Regulatory Considerations

The Indian regulatory landscape presents both challenges and opportunities in succession planning. Tax considerations span across direct taxes, including income tax, capital gains, and tax impact from gifts, while indirect tax implications, particularly post-GST, add another layer of complexity. The professional must navigate these along with personal laws as applicable to different sections of the society, corporate law requirements, FEMA regulations for international assets, and industry-specific compliance needs.

Creating efficient succession structures requires careful consideration of the following:

– Transfer pricing implications in family business restructuring

– Capital gains optimisation in asset transfers

– GST impact on business reorganisation

– Regulatory approvals in regulated sectors

– Cross-border compliance requirements

– Corporate governance norms

BUILDING A COMPREHENSIVE SUCCESSION PLANNING PRACTICE

In the dynamic landscape of professional services, chartered accountants are uniquely positioned to develop robust succession planning practices, particularly focusing on promoter-driven and family businesses. This specialised field offers significant opportunities for professionals to add value and build long-term relationships with clients while contributing to broader economic stability.

Succession Planning for Promoter-driven and Family Businesses

The cornerstone of a succession planning practice lies in addressing the complex challenges faced by promoter-driven and family businesses. These entities require tailored strategies that balance business continuity with family dynamics and personal aspirations. Professionals in this field must develop expertise in various ownership transfer mechanisms, including share transfers, management buy-outs, and trust structures. They should be adept at creating models for the gradual transition of control while maintaining business stability, a crucial factor in ensuring the longevity of family enterprises.

Establishing effective governance structures is paramount in family businesses. This involves assisting in the creation of family councils and boards of directors, developing comprehensive family constitutions and shareholder agreements, and implementing systems for transparent decision-making and conflict resolution. These structures serve as the foundation for smooth transitions and ongoing business operations.

Financial planning and business valuation form critical components of the succession planning process. Chartered accountants must conduct thorough business valuations to ensure fair distribution among heirs or stakeholders. This process often involves developing complex financial models for various succession scenarios and creating strategies for liquidity management during ownership transitions. The ability to navigate the intricate tax implications of business transfers is equally crucial, ensuring compliance with relevant laws and regulations while optimising tax efficiency for all parties involved.

Navigating the Complexities of Generational Wealth Transfer

The transfer of wealth from one generation to the next presents a unique set of challenges that succession planning professionals must address. This process often involves facilitating intergenerational communication, aligning expectations and values across different age groups, and mediating conflicts arising from
differing perspectives on wealth management. Professionals must develop frameworks for open discussions about wealth transfer and design equitable distribution plans that don’t compromise business operations.

Preserving family legacy while managing the practical aspects of wealth transfer requires a delicate balance. Succession planners should assist in articulating and documenting family values and vision, developing strategies to maintain family unity through the transition, and creating mechanisms for involving the next generation in philanthropy and social responsibility. This approach helps in maintaining the family’s core values and social impact while adapting to changing business environments.

Exploring Diverse Exit Strategy Options

A comprehensive succession planning practice must be well-versed in various exit strategies to cater to the diverse needs of business owners. Family succession, often the preferred route in family businesses, requires assessing family members’ capabilities and interest in taking over the business. Professionals should be capable of developing training programs for potential family successors and creating phased transition plans for the gradual transfer of responsibilities.

Management buy-outs (MBOs) present another viable option, requiring evaluation of the management team’s capacity to take over ownership. This strategy often involves structuring financing options for management to acquire ownership and developing incentive plans to retain key managers during the transition period. For businesses considering external sales, succession planners must prepare the business for sale, conduct market analysis to determine optimal timing and valuation and manage the complex sale process, including due diligence coordination.

Initial Public Offerings (IPOs) and Employee Stock Ownership Plans (ESOPs) represent more complex exit strategies that require specialised knowledge. Assessing a company’s readiness for going public, guiding through the IPO process, and developing strategies for managing family control post-IPO are crucial skills. Similarly, evaluating the suitability of ESOPs, designing structures that balance owner, employee, and business interests, and managing the tax implications and compliance requirements of these plans are essential components of a comprehensive succession planning practice.

The Role of the Trusted Adviser in Family Dynamics and Succession

Navigating complex family dynamics is perhaps one of the most challenging aspects of succession planning. As trusted advisers, chartered accountants must develop a high level of emotional intelligence and soft skills, including expertise in family systems theory, conflict resolution, and mediation. The ability to provide an objective, third-party perspective is invaluable in these situations, offering unbiased assessments of family members’ capabilities and providing a neutral ground for family discussions and negotiations.

Succession readiness assessment forms a critical part of this process. Professionals must be adept at evaluating both the business’s readiness for leadership transition and potential successors’ preparedness for their roles. This involves identifying gaps in skills or experience and developing plans to address them. Facilitating family councils, developing protocols for family decision-making processes, and guiding the creation of family employment policies and codes of conduct are also essential services that a succession planning practice should offer.

Crisis management is an often overlooked but crucial aspect of succession planning. Developing contingency plans for unexpected events, mediating family conflicts that threaten business continuity, and providing stability and guidance during turbulent transition periods are vital services that can significantly impact the success of a succession plan.

Expanding into Shared Family Office Services

As an extension of succession planning, chartered accountants can expand their practice by offering shared family office services. This involves providing comprehensive wealth management services, coordinating investment strategies across multiple family members, managing complex portfolios, including business assets, real estate, and financial investments, and providing regular performance reporting and analysis.

Centralised administration services, including consolidated bookkeeping and financial reporting for family entities, managing bill payments, cash flow, and day-to-day financial operations, and coordinating with legal and tax professionals for compliance and planning, can add significant value to high-net-worth families. Risk management and insurance services, encompassing the assessment and management of risks across family businesses and personal assets, coordination of insurance coverage, and development of crisis management plans, further enhance the service offering.

By developing expertise in these multifaceted areas of succession planning and family business advisory, chartered accountants can position themselves as indispensable partners in ensuring the longevity and success of family enterprises. This comprehensive approach not only adds significant value to clients but also contributes to broader economic stability by facilitating the smooth transition and continued prosperity of family-owned businesses, which often form the backbone of many economies.

CONCLUSION

Succession planning represents a significant opportunity for professionals to elevate their practice from routine compliance to strategic advisory. The professional’s role extends beyond technical expertise to become a trusted advisor who helps preserve both business value and family relationships. Success in this domain requires a commitment to continuous learning, the development of specialised skills, and the ability to coordinate multiple specialists while maintaining primary client relationships.

For professionals serving small and medium businesses, succession planning offers a natural extension of their trusted advisor role. By helping clients address succession planning proactively, professionals not only create substantial value for their clients but also enhance their practice sustainability. The complexity and long-term nature of succession planning engagements provide opportunities for deeper client relationships and premium service offerings.

As India witnesses one of the largest inter-generational transfers of wealth and business assets in its history, professionals who develop expertise in succession planning will be well-positioned to serve this growing need. The journey from being a compliance advisor to a succession planning consultant may be challenging, but it offers rich rewards both professionally and personally.
“The best time to plant a tree was 20 years ago. The second best time is now.” Chinese Proverb

This ancient wisdom perfectly encapsulates the essence of succession planning – both for business families and for professionals aspiring to build expertise in this domain. The opportunity exists today; the choice to seize it rests with us.

Chatting Up About India: Taxpayer Asks From Income Tax Code

The purpose of this article is to present income taxpayer view and some asks. Its cause is some movement in the government about relooking at tax code project more actively. After all, hope of taxpayer cannot be taken or taxed.

Ideally and reasonably, the tax code should mean an enabling force to lead Bharat towards the vision of 2047. For this to happen, taxpayer inputs are critical. Normally taxpayer inputs are taken as a checkbox ticking process. Tax administration does not record reasons for acceptance or rejection of inputs nor communicates anything about them, leave alone reasoning them out. Taxpayer suggestions pass as ‘consultation’, but falls way short of taking the shape of ‘consideration’. Everyone knows that the powerful finally do what they want and what will balance the budget as the obvious and fundamental matters remain off the agenda for decades. At the same time, it will be unfair to ignore work done by this NDA government in last 11 years towards making positive changes.

Nothing in this article that sounds sweeping, is not meant to be so, as there will always be exceptions. The matters in the following paragraphs are based on trends, concept of pre-dominance for the purpose of relevance, emphasis and common sense.

Nation: From Claws to Clauses

The claws of British Raj ended in 1947 and 1950 as we celebrate 75 years of Samvidhaan. The Claws of British ended and a new Rule of Law was envisaged where the nation will run with Clauses that will work for its citizens. The transition is ongoing from the CLAWS of the RAJ to CLAUSES of the STATE and not complete. The legacy system of income taxes is modelled on the Raj. Social Contract (rights, obligations and functions of citizens and government) is still not in place as a diverse country like ours would like. Now we are faced with the magical opportunity to make Bharat glorious for everyone where everyone works towards that common dream. The state obviously is funded by taxes and in that context; the taxpayer is that sub set of the citizenry, which is akin to National Treasure or the precious lot1, that makes a tangible contribution towards making Bharat glorious.

1 Budget Documents of 2024: 19% of Union Budget met by Income taxes

Taxpayer — KarDaataais the real Rashtra Samvardhak

Often the Sarkar takes credit for all development and good news. That is not true largely. Like the AnnaDaata, that is glorified in every political speech (despite them remaining poor and dependent), a taxpayer is the AnnaDaata. She gives nourishment to all schemes, spending, and development through taxes and therefore is a राष्ट्रपोषक, राष्ट्रसंवर्धक, and राष्ट्रकर्तारः. So, taking credit by executive would be like RBI taking credit for every rupee spent or earned since it prints the currency.

The point here is critical: understanding of the KarDaataaas VikasPoshak and should therefore be central to tax laws (by the way, it is not). While many people in the country take to streets, block roads for months, climb on Red Fort and remove tricolour to thrust their demands or protest; the taxpayers who contribute 19 per cent of Union Budget 2024 via income taxes don’t do any of this despite having fair case for a much better treatment. The words of then revenue secretary and now the Reserve Bank of India Governor, Shri Sanjay Malhotra talking to DRI officers pointed out: “We are here not only for revenue, we are here for the whole economy of the country, so if in the process of garnering some small revenue, we are hurting the whole industry or the economy of the country, it is certainly not the intent. Revenue comes in only when there is some income, so we have to be very cautious so that we do not in the process, as they say, kill the golden goose”2

2 https://www.cnbctv18.com/economy/revenue-secretary-sanjay-malhotra-stresses-balanced-approach-to-customs-duty-enforcement-19519098.htm - cnbctv18.com, December 4, 2024

Let’s look at who is this taxpayer?

a) Out of about 140,00,00,000 people of India, 7,54,61,286 individuals file tax returns3.

3 Income Tax Returns Statistics AY 2023-24, Published in June 2024

b) Of the 7.54 Crores individual tax returns, 2,81,61,3614 individual tax returns contributed to ₹6,77,350 Crore as Income Tax Liability5 as declared by them as tax on ₹61,77,988 Crores of GTI or Gross Total Income6. Thus, only 2 per cent of the population in India pays income taxes.

4 Ibid Page 31
5 Ibid Page 6
6 Ibid Page 6

c) Of the above 7.54 Crore people, about 6.92 Crore7 people are in the slab of up to ₹15,00,000 GTI, and declare some 40 Lac Crore as GTI8.

7 Ibid Page 21
8 Ibid page 21

d) During her working life, a taxpayer contributes 5-10-20-30-40 per cent of working life towards this goal excluding indirect taxes and other taxes and levies. How? Because the time spent by her at work, results in earnings, out of that earning, a portion goes as tax. Therefore, she gives on an average 5 per cent to 43 per cent of working life time for the country. That is how Karadaatais Annadataor Vikas Poshak that nourishes the nation.

e) What is a common taxpayer trying to do: He is wanting to come out of poverty / lack and improve his ability to buy for himself and family a life of dignity, comfort, safety and wishes to die without lack and pain.

f) This taxpayer is also “valuable convertible currency” — she can move to other countries and contribute to that country’s development and growth and pay taxes there if the opportunity is better elsewhere. It is well known that Indians are TOP expats anywhere in the world who contribute more and take less from those governments. Richest group in America is of Indian origin — they seek little benefits, they are most educated, they have open outlook, contribute to economy and society in every sphere from taxes to politics.

g) What is beating down the taxpayer in achieving his goal: Inflation and tax obligation defeat the citizen’s aspirations given in (e) above. Therefore, one cannot talk of taxes without inflation. Normally one can compare rise in basic exemption limit by comparing it with inflation indices. But for a moment I wish to present the ‘gold standard’ on how even the Basic Exemption Limit (BEL) furthers this beating of taxpayer:

9 Finance Bill, 1971 for FY 2071-72 
10 https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html

Analysis:

i) Why Gold: Gold has been historically and presently the store of value for all central banks. Value of currency is not the real value nor is declared inflation true reflection of what currency can do. This comparison tells us that BEL is actually going down instead of up, it hasn’t protected taxpayers, and erodes their ability to save and invest. Even if one were to take, ₹700,000 as that BEL, it is more than 30 per cent lower. The author does understand gold as investment class, however it has been so for millennia.

ii) The Basic Exemption Limit if one wants 143 gms. gold should be ₹10.56 lacs at ₹73,909 / 10 gms gold price on 1st April, 2024.

iii) The table shows that BEL has been beating the hell out of taxpayer, especially those on the edge who are trying to stay afloat to remain in the middle income group.

iv) Similar exercise can be done for upper limit of 30 per cent from which maximum rate applies. It could have the same outcome.

h) A taxpayer tries to race and beat the scourge of inflation eating into his savings by investing in modes like the stock market. However, today LTCGs is taxed at flat rate above ₹1.25 Lacs despite continuation of STT (which was brought in place of exemption of LTCG).

i) Inflation basket: The inflation basket doesn’t take two major expenses of middle income group adequately —housing costs and education cost. For emerging middle-income group, which pays this tax at a level that it bleeds, inflation is not factored by tax system fairly. BEL is not ‘inflation adjusted’.

j) What do you get for being a taxpayer: It must be noted that taxpayer doesn’t get ONE BENEFIT from Sarkar that a non-taxpayer doesn’t get (well we received certificates for 1-2 years). Further the taxpayer is susceptible to come into a ‘harassment net’ in the form of not given tax credit despite tax credit in Form 26AS or sending claims for unpaid taxed that are of 10-15 years old without showing any basis and even adjusting refunds against those so called unpaid demands. In fact, if you are general category, your taxes will be used to deny your children admissions on merit by huge margins to the extent that you pay two to three-times apart from being discriminated on marks. One reason for brain drain.

k) Paying taxes will debar you from every incentive a non-taxpayer enjoys at the expense of the taxpayer.

Therefore, the only response a government with a reasonable mind-set, which can grasp the above, is to protect this taxpayer number, and let it grow organically so that it can contribute more by earning more. Disrupting its earning, taking taxes excessively, being unfair will have adverse results.

Tax Administration — A Business Case

The tax administration consists of unelected people but it carries substantial power. The taxpaying citizens’ ask from tax administration is small and reasonable: have clear to understand and easy to comply tax laws and procedures.

At a structural level, the problem with the tax administration is that an individual administrator has nothing to lose personally for a decision he takes or not take whereas the taxpayer has a large monetary stake. This problem gets bigger by slow, expensive, cumbersome and little recourse to justice.

Typically, administrative system is modelled to self-perpetuate — making more of itself and increase the work and importance for itself. This is despite the bureaucracy often identified with sub-par outcomes, corruption, revenue bias, inability to listen to people it is meant to serve, slow implementation, and low standards of services.

Considering the above facts and facets about the taxpayer, the supreme role of tax administration should be to make lives of taxpayers easy, remove difficulties with pace and not have adversarial attitude. The idea of Sarkar vs. Kardaataa where the previous is chasing the latter is a remnant of the Raj. Yet, Sarkar remains the biggest litigant and from tax litigation its track record at winning at all three levels is far from admirable. Therefore, adversity, except with proven evaders and criminals, should be avoided. It just makes business sense.

The idea of serving the taxpayer where he can earn more and therefore he can in absolute terms pay more tax is genetically and historically missing. Tax laws should be made and presented as enablers.

Taxpayer Asks

The following paragraphs carry some simple ideas. Ideas that can:

a) be implemented without much effort,

b) be disproportionately in favour of benefits while evaluating effort vs. benefits ratio,

c) yield long term and short term benefits to taxpayer and tax collector.

d) makeViksit Bharat Sankalp a reality.

e) be measuring rods to evaluate existing laws and as tools to fix undesirable tax laws and their administration.

I. SIMPLICITY OF DRAFTING

Law is how it reads, just as money is what money can buy. Law need not be simple, but its drafting certainly can be.

Anyone who opens the ITA or Rules can tell that it’s not in English that common taxpayer can read and understand both. It is written in terse, dated, Queen’s English that is already BANNED in many countries11 where Queen / King are still on their currency. Such legal writing is culturally misplaced and at best a remnant of the Raj. US and UK had a Plain English movement12 in 1970s. New Zealand has a Legislation Manual13 on drafting laws in a language that is clear for mortals to decipher. It says: “Drafters must never lose an opportunity to make legislation easier to understand. This is primarily a matter of using plain language and drafting clearly14”. The Legislation Manual prohibits use of certain words that are everywhere in Indian tax laws.

Indian legislative drafting is far from plain English. India is not Bharat so far as legislative drafting of income tax laws is concerned. We are more British than even the present Britain despite the Queen having left 75 years ago and now even the planet. We haven’t won the battle between Authority and Accessibility yet, which such drafting poses. Lawyers and even CAs too, often tend to believe that complexity in writing is a sign of expertise and even genius. While actually it is only a form of barrier to communication and access at best. A recent MIT report15, posted by Elon Musk16 says the same thing and gives causes and means of obfuscating laws through such writing. How are Indian laws written? Well, most Dharma Shashtras, ArthaShashtra — ideas on conduct and economics are written in poetry, with high level of aesthetics.

Clarity can only come when the language is not a barrier, and drafting is for understanding and not casting a spell. Lack of clarity shows lack of understanding and /and certainly lack of adequate care for the reader. About 0.02 per cent people said English was their first language, 6.8 per cent people said it was their second language, and 3.8 per cent said it was their third language as per last census of 2011. If I were the head of drafting team of Law Ministry, I would have them put this framed:

11 Search Plain English movement and Pg45 , Para 158 of NZ Legislation Manual
12 The movement began in the 1970s in the United States and England. It was a response to criticism of the complexity of legal English and the lack of clarity in consumer information
13 https://www.lawcom.govt.nz/assets/Publications/Reports/NZLC-R35.pdf
14 Ibid Para 118, Page 35
15 https://news.mit.edu/2024/mit-study-explains-laws-incomprehensible-writing-style-0819
16 17th December, 2024 on X

Simplicity is the price for Clarity.
Clarity is the pre-requisite of greatness.17

Here is what research, experience and common sense tells us: Sentences longer than 27 to 30 words don’t land on the other side as they should. I tried redrafting such sections and normally found that in most cases there is 30 per cent flab. The short point is that Income Tax Act should be redrafted largely to:

1. Remove long sentences and break them down in shorter sentences about 30 words in length;
2. Remove / Reduce endless web of clauses, sub clause, sub-sub clauses, explanations, provisos, cross references. Remove all obfuscating words and replace them with common sense words;

3. Shorten the entire law of 1000s of pages by 20 to 30 per cent as legalise is akin to cholesterol and visceral fat in the words of a recent report18.

4. Keep the intent, meaning, key words, numbering and flow as it is. The Act should be contemporaneous and can be rearranged where necessary and yet reduced in size.

Is this doable? Very easily. How long should this take? Perhaps 6-12 Months, if one starts with important clauses.

17 Inspired by Da Vinci quote “Simplicity is the ultimate sophistication”
18 https://www.teamleaseregtech.com/reports/jailed-for-doing-business/ - Jailed for Doing Business, 2022

II. CLARITY

Clarity amongst other meanings would be:

– Words are simple and commonly used

– Where needed, words are defined; no undefined key word should be there;

– Words should not be absurd / redundant – Example: Assessment Year. I wonder whether this has any meaning at all except confusing people. You have year of Birth, year of graduation. Take the word “actually incurred” in Sections 10(5), 10(13A), 17(2) Proviso, 35 (2B)/ (5B) and Section 220 explanation;

– Low on repetition within the section of words and phrases and structuring;

– It’s not over the top long with numerous explanations, provisos, further tarnished by multiple amendments – Example: Read Rule 11UA, Rule 2(a) has 101 words in one sentence.

– Keep control of phrases such as “being”. The word Being seeks to change reality. It creates notion and fiction rather than deal with reality. Such subjectivity causes litigation and tax evasion. Ideas of notional rent (a property which can be reasonably let out). Rent is real, it’s not a word or fiction. Law creates a fiction and then creates a charge.

– Keep control over the phrase “as may be prescribed”. This is the passport to endlessly add directions on taxpayers.

Here is an example of Clarity

Original:

“Notwithstanding anything contained herein, a person who knowingly fails to comply with the provisions of this section shall, upon conviction, be liable to a fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding one year, or both.” (41 words)

Clear:

“If someone knowingly violates this section, he may be fined up to ₹50,000, imprisoned for up to one year, or both.” (21 words)

As you will see Clarity and Simplicity are twins. When they play together, the game is unambiguous.

III. CONGRUENCE OF LAWS WITH EASE OF COMPLIANCE

It is a stated State Policy of PM Modi’s government where ease of living and ease of doing business are pillars of everything. However, the laws are not congruent with the state policy.

Example: Size of ITR. A blank PDF ITR 6 is 80 Pages, ITR 3 is 58 pages, ITR 7 is 33 Pages.ITR 2 is 34 Pages. I could not find ease anywhere in those pages.

Why? Because snoop for data which is otherwise available. For example, for small businesses / companies it is asking Financial Statements
details at trial balance line item level. Today the same government has, and I believe government is one in this country:

i) access to GST data — which is invoice level sale and purchase and expenses.

ii) Annual Filing with MCA of every line item of Balance Sheet and Profit and Loss Account.

iii) AIS and TIS give transactions;

iv) There is NSDL CAS Data for Financial Assets which an assessee can offer to share.

It’s hard to understand why ITD cannot use some of this data instead of seeking it again under every regulation and then causing internal mismatch within the ITR or ITR and TAR or even ITR and other data sets / points like customs / GST etc. It seems like a trap set up or a synonym for ‘got you’.

Duplication and Excess is an impediment. It is probably a means of the state to see if the same data comes at 3–4 places. But doesn’t help Ease of Doing Business and Ease of Living.

Action Point

1. Take Company Identification Number (CIN) and MCA filing challan number of small companies in ITR, if filing is done and audited accounts are uploaded there;

2. This can be done post ITR also — like UDIN for TAR — within say 30 days instead of giving huge financial data. This will mean authorising ITD to fetch data from MCA;

3. Same for LLP;

4. Further, there is an option to attach FS for all others where there is no tax audit or only take total assets, total liabilities, Sale, Expenses and Profit figures where there is GST.

5. Today there are many options to reduce excess, duplicity and cumbersome data filling which often are made a cause of mismatch and dispute.

IV. RESTRAINT ON AMENDMENTS AND NOTIFICATIONS

RBI brings out Master Circulars / Master Directions once a year on a fixed day. It consolidates all Circulars and Notifications.

125 Notifications and 18 Circulars are issued till 15th December, 2024 under the Direct Tax Laws. Most Notifications are very specific and irrelevant to most people. Circulars are often Q&A or clarifications. Many seem like announcements. Here is the statistics:

Calendar Year Notifications Circulars
2024 (15 Dec) 125/2024 18/2024
2023 106/2023 20/2023
2022 128/2022 25/2022

 

Wouldn’t it be great to have a Quarterly Notification and Circular giving all that is needed unless its life and death situations — like flood relief institutions etc.? Income Tax Department (ITD) must end piecemeal and haphazard approach, which makes income tax law fragmented, messy, and lying all over the place.

Action Point

a. Bring One Notification per quarter or month

b. Bring One Circular per quarter or month

c. Bring and Annual Master Direction collating all changes of the year — Notifications and Circulars.

d. Eventually review all Circulars and Notifications and withdraw what is already a law or Rule and make collation of Circulars that are applicable from a date onwards.

V. FAIRNESS & TIMELINES

a) Laws tilted in favour of tax department

i. Penalties only on taxpayer, nothing on tax officer for their shortcomings.

ii. Interest charged: 12 per cent, Interest given: 6 per cent. This promotes delay in refunds apart from being unfair. Why should a tax payer pay double interest whereas government will pay 6 per cent for delay? This is unfair and promotes late refunds and also causes working capital problems for taxpayer.

iii. Tax Department should be treated akin to trade credit for MSME. Same laws of repayment should apply as often government causes business downfall due to cash flow crunch.

b) Taxpayers’ Charter and Taxpayer Services should be made a law, at least most of it. This will mean that government is committed to taxpayer and treat them as clients. Taxpayer rights and protections are not in the law, but in taxpayer charter on the wall. Much of the taxpayer service should become part of law and tax officer should be bound to deliver basic services – timely response, not closing queries, closing grievances without confirmation of assessee, escalation available for assessee, and so on. RTI like mechanism where 14 days’ rule will apply to provide data to taxpayer. Power without corresponding responsibility and accountability is lacking in the present law.

c) Approval & Discretion without Time lines: This mechanism is most prone to abuse. We all live within time. Taxpayer has to comply within a timeline. Then why not for tax collector at every stage? Example: Taxpayer services like Section 197 certificate. There cannot be anything that requires permission or application or justice without timeline — Say I have to file an appeal in 60 days, shouldn’t ITD dispose appeal in xxx days?

VI. ARBITRARY UNMOVING MONETARY LIMITS

Arbitrary limits that remain unchanged for years and decades:

a. Section 54E: ₹50 lac permitted investment has remained same since 1st April, 2007.

b. TP Study: International transactions of ₹ One Crore and above need a TP Study. This limit is there since TP law was introduced in 2001.

c. ₹100,000 remained as a limit for exempting LTCG from 2018 till 2024.

d. ₹10 Crore on Capital Gains investment in House Property is arbitrary — no explanation, just a law that if you sell shares and buy a property which was allowed without limit, now will be allowed till ₹10 crores. What if a young citizen was planning and saving to buy a dream house for 20 years, and now he will have to pay tax on the tax paid money I invested.

e. Mediclaim limit, 80C limit of ₹150,000, ₹50,000 Standard Deduction Limit have remained unchanged for years.

f. R100 for school allowance19 — this is not a limit; it is an insult. In fact, higher education allowance is a must for taxpayers. Today general category will pay ₹20 lacs minimum in Deemed Medical colleges per year per child despite getting adequate marks. Is this honouring middle income group?

19 Section 10(14), read with Rule 2BB

VII. CONSISTENCY, SURPRISES AND TURNAROUNDS

Taxpayers want consistency and stability. This is the bedrock of any relationship. One of the main ask is to keep the policy and law consistent.

LTCG

Late FM Arun Jaitley, mentioned that India won’t impose tax on LTCG20. In February 2018 tax imposed on LTCG by Shri Jaitley. But it did not end there, STT wasn’t rolled back. Till November ₹36,000 Crores of STT21 collected in FY 24-25 and also LTCG for FY 2023-24 was ₹36, 867 Crores from Individual ITRs between the range of 150,000 to 15,00,00022.

20 25 December 2016, https://www.business-standard.com/article/reuters/india-won-t-impose-long-term-capital-gains-tax-finance-minister-jaitley-116122500535_1.html

21 https://www.thehindubusinessline.com/markets/stt-collection-hits-36000-crore-reaching-97-of-budget-target-amid-market-rally/article68858203.ece

22  Income Tax Returns Statistics AY 2023-24, Published in June 2024, page 25

This is one recent example of lack of consistency and turnaround.

Budget as a Surprise Genie

Is Budget a magic show, where new changes are released? Much of this can stop. There is zero reason to bring out changes via Budgets without informing people in advance.

Example: Sudden change to limit of ₹10 Crore for property Purchase from sale of Shares.

If someone is in the middle of a transaction or is planning for years to buy a property, his costing changes in a big way. If there was knowledge that such changes are effective, then people can plan better. Such changes are used in the Budget as if they are a trap, as in a war where surprise is an element of ambush. Yes some rate changes etc. which are expected, or minor amendments to make law more efficient. However, taxpayer benefit should be above all and taxpayer needs to know what is coming when it’s a major change.

Imagine if this was known in advance that you have 12 months to sell equity, make gains and buy a house if you need to before 12.5 per cent and ₹10 Crore kicks in. Will it result in homes price inflation? Will there be a sell out in equity? I don’t think so. India is way too large now for such changes rocking the markets.

Example of Turnaround: Adding MAT to Tax Free SEZ Units midway in 10-year time period.

SEZ were exempt from tax as scheme. One fine day MAT on SEZ was introduced. This is breaking a promise. Once an investor has started a project with knowledge that there won’t be taxes, and then taxes creep in, it is breaking the contracts through law. A sovereign right need not be used to disrupt and throw taxpayers under the bus.

Predictability attracts investments as it reduces risk and is the bedrock of Trust.

Finally, taxmen always ask this question: will all these increase tax compliance and revenue? The answer is yes, because this government itself has adopted some simplification measures that resulted in better compliance, more tax, and more taxpayers. Mahabharata says Dharma always wins in the end. It means if one does the right things, the end result will be right.

There is a vision and idea of Amrit Kal. Another article will deal with some of the specific changes that are necessary in tax laws and procedures and affecting most taxpayers. Some of these may be redundancy, absurdity, unclarity, complexity and the like. Amrit only comes from manthan, and income tax law requires true manthan, where Amrit and Laxmi can both emerge for all people of Bharat.

Auditor’s Report on Special Purpose Financial Statements

Special Purpose Financial Statements (SPFS) are prepared to meet the information needs of specified users. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 dealing with SPFS; SA 805 dealing with Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial statement and SA 810 dealing with auditor’s report on summary financial statements. This article provides an overview of the requirements of SA 800 (revised) and explains the key aspects of special purpose financial statements.

An entity generally prepares general purpose financial statements as per the general purpose framework. A general purpose framework is designed to meet the common financial information needs of a wider range of users, e.g. financials prepared as per applicable Generally Accepted Accounting Principles for tax filing purposes; financial statements prepared under the Companies Act, 2013. The general purpose framework, i.e. Indian Accounting Standards and Accounting Standards, are used for the preparation and presentation of the financial statements and such financial statements are called statutory financial statements (i.e. prepared pursuant to a regulation or statute).

However, under certain circumstances, an entity would be required to submit financial statements as per a special purpose framework or an audited financial statement, specific elements, accounts, or items of a financial statement to meet the requirements of a specific category of stakeholders, e.g. shareholders, investors, lenders. Financial service entities such as asset managers or management companies may also be required to prepare financial statements for a specific purpose or for specific users. Such financial statements are often called as special purpose financial statements.

Special purpose financial statements can often be more relevant and less costly to prepare than financial statements that are fully GAAP compliant, depending on the intended use of the financial statements. The audits of such special purpose financial statements are required to be conducted in accordance with special consideration standards issued by the ICAI. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 (Revised), “Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks; SA 805 (Revised), “Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement”; SA 810 (Revised), “Engagements to Report on Summary Financial Statements”. These Standards will be applicable to audits/engagements for financial years beginning on or after 1st April, 2024, i.e., these Standards will be applicable to audits / engagements for the financial year 2024-25 and onwards.

The objective of this article is to provide an overview of the requirements of the revised SA 800 issued by the ICAI and to explain the key aspects of special purpose financial statements. It is important to understand why special purpose financial statements are prepared and the underlying reporting framework for the preparation of such special purpose financial statements. For example, if the company is required to get a special audit of the financial statements based on a regulatory order, it is important to understand the reporting framework followed for the preparation of such financial statements. If financial statements have been prepared as per the general purpose framework, the auditor will apply the requirements in SAs 100 to 700 series and not SA 800. It is the primary responsibility of the management to prepare financial statements. In order to do so the management should understand the purpose for which such financial statements are being prepared and its intended users.

SA 800 deals with special consideration in the application of the SAs (100-700 series) to an audit of financial statements that are prepared in accordance with a special purpose framework. SA 800 is written in the context of a complete set of financial statements prepared in accordance with a special purpose framework. However, in addition to the application of all SAs (SA 100 to SA 700 series), an auditor is also required to comply with these special considerations specified in SA 800. Therefore, it is important to understand whether the reporting framework in accordance with which financial statements have been prepared is a ‘special purpose framework’ or not.

SA 805 deals with special considerations in the application of the SAs (100-700 series) to an audit of a single financial statement or a specific element, account or item of a financial statement.

In 2016, ICAI issued the revised auditor’s reporting standards, i.e. Revised SA 700 — ‘Forming an Opinion and Reporting on Financial Statements’, Revised SA 705 — ‘Modifications to the Opinion in the Independent Auditor’s Report’ and Revised SA 706 — ‘Emphasis of Matter Paragraphs and Other Matter Paragraph in the Independent Auditor’s Report’. These standards are effective for audits of financial statements for periods beginning on or after 1st April, 2018. The auditor’s reporting requirements for SA 800 and SA 805 engagements are linked directly to the reporting requirements in SA 700 (Revised).

What are special purpose financial statements?

Special purpose financial statements are prepared to meet the information needs of specified users. As a result, the special purpose financial statements are prepared using an applicable special purpose framework that meets those users’ needs.

A special purpose framework, as defined by SA 800, is a financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework1.

The special purpose framework may comprise the financial reporting provisions of a contract. For example, for the purpose of establishing the value of net assets of a company at the date of its sale, the vendor and the purchaser agree that very prudent estimates of allowances for uncollectible accounts receivable are appropriate for their needs, even though such financial information is not neutral when compared with financial information prepared in accordance with a general purpose framework. In this case, the special purpose framework meets the needs of the specified users2.

1 Refer paragraph 7 of SA 700 for definition of fair presentation framework and compliance framework. 
2 Refer paragraph A8 of SA 800.

It is important to note that when financial statements are prepared based on the needs of a regulator, e.g. audit of an overseas subsidiary of an Indian company, which is not required in the host jurisdiction but required under Indian regulations, e.g. pursuant to FEMA regulations (filing of Annual Performance Report), it should not be construed that such financial statements are special purpose financial statements if the underlying framework is general purpose framework. Special purpose financial statements are financial statements with a special purpose framework which is designed to meet the financial information needs of specific users.

Other examples wherein special purpose financial statements may be prepared include:

  •  The cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors.
  •  The financial reporting provisions established by a regulator to meet the requirements of that regulator.
  •  The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a project grant.
  •  Combined financial statements prepared for submission to lenders or investors3;
3  Refer Guidance Note on Combined and Carve-Out Financial Statements issued by ICAI.

There may be circumstances when a special purpose framework is based on a financial reporting framework established by an authorised or recognised standards-setting organisation or by law or regulation but does not comply with all the requirements of that framework. In such a case, the special purpose framework will not be a fair presentation framework since it does not comply with all the requirements of the financial reporting framework that are necessary to achieve a fair presentation of the financial statements, e.g. all disclosures required by accounting standards, have not been made by a company.

Therefore, it will be inappropriate for the description of the applicable financial reporting framework in the special purpose financial statements (and in the auditor’s report) to imply full compliance with the financial reporting framework established by the authorised or recognised standards setting organisation or by law or regulation.

For example, a contract may require financial statements to be prepared in accordance with most, but not all, of the Accounting Standards. In this case, it is preferable that the description of the applicable financial reporting framework refers to the financial reporting provisions of the
contract (and may also refer to management’s description of those provisions in the disclosures to the financial statements) rather than make any reference to accounting standards.

Under SA 800, financial statements prepared on an accrual basis of accounting as per applicable Indian GAAP for filing with income tax authorities are considered to be general purpose financial statements and not special purpose financial statements.

Key considerations for acceptance of an engagement to express an opinion on special purpose financial statements

In deciding whether to accept an engagement to express an opinion on special purpose financial statements, the auditor should determine whether the special purpose framework applied in the preparation of the financial statements is acceptable. The auditor should obtain an understanding of –

  •  the purpose for which the financial statements are prepared;
  •  the intended users;
  •  the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.

Such a special purpose reporting framework may comprise financial reporting standards established by an authorised or recognised standard-setting organisation. If so, these standards may be presumed acceptable if the organisation follows an established and transparent process involving deliberation and consideration of the views of relevant stakeholders. It could also be a special purpose framework prescribed by the jurisdiction to be used in the preparation of special purpose financial statements for a certain type of entity.

Forming an opinion and reporting considerations

The standard setter retained the approach in extant SA 800 and SA 805, whereby the reporting requirements in SA 700 (Revised) and other SAs are not repeated in SA 800 (Revised) and SA 805 (Revised). Therefore, SA 700 (Revised) contains the overarching reporting requirements applicable for auditor’s reports on special purpose financial statements and single financial statements, or elements of a financial statement, with additional requirements and guidance as considered necessary in SA 800 (Revised) and SA 805 (Revised). Therefore, when forming an opinion and reporting on special purpose financial statements, the auditor is required to apply the requirements in SA 700 (Revised).

Reference may be made to Illustrative auditor’s reports in the Appendix of SA 800 (Revised) and Appendix 2 of SA 805 (Revised).

Key revisions in SA 800 and SA 805 as compared to extant SA 800 and SA 805 include the following:

  •  Refinements to the requirements and corresponding application material in the standard, where applicable, to clarify the reporting responsibilities of the auditor in light of new concepts established by the new and revised Auditor Reporting Standards (i.e. SA 700, SA 705 and SA 706).
  •  New application material relating to Going concern, key audit matters, Other information and inclusion of the name of the Engagement Partner.
  •  Update illustrative auditor’s report that:

⇒Align with the reporting requirements in SA 700 (revised) in terms of the layout and content, including the ordering of elements (for example, the Opinion section is now positioned first) and use of heading and terminologies consistent with SA 700.

⇒Include more fulsome descriptions of the circumstances that are assumed for each of the illustrative auditor’s reports and indicate the applicability of the auditor’s reporting enhancements.

It is important to note that SA 800 makes reference to SA 700 for forming an opinion and reporting on special purpose financial statements, i.e. the auditor is required to apply the requirements in SA 700 (Revised).

Inclusion of restriction on use paragraph in auditor’s report

When an auditor’s report on special purpose financial statements is intended for the use of specified users, a restriction on use paragraph for the specific users’ needs to be included in the auditor’s report to avoid any unintentional reliance on our auditor’s report by others. For example, a financial reporting framework that is specified in a purchase agreement for the preparation of financial statements of an entity to be acquired may be acceptable, but only with respect to the needs of the parties to the agreement. In this case, the auditor restricts the use of the report to the parties to the agreement. The auditor informs management and those charged with governance, in writing, that the auditor’s report is not intended for use by non-specified parties. Such restriction on use paragraph is included in the auditor’s report as the auditor may not have any control over the distribution of the auditor’s report.

Emphasis of Matter paragraph

When preparing an auditor’s report, the auditor recognises that the special purpose financial statements may be used for purposes other than those for which they were intended; for example, a regulator may require certain entities to place the special purpose financial statements on public record. To avoid misunderstandings, auditors alert users of the auditor’s report by including an Emphasis of Matter paragraph explaining that the financial statements are prepared in accordance with a special purpose framework and, therefore, may not be suitable for another purpose. The auditor describes the purpose for which the financial statements are prepared and, if necessary, the intended users or refers to a note in the special purpose financial statements that contains that information.

Illustrative Emphasis of Matter — Basis of accounting

“We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] to meet the requirements of [name of regulator]. As a result, the financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter.”

The auditor may expand the Emphasis of Matter paragraph to include the restriction on use (instead of adding a separate Other Matter paragraph), and the heading in the auditor’s report can be modified accordingly (refer below).

Emphasis of Matter — Basis of accounting and restriction on use

We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] in complying with the financial reporting provisions of the contract referred to above. As a result, the financial statements may not be suitable for another purpose. Our auditor’s report is intended solely for the information and use of [Name of entity] and [Name of other contracting party] and should not be used by parties other than [Name of entity] or [Name of other contracting party]. Our opinion is not modified in respect of this matter.

Inclusion of a Reference to the Auditor’s Report on the Complete Set of General Purpose Financial Statements

SA 800 states that the auditor may deem it appropriate to refer, in an Other Matter paragraph in the auditor’s report on the special purpose financial statements, to the auditor’s report on the complete set of general purpose financial statements or to matter(s) reported therein. For example, the auditor may consider it appropriate to refer in the auditor’s report on the special purpose financial statements to a Material Uncertainty Related to Going Concern section included in the auditor’s report on the complete set of general purpose financial statements.

Adequate disclosures in the financial statements

The management should ensure that the special purpose financial statements contain adequate disclosures to enable the intended users to understand the information contained in the financial statements.

Concluding remarks

Financial statements prepared under a special purpose framework or special circumstances are specific engagements that provide specific information relevant to a specified group of users. Therefore, it is imperative for the management and the auditor to understand the requirements of such specific users. As the audit reports of general purpose financial statements and special purpose financial statements are governed by two separate sets of auditing standards, i.e. SA 700 and SA 800, an auditor should understand the difference between the two frameworks. Also, the auditors should exercise professional judgement while accepting such engagements and issuing opinions, as it helps maintain stakeholder confidence in the assurance.

Small Steps, Big Impact: Beginning Your AI Journey

For CAs grappling with late hours and an overwhelming workload, it’s time to unlock the transformative power of AI. This article explores how small, thoughtful AI implementations can drive significant efficiency gains, enabling a balanced and more productive professional life.

CA Rahul sat alone in his office. It was 9:15 pm, and the staff had long gone home. The faint hum of the air conditioner was the only sound breaking the stillness of the small office. His eyes drifted to his inbox, overflowing with hundreds of unread emails, while his phone buzzed with a barrage of WhatsApp messages from clients and staff, each demanding his attention.

Rahul sighed. The past years had felt like an endless loop of tax compliances, constantly racing to keep up with changing regulations. Finding capable staff and managing a shortage of article trainees only added to the stress. Then there were the clients — always needing reminders and follow-ups to share their data on time, making the job even more challenging.

He had heard and read a lot about AI in recent months. He recalled a seminar he had attended on AI and how it can improve efficiency at work. On his college-going daughter’s insistence, he had even installed ChatGPT on his mobile. But aside from a few casual attempts, he hadn’t explored its potential seriously.

Can you relate to Rahul’s story?

Rahul’s situation mirrors that of many small and medium-sized CA firms. The daily grind often leaves no time to focus on “important but not urgent” tasks, like finding ways to improve efficiency. While most CAs recognise AI’s potential, the sheer volume of information and multiplicity of solutions creates confusion. Like Rahul, you might be asking:

  •  Where do I begin?
  • With concerns about inaccurate results, should I use it at all?
  • Which tool should I choose among so many options?
  • How do I handle work from younger staff already using AI tools?
  • How do I prepare my firm to collaborate with young, tech-savvy clients?

Basics First

Before diving in, let’s clarify some fundamental concepts and understand some terms which keep appearing in AI related articles and conversations.

Artificial Intelligence

A branch of science concerned with the ability of computers or machines to perform tasks that usually require human intelligence, like learning, problem-solving, and decision-making.
Generative AI

A field of AI that focuses on generating new content (text, images, videos, etc.) based on patterns learned from existing data.
Large Language Model

Large Language Models are a specific category within Generative AI, trained on massive amounts of text data to understand and generate human-like text.

 

ChatGPT by OpenAI is a product of Generative AI that uses a Large Language Model (LLM) to understand context and produce coherent, human-like responses in a conversational format. Similarly, there are other tools in the market, such as Gemini by Google and Claude by Anthropic, which also utilise advanced AI models for similar purposes.

Making of a Large Language Model

A Large language model creation requires the following steps:

1. Collection of Data: Large Language Models (LLMs) are trained on vast amounts of publicly available data, including Wikipedia articles, news reports, educational materials, and legal documents. This diverse dataset helps the model understand human language patterns and usage. During the data selection process, careful filtering is done to minimise harmful or biased content.

2. Pre-processing Data: The collected data is then pre-processed to remove duplicate, irrelevant and low-quality data. The remaining data is then properly formatted and broken down into smaller units like words or sub-words.

3. Model Architecture and Training: At this stage, developers design and build the AI system’s structure, then train it to predict the next word in a sequence of text. This forms the technical foundation of how the model processes and generates language.

https://arxiv.org/abs/2303.18223v14

Is 100 per cent accurate output possible?

  • The content generated by LLMs is not guaranteed to be 100 per cent correct, and the main reasons for these inaccuracies are as follows:
    LLMs are trained on vast public datasets that may contain inaccuracies, outdated information, or biases. The model can unintentionally learn and replicate these errors.
  •  LLMs don’t “understand” the world as humans do. They predict likely sequences of words based on patterns in the data. While these predictions often appear coherent, they may not always be factually correct.
  •  If the user’s input is unclear or lacks detail, the model might make incorrect assumptions and provide an inaccurate response.
  •  LLMs rely on pre-trained data. If not continuously updated, they might lack knowledge about recent events or developments.
  •  While LLMs are versatile, they might provide superficial or generic answers in specialised fields without deep domain-specific knowledge.
  •  LLMs can “hallucinate” information, generating details or facts that seem convincing but are entirely fabricated

Although LLMs have inherent limitations, several scientific approaches can significantly reduce errors in their outputs. Using well-crafted prompts can guide the model to provide more accurate responses. Retrieval Augmented Generation (RAG) enhances accuracy by connecting the model to verified external information sources. Additionally, custom-trained models can be developed for specific domains to improve performance in specialised areas.

Why does a good prompt matter?

A prompt is the input text or query that guides the LLM to generate a response. As mentioned earlier, if the query is vague or not complete, the LLM will make certain assumptions and create output which may not be relevant. While precise, detailed prompts typically yield accurate and relevant responses.

Poor Prompt: “Write about AI.”

Good Prompt: “Write a 500-word article explaining the role of AI in automating repetitive tasks, with examples from the perspective of a tax practitioner, in a conversational tone.”

In fact, prompts are so important that Prompt Engineering is becoming a specialised area of expertise and a valuable skill of crafting and refining prompts to achieve specific, high-quality outputs from AI models.

Rahul makes a beginning.

After understanding the basics of LLMs, their inherent strengths and limitations, Rahul called a brainstorming session with his team. He invited ideas on how to start using AI to improve efficiency.

“Sir let’s use AI for routine drafting,” suggested Zaid, the new article trainee. Other young team members eagerly supported the idea. Alex demonstrated how
ChatGPT could draft client communications and compliance-related documents. The team was impressed.

The discussion continued, and a decision was arrived at to start the use of AI for drafting purposes, starting small but aiming for impactful results.

Standard Operating Procedure

To ensure smooth integration, Rahul outlined an SOP:

Scope: Specify which team members can use AI for drafting and clearly define the tasks AI can assist with.

  •  Routine emails to clients asking for data, payment reminders, etc.
  •  Explaining tax-related queries to a client.
  •  Drafting compliance-related documents, e.g., Minutes of Board Meetings, Resolutions, etc.
  • • Drafting Agreements, e.g., Partnership Deed
  •  Drafting replies to legal notices

Tool Selection: Evaluate various AI tools. Decide between free and paid versions based on usage needs and features.
Each tool comes with a free and paid version. The differentiation is in terms of limit of use, access to better models, access to better features, etc. Here is a brief comparison of a few prominent tools:

Tool Free Version Paid Version
ChatGPT • Access to GPT-4o mini.

• Standard voice mode.

• Limited access to file uploads, advanced data analysis, web browsing, and image generation.

 

 • Everything in Free, plus + the following:

• Extended limits on messaging, file uploads, advanced data analysis, and image generation.

• Limited access to o1 and o1-mini.

• Create and use custom GPTs.

• Subscription: USD 20 per month.
Claude • Limited daily message limit, which varies based on demand.

• Access to Claude 3.5 Sonnet model.

 • 5x more usage versus the Free plan.

• Access to Claude 3 Opus model.

• Early access to new features.

• Access to Projects to organise. documents and chats.

• USD 20 per month.
Gemini • Access to 1.5 Flash Model.

• Free flowing voice conversation.

• Connect with multiple Google Apps.

 • Access to 1.5 Pro model.

• Access to Deep Research.

• Work seamlessly with Gmail, Docs and more.

• Upload up to 1500 pages of text.

• Subscription: INR 1950 per month.
Microsoft
Co-Pilot		 • Limited Access during peak hours. • Priority Access.

• Early Access to new features.

• Works seamlessly with Word, Excel, PowerPoint, and OneNote.

• Subscription: USD 30 per month.

Note: These features are highly dynamic and are frequently updated by companies

Training: Basic training to each member for tool usage and effective prompt creation.

Maintaining a library of standard prompts.

Confidentiality Measures: Understand the privacy policy of the AI tool. Set up strict confidentiality protocols for inputting sensitive data. Avoid sharing client-identifiable information unless it is redacted or anonymised.

When uploading files or posting queries, ensure that all Personally Identifiable Information (PII) is deleted. For example, if you are uploading a document that contains details such as the company name, PAN, address, CIN, etc., remove this information before uploading.

Drafting and Review Process: Define the review process for each type of AI-generated output.

What kind of documents can be generated from scratch? What kind of documents require a rough draft to be written by a team member and then improved using an AI tool?

Each document must be reviewed before it goes externally. Some documents may be reviewed by seniors, and other more sensitive documents may require approval by proprietor / senior.

The review must be done to spot inaccuracies and correct them. Case law citations should always be sourced from authoritative and reliable references, not from AI-generated content.

Continuous Improvement: This SOP must be reviewed every quarter and amended for improvements and accuracy

Drafting- AI-Generated vs. Human Generated

As the use of AI tools for content generation continues to grow, various tools have emerged in the market to identify whether the content is human-written or AI-generated. Some of these detection tools include TraceGPT, Hive, and Originality.ai.

AI excels at generating content quickly, with accurate grammar, proper punctuation, and consistent style. However, it often struggles with complex requirements. On the other hand, human-created text, though more time-consuming, stands out for its uniqueness and ability to better convey human emotions. The ideal approach is combining AI efficiency with human creativity and insight.

AI should be used to enhance NI (i.e. Natural Intelligence) and not to substitute the latter. NI should be used to make effective use of AI. Excessive use of AI may kill creativity and natural skills, just as we lost our memory skills of remembering telephone numbers with the advent of cell phones.

Rahul’s office- Two months later

It was 7 pm, and Rahul was packing up to leave for home. Watching his favourite sports event and having dinner with family now felt like a luxury he could afford. The team’s adoption of AI for drafting tasks significantly reduced his workload.

“What’s next?” he wondered. Rahul was ready to explore some more ways AI could transform his practice.

Here’s how you can begin implementing AI in your office:

Ready to take the first step? The possibilities are endless. Start small, think big, and let AI handle the routine while you focus on what truly matters.

Identify a Starting Area: Choose a specific area to begin using AI. For example, Rahul’s firm started with drafting. You could consider areas like research or financial analysis, depending on your comfort level and the potential for time savings.

Select the Right Tool: Research and choose an AI tool that aligns with your chosen area of focus.

Conduct Team Training: Organise a formal training program to ensure team members understand how to use the tool effectively.

Develop a Standard Operating Procedure (SOP): Create a clear and structured SOP to streamline the AI implementation process and maintain consistency.

Note: This article was conceived, structured, and written entirely by a human. However, several sentences were paraphrased with the assistance of AI to enhance clarity and ensure grammatical accuracy.

Allied Laws

43 Rizwi Khan vs. Abdul Rashid and Ors.

AIR 2024 Jharkhand 167

12th July, 2024

Transfer of property — Gift deed — No title with the donor to start with — Illegal occupation over property — Gift deed invalid. [S. 122, Transfer of Property Act, 1882; O. 1, R. 10, Code for Civil Procedure, 1908].

FACTS

A suit was instituted by the Plaintiff (Rizvi Khan) for declaration of title over the suit property. The suit was filed on the strength of a gift deed executed by the donor (one Mr. Shamsher Ali, father of both Plaintiff and Respondents) in favour of the Plaintiff. The Respondents had argued, inter alia, that the said gift deed was null and void on the ground that the donor did not have a clear title over the suit property on the date of transfer of property.

HELD

The Hon’ble Jharkhand High Court observed that the suit property belonged to the state government, which was leased out to TISCO. Further, it was observed that the donor was illegally occupying the said land. Thus, relying on the legal maxim ‘Nemo dat quod non-habit’, i.e., one cannot give what he does not have, it was held that the gift deed was invalid.

The suit was, therefore, dismissed.

44 Parvati alias Parvati Mohapatra vs. Sadasiba Mohapatra (dead) and Ors.

AIR 2024 (NOC) 819 (ORI)

28th February, 2024

Succession — Void Marriage — Children from void marriage — Illegitimate children also have right over the property of parents. [S. 16, Hindu Marriage Act, 1955; S. 11, Hindu Succession Act, 1956].

FACTS

The Respondent (Original Plaintiff) had filed a suit for eviction of the Appellants (Original Defendant) from possession of the suit property. Plaintiff had contested that Defendant was staying with him for the last 30 years in the suit property. Thereafter, due to issues between the parties, the Plaintiff had asked the Defendant to vacate the property. The Defendant had contested the removal on the ground that the Defendant had been married (as per social norms) to the Plaintiff for the last 30 years and, therefore, she and their children had a legal right, title, and interest over the suit property and thus, cannot be evicted. Plaintiff had rebutted by stating that he was already married to somebody else and, therefore, Defendant was not his wife as per section 11 of the Hindu Marriage Act, 1956, and consequently, the children also did not possess any right, title and interest over the suit property. Thereafter, during the pendency, Plaintiff expired, and his legal heirs (children through his first wife) were made a party to the plaint. The Ld. Trial Court dismissed the plaint. Aggrieved, an appeal was filed before the Ld. division Bench. The Ld. Division Bench allowed the Plaintiff’s appeal.

Aggrieved, a second appeal was filed by the Defendant before the Hon’ble Orissa High Court.

HELD

On appeal, the Hon’ble Orissa High Court observed that the children of the Plaintiff and Defendant (Defendant 2 to 4) had become legal heirs to the suit property upon the death of the Plaintiff. Further, relying on section 11 of the Hindu Succession Act, 1956 and the decision of the Hon’ble Supreme Court in the case of Revanasiddapa and others vs. Mallikarjun and Others AIR 2023 Supreme Court 4707, it was held that Defendants 2 to 4 inherited right, title, and interest over the property even though they were born out of a void marriage.

The Appeal was, therefore, allowed.

45 Kripa Singh vs. GOI & Ors

2024 LiveLaw (SC) 970

21st November, 2024

Arbitration — Delay in filing appeal — Implications of the Limitation Act — Court of law to secure and protect appellants. [S.14, Limitation Act, 1963; S. 34, S. 37, Arbitration and Conciliation Act, 1996 (Act)].

FACTS

The appellant’s land was acquired by the Government vide an award. After receiving a certified copy of the award, the appellant filed an appeal before the High Court. Thereafter the appellant came to know about the appropriate action available, being the statutory remedy under Section 34 of the Act, and instituted proceedings under Section 34 of the said Act before the District Court.

The District Judge took up the application under Section 34 of the Act and dismissed the same on the ground that it was barred by limitation. An appeal under section 37 of the Act was also dismissed.

The appellant filed an appeal before the Supreme Court.

HELD

The substantive remedies under Sections 34 and / or 37 of the Act are by their very nature limited in their scope due to statutory prescription. It is necessary to interpret the limitation provisions liberally, or else, even that limited window to challenge an arbitral award will be lost. The remedies under Sections 34 and 37 of the Act are precious. Courts of law will keep in mind the need to secure and protect such a remedy while calculating the period of limitation for invoking these jurisdictions. Applying Section 14 of the Limitation Act, we hold that there is sufficient cause excluding the period commencing from the filing of the wrong appeal before the High Court to the filing of the correct appeal before the District Court will be excluded.

The Appeal was allowed.

46 Manohari R vs. The Deputy Tahsildar (Revenue Recovery) & Ors

2024 LiveLaw (Ker) 783

5th November, 2024

Writ Jurisdiction — Difference between Maintainability and Entertainability. [Art. 226, Constitution of India, S. 7 Kerala Revenue Recovery Act, 1968].

FACTS

The Appellant / Original Petitioner had challenged a notice issued under Section 7 of the Kerala Revenue Recovery Act, 1968 by filing a Writ Petition. The notice was issued by Respondent No.1, authorising the Village Officer, to seize the movable property of the Appellant for the defaulted amount of ₹1,10,096/- with interest due to the Kerala State Electricity Board (KSEB).

The Writ Petition was dismissed as not maintainable. Being aggrieved by the summary dismissal of the writ petition, the Petitioner filed appeal under Section 5 of the Kerala High Court Act, 1958.

HELD

There is a difference between the entertainability and maintainability of a writ petition. Even if the alternate remedy is available to the Petitioner, that cannot be a ground to hold the writ petition under Article 226 of the Constitution of India against an administrative authority as “not maintainable”. The powers under Article 226 of the Constitution of India can be exercised even if there exists an alternate remedy. However, it is in restricted circumstances, within well-defined parameters. As a matter of settled judicial practice, the jurisdiction under Article 226 of the Constitution of India is not exercised if there is an alternative efficacious remedy available and in such circumstances, the writ court may decline to “entertain” the writ petition. There is, therefore, a difference between maintainability and entertainability of a writ petition.

Therefore, the petition filed by the Appellant / Petitioner was maintainable. The impugned judgment was set aside, to decide whether the writ petition should be entertained.

The Appeal was allowed

From The President

Adios 2024!

The landmark calendar year of 2024 has come to a close, marking the 75th anniversary of our esteemed Society. This year has been an opportunity to express gratitude and recognise the numerous contributions made by our Society over the past several decades. It also served to reinforce our commitment and dedication to our Society’s mission for our shared future. The year commenced with the landmark ReImagine mega-conference and concluded on a high note with India’s inaugural CAthon — a marathon run for Chartered Accountants, which attracted over 1600 participants in support of noble causes. On behalf of the entire BCAS team, I would like to extend my heartfelt thanks to all our members and well-wishers for their unwavering support for the various BCAS initiatives throughout the year.

The beginning of a brand-new year is always a good spot to pause and reflect on the year gone by, as well as expectations from the new year. Whilst 2024 gave us new governments at the centre and the state, closer home, the new council of our Institute of Chartered Accountants (‘ICAI’) is also set to get started soon. In this backdrop, we discuss some trends affecting our profession that can seemingly unfold (or accelerate) as we glide into the new year:

i. Evolving Assurance Regulatory Landscape: In 2024, India’s assurance regulatory landscape underwent significant changes, with the NFRA demonstrating its strong intent through various amendments and circulars despite opposing views from other stakeholders. With a new council leading ICAI and the recent opinion from the Solicitor General of India, the outcome of the proposed amendments will be closely observed. Additionally, as the NFRA team expands, it is expected that their monitoring and oversight functions will accelerate, resulting in an increase in Audit Quality Review Reports, inspections, and orders.

The Accounting and Auditing Committee at BCAS initiated a series of webinars in December 2024 focusing on significant auditing standards and recent NFRA orders analysis. Featuring speakers from NFRA, the objective of these webinars was to enhance our members’ understanding of the evolving assurance landscape.

ii. Simplification Effort for Income Tax Act: In 2025, it is anticipated that meaningful amendments will be made to the Income Tax Act, 1961, in an effort to simplify its provisions. As announced by the Honourable Finance Minister in her Budget Speech of 2024, there is considerable expectation regarding the changes that may be proposed in the upcoming 2025 budget. These modifications are likely to be refined over the coming months, with the budget document setting the groundwork for this initiative.

At BCAS, the Direct Tax Committee has established a sub-group to provide suggestions on simplification initiatives. This sub-group will also focus on training and knowledge dissemination for our members following the announcement of these changes. Additionally, in December 2024, BCAS had the honour of hosting Dr. Pushpinder S. Puniha and other members from the Consultative Group on Tax Policy at NITI Aayog, where suggestions were shared on tax policy-related matters.

iii. The fruition of legal challenges under GST: The GST law has travelled through the phases of awareness > implementation > assessments > dispute resolution. Since the dispute resolution process is time-consuming, many important matters, including certain constitutional challenges to GST law, might see conclusion in 2025. It would not be of surprise if legislative amendments are resorted to cover some of these judicial pronouncements, as is the expectation with the Safari Retreats judgment. The commencement of matters at the appellate tribunal level is also expected to gather steam in the coming year.

The Indirect Tax Committee at BCAS recently hosted a comprehensive full-day workshop on recent developments in GST, which included a Brain’s Trust session addressing issues arising from recent judgments. Additionally, the committee is preparing a representation to be submitted to the Union Finance Minister and the CBIC, focusing on specific provisions related to the legal and procedural aspects of GST.

iv. Embedded usage of AI across practice areas: The discussion on AI has transitioned from questioning its impact to examining the extent of its influence. As more AI tools become widely used, AI adoption is expected to increase across all professional practice areas by 2025. It is unlikely that AI will replace accountants entirely, but it is entirely probable that ‘accountants with AI’ will replace ‘accountants without AI’.

At BCAS, our AI mission is to enable members to harness the power of AI rather than perceiving it as an adversary. The Technology Initiatives Committee has embarked on a journey of organising subject-specific AI discussions. Having successfully concluded a session on ‘Transforming Tax Practice through AI’, the team is all set to host an upcoming session on ‘Revolutionising CA Practice through AI’.

v. Acceleration in the trend towards audit-only firms and non-audit firms: The changing regulatory framework, increased stakeholder expectations, and the need for specialised domain knowledge are likely to accelerate the trend of firms focusing their efforts on either audit services or non-audit services. As this distinction becomes more pronounced, it may lead to the formation of audit-only firms that utilise their core assurance expertise to provide conflict-free services.

The forthcoming Members’ RRC in Lucknow-Ayodhya will feature insightful sessions on the topic of the future of firms, raising private equity for professional firms and developing non-conventional practice areas. While registration for the Members’ RRC is closed, individuals can join a waitlist to possibly secure a spot in the event of cancellations.

The BCAS membership extends across over 350 towns and cities in India. In December, the Vice President visited Coimbatore to conduct the first BCAS Townhall. These Townhall sessions, which are held outside of Mumbai, provide an excellent opportunity for the BCAS office bearers to engage with our membership and exchange thoughts. Coupled with the Sherpa initiative, these BCAS Townhalls will help reaching out to the growing diverse membership at BCAS.

This month, we surpassed 25,000 subscribers on our BCAS YouTube channel. The BCAS YouTube channel is a treasure trove of professional knowledge and deep insight on various topics. Now, all videos from the ReImagine mega-conference have been added to the BCAS YouTube channel for the benefit of our community.

BCAS congratulates the newly elected council members of the Institute of Chartered Accountants of India as they embark on leading and guiding our collective efforts towards the betterment of our profession.

Please also join me in congratulating the 11,500 newly qualified Chartered Accountants as they embark on their journey in this esteemed profession, with a promising future ahead of them.

As the new year begins, I hope you have obtained your copy of the BCAS Calendar and Diary. Best wishes for a healthy, happy and fruitful new year ahead. Bienvenue 2025!

CA Anand Bathiya

President

Do Not Kill The Golden Goose

Corporate Tax contributed 46.47 per cent, and Personal Income Tax contributed 53.31 per cent of total direct tax collections in India in the FY 2023-24.1 Total collection on account of direct taxes in the FY 2023-2024 was ₹19.60 lakh crores. Thus, we find that taxpayers, both corporate and non-corporate, are major contributors to the government exchequer. GST contributed ₹18.01 lakh crore for the FY 2023-20242.

1 https://incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Final-Approved-Time-Series-Data-2023-24-English.pdf
2 https://pib.gov.in/PressReleasePage.aspx?PRID=2016802

There were 7.5 crore individual taxpayers for the AY 2023-2024.3 This shows that only 5 per cent of the population pays tax in India or files tax returns. Out of this, 87 per cent has returned income of less than ₹10 Lakhs. Fifty per cent of the total individual taxpayers are salaried class, of which 82 per cent have income less than ₹10 lakhs. This shows that the majority of the taxpayers belong to the middle class. Individual taxpayers, and especially the salaried class are the worst hit by inflation and taxes. Over and above income tax, they pay GST on their gross spending. GST should be reduced on items of mass consumption to give relief to people. There is no social security for a large number of private sector employees, and they are taxed at a higher maximum marginal rate of 30 per cent as against the peak corporate tax rate of 25 per cent. There is a strong case for substantial relief to the middle class.

3 https://incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Approved-version-Income-Tax-Return-Statistics-for-the-AY-2023-24.pdf

The government refers to taxpayers as “Pratyek Karadata — ek Rashtra Nirmata”(प्रत्येक करदाता एक राष्ट्र निर्माता). However, unfortunately, this Rashtra Nirmata is not given his due credit, respect, benefit or any social security. In fact, a ‘taxpayer’ is debarred from many government benefit schemes. It pains to see the hard-earned money of the taxpayers utilised in freebies and unproductive work.

Instead of rewarding taxpayers, they are penalised by assessing officers with high-pitched assessments, unreasonable penalties / demands, unfriendly communications, prosecution notices, litigation and so on. Complex tax laws, long-drawn litigation and ambiguity have resulted in uncertainty in tax system / compliances.

It is interesting to note that Mr Sanjay Malhotra, then Revenue Secretary4, echoed the sentiments of taxpayers while addressing the Directorate of Revenue Intelligence5 on 4th December, 2024:

  •  The government aims to make the tax system simple, easier to understand and comply with. He said that the aim is to reduce disputes and litigation.
  •  He conveyed the government’s intent of building trust with taxpayers by avoiding harassment and inconvenience to honest taxpayers, at the same time dealing rigorously with dishonest.
  •  He exhorted members present to remain alert and keep the interest of the economy ahead of the interest of the revenue.
  •  He said that tax officials should desist from raising unwarranted high-pitched demands and keep economic growth in mind.
  •  He said, “If in the process of garnering some small revenue, we are hurting the whole industry and economy of the country, that is certainly not the intent,”
  •  He said, “Revenue comes in only if there is some income and so we have to be very cautious that in the process, as they say, ‘do not kill the golden goose’.”
4 Mr. Sanjay Malhotra has been appointed as the 26th Governor of Reserve Bank of India w.e.f. 11th December 2024
5 DRI is the apex anti-smuggling agency of the Central Board of Indirect Taxes & Customs (CBIC).

Mr. Malhotra’s comments carry a lot of weight, as he has played a pivotal role in shaping policies related to both direct and indirect taxes. On 31st May, 2024, he met BCAS along with many other organisations and trade bodies to understand the challenges faced by taxpayers. While he has now taken up office as Governor of the Reserve Bank of India, let us hope that his successor will follow a similar approach and provide much needed relief to the taxpayers.

It is heartening to note that the government is seized of these issues and has set up a Consultative Group on Tax Policy at NITI Aayog6 to analyse tax policies and processes and suggest reforms that help in tax simplification, enhance tax collections, reduce tax compliances, and other costs for the taxpayers through improved filing, grievance redressal mechanisms and reduced litigation. Dr Pushpinder Puniha, IRS, the chairman of the Consultative Group on Tax Policy, along with Mr Sanjeet Singh, IRS, Senior Adviser at NITI Aayog, visited BCAS on 10th December, 2024 to discuss the changes required in the direct tax laws to achieve the above objectives. They were very open, and their approach was pragmatic. The profession and business community have high hopes from this Consultative Group with regard to tax reforms.

6 National Institution for Transforming India (NITI)

UNION BUDGET 2025

Union Budget 2025 will be presented on 1st February, 2025. One hopes that the Government fulfils the hopes of Aam Adami (Common Man) and brings in reforms to ease the tax burden and compliances. The government consults various trade associations, professional bodies and stakeholders before the Budget. However, once it is announced, there is hardly any discussion by the honourable Members of Parliament (MPs) while passing the same. It would be better if a Committee of Experts from across sectors is set up to study and evaluate the proposals in the Union Budget, including the Finance Bill, before the same is taken up for debate and discussion in Parliament. This group can highlight the pros and cons of various proposals, which would guide MPs while passing them.

ECONOMIC CHALLENGES AHEAD

It is well known that India is facing tough competition from countries like Vietnam, Indonesia, etc. Somehow, India has failed to attract desired investments and capitalise on the present geo-political and economic upheavals and the economic turmoil in Bangladesh, China (credibility crisis post-Covid) and other war zone countries. If India is to attract foreign investment and play a crucial role in the global market, then it needs to address some of its perennial problems, such as lack of stability and consistency in tax laws, adversarial tax regime, corruption, long-drawn tax litigation and complex laws.

It is imperative that India creates an image of a taxpayer-friendly jurisdiction, that cares for and respects all contributors to the progress of the country. India needs to focus on the generation of employment, exports and economic development. Revenue is the by-product of economic growth and should not become a hindrance to development.

At present, India is facing multiple challenges, namely, the slowdown of the economy (for the Q.E. Sep 2024, it is expected to be 5.4 per cent — a seven-quarter low), rising inflation and depreciating rupee7. The new RBI governor has a tightrope to walk on.

7 Rupee ended at 85.53/$1 on 27th December, 2024 – the steepest single day fall since 15th March 2023 Source: The Economic Times dated 28.12.2024.

NEED OF THE HOUR

In the present global scenario, India needs to play its cards wisely. As Mr. Malhotra rightly said, if there is income, revenue will come automatically. All we need to do is to provide a conducive environment for the business community to grow and prosper. A friendly and reasonable tax regime will give much-needed relief to the middle-class population. GST rates need to be reduced, as they are regressive, and ultimately, the end consumer (which is largely lower and middle-income class people) bears the burden.

As we bid adieu to 2024, let us hope that 2025 will bring a simplified tax regime in which the golden goose (taxpayers) will be so well treated that it will give more and more golden eggs for a very long time.

I wish you all a happy New Year 2025!

Best Regards,

 

Dr CA Mayur Nayak

Editor

जानामि धर्मम् न च मे प्रवृत्ति: !

This is a wonderful line adopted from Pandav Geeta (57). It is also incorporated in ‘Vidurniti’, i.e. the preaching by Vidur to his eldest brother Dhrutarashtra in Mahabharata. It is an all-time truth, experienced by and applicable to almost every person. One needs the courage to accept it.

In Pandav Geeta, Duryodhana says this, while in Vidurniti, it is said by Dhrutarashtra, Duryodhana’s father. I am presuming that the readers are aware of the basic story of Mahabharata.

All persons, even uneducated or illiterate, have a basic idea of what is good and what is bad. The problem is that despite this knowledge, one is not inclined to do good things, nor can one refrain from doing bad or undesirable things. He leaves everything to the diktats of his ‘God’ at the time of actual action. The literal meaning: –

जानामि धर्मम् न च मे प्रवृत्ति: ! I know what is good, i.e. what is as per ‘Dharma’ — norms of good behaviour. But, I am not always inclined or willing to act according to the Dharma.

जानाम्यधर्मम् न च मे निवृत्ति:! I also know what is bad or not acceptable to the Dharma. But I am not able to refrain myself from doing that thing. I cannot withdraw myself from evil things.

केनापि देवेन हृदि स्थितेन Some God who is in my heart always guides me on what and how to do (behave) and I can’t disregard Him! I cannot resist His directions!

यथा नियुक्तोस्मि तथा करोमि! I act as per that ‘God’s diktat. (often in a selfish manner)

The learned and wise readers of BCAJ do not need any elaboration on this principle. We experience and observe this every now and then in all walks of life. We develop a feeling that it is ‘inevitable’. That is the ‘gift of Kaliyuga. That is the tragedy of human life.

In any walk of life — education, health, profession, business, administration, judiciary even in so-called ‘spiritualism’ bad or false things are routinely done. There is hypocrisy. There is a dichotomy between what we say and what we do. About politics, elections, etc., the less said, the better.

In the present scenario and systems in India, it is extremely difficult for any professional to remain completely above board. Either he is a victim of corruption or a forceful supporter of it for various reasons. It is sad to see that most professions are losing their charm, respect and credibility in society. The irony is that it is the same society and system, which force them to adopt unethical practices, and when they succumb to pressures, they are defamed.

One of the fallouts of unrighteous ways is the loss of courage to fight. When we are part of the rotten system, we cannot fight or complain against it. We have lost the courage to expose crimes happening before our eyes or in our knowledge. We need to learn a lesson from King Dasharatha in this respect.

Dasharatha, by mistake, killed Shravan. Dasharatha was a King and not answerable to anyone, yet he admitted his guilt and accepted the punishment (A curse from Shravan’s parents).

Hundreds of such examples can be given in our scriptures. However, in the DwaparYuga and Kaliyuga, the value system degenerated rapidly, and today, we are in this pathetic and undesirable situation! Today, the ‘self’ dominates over good morals, and we lack the courage and willingness to act dutifully and conscientiously!