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Year: 2025

Nomination and Remuneration Committee

INTRODUCTION

One of the important committees of the Board of Directors of a listed company is the Nomination and Remuneration Committee (“NRC”). The NRC plays a very important role in the corporate governance of a listed company. Recognising its importance,  the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) has prescribed various roles and responsibilities for the NRC. Let us analyse its relevance in the context of a listed entity.

MANDATORY REQUIREMENT UNDER THE ACT’

Under the Act and the LODR, the NRC is a mandatory committee that all listed entities have to constitute. The Companies Act also requires that the following unlisted public companies constitute an NRC:

(i) Public Companies having a paid-up share capital of ₹10 crore or more; or

(ii)Public Companies having a turnover of ₹100 crore or more; or

(iii)Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crore.

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account for the above purpose.

However, despite being covered by the above thresholds, the following companies need not constitute an NRC:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act

ADDITIONAL REQUIREMENTS UNDER THE LODR

In addition to the provisions of the Act, the LODR contains certain additional provisions for the NRC. The NRC must comprise of at least 3 directors of which all directors shall be non-executive directors and at least 2/3 of the NRC shall be independent directors. Non-executive directors would mean those directors who are not drawing any remuneration other than director’s sitting fees and commission. Thus, the members of the NRC would be either independent directors or non-executive non-independent directors. The requirement of having 2/3 of the NRC as independent directors is the same as in the case of the Audit Committee. However, unlike in the case of the Audit Committee (where members must be financially literate), there is no further qualification prescribed for the members of the NRC.

The quorum for a meeting of the NRC is either 2 members or 1/3 of the members of the committee, whichever is greater, including at least 1 independent director in attendance. Thus, if there is no independent director in attendance, then an NRC cannot have a meeting.

The LODR requires that the NRC meets at least once in a financial year. Thus, while the Audit Committee must meet once every quarter, the NRC can meet only once in a financial year.

CHAIRPERSON

The Chairperson of the nomination and remuneration committee must be an independent director, this again is the same as in the case of an Audit Committee. However, the Chairperson of the Company’s Board of Directors cannot be appointed as the Chairperson of the NRC but he can be a member of the NRC. This is so irrespective of whether he is an executive or a non-executive director.

The LODR provides that Chairperson of the NRC may be present at the AGM, to answer the shareholders’ queries. However, the Act states that the chairperson of the NRC constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Thus, unlike in the case of the Audit Committee Chairman, it is not mandatory for him to present at the AGM.It is up to the chairperson to decide who shall answer the shareholders’ queries.

ROLE UNDER ACT

The Act requires that the NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

It shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. While doing so, the Committee must ensure that—

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the report of the Board of Directors.

ROLE UNDER LODR

The responsibilities of the NRC as laid down under the LODR include the following which are in addition to those laid down under the Act:

(a) Formulation of the criteria for determining qualifications, positive attributes and independence of a director – this could also include additional requirements over and above those mandatorily laid down under the Companies Act, 2013 and the LODR. Listed entities are free to prescribe additional criteria for an independent director. For instance, while the Act prescribes 2 terms of a maximum tenure of 5 years per term, many companies prescribe a maximum tenure of 3 years per term.

For every appointment of an independent director, the NRC is required to evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

  •  use the services of an external agencies, if required;
  •  consider candidates from a wide range of backgrounds, having due regard to diversity; and
  •  consider the time commitments of the candidates.

(b) Recommending to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees – in the case of directors, it would include board fees and directors’ commission. In the case of KMPs and other employees, it would include, salary, bonus, variable pay, employee stock option plans, etc.

(c) Formulation of the criteria for evaluation of performance of independent directors and the board of directors – this could include external evaluation, internal questionnaires, surveys, benchmarking, etc.

(d) Devising a policy on diversity of board of directors – this could include diversity in terms of gender, experience, qualifications, etc.

(e) Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal. Any vacancy in a director must be filled up by the entity within 3 months.

(f) Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

(g) Recommend to the board, all remuneration, in whatever form, payable to senior management. The LODR now expressly provides that remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management (except those who are part of promoter) shall not require approval of the audit committee provided that the same is not material.

(h) The appointment / re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. For this purpose, the NRC must provide a detailed explanation and justification for recommending such a person for appointment or re-appointment.

For the above purpose, the term “senior management” meansthose officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Boardof Directors) and shall specifically include the functional heads, by whatever name called and the persons identified and designated as Key Managerial Personnel (KMP), other than the board of directors, by the listed entity.

Earlier, the NRC only considered appointment and remuneration of the KMP. KMP under s.203 of the Companies Act, 2013 comprises of the MD, Manager, CEO, Whole-time Director, CFO and Company Secretary. However, now even one level below the KMP is covered within the ambit of the NRC. For instance, if there is a change in Vice-President Finance, then the same would have to be placed before the NRC.

When it comes to the appointment of KMP, the provisions of the LODR and the Companies Act are both relevant and should be kept in mind by the NRC:

(a) A whole-time KMP cannot hold office in more than one company except in its subsidiary company.

(b) A KMP can be a non-executive Director of any other company with the prior permission of his Board of Directors.

(c) S.196 of the Act lays down the requirements for a person to be appointed as an MD. For instance, one of the important requirements is that he must be a resident of India and resident for this purpose has been specifically defined under the Act. Another important requirement is that he must not have been sentenced to imprisonment for any period OR to a fine exceeding Rs. 1,000 for the conviction of any offence under 19 specific Laws, one of them is the Income-tax Act, 1961. For instance, if a person has been convicted for an offence relating to Tax Deducted at Source, he may become ineligible to be appointed as an MD of a company. To appoint such a person, prior approval would be required from the Ministry of Corporate Affairs.

(d) A person can be a Managing Director of maximum 2 companies. However, the 2nd company appointing such person as MD must approve his appointment by a Board resolution with the consent of all the directors present at the meeting.

(e) While fixing the managerial remuneration, the Act provides that the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198. The Remuneration payable to non-executive directors cannot exceed 1% of the net profits of the company. However, sitting fees payable for attending Board Meetings is not included in this limit, but the maximum fees payable per committee / board meeting cannot exceed ₹1 lakh.

Further, Schedule V to the Act provides for the maximum managerial remuneration in case of a company that has inadequate profits. The NRC must be cognizant of these provisions when it fixes the remuneration of an MD / Whole-time Director, Director, etc.

(f) The Companies Act provides that if the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. However, the LODR provides that any vacancy in the office of Chief Executive Officer, Managing Director, WholeTime Director or Manager or CFO shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy. The LODR providing a more stringent requirement will override the provisions of the Act.

(g) The Compliance Officer (Company Secretary) of the Company shall be a whole-time employee of the listed entity, not more than one level below the board of directors and shall be designated as a Key Managerial Personnel.

(h) Any vacancy in the office of the Compliance Officer shall be filled by the listed entity within 3 months.

(i) In case of resignation of an independent director of the listed entity, detailed disclosures shall be made to the stock exchanges by the listed entities within 7 days from the date of his resignation. The NRC should ensure that these disclosures are made.

(j) In case of resignation of KMP, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date that such resignation comes into effect. The NRC should ensure that these disclosures are made.

The powers of the NRC were scrutinised by the Bombay High Court in the case of Invesco Developing Markets Fund vs. Zee Entertainment Enterprises Ltd. [2022] 232 COMP CASE 20 (Bombay). The Court held that there is no bar on a shareholder to appoint an Independent Director on the Board of a Company. S. 160 of the Act expressly gave powers to a shareholder to appoint a Director even if the same was not appointed by the NRC. The Court held that if this interpretation were upheld a shareholder of a listed company would not only be disabled from proposing Independent Directors, but such disability would extend to all other Directors. Effectively, even a majority shareholder of a listed Company would not be able to appoint a Director without identification by the NRC. The Court held that this was not the intent or purpose of the Act.

ESOP REGULATIONS

In addition to the Act and the LODR, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“the ESOP Regulations”) also prescribe a role for NRCs of those listed companies that have instituted an ESOP. ESOPs for this purpose, can also be in the form of employee share purchase schemes, stock appreciation rights, etc.

The ESOP Regulations require that a company shall constitute a Compensation Committee for administration and superintendence of the ESOP schemes. However, its NRC can act as this Compensation Committee.

The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOP schemes. Regulation 5(3) of the ESOP Regulations lays down the terms and conditions of schemes to be formulated by the Compensation Committee.

The Committee must also frame suitable policies and procedures to ensure that there is noviolation of securities laws, including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

CORPORATE GOVERNANCE REPORT

The corporate governance contained in the company’s Annual Report must contain the following disclosures regarding the NRC:

(a) brief description of terms of reference;

(b) composition, name of members and chairperson;

(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.

PENALTY

For any contravention of the provisions of Act relating to an NRC, the company shall be liable to a penalty of ₹5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹1 lakh. The LODR provides a fine of ₹2,000 per day of non-compliance with respect to the constitution of the NRC.

In the case of Max Heights Infrastructure Ltd, Adjudication Order No. Order/BM/GN/2024-25/30529, SEBI’s Adjudication Officer held that under the LODR, at least 2/3 of the directors of the NRC must be independent directors. However, in that case, the one director was incorrectly classified as an Independent Director and hence, the number of independent director was reduced by 1 compared to what it should have been. Hence the independence requirements of nomination and remuneration committee was not fulfilled.

The Registrar of Companies, NCT of Delhi & Haryana has passed an adjudication order (order no.RoC/D/ADJ/2023/Section 178/PFS/2511-2515). The findings were that a company which was a listed public company was mandatorily required to constitute anNRC and its total strength could not be reduced below 3. As far as the role of the NRC was concerned, the same was spelt out under the Act and it was seminal in identifying persons who were suitable for becoming directors in a company, it was also responsible for laying down the criteria qualifications, positive attributes and independence of a director, besides laying down policies for syncing remuneration with the performance benchmarks. Owing to the withdrawal of a nominee director by the holding company, the NRC became dysfunctional as the number of directors fell below 3. The RoC held in spite of this the company did not show any alacrity in reconstituting the NRC. Accordingly, it held that the company and its MD had failed to discharge their obligation under section 178 of the Companies Act 2013 thereby rendering themselves for penal actions.

CONCLUSION

The NRC is a very vital cog in the corporate governance wheel. It is vested with great powers as regards appointment of the Directors, KMP and senior management. It would also act as an important link between the shareholders and management of the company.

Miscellanea

1. TECHNOLOGY AND AI

#Google Claims Its AI Tool Can Beat Math Olympiad Gold Medalists

Google has developed an artificial intelligence (AI) math system that can outwit human gold medalists at the International Mathematical Olympiad (IMO). AlphaGeometry2, the AI problem solver is capable of solving 84 per cent of geometry problems posed in the IMO where the gold-medal winners can only solve 81.8 per cent of the problems on average. IMO problems are known for their difficulty, and solving them requires a deep understanding of mathematical concepts — something which the AI models had not been able to achieve up until now.

Engineered by DeepMind, AlphaGeometry managed to perform at the level of silver medalists in
January last year when it was unveiled. However, a year later, Google claims the performance of its upgraded system had surpassed the level of average gold-medalists.

To enhance the system’s abilities, the California-based company said it extended the original AlphaGeometry language to tackle harder problems involving movements of objects, and problems containing linear equations of angles, ratios, and distances.

“This, together with other additions, has markedly improved the coverage rate of the AlphaGeometry language on IMO 2000-2024 geometry problems from 66 per cent to 88 per cent.”

Despite achieving an incredible 84 per cent efficiency rate in solving tricky math problems, Google said there is still room for improvement.

(Source: www.ndtv.com dated 24th February, 2025)

#Alibaba to invest more than $52 billion in AI over next 3 years

Alibaba opens new tab said on Monday it plans to invest at least 380 billion yuan ($52.44 billion) in its cloud computing and artificial intelligence infrastructure over the next three years.

The Chinese e-commerce giant had said it had plans to invest in the sector. The company had reported revenue of 280.15 billion yuan for the three months ended December 31.

Alibaba said the total investment amount exceeds the company’s spending in AI and cloud computing over the past decade. The company has kicked off 2025 as a winner in China’s AI race, drawing in investors with strategic business deals. Its stock has risen more than 68% this year, as of last close.

Other Chinese firms have also been investing into the sector, with ByteDance, the Chinese owner of TikTok, earmarking over 150 billion yuan in capital expenditure for this year, much of which will be centered on AI

(Source: www.reuters.com dated 24th February, 2025)

2 WORLD NEWS

Tesla in India: Trump says unfair to U.S. if Elon Musk builds factory in India

U.S.A. President Donald Trump has said that if Tesla were to build a factory in India to circumvent that country’s tariffs, it would be “unfair” to the U.S.A. Mr. Trump called out India’s high duty on cars during Prime Minister Narendra Modi’s visit to the U.S. last week but agreed to work towards an early trade deal and resolve their standoff over tariffs.

Tesla’s CEO Elon Musk has long criticised India for having import tariffs of around 100 per cent on EVs which protect local automakers such as Tata Motors in the world’s third largest auto market, where EV adoption is still at a nascent stage.

Mr. Trump said it is “impossible” for Mr. Musk to sell a car in the South Asian nation. “Every country in the world takes advantage of us, and they do it with tariffs… It is impossible to sell a car, practically, in, as an example, India,” he said.

India’s government in March unveiled a new EV policy lowering import taxes substantially to 15% if a carmaker invests at least $500 million and sets up a factory.

Tesla has selected locations for two showrooms in the Indian cities of New Delhi and Mumbai, and posted job ads for 13 mid-level roles in India. It does not currently manufacture any vehicles in India.

Mr. Trump said it would be “unfair” to the U.S. if Mr. Musk did decide to build a factory there. “Now, if he built the factory in India, that’s okay, but that’s unfair to us. It’s very unfair,” Mr. Trump said in the interview. Mr. Trump’s plans for reciprocal tariffs on every country that taxes U.S. imports have raised the risk of a global trade war with American friends and foes.

(Source: www.thehindu.com dated 20th February, 2025)

3. ENVIRONMENT

#Global glacier melt is accelerating, new study finds

Ice loss from the world’s glaciers has accelerated over the past decade, a first-of-its-kind global assessment has found, warning that melting may be faster than previously expected in the coming years and drive sea levels higher.

The assessment published in the journal Nature by an international team of researchers found a sharp increase in melting over the past decade, with around 36 percent more ice lost in the 2012 to 2023 period than in the years from 2000 to 2011.
Michael Zemp, a professor at the University of Zurich and co-author of the study, said the findings were “shocking” if not altogether surprising. Regions with smaller glaciers are losing them faster, and many “will not survive the present century”.

“Hence, we are facing higher sea-level rise until the end of this century than expected before,” Zemp told the AFP news agency, adding that glacier loss would also impact fresh water supplies, particularly in central Asia and the central Andes.

Overall, researchers found that the world’s glaciers have lost around five percent of their volume since the turn of the century, with wide regional differences ranging from a two-percent loss in Antarctica to up to 40 percent in the European Alps. On average, some 273 billion tonnes of ice are being lost per year – equivalent to the world population’s water consumption for 30 years, scientists said.

Martin Siegert, a professor at the University of Exeter who was not involved in the study, said the research was “concerning” because it predicts further glacier losses and could indicate how Antarctica and Greenland’s vast ice sheets react to global warming. “Ice sheets are now losing mass at increasing rates – six times more than 30 years ago – and when they change, we stop talking centimetres and start talking metres,” he said.

Zemp warned that to save the world’s glaciers, “you have to reduce the greenhouse gas emissions, it is as simple and as complicated as that.” “Every tenth of a degree warming that we avoid saves us money, saves us lives, saves us problems,” he said.

(Source: www.aljazeera.com dated 24th February, 2025)

Digital Assurance

The Securities and Exchange Board of India (SEBI) has recently issued a draft circular, dated 3rd February, 2025, requiring digital assurance, of financial statement. The first reaction is that this probably relates to IT-related controls or cyber security. That is not the case. SEBI has separate regulations for the same, e.g., Cyber Security and Cyber Resilience Framework for SEBI-regulated entities.

In the circular relating to digital assurance, SEBI states “As a continuous endeavour to enhance the quality of financial reporting being done by listed companies and in order to provide greater investor protection, it is proposed to mandate a separate report on digital assurance of financial statement. The report will increase transparency, improve disclosure standards and enable better enforcement, and thereby provide greater investor protection and trust in the ecosystem.”

The auditor shall conduct an examination in accordance with the “Technical Guide on Digital Assurance” issued by the Institute of Chartered Accountants of India (ICAI). The report shall be prepared by an auditor (Statutory Auditor or Independent Practitioner) who has subjected himself / herself to the peer review process of the Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

If SEBI issues the circular, reporting on digital assurance shall be applicable to the Top 100 listed entities by market capitalization from Financial Year 2024-25 onwards i.e. for the period ending on or after 31st March, 2025.

Some examples of external digital information that can be used to corroborate information in the financial statements are the following:

  1. Revenue of an entity can be corroborated with the GST tax portal
  2. Export receivables can be corroborated with the EDPMS report
  3. Import payables can be corroborated with the IDPMS report
  4. Tax deducted at source and advance taxes paid can be corroborated with the traces portal and AIS data
  5. Total contribution to provident fund by employer and employee, can be corroborated with Employee Provident Fund Organization portal
  6. Use of e-way bills to perform a sales cut-off procedure
  7. Traffic data submitted to NHAI can be corroborated with toll revenue.

The ICAIs technical guide was issued some time ago in January 2023. This guide primarily focuses on sources of external audit evidence available and how it can be utilized by the members in their audit procedures. This guide also highlights the importance of reliability and relevance of the source from which the information is being obtained. In addition to using the available source, the members are guided to consider the reliability and relevance of the source and information being used in the audit. This guide also provides various illustrations of available sources of external audit evidence and how they can be used. Some of those examples are given above.

The aforementioned Technical Guide primarily focuses on sources of external audit evidence and information available and how the same can be utilised by the members in their audit procedures. It is noted that the Technical Guide does not require any separate reporting by auditors on these aspects. Further, no responsibility is cast on the management of the listed entity to provide this information obtained from external data repositories to auditors or provide access to such information to auditors. However, rightfully so, SEBI in the draft circular requires management to take responsibility for sharing such information to the auditors of the company.

The ICAI’s stance not to require any separate audit attestation is understandable, because external audit evidence, whether digital or otherwise, is in any case covered under extant auditing standards and audit procedures in the audit of financial statements.

Paragraph 7 of SA 500 requires as under: “When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence.” Accordingly, the auditor is required to consider the relevance and reliability of information (e.g., information contained in accounting records, information obtained from other sources, information prepared using the work of a management’s expert) which is intended to be used by the auditor as audit evidence.

The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. However, SA 500 rightfully cautions, that there may be exceptions, for e.g., information obtained from an independent external source may not be reliable if the source is not knowledgeable, or a management’s expert may lack objectivity.

According to the Technical Guide, the following factors may be important when considering the relevance and reliability of information obtained from an external information source:

  • The nature and authority of the external information source, including the extent of regulatory oversight (if applicable)
  • The “independence” of the data — is the entity able to influence the information obtained  The competence and reputation of the external information source with respect to the information, including whether, in the auditor’s professional judgement, the information is routinely provided by a source with a track record of providing reliable information
  • The auditor’s past experience with the reliability of the information
  • Market acceptability of the data source
  • Whether the information has been subject to review or verification
  • Whether the information is relevant and suitable for use in the manner in which it is being used, including the age of the information and the nature and strength of the relationship between the information and the entity’s transactions, and, if applicable, the information was developed taking into account the applicable financial reporting framework
  • Alternative information that may contradict the information used
  • The nature and extent of disclaimers or other restrictive language relating to the information obtained
  • Information about the methods used in preparing the information, how the methods are being applied including, where applicable, how models have been used in such application, and the controls over the methods
  • When available, information relevant to considering the appropriateness of assumptions and other data applied by the external information sources in developing the information obtained.

The technical guide emphasises that, the information obtained by the auditor from external sources may reveal inconsistencies with the information obtained by the auditor from other sources (e.g., accounting records, information obtained during the course of audit, etc.). This would help the auditor in performing necessary modifications or additional procedures to resolve the matter. Thus, audit evidence obtained from external sources plays a vital role in the audit process.

SEBI has invited comments and suggestions, by 24th February, 2025. The author submits as follows:

1. There are numerous auditing standards that require an appropriate use of internal and external audit evidence, in the audit of financial statements, to ensure that they are true and fair. The implementation of these standards and the conduct of appropriate audit procedures are also verified by various peer reviewers, including the NFRA reviewers. Therefore, a separate audit report to certify the same is unwarranted and is an extra burden on the auditors.

Precisely for this reason, the Technical Guide of the ICAI does not require any separate audit report. What may be more appropriate under the circumstances, is that the auditors include a summary work paper in their audit file, which will document all the external evidences that they used to audit the financial statements. This in the normal course will be subjected to a review by various peer reviewers.

2.   If the above recommendation is not acceptable to SEBI, they should require the report to be issued by the company’s statutory auditor. It would be incorrect and inappropriate for an independent practitioner to certify the report, as they do not have the same level of knowledge about the client as the statutory auditor. A statutory auditorconducts regular audits, reviews financial statements, and has a deep understanding of a company’s internal controls, compliance framework, and financial history. On the other hand, an independent practitioner, who is engaged for a specific task, lacks this extensive familiarity. For instance, if a company has complex revenue recognition policies, the statutory auditor—being well-versed in past accounting treatments—can provide a more informed certification than an external practitioner with limited exposure to the company’s financial intricacies.

Suppose a company’s revenue figures in its financial statements need to be verified against GST (Goods and Services Tax) returns. The statutory auditor, having audited the company’s financials and tax reconciliations over time, is aware of any past discrepancies, discount or adjustments for returns, or specific reporting nuances, such as aggregating the multiple branches. An independent practitioner, however, would only be reviewing the data at a surface level and may not be aware of historical issues such as classification errors, past rectifications, or timing differences in revenue recognition.

3. The original purpose of digital assurance was to obtain more certification by statutory auditors on various non-GAAP measures in offer documents, which a merchant banker may not be competent, since they are not involved in the audit of financial statements; and may not have a deep understanding of clients databases and controls. Take for example, in the case of Swiggy, there are several non-GAAP measures that are used, such as adjusted EBITDA, quick commerce gross revenue, food delivery gross revenue, etc. Without opining on the relevance of these measures, it is not out of bounds for the statutory auditors to comfort such numbers.

In the offer document, Swiggy also provides industry and market-related data, basis the Redseer Report. Here the merchant banker’s basis their in-house experts or hired consultants should feel comfortable that the source is authoritative, and that it is fairly represented in the offer document, without any cherry-picking of information that suits the issuer, and avoiding those that are adversarial.

Likewise, there could be detailed cost-related data, where comforting by a cost accountant or cost auditor may be appropriate. A geoscientist may be more competent to certify mineral reserves. Information related to attrition rate for services company can be comforted by the statutory auditors, however, since there could be multiple ways of computing the same, the basis of measurement should be clarified by ICAI, so that there is consistency in calculations.

Whilst the merchant bankers are overall responsible for the information contained in the offer document, they should be supported by various professionals. Some of these professionals can be sourced as consultants or employed by the merchant bankers. Information that is closely associated with financial systems and related databases, should be comforted by the statutory auditors. SEBI should ensure that all stakeholders have a collaborative and cooperative approach in this matter, so that the end result is a solid offer document that can form a strong basis for evaluating a company.

Section 148: Reassessment assessment cannot be opened twice for the same reason.

27. SarikaKansal vs. ACIT

[W.P.(C) 7940/2024 & CM APPL. 32747/2024]

Dated: 30th January, 2025

(Del) (HC).] AY 2017-18

Section 148: Reassessment assessment cannot be opened twice for the same reason.

The petitioner challenged to the impugned order under Section 148A(d) of the Act and the impugned notice 148 of the Act. First, that the impugned order has been passed without considering that the information on the basis of which it was the subject matter of reassessment proceedings, which culminated in an order dated 29th March, 2022 passed under Section 147 read with Section 144B of the Act.

The second ground is that the impugned notice is beyond the period of limitation. According to the petitioner, the limitation for issuance of the impugned notice expired on 31st March, 2024.

The grounds on which the petitioner’s assessment is sought to be reopened revolves around transactions, whereby the petitioner had sold 1,70,000 (One Lac Seventy Thousand) shares of a company named Trustline Real Estate Private Limited (hereafter TREPL) to one Mr. Samir Dev Sharma at the rate of ₹42/- per share. The Assessing Officer (hereafter AO) suspects that the said shares were sold at an apparent consideration, which is below the fair market value with an intent to avoid tax.

The petitioner disputes the same and contends that her income for AY 2017-18 has been reassessed for the same reason that she had sold the shares of TREPL at a value, which was less than the fair market value.

Thus, the first and foremost question to be addressed is whether the AO had reopened the assessment for AY 2017-18 for the same reason that has led the AO to pass the impugned order holding that it is a fit case for issuance of the impugned notice.

The petitioner is an individual and there is no dispute that she files her income tax returns regularly. She had filed her return for AY 2017-18 on 2nd August, 2017 declaring her taxable income as ₹74,77,750/-. The said income also included income arising from sale of 1,70,000 (One Lac Seventy Thousand) shares of TREPL at the rate of ₹42/- per share. The petitioner claims that the said rate was settled on the basis of valuation report, whereby the shares of TREPL were valued taking into account its underlying assets including the first and third floor of the property bearing the address A-20, Friends Colony East, New Delhi (hereafter the Friends Colony property). The petitioner’s return was processed under Section 143(1) of the Act.

On 31st March, 2021, the AO issued a notice under Section 148 of the Act, as in force at the material time, calling upon the petitioner to file her return for AY 2017-18 within a period of fifteen days from the date of the said notice. Subsequently, the AO furnished the reasons for reopening the assessment.

It is apparent from perusal of the reasons that the petitioner’s assessment was reopened on the premise that the petitioner as well as certain other companies had sold the shares of TREPL to one Mr. Samir Dev Sharma during the Financial Year 2016-17 at an abysmally low value. During the course of the reassessment proceedings, the AO issued a notice under Section 143(2) read with Section 147 of the Act calling upon certain information including the information that was relevant for determining the market value of the Friends Colony property. The petitioner responded to the said notice and provided the information as sought for. The petitioner had explained that TREPL owns two floors of the Friends Colony property — first and third floors each having covered area of 2,248.44 sq. ft.

The petitioner asserted that the market value of the Friends Colony property, as determined by the government approved valuer, was ₹8,58,90,408/-(Rupees Eight Crores Fifty-eight Lakhs Ninety Thousand Four Hundred and Eight only) and she had also furnished the copies of the valuation report, balance sheet and profit and loss account of TREPL. A letter dated 24th March, 2022 furnished by the petitioner to the AO in response to the notice issued under Section 143(2) of the Act. The explanation as provided by the petitioner was accepted and the AO passed an assessment order dated 29th March, 2022 accepting the petitioner’s returned income.

Now the AO once again issued a notice dated 28th March, 2024 under Section 148A(b) of the Act enclosing therewith an annexure containing information which according to the AO, suggested that the petitioner’s income had escaped assessment and accordingly, called upon the petitioner to show cause why her assessment for AY 17-18 not be opened.
The Court observed that it was apparent from the reasons that the notice under Section 148A(b) of the Act was issued on the assumption that the petitioner had sold the shares of TREPL at an apparent value which was less than its fair value. It is important to note that whereas in the earlier round of proceedings, the AO had reasoned that income amounting to ₹18,91,41,050/- for AY 2017-18 had escaped assessment, the AO now stated that the information available suggested that the income amounting to ₹32,35,81,536/- had escaped assessment. The said view was premised on the basis that the value of the Friends Colony property was ₹32,35,81,536/- and the petitioner had sold the entire Friends Colony property to Mr. Samir Dev Sharma by transferring the shares of TREPL, which owned the said property. It is material to note that this was clearly the subject matter of examination in the previous round of the reassessment proceedings that had commenced by virtue of the notice dated 31st March, 2021 issued under Section 148 of the Act.

The petitioner responded to the notice by a letter dated 10th April, 2024. Once again, the petitioner reiterated that TREPL owned only two floors of the Friends Colony property – first and third floors and each of the said floors measured 2,248 sq.ft.

The petitioner furnished a valuation report which was furnished earlier disclosing the value of the two floors of the Friends Colony property which was owned by TREPL as ₹8,60,00,000/- (Rupees Eight Crores Sixty Lac Only). She reiterated that the fair market value of the shares sold by her and as determined in terms of Rule 11UAA of the Income Tax Rules, 1962 would amount to ₹42/- per share after considering the market value of the two floors of the Friends Colony property. The AO passed the impugned order holding that it is a fit case for issuance of notice under Section 148 of the Act. The impugned order proceeds on the basis that the entire shareholding (25,00,000 shares) of TREPL were transferred to one Mr. Samir Dev Sharma by three persons for a consideration of ₹10,50,00,000/-

The impugned order proceeds on the assumption that TREPL owned the entire Friends Colony property ad-measuring 500 sq. yds. (418.064 sq. mtrs.) and the circle rate in the given area is ₹7,74,000/- per sq. meter. Thus, the value of the immovable property owned by TREPL is ₹32,35,81,536/- and the same had been transferred indirectly by sale of shares of TREPL. The impugned order on the aforesaid basis computes the fair market value of the shares of TREPL sold by the petitioner.

The Hon. Court observed that it is clear that the information on the basis of which the impugned order has been passed was subject matter of examination in the earlier round of reassessment under Section 147 of the Act. The AO’s reason to believe that the petitioner’s income had escaped assessment, which had led to the issuance of notice dated 31st March, 2021, was founded on an assumption that the petitioner had sold the shares of TREPL at a price below its correct value. The notice issued under Section 143(2) of the Act during the said proceedings and the petitioner’s response dated 24th March, 2022 issued to the said notice clearly establishes that the examination revolved around the value of the immovable property held by TREPL (Friends Colony property). The petitioner’s response dated 24th March, 2022 indicates that the petitioner had forwarded the audited balance sheet and the profit and loss account of TREPL and had also explained that TREPL owned only two floors of the Friends Colony property. The AO had examined the said response and accepted the same. Clearly, the impugned order has been passed in respect of the same issue that was subject matter of examination in the earlier round.

The learned counsel for the Revenue contended that there was a difference in the issue involved as the impugned order has been passed on the information that TREPL had owned the entire Friends Colony property. He contended that in the earlier round, the AO had accepted that TREPL held only part of the Friends Colony property, however, information now available suggests that TREPL owns the entire Friends Colony property.

Undisputedly, the impugned order has been passed on the basis that TREPL owns the entire Friends Colony property. However, the same was clearly an issue in the earlier round as well and the petitioner had clearly explained the extent of property owned by TREPL. In her response to the notice dated 28th March, 2024 issued under Section 148A(b) of the Act, the petitioner had reiterated that TREPL owns only two floors of the Friends Colony property and there is no material on record available with the AO to contradict the same. The impugned order does not discuss why the petitioner’s assertion that TREPL owns only two floors of the Friends Colony property had been ignored. The counter affidavit filed on behalf of the Revenue also does not address the said issue. The counter affidavit merely reiterates what is stated in the impugned order.

The Court observed that it is apparent that the impugned order has been passed on surmises without any cogent material to controvert that TREPL owns only two floors of the Friends Colony property and not the entire building at the material time.

The question whether the TREPL owned the entire Friends Colony property is one that is easily verifiable by the AO. However, as noted above, the AO has completely ignored the petitioner’s response to the notice issued under Section 148A(b) of the Act in this regard in the impugned order. Similar approach has also been adopted in the counter affidavit as well.

Section 148A(d) of the Act mandates that the AO is required to pass an order on the basis of record and considering the response to the notice under Section 148A(b) of the Act. In this case, the record indicates that the information on the basis of which the assessment is sought to be reopened was fully examined in the earlier round of reassessment under Section 147 read with Section 144B of the Act. The petitioner’s response clearly stated that TREPL owned only two floors of the Friends Colony property and there is nothing credible on record that controverts it. The impugned order does not even advert to the said issue.

Thus, the impugned order and the impugned notice were quashed and set aside.

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

26. City Corporation Limited vs. ACIT Circle – 1 Pune &Ors.

[WP (C) No. 6076 TO 6081 OF 2023]

Dated: 29th January, 2025

(Bom) (HC)] [Assessment Years : 2013-14 to 2019-20]

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

The assessee is engaged in constructing and developing infrastructure facilities. In terms of the NCLT’s order dated 27th April, 2020, the CCL got merged with its wholly owned subsidiary “Amanora Future Tower Pvt. Ltd.” (AFTPL), with effect from 1st April, 2018.

By communication dated 27th April, 2020, the Petitioner informed the Income Tax Authority of the merger effective 1st April, 2018. This intimation bore the stamp and endorsement of receipt from the office of the Deputy Commissioner of Income Tax, Circle 1(1), Pune.

In the return filed on behalf of the Respondents, no dispute was raised about receiving this intimation on 27th August, 2020.

On 31st March, 2023, the Assistant Commissioner of Income Tax, Circle 1(1), Pune, issued a notice dated 31st March, 2013 under Section 148 of the Act, to AFTPL seeking to reopen the case in PAN: AAKCA3074H. The Assistant Commissioner obtained approval from the Principal Chief Commissioner of Income Tax to issue notice to “Amanora Future Towers Private Limited (now merged with City Corporation Limited)”.

The Petitioner thereupon instituted the writ Petitions, questioning the impugned notice dated 31st March, 2023, inter alia, on the ground that, post-merger, AFTPL was a non- existing entity. Therefore, no notice under Section 148 of the Act, could have been issued to AFTPL.

The learned counsel for the Petitioner, relied on Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. (2019) 107 taxmann.com 375 (SC); Uber India Systems (P.) Ltd. vs. Assistant Commissioner of Income(2024) 168 taxmann.com 200 (Bombay); and Alok Knit Exports Ltd. vs. Deputy Commissioner of Income-tax, Circle 6(1)(1), Mumbai (2021) 130 taxmann.com 457 (Bombay); in support of the contention that the notice issued to a non- existing entity post-merger was a substantive illegality and not some procedural violation. Accordingly, he urged that the impugned notices be quashed and set aside.

The learned counsel for the Respondents, submitted that issuing notices in the name of AFTPL was not illegal. He also submitted that the Principal Commissioner of Income Tax specifically approved the issuance of such notices. It was submitted that the material on record shows that the notice was meant to be served upon the Petitioner. However, due to certain technical glitches, the utility system generated a notice in the name of AFTPL. He said the facts in the present case were like those in Skylight Hospitality LLP vs. Asstt. CIT(2018) 92 taxmann.com 93/254 Taxman 390 (SC). He submitted that, in this case, the Delhi High Court upheld a notice issued to the company that had already merged. Accordingly, it was urged that these Petitions may be dismissed.

The Hon. Court observed that the merger between City Corporation Limited and Amanora Future Towers Private Limited, which was effective from 1st April, 2018, was not disputed. This merger was based on the NCLT’s order dated 27th April, 2020. There was also no dispute about the Petitioner, vide a communication received by the Income Tax Department on 27th August, 2020 informing about the merger effective 1st April, 2018. No dispute was raised about the department not receiving the intimation on 27th August, 2020 or about the department being unaware of the merger. Still, the impugned notices dated 31st March, 2023 under Section 148 of the Act, were issued only in the name of “Amanora Future Towers Private Limited”. The crucial factor being that all such notices were issued to and in the name of ‘Amanora Future Towers Private Limited’

As of the date of the issue of the impugned notices, the noticee ‘Amanora Future Towers Private Limited’ could not have been regarded as a ‘person’ under Section 2(31) of the Act. In fact, that was a non-existent entity. In Maruti Suzuki case the Hon’ble Supreme Court has held that notice issued in the name of a non-existent company is a substantive illegality and not merely a procedural violation of the nature adverted to in Section 292B of the Act.

The Hon. Court noted that in the Maruti Suzuki case, the Hon’ble Supreme Court noted that the merged company had no independent existence after the merger. The Court noted that even though the Assessing Officer was informed of the merged company having ceased to exist due to the approved merger scheme, the jurisdictional notice was issued only in its name. The Court held that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the merged entity ceases to exist upon the approved merger scheme. Participation in the proceedings by the petitioner company into which the merged company had merged or amalgamated could not operate as an estoppel against the law.

Similarly in Ubber India Systems case, the Coordinate Bench held that where by virtue of an order passed by the NCLT, the assessee company stood amalgamated with the petitioner, notice issued under Section 148A(b) and Section 148 to the assessee, which was a non-existent company was illegal, invalid and non-est. Similarly, in Alok Knit Exports Ltd(supra), another Coordinate Bench where the Assessing Officer had committed a fundamental error by issuing notice under Section 148 of the IT Act in the name of an entity which had ceased to exist because of it having merged with the petitioner company, the stand of the Assessing Officer that this was only an error which could be corrected under Section 292B could not be sustained.

The Court observed that in the affidavit filed by the tax department there is a clear admission that the amalgamation of the company was brought to the notice of the Department. The only explanation is that “notice was issued on the non-existing company due to technical glitch in the system wherein no field in the notice u/s 148 of the Act is editable.”

The affidavit states that files were moved proposing notices in the names of both entities, AFTPL and the Petitioner (CCL). There was a reference to seizure proceedings, the two PAN numbers, and the lack of an editable field on this notice. Therefore, it was submitted that the notice was generated on AFTPL’s PAN.

In short, the averments in the affidavit purport to apportion the blame on the department’s utility system. Based upon this, the fundamental error is sought to be passed off as a mere technical glitch.

The Court held that based on the above averments and the arguments, the fundamental error in issuing the impugned notices against a non-existing company despite full knowledge of the merger cannot be condone. The impugned notices, which are non-est cannot be treated as “good” as urged on behalf of the Respondents. In Maruti Suzuki case, the Hon’ble Supreme Court has held that issuing notice in the name of a non-existing company is a substantive illegality and not a mere procedural violation of the nature adverted to in Section 292B of the Act.

The department contention about the facts in the present case being akin to those in Skylight Hospitality LLP case could not be accepted. The Court held that the Special Leave Petition filed by the Skylight Hospitality LLP (supra) against the judgment of the Delhi High Court rejecting its challenge was dismissed in the peculiar facts of the case, which weighed with the Court in concluding that there was merely a clerical mistake within meaning of Section 292B. The Hon’ble Supreme Court held that in Maruti Suzuki case the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer, was issued to a non-existent company. The assessment order was issued against the amalgamating company. “This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B”.

The Hon. Court also referred to decisions in case of Anokhi Realty (P) Ltd. Vs. Income-tax Officer(2023) 153 taxmann.com 275 (Gujarat); Adani Wilmar Ltd. vs. Assistant Commissioner of Income-tax(2023) 150 taxmann.com 178 (Gujarat) and in the case of Principal Commissioner of Income Tax -7, Delhi vs. Vedanta Limited ITA No. 88 of 2022 decided on 17th January, 2025.

Accordingly, the impugned notices were quashed and set aside.

Statistically Speaking

1. COUNTRIES WHICH RECEIVED THE MOST MONEY FROM INDIA IN BUDGET 2025-26

2. POWERFUL PASSPORTS IN THE WORLD

Rank Country Visa free destinations
1 Singapore 195
2 Japan 193
3 Finland 192
3 France 192
3 Germany 192
3 Italy 192
3 South Korea 192
3 Spain 192
4 Austria 191
4 Denmark 191
India has dropped five places in this year’s rankings, falling from 80th to 85th.

The Indian passport now provides visa-free access to 57 countries
U.S. passport has fallen to ninth place. Currently, U.S. passport holders enjoy visa-free access to 186 destinations.
Pakistan, Yemen, Iraq, Syria, and Afghanistan rank among the bottom five. 
Source: Henley Passport Index 2025

 

3. DIRECT TAX COLLECTIONS FOR F.Y. 2024-25

            (₹ in Crore)
FY 2023-24 (as on 10th February, 2024)
Corporate

Tax (CT)

 Non*- Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total
Gross Collection 8,74,561 9,30,364 29,808 3,461 18,38,194
Refunds 1,41,132 1,46,321 – 78 2,87,531
Net Collection 7,33,429 7,84,042 29,808 3,384 15,50,663

(₹ in Crore)
FY 2024-25 (as on 10th February, 2025) Percentage growth
Corporate

Tax (CT)

 

 Non*-Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total Total Growth
Gross Collection 10,08,207 11,28,040 49,201 3,059 21,88,508 19.06%
Refunds 2,29,731 1,80,317 – 57 4,10,105 42.63%
Net Collection 7,78,475 9,47,723 49,201 3,003 17,78,402 14.69% 
Source: Central Board of Direct taxes

 

4. COUNTRIES WITH THE MOST IPOS IN 2024

5. GROWTH IN ELECTRONIC EXPORTS

Letter to the Editor

Dear Sir,

I read the ‘NAMASKAAR’ column with a keen interest. I’m writing to you about the article ‘One’s nature cannot be changed’ in a recent BCA Journal, authored by Mr C N Vaze. I appreciated this column and it has always fascinated me. It has a lot of learning, relearning, and material to introspect and work on oneself to become a better human being.

He has rightly said a lion cannot be expected to eat grass, or a fox will always remain धूर्त… For human beings, I will share a conversation between Lord Brahma and Naradaji, when Lord was seeding this planet with the various species, he would give details of that creation to Naradaji, when it was the turn to create humans, the Lord said about human beings, इसकी प्रवर्ति पानी की तरह नीचे ही गिरने की होगी, नारदजी विस्मय से बोले, प्रभु, ऐसा अनर्थ क्यो कर रहे हैं, ब्रह्मा जी ने उत्तर दिया, इसे मैं एक ऎसी चीज़ दे रहा हूँ, जिसे ये इस्तेमाल करेगा, तो मुझ पर भी राज करेगा, वो था दिमाग, विवेक… We as human beings need to use our विवेक, the biggest blessing bestowed on us, or we will live a life worse than animals and endanger the whole planet. And we should keep changing, and everybody can change; change is constant. Dinosaurs became extinct as they could not change, and tomorrow the human race will become extinct.

COVID-19 did try to give a wake-up call, but what we see today is better not said. I learn from Kabir, Rahim, Tulsidas, and many such saints.

My appreciation to Mr Vaze and the Editorial Team.

With regards

Yatendra Goyal,
Chartered Accountant

Tech Mantra

Some more productivity apps for this edition:

Simple Login – Anti Spam

When you give away your personal email ID online to anyone, there is a good chance that the same would end up with a spammer or a hacker. SimpleLogin acts as a firewall to protect your personal email inbox.

SimpleLogin is an open-source solution to protect your email inbox. It allows you to quickly create a random email address, an alias. All emails sent to that alias are forwarded to your personal email address.

You can use the alias when subscribing to a newsletter, signing up for a new account, or giving your email to someone you don’t trust. Not only an alias can receive emails, it can also send emails. An alias is a full-fledged email address.

Later, you can simply block or delete an alias if it’s too spammy. That’s it!

Android: https://bit.ly/4gjd8dy

 

USB Lockit – Pendrive Password

This app allows you to lock / unlock your USB drives. If you have USB drives with photos, audios, videos, etc. and would like to lock them with a password, this app is for you. Once the drive is locked, nobody can access your files without unlocking it by entering the password!

The locking / unlocking can be done easily, by inserting the USB drive in your phone / Laptop C-Type port and going through 3 quick steps:

1. To lock the USB drive and protects all your files, simply set a PIN and click on LOCK button.

2. To unlock the USB drive and access to all your files, enter your PIN and click on UNLOCK button.

3. To relock the USB drive without entering the PIN every time, just a click on the LOCK button.

ATTENTION: If you lose or forget the PIN, it cannot be recovered. It is advisable to write it in a safe place.

Android : https://bit.ly/3PVFQ9S

Windows : https://www.usblockit.com/

 

Auto Answer Call—Raise to Ear

If you are tired of always having to swipe in order to answer an incoming call, Auto Answer Call lets you answer a call by simply holding your phone to your ear. When your phone rings and the app detects that it is near your ear, it will beep once and automatically answer the call. It’s that simple!

NOTE: The app does not currently work for WhatsApp calls.

It works with your existing call screen / phone app and is very easy to enable and disable. You also have an option to end an ongoing call by turning the phone face down and to automatically turn down the ringer volume once the phone has been picked up.

A very simple and efficient app for daily use – for a small price.

Android : https://bit.ly/3WBPwdn

 

Droid Dashcam – Video Recorder

Convert your phone into a dashcam with Droid Dashcam!

Droid Dashcam is a great driving video recorder (dashboard camera, BlackBox) app for car / vehicle drivers that can continuously record videos in loop mode, add subtitles with needed information directly on those videos and record in the background, auto start recording, and much more.

You can overlay captions directly on the Recording Video file, including Timestamp (Date), Location Address, GPS Coordinates, Speed (based on GPS data), etc. You can continue recording in the background and use other apps that don’t use camera. You can also use the notification panel to start/stop recording while this app is running in the background. You can use any camera for recording (rear / front) but only some devices allow you to choose a camera with a wide-angle lens.

Overall, it is a great app if you will use your dashcam sparingly and do not need it daily.

Android : https://bit.ly/42svgi6

ASS – Movement

Readers may get the impression that it is a donkey’s movement. It is far from that. ASS stands for ‘Anti-Simplification of Statutes’. It is a great movement in the national interest.

There was a country where all laws were very complicated. Certain anti-social elements were pressurising the King to simplify the laws. The King directed his Minister to appoint various committees from time to time to look into the matter.

The Minister after a study over ten to twenty years, prepared a Bill to simplify a particular law relating to revenues. There was a big hue and cry in all circles, even before reading the contents of the Bill. Many could not even digest the idea of simplification.

Certain groups in the kingdom who were like opposition parties and not in favour of the King resisted it vehemently. They felt that it was their duty to protest any proposal made by the King without even knowing what it contained. Many didn’t know what and why they were resisting. There was a huge discontent in many quarters. Therefore, the King appointed 3 special judges to hear the representations of different groups.

Bureaucrats who were asked to draft the simplified law felt that it was unethical to do so. Their thinking was that any law has to be complicated. If a common man knows the law, he may commit lesser defaults and the King will lose revenue on account of fines and penalties.

Expert Committee members demanded the constitution of fresh committees to do a comparative study or cost-benefit analysis. It was difficult for them to survive without being a member of any such committee.

Lawyers had a point for objection. They said many of them would be left with no work, if laws are simplified and there is no litigation. Another strong objection came from the authors and publishers of books, people engaged in preparing CDs of compilation of cases and so on. They said it would create lot of unemployment in the printing industry and also in the distributing agencies.

Those who were in the liaisoning activity could not bear this shock. They said they thrive on the settlement of complicated cases. The Union of employees in the Revenue Department and the Courts realised that many of them would lose their jobs as many establishments would be closed down.

After all this happened, Chartered Accountants were asked about their reaction. They did not participate in the proceedings since their ‘say’ is never heard by anybody, not even by their own subordinates. According to them, ‘Simplification’ ‘Simply a Fiction’. They only expressed that be it simplified or be it complicated, please don’t make us certify any document or sign any report! They said all clients did whatever they liked and CAs are required to endorse all the sins committed by others.

Till the Bill is passed or otherwise, the book publishing business is thriving and there is a boom in seminar business!

ASS-Movement is always successful.

Regulatory Referencer

I. DIRECT TAX: SPOTLIGHT

1. Guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements — Circular No. 1/2025 dated 21st January, 2025

2. Rule 114DA(1) amended to substitute Form No. 49C and to provide that the said Form be filed within eight months from the end of the financial year — Income-tax (Fourth Amendment) Rules, 2025- Notification No. 14/ 2025 dated 7th February, 2025

II. FEMA READY RECKONER

RBI amends receipt and payment norms for trade transactions between two ACU residents:

The RBI has amended FEMA Notification No. 14(R), the Manner of Receipt and Payment Regulations. It has been now been provided that payment from a resident in the territory of one participant country to a resident in the territory of another participant country for a trade transaction should be through the ACU mechanism, or as per the directions issued by RBI to Authorised Dealers. Here, participant country means Member countries of ACU other than Nepal and Bhutan. Thus, the requirement is now restricted only to residents of these countries and not to suppliers located in these countries. Proviso meant for suppliers to India who are residents of countries other than countries that are participants of ACU has been consequently removed. For all other trade transactions between these countries, the payment can be in INR or any foreign currency.

[NOTIFICATION NO. FEMA 14(R)(1)/2025-RB, dated 4th February, 2025]

RBI announces steps to encourage the use of Indian Rupee and local currencies for settlement of cross-border transactions

The RBI has been focusing on Internationalisation of Indian Rupee since some time. In this process, it keeps amending FEMA notifications. Amendments have been made in FEMA Notification 5(R) — Deposit Regulations, FEMA Notification 10(R) — Foreign Currency Accounts by a person resident in India Regulations and FEMA Notification 395 — Mode of Payment and Reporting of Non-Debt Instruments Regulations. The main amendments are as follows:

i. The Overseas branches of AD banks will be able to open INR accounts for a person resident outside India for settlement of all permissible current account and capital account transactions with a person resident in India.

ii. Persons resident outside India will be able to settle bona fide transactions with other persons resident outside India using the balances in their repatriable INR accounts such as Special Non-resident Rupee (SNRR) account and Special Rupee Vostro Account (SRVA).

iii. Persons resident outside India will be able to use their balances held in repatriable INR accounts for foreign investment, including FDI, in non-debt instruments.

iv. Indian exporters will be able to open accounts in any foreign currency overseas for settlement of trade transactions, including receiving export proceeds and using these proceeds to pay for imports.

[Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 5(R)(5)/2025-RB, dated 14th January, 2025]

[Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 10(R)(5)/2025-RB dated 14th January, 2025]

[Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Third Amendment) Regulations, 2025 — Notification No. FEMA 395(3)/2025-RB, dated14th January, 2025]

RBI updates FEMA Master Directions on Foreign Investment, Export of Goods & Services, and Deposits

Over the last few months, the RBI and GOI have amended several FEMA rules and notifications. The changes have now been incorporated in the respective Master Directions. The RBI has issued Updated Master Directions on “Deposits and Accounts”, “Export of Goods and Services”, and “Foreign Investment in India”. There are several clarifications provided in the Master Direction on Foreign Investment in India, some of which are listed below:

  • Indian companies which are Foreign Owned and Controlled (referred to as FOCCs) are permitted to make further investment in an Indian company only as per the FDI provisions. In spirit, these are considered as non-residents and hence they need to comply with FDI provisions to make further investment in India. While all restrictions followed for FOCCs, it was not clear whether certain reliefs which were provided to non-residents for making FDI were available to FOCCs are not. It is not clarified that the reliefs provided to non-residents under NDI Rules while making FDI — like permissibility of swap, deferred consideration, etc. — are also available to FOCCs.
  • With respect to Indian residents who migrate abroad and become non-residents — it has been clarified that the investments will be held by them on a non-repatriable basis.
  • Further, it has been clarified where a non-resident acquires equity instruments by way of transmission on the death of an Indian resident, shall be considered as a non-repatriable investment.
  • The definition of control has been streamlined throughout all provisions.

[Master Direction — Deposits and Accounts; Export of Goods and Services; Foreign Investment in India]

IFSCA notifies IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations

The IFSC Authority (IFSCA) has notified IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations, and registration of bullion depositories & vault managers. It specifies provisions related to an application for recognition of bullion exchange, conditions for grant of recognition, period of recognition, renewal & withdrawal of recognition. Also, it prescribes the operational framework of bullion exchange and the general obligations of bullion clearing corporations.

[IFSCA Notification F. No. IFSCA/GN/2025/001]

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

89. Principal CIT vs. Vikram Dhirani

[2025] 472 ITR 342 (Del)

A. Y. 2007-08

Date of order: 20th August, 2024

Ss.132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

In an appeal by the Revenue, on the question whether the Tribunal erred in deleting the addition made to the income of the assessee in the assessment made pursuant to a search u/s. 132 of the Income-tax Act, 1961 for the A. Y. 2007-08, dismissing the appeal, the Delhi High Court held as under:

“i) Since the assessment initiated in respect of the A. Y. 2007-08 was one which had already stood concluded, the Tribunal had held that since the pen-drive and the data appearing thereon having not been unearthed in the course of the search u/s. 132 of the Act, it would not constitute incriminating material. It had consequently followed the view consistently taken by this court.

ii) The assessment was confined to section 153A and consequently the significance of the incriminating material found in the course of the search alone would be the basis for any additions to the income. Since the pen-drive was an article which was not recovered in the course of the search but constituted material which had been obtained by the Department through the exchange of information route, there was no ground to interfere with the view expressed by the Tribunal.”

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

88. HansaMetallics Ltd. vs. Dy. CIT

[2025] 472 ITR 737 (P&H)

A. Y. 2012-13

Date of order: 22nd January, 2024

S. 276C of ITA 1961

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

The Assessee filed its return of income for A. Y. 2012-13 on 29th December, 2012 declaring total income at ₹8,20,53,544. As per the return of income, the self-assessment tax was pending. The self-assessment tax was paid belatedly on 10th July, 2013 along with interest.

The Assessing Officer issued a notice dated 11th February, 2014 requiring the Assessee and its directors to show cause as to why the prosecution proceedings u/s. 276C(2) should not be initiated. On the basis of legal opinion sought from the standing counsel of the Income-tax Department, a complaint was filed u/s. 276C read with section 278B of the Act.

Thereafter, the Criminal Court came to the conclusion that a case was made out and charges were framed.

The Assesseecompany and its directors filed a petition for quashing the complaint and all the consequential proceedings arising therefrom. The Assessee’s contention was that there was no evasion of tax at all. Though there was a delay in payment of tax, but the said tax was admitted / acknowledged in the return of income. On the other hand, the Department contended that the Assessee was well within his financial limits to pay the tax at the time of filing return of income, yet it did not choose to pay the tax and thereby caused loss to the revenue.

The Punjab and Haryana High Court allowed the petition and held as follows:

“i) Prosecution u/s. 276C(2) of the Income-tax Act, 1961 read with the other provisions of the Act can only be launched if there was a wilful evasion or attempt at evasion of either tax, penalty or interest. Delay in payment of Income-tax would not amount to evasion of tax.

ii) It was not in dispute that the Income-tax was self assessed and payment thereof was also made, though belatedly. The tax along with interest was paid on July 10, 2013. The show-cause notice for delayed payment was sent only on February 11, 2014 and February 24, 2014 pursuant to which the complaint was instituted. Therefore, by no stretch of imagination could it be held that there was any evasion of tax on the part of the assessees, though there was a delay in the payment of the tax for which interest was paid. The prosection was not valid.”

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

87. Principal CIT vs. Jupiter Capital Pvt. Ltd.

[2025] 472 ITR 561 (Kar)

A. Y. 2014-15

Date of order: 20th February, 2023

S. 2(47) of ITA 1961

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

In an appeal by the Revenue,on the question whether the Tribunal was right in setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares when no such extinguishment of rights was made out by the assessee as required under section 2(47) of the Income-tax Act, 1961 and there was no reduction in face value of shares, dismissing the appeal, the Karnataka High Court held as under:

“i) The undisputed facts were that pursuant to the order passed by the High Court of Bombay, number of shares had been reduced to 9,988. The face value of the shares had remained same at ₹10 even after the reduction. The Assessing Officer’s view that the voting power had not changed as the percentage of the assessee’s share of 99.88 per cent. had remained unchanged was untenable because if the shares were transferred at face value, the redeemable value would be ₹99,880 whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300.

ii) The Tribunal had rightly followed the authority in Karthikeya vs. Sarabhai v. CIT [1997] 228 ITR 163 (SC); (1997) 7 SCC 524; 1997 SCC OnLine SC 152, with regard to meaning of transfer by holding that there was no transfer within the meaning of the expression “transfer” as contained in section 2(47). There was no error in the order of the Tribunal setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares.”

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

86. Principal CIT vs. International Coal Ventures Pvt. Ltd.

[2025] 472 ITR 307 (Del)

A. Ys. 2012-13

Date of order: 20th December, 2024

S.4 of ITA 1961

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

The assessee was a joint-venture company formed by five public sector undertakings, SAIL, CIL, RINL, NMDC and NTPC, for the purpose of ensuring adequate and dependable coal supply for its promoter companies. During the financial year relating to the A. Y. 2012-13, the assessee pursued a proposal to acquire and develop a coal mine overseas and received equity contributions from some of these undertakings. The amounts received from RINL were kept in a fixed deposit with a bank. Subsequently since the proposal for acquisition of the coal mine which was being pursued was abandoned, the assessee refunded the amount received from RINL. Since the assessee had earned interest on the amount received from RINL, it paid interest to RINL which confirmed that the amount received by it was accounted for as income in its hand and tax was paid.

In the appeal by the Revenue, on the question whether interest on funds that were called for and earmarked for a specific purpose of acquiring a coal mine and deposited in the short-term fixed deposit could be construed as incidental to setting up the business of acquisition of a coal mine, dismissing the appeal, the Delhi High Court held as under:

“i) The accounting treatment of capitalising expenses during the preoperative stage of setting up a business, rests on the rationale that the cost incurred for setting up the profit-making apparatus is required to be accounted for as the value of that asset. Such expenditure is incurred for bringing the undertaking into existence. Thus, it would not be apposite to treat such preoperative expenses as revenue expenses since it cannot be matched with the revenue receipts. The amount incurred for construction or acquisition of the asset would necessarily have to be accounted as the cost of that capital asset. This principle applies only in cases where substantial time is required to construct the asset or bring the asset to use. The financial costs for such assets are thus
considered as a part of the intrinsic value of the asset. There is a distinction between the price of an asset and its cost. On the same principles, the amounts received which are directly linked to the
acquisition or construction of the asset, are required to be reduced from the capital cost of the said asset. In one sense, such receipts mitigate the cost of the capital asset and it is essential to reflect the correct cost of the asset.

ii) The Accounting Standard 16 applies to a “qualifying asset”, which is defined as an asset that takes substantial period to get ready for its intended use or sale and also explains that the substantial period of time as contemplated under the standard, primarily depends upon the circumstances of each case. Ordinarily, the same should be considered as twelve months unless a shorter or longer period is justified in the facts and circumstances of the case. It also explains that for estimating this period, “the time which an asset takes technologically or commercially, to get ready for its intended use or sale”, is required to be considered.

iii) Accounting treatment of various items are guided by an overarching principle that final accounts should reflect the true and fair view of the reported entity. In order for a capital value of an asset (which takes a considerable time to bring it to intended use) to be fairly disclosed on historical cost basis, it would be essential to subsume within the cost of the said asset all elements of expenditure, which directly contribute to the cost of that asset. It is for this reason that general administrative cost of an entity which cannot be attributed to a particular asset is not construed as the cost of that asset. But the expenditure that is directly linked to the construction or acquisition of a qualifying asset, is required to be treated as a part of its cost.

iv) If the interest was earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up the assessee’s business, the interest earned would require to be accounted for as the part of the capital value of the business or asset. A caveat was added that such accounting treatment was or would be applicable only if the nature of the asset was such that required time for construction or for putting it in use. Illustratively, the same would be applicable where the asset is to be constructed, developed or is of a nature that required considerable time to bring it to use. In case where a plant is being set up in a factory and the requisite funds for setting up the same are deployed for a period of time, the interest paid on the amount borrowed for the said purpose and interest earned on temporary deposits during the course of deployment are required to be accounted for as a part of the capital costs. This is not true for an off-the-shelf product. Illustratively, if a motor vehicle is purchased from borrowed capital, neither the interest paid nor the interest earned on the funds borrowed for payment of consideration of the same can be accounted for as a part of the cost of the said asset.

v) The assessee was set up to acquire resources to ensure supply of coal and at the material time it was in the process of negotiation for acquiring a coal mine, to set up its business, and thus called for capital from its shareholders for the purpose of payment of the acquisition costs. It was the part of the said funds that were kept in the short-term fixed deposit in the bank for pending payment of the construction. The attempt to acquire the coal mine was aborted and thus the amounts borrowed were repaid to RINL. It was not disputed that the funds in question were not surplus funds of the assessee, the same were called for and were earmarked for acquisition of a coal mine overseas which was to be the assessee’s undertaking as the assessee was formed for the purpose of acquiring and operating a coal mine overseas.

vi) The interest received on borrowed funds, which were temporarily held in interest-bearing deposit, was a part of the capital cost and was required to be capitalised as capital work-in-progress.”

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

85. World Vision India vs. NFAC

[2025] 472 ITR 564(Mad.)

A. Y. 2018-19

Date of order: 19th December, 2024

Ss. 37, 142(2A) and 144of ITA 1961:

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

The assessee filed its return of income for AY 2018-19. The said return was selected for scrutiny assessment. The assessment was completed and order dated 14th September, 2021 was passed. In the said order, the Assessing Officer relied upon special audit report dated 2nd June, 2017 as also the assessment orders passed for A. Ys. 2014-15, 2015-16 and 2017-18. The report dated 2nd June, 2017 was prepared u/s. 142(2A) of the Act for AY 2014-15, pursuant to which the assessment orders for AYs 2014-15, 2015-16 and 2017-18 were passed. The orders for AY 2014-15, 2015-16 and 2017-18 were challenged in appeal before the CIT(A).

In the A. Y 2018-19, the Assessing Officer concluded that the Assessee had applied 67 per cent of the gross receipts for charitable purposes and for the balance the Assessee had failed to establish any documents to substantiate that the amount was utilised for charitable purposes and therefore the demand has been confirmed.

The Assessee filed a writ petition challenging the assessment order mainly on the ground that the basis for coming to the conclusion that the Assessee has failed to utilize the amount for charitable purposes is based on the special audit report dated 2nd June, 2017 which was generated for AY 2014-15. The Hon’ble Madras High Court allowed the petition and remanded the matter back to the AO for the re-computation of income and held as follows:

“i) Prima facie reliance on the special audit report u/s. 142(2A) generated for the earlier assessment years could not be a basis to conclude that the similar pattern would have been followed by the assessee during the subsequent assessment years and to do so would amount to assessment by sampling. The special audit report was for the A. Y. 2014-15. In terms of section 142(2A) the special audit report could relate only for a particular assessment year since the expression used is, “if at any stage of the proceedings before him”, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the Revenue, was of the opinion that it was necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of, (i) getting the accounts audited by an accountant, as defined in sub-section (2) of section 288 , nominated by the competent authority or (b) getting the inventory valued by a cost accountant nominated by the competent authority.

ii) The assessment order indicated that no allowance had been made for the expenses incurred by the assessee towards administrative and salary expenses of the assessee and had only been allowed to accumulate 15 per cent. of the gross receipt. It was the contention of the Department that if no other amount was to be allowed, the Department had to make best judgment assessment u/s. 144. Therefore, the assessment order was set-aside and the matter was remitted back to the Assessing Officer to pass a fresh order on the merits and in accordance with law independently without getting influenced by the special audit report u/s. 142(2A) generated for the A. Y. 2014-15. Since the re-computation of income required a proper consideration, the assessee was directed to give a proper reply with proper evidence explaining the expenses which it sought to exclude.”

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

84. Neha Bhawsingka vs. UOI

[2025] 472 ITR 335 (Cal)

A. Y. 2022-23

Date of order: 22nd November, 2024

Ss.142(1), 143(2), 144, 144B, 156, 271(1)(d) and 271AAC(1) of ITA 1961

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

The assessee was in trading business. For the A. Y. 2022-23, an intimation u/s. 143(1) of the Income-tax Act, 1961 was sent to the assessee’s registered e-mail address, confirming that the return was processed without any discrepancies. Similar communications for the earlier A. Ys. 2019-20 to 2021-22 and the subsequent year 2023-24 were also sent to the same registered e-mail address. While accessing the Income-tax portal, the assessee’s tax consultant discovered that several notices, including u/ss. 143(2) and 142(1) and show-cause notices were issued against the assessee for the A. Y. 2022-23 and sent to an unregistered e-mail address. The ex parte assessment order was passed u/s. 144 read with section 144B making disallowances on account of purchases as non-genuine and unsecured loan as unexplained credit u/s. 68. Penalty notices u/ss. 271(1)(d) and 271AAC(1) were also issued.

The assessee filed a writ petition contending that the assessment order and demand notices were vitiated since they were not served at the assessee’s registered e-mail address as required u/s. 282 but were sent to an unregistered e-mail address which was not associated with her. The Calcutta High Court allowed the petition and held as under:

i) The assessment order passed u/s. 144 read with section 144B, the consequent demand notice u/s. 156 and the penalty notices u/s. 271(1)(d) and 271AAC(1) were vitiated due to procedural lapses and non-compliance with statutory provisions. The notices u/s. 143(2) and 142(1) were not served to the assessee at her registered e-mail address as mandated u/s. 282 but were sent to an unregistered e-mail address, thereby depriving the assessee of a fair opportunity to respond, violating the principles of natural justice.

ii) The assessee had a legitimate expectation, arising from consistent past practices, that all communications would be sent to her registered e-mail address. The failure to adhere to this established protocol and the absence of proper service of notices invalidated the subsequent assessment proceedings and the ex parte assessment order passed u/s. 144 and 144B. The Revenue’s reliance on the assessee’s permanent account number database or an alternate e-mail address could not substitute for statutory compliance. Procedural irregularities in issuing and serving notices undermine the jurisdiction and legality of the entire assessment process. The assessment order could not be completed without issuance of a notice u/s. 143(2). Hence, the assessment proceedings and the assessment order without issuing the notice u/s. 143(2) were bad in law.

iii) Accordingly, the assessment order, demand notice and penalty notices were quashed and set aside. The authorities were directed to issue fresh notices, if deemed necessary, strictly adhering to the statutory provisions and ensuring proper service to the assessee.”

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

83. Religare Enterprises Ltd. vs. NFAC

[2025] 472 ITR 329 (Del)

A. Y. 2013-14

Date of order: 28th November, 2024

Ss. 143(3), 144B and 254 of ITA 1961

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

The Assessee filed revised return of income for AY 2013-14 declaring total income at ₹2,70,87,75,810. This included income from dividend amounting to ₹4,14,800 which was exempt. The Assessee had not claimed any deduction in respect of expenses amounting to ₹1,83,55,525 u/s. 14A of the Income-tax Act, 1961. The Assessee’s case was selected for scrutiny and an addition of ₹1,93,79,583 was made u/s. 14A of the Act in addition to the amount of ₹1,83,55,525 already disallowed u/s. 14A of the Act. The AO also made disallowances in respect of fines and penalties.

The CIT(A) partly allowed wherein the CIT(A) deleted the additional disallowance made by the AO. In the appeal before the CIT(A), the Assessee had raised an additional ground and claimed allowance of ₹1,83,55,525 which it had not done under the revised return.

The Tribunal remanded the matter regarding disallowance u/s. 14A and disallowance of fines and penalties to the AO for consideration afresh with the direction that the disallowance u/s. 14A was required to be worked out in respect of only those investments which were yielding exempt income. Thereafter, the Assessee filed a Miscellaneous Application requesting that the AO be directed to restrict the disallowance to the extent of exempt income. The Miscellaneous Application was allowed and the Tribunal modified its order and directed that the disallowance u/s. 14A of the Act be restricted to the exempt income.

Pursuant to the aforesaid directions, the Jurisdictional AO passed an order dated 4th February, 2023 to give effect to the directions issued by the Tribunal and restricted the disallowance u/s. 14A to the extent of dividend income. However, the AO did not give any specific findings in respect of fines and penalties. The Assessee also did not file any appeal against the said order.

Thereafter, the National Faceless Assessment Centre (NFAC) issued an intimation informing the Assessee that the assessment would be completed in accordance with the procedure u/s. 144B of the Act. Against this, the Assessee filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal as the Jurisdictional AO had already passed an order to give effect to the order passed by the Tribunal. However, the NFAC passed an order, once again making the same disallowance u/s. 14A and disregarded the directions of the Tribunal. The NFAC also expressly stated that its order would supersede the order of the Jurisdictional AO.

The Assesseefiledwrit petition against the said order of NFAC. The Delhi High Court allowed the writ petition and held as follows:

“i) There is no provision under the Income-tax Act, 1961 for continuing assessment proceedings after an assessment order is passed. Concluded assessments cannot be opened except by recourse to specific provisions including section 147 of the Act.

ii) The issue of disallowance u/s. 14A had stood concluded by the order dated February 4, 2023. The Assessing Officer did not issue any specific findings regarding the fines and penalties amounting to Rs. 35,18,803 and the assessee had not filed any appeal against such decision. Notwithstanding that an order dated February 4, 2023 passed by the jurisdictional Assessing Officer, the National Faceless Assessment Centre had proceeded to pass another order. Although, the jurisdictional Assessing Officer had passed an order giving effect to the order dated February 25, 2021 and the order dated February 25, 2021 as modified by the order dated April 1, 2022 by the Tribunal, the National Faceless Assessment Centre had issued an intimation dated February 15, 2023 informing the assessee that the assessment would be completed in accordance with the procedure u/s. 144B . The assessee had filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal since the jurisdictional Assessing Officer had already passed an order dated February 4, 2023 giving effect to the orders passed by the Tribunal.

iii) The National Faceless Assessment Centre had passed an order dated March 29, 2023 once again reiterating the disallowance of ₹3,60,51,977 made u/s. 14A, which included an additional disallowance of ₹1,93,79,583 which was made by the Assessing Officer in the assessment order dated March 28, 2016. Although, the National Faceless Assessment Centre had found that the order dated April 1, 2022 passed by the Tribunal had confined the disallowance u/s. 14A to ₹4,14,800, such directions were disregarded and had also expressly stated that its order would supersede the order dated February 4, 2023 passed by the jurisdictional Assessing Officer. The order dated February 4, 2023 passed by the jurisdictional Assessing Officer had set out that it was an order to give effect to the order passed by the Tribunal wherein it was held to the effect that after appeal effect income of the assessee (since merged with REL) for the assessment year 2013-14 was recomputed at ₹2,69,43,53,890 under the normal provisions of the Act. Credit for tax deducted at source, advance tax and regular taxes paid were given after verification and interests u/s. 234A, 234B, 234C and 234D were being charged, as applicable.

iv) Therefore, there was no doubt that the proceedings pursuant to the directions issued by the Tribunal stood concluded by the order dated February 4, 2023. The initiation of further proceedings by the National Faceless Assessment Centre pursuant to the orders passed by the Tribunal was without jurisdiction. The assessment order passed u/s. 143(3) read with sections 254 and 144B was set aside.”

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

82. Sunshine Capital Ltd. vs. DCIT

[2025] 472 ITR 293 (Del.)

A. Y. 2008-09

Date of order: 16th April, 2024

Ss.153 and 254 of ITA 1961

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

The case of the Assessee was selected for scrutiny and assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed after making various additions. CIT(A) partly allowed the Assessee’s appeal. The Tribunal, vide its order dated 08-10-2018 remanded the matter to the AO for the purpose of fresh assessment. The Tribunal also deleted the demand reflected on the Income Tax Portal.

Thereafter, the Assessee made several representations from July 2020 to August 2021 to the Department praying for rectification of the error with respect to the demand being reflected on the portal as well as the issue of refund. But there was no action by the Department. Since no reply was received by the Assessee upon representations, the Assessee filed an application in August 2021 in accordance with the Right to Information Act (RTI) to give effect to the order passed by the Tribunal. Pursuant to the RTI application, the AO passed an order in November 2021 wherein it expressed its inability to give appeal effect on the ground that it had not received the order passed by the Tribunal through proper channel. Against this order, the Assessee filed an appeal in December 2021 which came to be disposed vide order passed in January 2022 whereby it was decided that the information provided to the Assessee was adequate.

Thereafter, in February 2022, the Assessee filed an application to the registry of the Tribunal seeking information on service of order passed by the Tribunal. The Assessee was informed by the registry in March 2022 that the order passed by the Tribunal was duly sent to the CIT(Judicial) on 24th August, 2018 for further action. In March 2022, the Assessee also made subsequent representations to rectify the error with respect to the demand reflected on the portal, but to no avail.

The Assessee therefore filed writ petition challenging the inaction on the part of the Department and contended that despite the order passed by the Tribunal being communicated to the concerned authority of the Income tax Department within stipulated time, the Department failed to pass a fresh assessment order. The Delhi High Court allowed the petition and held as follows:

“i) Section 153 of the Income-tax Act, 1961, stipulates that an order for fresh assessment pursuant to an order u/s. 254 or section 263 or section 264 of the Act may be made at any time before the expiry of a period of nine months. The provision further encapsulates that the period has to be calculated from the end of the financial year in which the order u/s. 254 of the Act is received by the authorities mentioned in the section. Regarding the word “received” the language couched in section 260A of the Act is similar to that of section 153(3). The contextual interpretation of the phrase “received” postulates the time when the parties are notified about the pronouncement and are represented at that instant in the open court. The legislative intent behind the enactment of section 254(3) of the Act does not prescribe shifting of the onus of proving the receipt of the order under the provision on the assessee, the expression “is received” used in section 153(3) of the Act cannot mean to extend the limitation till perpetuity. The expression “received” employed in section 153(3) of the Act would not strictly mean that a certified copy of the order of the Tribunal, in the given facts and circumstances, ought to have been necessarily supplied to the concerned authority through an appropriate mechanism devised by the respondents. Further, section 254(3) of the Act casts a duty upon the Tribunal to send the copy of the orders passed under section 254 of the Act to the assessee as well as to the Principal Commissioner or Commissioner. A conspectus of section 254 read with section 153(3) of the Act would reveal that the provisions cannot be made applicable to the detriment of the assessee.

ii) The material on record showed that the Tribunal sent the order of the remand to the Department on October 24, 2018, but the Department denied having received it. It was sufficient to take note of the Tribunal’s stand of sending a copy of the order to the Department. Moreover, the assessee, as early as on July 30, 2020 itself, made the first communication to the Department to give effect to the order in appeal. The record would show that the subsequent representation sent by the assessee on July 9, 2021 to the Department contained all the requisite information of the orders passed by the concerned authorities in the case of the assessee. No concrete steps had been taken by the Department. Except harping upon the word “received”, the Department had not taken any measure to give effect to the order in appeal. Taking into consideration the Tribunal’s response that the concerned order was sent on October 24, 2018, the Department ought to have passed the order to give effect to the order in appeal within twelve months from then. However, that had not been done by the Department till date.

iii) Since the Department had failed to comply with the order of the Tribunal in passing a fresh assessment order within the stipulated time, the writ petition was to be allowed with the directions to the Department to ensure that the demands of quantum amounting to ₹34.70 crores and penalty amounting to ₹33.98 crores being reflected in the Income-tax Business Application portal were removed within two weeks, that the amount of ₹25,44,671 lying with the Department were refunded to the assessee with applicable interest as per law, that the properties of the assessee were released within two weeks of the passing of this judgment, and that the three bank accounts were defreezed by the Department within two weeks.”

Glimpses of Supreme Court Rulings

19. PCIT vs. Jupiter Capital Pvt. Ltd.

(2025) 170 taxmann.com 305 (SC)

Capital gains – Reduction of share capital – The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961 – Percentage of shareholding of the assessee in the Company prior to, and post, reduction in Share Capital is not relevant – Loss incurred on erosion of the net worth is allowable as capital loss.

The Respondent-Assessee was a company engaged in the business of investing in shares, leasing, financing and money lending. The Assessee had made an investment in Asianet News Network Pvt. Ltd. (ANNPL), an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having face value of ₹10/- each. Thereafter, the Assessee purchased 38,06,758 shares from other parties, thereby increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company, i.e., 15,35,05,750.

The said company incurred losses, as a result of which the net worth of the company got eroded. Subsequently, the company filed a petition before the Bombay High Court for reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered a reduction in the share capital of the company from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the Assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at ₹10 even after the reduction in the share capital. The High Court also directed the company for payment of ₹3,17,83,474/- to the Assessee as a consideration.

During the year, the Assessee claimed long term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the Assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income-tax Act, 1961. The Assessing Officer took the view that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Hence there was no extinguishment of the rights of the shareholders. Extinguishment of rights would mean that the assessee has parted with those shares or sold off those shares to second party, which was not the case here.

In appeal the CIT(A) vide order dated 14th December, 2017 while distinguishing the facts of the present case from those involved in the decision of the Supreme Court in Kartikeya V. Sarabhai vs. Commissioner of Income Tax (reported in (1997) 7 SCC 524) held that any extinguishment of rights would involve parting the sale of percentage of shares to another party or divesting rights therein. The appeal was therefore dismissed.

However, the ITAT reversed the order passed by the CIT(A) and allowed the appeal filed by the Assessee observing that the decision of the Supreme Court in Kartikeya vs. Sarabhai (supra) was squarely applicable to the facts of the present case. On the account of reduction in number of shares held by the Assessee company in ANNPL, the Assessee has extinguished its right of 15,33,40,900 shares and in lieu thereof, the Assessee received 9,988 shares at ₹10/- each along with an amount of ₹3,17,83,474/-. The Assessee’s claim for capital loss on account of reduction in share capital in ANNPL was therefore allowable.

The Revenue went in appeal before the High Court. The High Court, dismissed the appeal filed by the Revenue and affirmed the order passed by the ITAT, observing that the AO’s view that the voting power of the Assessee had remained unchanged was untenable. The rationale was that if the shares were transferred at face value, the redeemable value would be ₹99,880/- whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300/. According to the High Court, the ITAT had rightly followed the judgement in the case of Kartikeya V. Sarabhai vs. The Commissioner of Income Tax (supra).

The Supreme Court after having heard the learned ASG appearing for the Revenue, and having gone through the materials on record, were of the view that no error, not to speak of any error of law, was committed by the High Court in passing the impugned order.

According to the Supreme Court, whether reduction of capital amounts to transfer was no longer res integra in view of its decision in Kartikeya V. Sarabhai (supra).

According to the Supreme Court, the following principles are discernible from its aforesaid decision:

a. Section 2(47) of the Income-tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.

b. A company under section 66 of the Companies Act, 2013 has a right to reduce the share capital and one of the modes which could be adopted is to reduce the face value of the preference share.

c. When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of Section 2(47) of the Income-tax Act, 1961.

The Supreme Court noted that in the present case, the face value per share has remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares have been reduced from 15,35,05,750 to 10,000 and out of this the Assessee was holding 15,33,40,900 shares prior to reduction and 9,988 shares after reduction, it can be said that on account of reduction in the number of shares held by the Assessee in the company, the Assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the Assessee received 9,988 shares at ₹10 each along with an amount of ₹3,17,83,474.

The Supreme Court observed that in the case of Kartikeya v. Sarabhai (supra) it has not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital. In that case, it was observed that reduction of right in a capital asset would amount to ‘transfer’ under Section 2(47) of the Income-tax Act, 1961. Sale is only one of the modes of transfer envisaged by Section 2(47). Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income-tax Act, 1961.

The Supreme Court noted the decision of a Division Bench of the Gujarat High Court in the case of Commissioner of Income-Tax vs. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 where the Court clarified that receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains as envisaged under Section 48 of the Income-tax Act, 1961.

The Supreme Court further noted that in the case of Anarkali Sarabhai vs. CIT reported in (1997) 224 ITR 422, it was observed that the reduction of share capital or redemption of shares is an exception to the Rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the
Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer Under Section 2(47) of the Income-tax Act, 1961.

In view of the aforesaid, the Supreme Court held that that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961.

The Supreme Court therefore dismissed the appeal filed by the Revenue authorities.

Note: The judgment of the Supreme Court in the case of Anarkali Sarabhai has been analysed in the column “Closements” in April, 1997 issue of BCAJ.

From The President

Get out of the way!

– Stop micromanaging economic activity!

– Give entrepreneurs and households back their time and mental bandwidth.

– Regulators should hold themselves to the same standards that they expect of regulated entities.

The preface to the Economic Survey 2024-25 resounds with a bold and decisive call for reform. These foundational principles underscore the broader vision through which our nation’s governing dispensation can truly embrace and enable ‘growth through deregulation.’

The core takeaway from this year’s Economic Survey is the imperative need for a substantial rollback of regulatory excesses, as well as a conscious restraint from layering policies with additional operational conditions under the pretext of preventing misuse. More often than not, such over regulation distorts the original intent of policy measures, hampering rather than facilitating economic dynamism. The Survey makes an insightful case for leveraging India’s deeply ingrained social trust structures to attain scale and efficiency, especially
in its closely connected, kinship-based economic landscape. Each chapter of the Survey reinforces the necessity of ‘simplification and deregulation’ wherever feasible. As Chartered Accountants being enablers of commerce and enterprise, such unequivocal directional clarity in favour of effective deregulation is truly a welcome shift.

Encouragingly, early indicators of this ‘growth through deregulation’ vision are already visible. The conceptualisation of a Deregulation Commission, backed by well-defined terms of reference and coordinated efforts between the central and state governments, is a promising step forward. However, the success of this initiative hinges on its substantive execution rather than merely its structural existence. If implemented with true intent and depth, this deregulation drive can significantly bolster the competitiveness of Indian businesses, enabling them to expand and scale with greater ease and speed.

A Budget with Balance and Direction

The month of February commenced with the high-decibel presentation of the Union Budget 2025, accompanied by the introduction of the Finance Bill, 2025. A strong emphasis on driving consumption-led growth was evident, while an impressive balance has been achieved on the fiscal front. The Society hosted two highly engaging Public Lecture Meetings: one on the Direct Tax Provisions under the Finance Bill, 2025 by Shri CA. Pinakin Desai, and another on the Indirect Tax Proposals under the Finance Bill, 2025 by Shri CA. Sunil Gabhawala. Both sessions were well attended and have since garnered over 15,000 views on the Society’s YouTube channel. Additionally, our esteemed BCAS publication on the Analysis of Union Budget 2025-26 is now available for complimentary download via the Society’s website.

The Much-Anticipated Income Tax Bill, 2025 — Simplification in Form and not Substance?

In her Budget speech, the Hon’ble Finance Minister underscored ‘taxation’ as the foremost lever for ‘transformative reform’ within a broader set of six identified reformative pillars. This set the stage — and expectations — for the unveiling of a new Income Tax Bill, which was subsequently introduced in the legislature a week later.

Given that the palimpsest Income Tax Act, 1961 has governed direct taxation for over six decades, the introduction of the new Bill was anticipated to be a landmark moment — one that would bring forth a contemporary, well-calibrated framework equipped with modern concepts to facilitate real ease of compliance and substantive deregulation.

However, upon review of the Income Tax Bill, 2025, it becomes evident that the ‘simplification’ proposed within it is largely cosmetic. The revisions primarily revolve around improved structural organisation through better grouping of sections and chapters, rather than a meaningful reimagining of substantive provisions. While a detailed analysis does reveal a few high-impact potential changes, many appear to stem from drafting inconsistencies rather than deliberate policy shifts. It is reassuring to note that an ongoing review process seeks to address these inconsistencies, but the broader expectation of a comprehensive transformation in our tax statutes remains unmet.

Undoubtedly, rewriting well-entrenched and settled tax principles is a formidable challenge, and in many cases, an undesirable exercise. However, a more ambitious approach could have been undertaken — one that integrates fresh, progressive thinking into our tax framework in alignment with the overarching theme of ‘growth through deregulation’ as articulated in the Economic Survey. Alas, it appears that the journey toward a truly transformative tax regime is yet to be realised, and we must wait longer for substantive change.

Warm Regards,

CA Anand Bathiya

President, Ayodhya, 28th February, 2025

From Published Accounts

COMPILER’S NOTE

Given below are 3 typical ‘Emphasis of Matter’ paragraphs included in the audit reports for the year ended 31st March, 2024.

1. Infosys Ltd

Emphasis of Matter regarding Cybersecurity Incidents

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

As described in note 2.24.2 to the Consolidated Financial Statements, certain costs relating to possible damages or claims relating to a cybersecurity incident in a subsidiary are indeterminable as at the date of this report because of reasons stated in the note. Our opinion is not modified in respect of this matter.

From Notes to Consolidated Financial Statements  Note 2.24.2: McCamish Cybersecurity incident in November 2023

Infosys McCamish Systems (McCamish), a step-down subsidiary of Infosys Limited, experienced a cybersecurity incident resulting in the non-availability of certain applications and systems. McCamish initiated its incident response and engaged cybersecurity and other specialists to assist in its investigation of and response to the incident and remediation and restoration of impacted applications and systems. By 31st December, 2023, McCamish, with external specialists’ assistance, substantially remediated and restored the affected applications and systems. Loss of contracted revenues and costs incurred with respect to remediations, restoration, communication efforts, investigative processes and analysis, legal services and others amounted to $38 million (approximately ₹316 crore). Actions taken by McCamish included investigative analysis conducted by a third-party cybersecurity firm to determine, among other things, whether and the extent to which company or customer data was subject to unauthorized access or exfiltration. McCamish also engaged a third-party eDiscovery vendor in assessing the extent and nature of such data. McCamish in coordination with its third-party eDiscovery vendor has identified corporate customers and individuals whose information was subject to unauthorized access and exfiltration. McCamish’s review process is ongoing. McCamish may incur additional costs including indemnities or damages / claims, which are indeterminable at this time. On 6th March, 2024, a class action complaint was filed in the U.S. District Court for the Northern District of Georgia against McCamish. The complaint arises out of the cybersecurity incident at McCamish initially disclosed on 3rd November, 2023. The complaint was purportedly filed on behalf of all individuals within the United States whose personally identifiable information was exposed to unauthorized third parties as a result of the incident.

2. Indus Towers Ltd

Emphasis of Matter regarding material uncertainty at one of the largest customers and its consequential impact on the company’s business operations

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

Material uncertainty at one of the largest customers of the Company and its consequential impact on the Company’s business operations. We draw attention to note 48 of the consolidated financial statements, which describes the potential impact on business operations, receivables, property, plant and equipment, and financial position of the Company on account of one of the largest customer’s financial conditions and its ability to continue as a going concern. Our opinion is not modified with respect to the above matter.

From Notes to Consolidated Financial Statements’

48. A large customer of the Group accounts for a substantial part of revenue from operations for the quarter and year ended 31st March, 2024, and constitutes a significant part of outstanding trade receivables and unbilled revenue as of 31st March, 2024.

a) The said customer in its latest published unaudited financial results for the quarter and nine months ended 31st December, 2023, had indicated that its ability to continue as a going concern is dependent on its ability to raise additional funds as required, successful negotiations with lenders and vendors for continued support and generation of cash flow from operations that it needs to settle its liabilities as they fall due. The said customer had also disclosed in the aforesaid results that so far it has met all debt obligations to its lenders/ banks and financial institutions along with applicable interest till date. Further, the said customer had disclosed that one of its promoters has confirmed that it would provide financial support to the extent of ₹20,000 Mn to the said customer.

b) The Group, subject to the terms and conditions agreed between the parties, has a secondary pledge over the shares held by one of the customer’s promoters in the Group and a corporate guarantee provided by said customer’s promoter which could be triggered in certain situations and events in the manner agreed between the parties. However, these securities are not adequate to cover the total outstanding with the said customer.

c) During the quarter ended 30th June, 2022, through the quarter ended 30th September, 2022, the said customer had informed the Group that a funding plan was under discussion with its lenders and it had agreed to a payment plan to pay part of the monthly billing till December 2022 and 100% of the amounts billed from January 2023 onwards, which will be adjusted by the Group against the outstanding trade receivables. As regards the dues outstanding as of 31st December, 2022, the customer had agreed to pay the dues between January 2023 and July 2023. However, the said customer has not made the committed payments pertaining to the outstanding amount due as of 31st December, 2022. Based on Stock Exchange filings, the said customer (i) concluded its equity fund raise of ₹1,80,000 Mn through the FPO route on 22nd April, 2024, (ii) at its Board meeting held on 6th April, 2024 has, subject to the approval of the shareholders in the Extra-ordinary General Meeting to be held on 8th May, 2024, approved the issuance of equity share aggregating to ₹20,750 Mn on a preferential basis to one of its promoter group entity, (iii) issued Optionally Convertible Debentures (OCDs) amounting to ₹16,000 Mn to one of its vendors in February 2023 of which ₹14,400 Mn worth of OCDs were converted into equity shares on 23rd March, 2024, and (iv) is actively engaged with its lenders for tying-up the debt funding, which will follow the equity fund raise. The Group is in discussion with the said customer for a revised payment plan pertaining to the outstanding amount due. (d) As the said customer has been paying an amount largely equivalent to monthly billing since January 2023, hence, the Group continues to recognise revenue from operations relating to the said customer for the services rendered. The Group carries an allowance for doubtful receivables of ₹53,853 Mn as of 31st March, 2024 relating to the said customer which covers all overdue outstanding as at 31st March, 2024. (e) Further, as per Ind AS 116 “Leases”, the Group recognises revenue based on straight-lining of rentals over the contractual period and creates revenue equalisation assets in the books of accounts. During the quarter ended 31st December, 2022, the Group had recorded an impairment charge of ₹4,928 Mn relating to the revenue equalisation assets up to September 30, 2022 for the said customer and presented it as an exceptional item in the statement of profit and loss. Further, the Group had stopped recognising revenue equalisation asset on account of straight-lining of lease rentals from 1st October, 2022 onwards due to uncertainty of collection in the distant future. (f) It may be noted that the potential loss of the said customer (whose statutory auditors have reported material uncertainty related to going concern in its report on latest published unaudited results, which was issued before funding as mentioned above) due to its inability to continue as a going concern or the Group’s failure to attract new customers could have an adverse effect on the business, results of operations and financial condition of the Group and amounts receivable (including unbilled revenue) and carrying amount of property, plant and equipment related to the said customer.

3. Career Point Ltd.

Emphasis of Matter regarding legal action uncertainties on amounts receivable by the holding company and a subsidiary

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

We draw attention to

a) Note no 49 of the consolidated financial statements which describes Srajan Capital Limited (‘SCL’), a Subsidiary Company has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March, 2024 amounting to ₹ 782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for) (as of 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March, 2024, the related party has made a payment of ₹756.67 lakhs (total ₹1,707.40 lakhs up to 31st March 2024) to SCL against its outstanding dues, which is treated as income by the subsidiary company. The auditor of the SCL has not modified its opinion in this regard.

b) Note no. 38 of the consolidated financial statements which describes the uncertainties relating to legal action pursued by the Holding Company against Rajasthan Skill and Livelihood Development Corporation (RSLDC) before Hon’ble Arbitrator for invocation of bank guarantee of ₹54.22 lakhs by RSLDC and recovery of the outstanding amount of ₹213.41 lakhs (including ₹159.19 lakhs receivable). Based on its assessment of the merits of the case, the management of the Holding Company is of the view that the aforesaid receivable balances are good and recoverable and hence, no adjustment is required as stated in the note no. 38 of the consolidated financial statements for the amount receivable as stated in the said note. Further, in the opinion of the management of the Holding Company, stated amount is good and full recoverable. Our opinion is not modified in respect of above matters.

From Notes to Consolidated Financial Statements

Note No 38

During the earlier years, the Holding Company has received principal amount of 1st instalment of ₹216.90 lakhs from Rajasthan Skill and Livelihoods Development Corporation (RSLDC} for the Deen-DayalUpadhyayaGrameenKaushalyaYojana (DDU-GKY) project, against which the Holding Company had incurred ₹371.75 lakhs and Issued bank guarantee of ₹54.22 lakhs in terms of the agreement signed with RSLDC. During the year ended 31st March, 2022, RSLDC has invoked bank guarantee of ₹54.22 lakhs and has also demanded refund amounting to ₹334.76 lakhs (including interest of ₹117.36 lakhs) on termination of the above-stated project. The Holding Company has pursued the invocation of Bank Guarantee and other receivable of ₹213.41 lakhs (including ₹158.19 lakhs receivable) from RSLDC, before the Hon’ble Rajasthan High Court, Jaipur and the Rajasthan State Commercial Court under section 9 of Arbitration & Conciliation Act, 1996. The Hon’ble Rajasthan High Court, Jaipur Bench has appointed the sole arbitrator in the matter. The Holding Company has submitted its application before the Hon’ble Arbitrator. After submission of statement of defence by RSLDC, evidence and arguments, arbitral judge will pronounce the judgement. Based on its assessment of the merits of the case, the management is of the view that it has a creditable case in its favour and the aforesaid receivable balances are good and fully recoverable and hence, no adjustment is required as demanded by the RSLDC at this stage.

Note no 49

One of the Subsidiary Company Srajan Capital Limited (“SCL”), SCL has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March 2024 amounting to ₹782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)) (as at 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March 2024, the related party has made payment of ₹756.67 lakhs (Total ₹1,707.40 lakhs upto 31st March, 2024) to SCL against its outstanding dues and interest, which is treated as income by SCL

A Chartered Accountant’s Guide to Writing: Debit Procrastination, Credit Guilt

For over 15 years, I’ve juggled tax audits, reconciled financial statements, and answered client queries that range from the existential, Why do I pay so much tax? To the downright bizarre one like …Can I claim my dog’s grooming bill as a business expense?

I’ve survived financial year-end chaos, outsmarted the ever-crashing GST portal (at times), and, like every super working mom, somehow managed to keep my 11-year-old daughter from showing up at school in her PE uniform instead of a Navvari saree for Shivaji Jayanti celebrations. Yet, despite all of this, there is one thing I just haven’t managed to do—write an article.

For years, I have put off writing this article, finding new excuses every time. It has been on my to-do list for ages, just like that one client who always submits documents late but still expects everything to be done on time. I often picture myself writing smart and funny articles like Twinkle Khanna, but instead of bestselling books and popular columns, I have a laptop, a cold cup of masala chai, and an Excel sheet filled with numbers.

Recently, I even attended a writer’s workshop at the Bombay Chartered Accountancy, hoping to discover the writer in me. But every time I sit down in front of a Word document, my mind just goes blank. Every time I see the blinking cursor on a blank page, I feel completely stuck, not knowing where to begin.

As a Chartered Accountant, I live by numbers, spreadsheets, and logic. Writing, on the other hand, demand first and foremost—a topic, emotions, and naturally, some creativity. Numbers follow rules, while words seem to have a mind of their own!

Every time I sit down to write, my brain defaults to financial jargon. Should I start with an opening balance of my thoughts? Or maybe a profit-and-loss statement of my failed attempts? It’s as if my mind cannot function without an Excel sheet.

And just when I manage to gather some thoughts, life intervenes. My daughter needs help finding her debate notes. The doorbell rings because, apparently, Sunday at 3 p.m. is the best time to deliver a courier. A client who hasn’t contacted me in three months suddenly panics over a tax matter and expects an urgent answer, as if tax solutions come with instant gratification.

So, once again, writing takes a backseat…

For years, my writing has been confined to crisp WhatsApp messages, precise emails, engagement letters, and the occasional leave applications each with a clear recipient and a specific purpose. The shift from this structured, transactional writing to something meant for a wider audience, where there’s no fixed reader in mind, feels unsettling. The idea that my words will be out there, open to interpretation, reaction, or even indifference, makes me nervous. Writing in a professional setting is about clarity and brevity while writing for an audience is about connection and impact. Bridging this gap is the challenge and the adventure I now find myself navigating.

Over time, I have realized that writing and filing taxes are more similar than you’d think:

– You know it’s important, but you put it off until the last minute.

– You overthink every detail and are still terrified of making a mistake.

– You compare your work to others and convince yourself you are doing it all wrong.

– You finally submit it, feeling relieved but also paranoid that someone will find an error.

But unlike taxes, where deadlines and penalties force you to get things done, writing has no such enforcement mechanism. Honestly, if the Income Tax Department introduced a fine for incomplete and unwritten articles, I would have clinched the highest taxpayer title!

A Tiny Victory in an Endless Struggle

Here I am, finally putting words on paper. It’s not perfect, but then again, neither are tax laws, and yet they have managed to survive for decades. Maybe writing isn’t about perfection….it’s just about starting!!

So, to my fellow accountants who have been meaning to write but haven’t figured it out yet: If we can navigate the ever-changing world of financial regulations, we can conquer the written word too. After all, both demand:

– Structure

– Analysis

– And the ability to survive last-minute chaos

an expertise that is ingrained in every Chartered Accountant.

Now, if you’ll excuse me, I’m going to celebrate this little victory the best way I know how… by opening an Excel sheet!

1. An inspired writer from the workshop begins her journey in new avatar..

Thank You Letter Summarising the Workshop

To,

BOMBAY CHARTERED ACCOUNTANTS SOCIETY (BCAS)

I am delighted to have attended and learned from the Writers’ Workshop organized by the BCAS on 20th February. The key learning was how to develop or enhance professional writing skills.
Topics Covered:

  1.  Writers and Writing
  2. How to Write for the Profession and the Public
  3. How to Respond to Government Authorities

The session was conducted by experienced and knowledgeable speakers, all of whom are past presidents of BCAS: CA Raman Jokhakar, CA Gautam Nayak, and CA Anil Sathe.

KEY TAKEAWAYS:

  1.  Encouragement for Writing
  2. Importance and Relevance of Writing
  3. Importance of Writing a Book
  4. Techniques of Writing (Structure of Ideas, Express Thoughts Clearly, Create Meaningful Impact)
  5. Essentials of Good Writing
  6. Common Mistakes While Writing

WRITING INSIGHTS:

  1. Writing is a skill. 85 per cent of financial success comes through skills, and 15% through technical knowledge.
  2. Writing is an art.
  3. Writing creates permanent records
  4. Writing brings new and original ideas.
  5. Writing is a reflection of thoughts.
  6. Writing is tool for mental wellness.
  7. Writing is joyful and gives immense satisfaction.
  8. Writing is about crafting words and making an impact; this craft cannot be replaced by technology.
  9. write in simple English.
  10. Make a clear summary.
  11. Write, read, understand, and write what we understood.
  12. Use minimal words, be free from doubts, and unobjectionable.
  13. Say less, but mean more.
  14. State facts, not opinions.
  15. Grammar and punctuation are important.
  16. Use active voice.
  17. If writing is your goal, write for your audience, not for your personal style.
  18. Writing helps us to know history or basics.
  19. The more we read, the better writers we become.
  20. Writing clears our mind and thoughts.
  21. Reading is the other side of writing.
  22. Good reading and good writing go together.

ESSENTIALS OF GOOD WRITING:

  1. Complete Understanding of topic
  2. Command over Language
  3. Target Audience
  4. Research the Subject
  5. Topic should be current and relevant in future
  6. Conclusion: Logical and Rationale

From this workshop, it was evident that traditional skills like writing and reading will always hold importance and be irreplaceable. Rather, the value of these skills will be in high demand. According to one survey, due to over usage of technology, reading and writing skills have been reduced to 40 per cent of their earlier levels.

The workshop was organized in a very planned manner with timely sessions, learning methodology, and practical handouts. It was attended by participants from cities other than Mumbai as well.

A heartfelt thank you to all speakers, coordinators, the Chairman of the Journal Committee, the President, and the support staff. Special thanks for this new initiative by the Journal Committee. We look forward to more such enriching workshops.

Best Regards,

CA Samir Kasvala

Ink & Inspiration: Writers’ Workshop Reflections

The Journal Committee of the BCAS (Bombay Chartered Accountants’ Society) successfully organised a Writers’ Workshop on 20th February 2025 in physical mode at the BCAS Office. This initiative aimed to nurture and enhance the writing skills of members and budding Chartered Accountancy (CA) professionals. Recognising the importance of encouraging young talent, the committee offered concessional registration fees for CA students, ensuring wider participation and fostering a learning culture.

The workshop received an overwhelming response, attracting participants from various states across the country. Attendees expressed their appreciation for the workshop’s well-structured sessions and rich content, which provided practical insights and actionable takeaways to improve their writing capabilities.

Topics were:

  1.  Writer & Writing – CA Raman Jokhakar
  2.  How to Write for the Profession and the Public? – CA Gautam Nayak
  3.  How to Respond to Government Authorities? – CA Anil Sathe

REMINISCENCE….

AN ODE TO WRITER’S WORKSHOP

The music created in the prosody of writings,

BCAS being the concert hall.

Sounding so purposeful and deep

The participants were confident of taking writing as their faithful leap.

The enthusiasm knew no bounds,

The workshop will be weighed for months in pounds.

90+ participants and 3 authentic speakers,

The enrolment had to be closed for more seekers.

Laughter, deep insights and practical aspect,

The participants went inside their minds and started to introspect.

Write, write till your ink finishes,

Paint the paper till you see you own artist.

CA Divya Jokhakar

India Creates History

India created history and a world record with an estimated 66.30 crore devotees taking a dip at the PrayagrajMahaKumbh within 45 days. The scale and grandeur of the MahaKumbhMela was unprecedented. I have personally witnessed the superb arrangements, cleanliness in the Mela and unflinching faith of devotees. Truly, it is surprising that so many people taking a dip in one place did not trigger any pandemic or unrest. Salute and Pranam to the devotion and faith of crores of devotees and Kudos to the government for the success of the MahaKumbh, an event which happened in 144 years and could be witnessed only once in the lifetime of an individual.

Economically, too, this KumbhMela has been a great success. The MahaKumbh festival in Prayagraj has generated over ₹3 lakh crore in business, making it one of India’s largest economic events. Various sectors such as hospitality, transport, and retail have seen significant economic activity, benefiting not only Prayagraj but surrounding regions1.

1 https://economictimes.indiatimes.com

2 https://www.indiabuget.gov.in/economicsurvey/

Along with Prayagraj, Varanasi and Ayodhya witnessed a surge of pilgrims. Thus, we find that religious tourism can be tapped to boost the regional economies and help generate employment.

Let’s turn to other important events that happened during the last 45 days or so.

The change of regime in the USA has begun to change the geo-political scenario the world over. We have already started experiencing the same, with the USA changing its stance on the Ukraine War, taking Europe and the world by surprise. The USA has launched a new Golden Card for immigrants, requiring an investment of USD 5 million. A new tariff war to protect American industries has begun in tune with campaigns during the recently concluded election like “Making America Great Again (MAGA).”

Economic Survey 2024-2025 echoes these global developments and remarks that “lowering the cost of business through deregulation will make a significant contribution to accelerating economic growth and employment amidst unprecedented global challenges.”

The Economic Survey exhorts governments around the country to get out of the way and allow businesses to focus on their core mission to foster innovation and enhance competitiveness. It suggests rolling back of regulations significantly and embracing risk-based regulations. It emphasises changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’. It is indeed a treat to read the well-researched and pragmatic Economic Survey2. Economic Survey gives the real picture of the economy, the global perspectives/trends and benchmarking; sector and region-specific developments, challenges of the economy and possible solutions, etc. Therefore, it should be published at least one month prior to the Union Budget such that it doesn’t miss the limelight amidst the glare/hype of the Budget Proposals.

THE FINANCE BILL 2025

The editorial of January 2023 titled “The Middle Class Deserves More!” laid a case for much-needed relief to this vital class of the economy post-pandemic. Another editorial of January 2025 titled “Don’t Kill the Golden Goose” also urged the government for a friendly and reasonable tax regime and giving much-needed relief to the middle-class population.

On several occasions, the BCAS has represented and pitched for tax relief to the middle class, especially salaried people, the latest before the Consultative Group on Tax Policy at NITI Aayog, which visited the BCAS office on 10th December, 2024. Well, the BCAS efforts bore fruits, and we have had a historic Budget 2025-2026. The Finance Bill 2025 came with a much-awaited relief to the Middle Class, granting a tax-free income of up to ₹12 lakhs (₹12.75 lakhs to the Salaried Class). It is indeed a bold move to grant tax-free income to about 87 per cent of the taxpayers. Kudos to the Government for this unprecedented decision. There are some other relief measures to the Charitable Trusts, increase in thresholds of TDS and TCS; an increase in the investment and turnover limits for the classification of all MSMEs, etc. The estimated fiscal deficit at 4.4 per cent of GDP is in line with the government’s efforts to reduce it on year on year basis. Economic survey predicts growth of the Indian economy between 6.3 to 6.8 per cent for the FY 2025- 2026, which is quite optimistic when we look at the world average of 3.2 per cent.

THE INCOME TAX BILL 2025

Another significant development is the release of “ The Income Tax Bill 2025”, which is considered an honest attempt to simplify the Income-tax Act, 1961. The critics say, “It is old wine in a new bottle.” For a teetotaler like me, the age of wine may not matter, but for the connoisseur of wine, the age does matter – the older, the better. Technically also, it is good that the Bill only aims at simplifying the language without any substantial changes in the provisions, such that the jurisprudence of over six decades will be helpful in the interpretation of the new Act also. One significant change is the replacement of “Previous Year” and “Assessment Year” with “Tax Year”. This will help AamAdami to understand tax law better.

Even though some of the provisions of the Income-tax Act, 1961 are simplified, as well as some inconsistencies are removed, by and large, many old complex provisions requiring the fulfilment of several conditions and those exposed to ambiguous interpretations still remain. It is believed that the government missed a golden opportunity to make these changes at the bill stage. However, the government, with an open mind, may consider doing so at the time of enactment of the Bill, taking into account suggestions from various stakeholders.

EXCESSIVE FINANCIALISATION

One of the concerned areas of the present economy is potential excessive financialisation. The Economic Survey reports that “When the economy reaches a state of ‘over-finance’, the financial sector would compete with the real sector for resources.” It further adds that “the financial markets must grow in line with, but not faster than, the economy’s capital needs and overall economic growth. As the country undergoes this significant transformation, it is crucial to be aware of the potential vulnerabilities that may arise. Excessive financialisation can hurt the economy. The costs may be particularly high for a low-middle-income country like India.” Uday Kotak, founder and director of Kotak Mahindra Bank, expressed similar concerns about over-financialisation. He said, “Over-financialisation can hurt the Indian economy as investors move their savings into equities without understanding valuations.”

People are investing huge sums in Mutual Funds in various schemes/financial products and through SIPs, which are pumped into the equity market, besides direct investments by retail investors. Thus, we find that large amounts of savings of lower and middle-class people are invested in the stock market and the real sector is deprived of cheap finances. This view is supported by the Economic Survey, which states that “Greater levels of financial engineering can create complex products whose risks are not apparent to the regular consumer. At the same time, these products are designed so that the lenders have little ‘skin in the game’. Ultimately, the proliferation of such products can lead to an event such as the financial crisis of 2008.” It is here that Regulators should be vigilant and introduce checks and balances in the system.

The recent failure of the New India Cooperative Bank Ltd. has again brought auditors to the spotlight. We need to be vigilant and careful in certifying the quality of assets (including loans) and hidden liabilities / exposures clients (especially banks) have in their balance sheets.

To conclude, India is poised to grow at over 6 per cent for the fourth consecutive year, which can be faster if the recommendations of the Economic Survey about deregulation and free hand to Indian entrepreneurs are granted. The Income Tax Bill 2025 has raised hope of simplification and reduced litigation. Let’s hope that the tax administration and regulators abide by and follow the same standards of service and trust as they expect from the taxpayers and regulatees!

Greetings for the holy month of Ramadan and the festival of colours — Holi, Ugadi and GudiPadwa.

Jai Hind!

 

Best Regards,

Dr CA Mayur Nayak

Construction Input Tax Credits

Two recent decisions of the Supreme Court at the close of 2024 have set the direction over the interpretation of “construction credits” which were at the helm of constant controversy under the GST law. While the first decision was rendered in the case of Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P) Limited1 (Safari Retreat case) with respect to input tax credit availability to shopping malls, etc., the second decision namely Bharti Airtel Ltd. vs. Commissioner of Central Excise, Pune2 (Bharti Airtel case) was rendered in the context of availability of credit of Telecommunication towers to cellular companies under the Cenvat Credit scheme. The said matter was quickly adopted by the Delhi Court in the case of Bharti Airtel Ltd. vs. Commissioner, CGST Appeals-1, Delhi3 in the context the GST provisions. The GST Council quickly sprung into action by reversing the decision of Safari Retreat case and reaffirming its original intent to exclude land, building and civil structures from the scope of input tax credit. In this article, we would briefly summarise the principles emerging from these decisions and their application to the provisions of section 17(5)(c) and 17(5)(d) of GST law (colloquially be termed as ‘out-sourced / sub-contracted construction’ and ‘in-house construction’ respectively).

1  [2024] 167 taxmann.com 73 (SC)

2  [2024] 168 taxmann.com 489 (SC)

3  [2024] 169 taxmann.com 390 (Delhi)

CONTEXT OF THE ISSUE — BLOCK CREDIT

Extract of section 17(5)(c) and (d) is as under:

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

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business…………

Explanation –– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation –– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.”

A simple reading of the above extract suggests that all goods or services used for construction of an immovable property (except plant and machinery) are barred from input tax credit except when such activity is performed for onward supply of work contract / construction services. Similar provisions existed under the extant CENVAT credit rules and the respective State VAT laws. Despite modern laws being conceptualised on ‘value added tax’ principles, successive administrations have treated construction of immovable capital assets (specifically buildings) as ineligible for input tax credit based on the philosophy that capex buildings did not contribute to the value-addition of the end-product / service. This blockage also provided an attractive opportunity to Government(s) to realise substantial revenues on such construction activity.

The advent of the GST scheme shifted the focus to taxing all business activities and consequently transforming input tax credit from a narrow ‘one-to-one eligibility’ into a wider ‘business level eligibility’. Despite this wider stance, blocking of construction continued in a more regressive form having a larger impact on construction activity, re-emphasising the Government’s resolve to garner tax revenues from this blockage.

Construction intensive industries such as commercial complexes, warehousing/ logistic structures, hospitality buildings, etc., faced significant cost overruns on account of the above provisions. Though these business verticals were rendering output taxable services, substantial financial capital got sucked into GST credit blockage. There was also an onerous burden on such operators to establish that an item was ‘movable’ or ‘plant and machinery’ in order to stake a claim of input tax credit. Being a new law, these terms were being interpreted by field formations (including Advance ruling authorities) based on their personal bias rather than business application. This lead to the pioneer case of Safari Retreat case4, in which the Orissa High Court read down the provisions of section 17(5)(d) for shopping malls, commercial complexes, etc., and granted input tax credit to all construction activity when such complexes were directly used for onward taxable output activity. Sensing a huge revenue loss, the Government jumped into action by agitating its stand before the Supreme Court which ultimately culminated into the now famous Safari retreat case.

4 [2019] 105 taxmann.com 324 (Orissa)

BRIEF OF THE SAFARI RETREAT CASE

The key issue before the Supreme Court was the interpretation of section 17(5)(d) of the CGST Act. While the issue was limited to section 17(5)(d), reference and interpretation was being made to section 17(5)(c) to appreciate the true scope of both clauses. The key propositions/ arguments before the Court were:

Issue 1 – Constitutional challenge to the provisions of section 17(5)(d) on the premise that it violated Article 14 as it discriminated taxpayers onward selling the commercial structures with those leasing the very same structures despite both being liable to tax on their respective outward supply;

Issue 2 – Scope of ‘plant and machinery’ u/s 17(5)(c) and ‘plant or machinery’ u/s 17(5)(d) are different as the term ‘or’ in section 17(5)(d) is a conscious legislative usage de-linking the phrase from the defined term in the Explanation. Therefore, buildings, civil structures, telecommunication towers, etc which were specifically excluded from the definition of ‘plant and machinery’ u/s 17(5)(c) could still be considered as plant in its generic usage u/s 17(5)(d) based on its functionality;

Issue 3 – Condition placed by the phrase ‘on own account’ under section 17(5)(d) excludes suppliers of constructed apartments for sale as well as for lease/ licence. Hence credit was blocked only to cases where the construction was for self-usage and not for onward commercial exploitation.

The Hon’ble Supreme Court examined the legislative setting behind introduction of GST and the inter-play between the provisions of section 17(5)(c)/ (d). In so far as the constitution challenge is concerned, the provisions were clearly held to be valid and within legislative domain, putting to rest questions over the Council’s discretion in denying input tax credit even though the building contributed to generating taxable supplies. While addressing the question of law on the phrase ‘plant or machinery’ u/s 17(5)(d) in contrast to the phrase ‘plant and machinery’ adopted in 17(5)(c), the Court observed that the difference in ‘and’ and ‘or’ is not a legislative error but a conscious choice. Hence, the definition of ‘plant and machinery’ which specifically excluded land, buildings, civil structures would not apply to the phrase ‘plant or machinery’. ‘Plant’ or ‘machinery’ would be understood in generic terms and not by the definition of ‘Plant and machinery’. The Court borrowed the functionality test from the Income tax law5 to hold that if a building was used as a ‘technical structure’ rather than merely a ‘setting’ in which trade is carried on, such building would constitute a plant despite the specific exclusion of buildings in the explanation. It was observed that a plant is an apparatus used by a businessman for carrying on its business and does not include his stock in trade; it include all goods and property, whether movable or immovable, as long as it function as an apparatus in his trade. Since generating station building, hospital, dry dock and ponds were considered as apparatus based on the business functions, a building or a warehouse could also be considered as ‘plant’ within the meaning of Section 17(5)(d) if it served as an essential tool of trade with which business is carried on. However, if it merely serves as a setting or mere occupation, it will not qualify as a ‘plant’. On the third aspect, the court held that section 17(5)(d) blocked credit when the immovable property is used for ‘own account’. Where the construction of immovable property was for ‘other’s account’ and generating revenues which are in the nature specified in clause (2) or (5) of Schedule II, such structure would be eligible for input tax credit. The phrase ‘own account’ covered within its ambit only those cases where the building was for own residential or commercial occupation and not for cases where the building was for onward lease/ license. Accordingly in cases where any building was under construction with intent of generating leasing/ licensing revenue, credit was permissible u/s 17(5)(d) since the building was not constructed for ‘own account’ but for ‘other’s account’.

5 Commissioner of Income-tax vs. Taj Mahal Hotel [1971] 82 ITR 44 (SC); 
Commissioner of Income-tax vs. Anand Theatres [2000] 110 Taxman 338 (SC); 
Commissioner of Income-tax vs. Karnataka Power Corpn. [2000] 112 
Taxman 629 (SC)

RETROSPECTIVE AMENDMENT TO SECTION 17(5)(D)

The Finance Bill 2025 has now introduced an amendment attempting to overturn and rectify the acclaimed error in using the phrase ‘plant or machinery’ in section 17(5)(d) instead of ‘plant and machinery’. The said retrospective amendment (w.e.f. 1st July, 2017) effectively overcomes the decision of the Safari retreat case on the proposition that the term ‘plant or machinery’ is distinct from the term ‘plant and machinery’. Among the two exceptions which were cited by the Supreme Court, the first exception of differentiating ‘plant and machinery’ from ‘plant or machinery’ seems to have now been nullified. While thoughts are developing over challenging this retrospective amendment on the ground of denying vested credit6, probability of achieving a positive result seems to be bleak in view of the review petition filed by the Revenue. The Revenue still acclaims in its review that the use of the term ‘or’ was drafting error and not a legislative choice. De hors the review petition it would be suitable to treat both the clauses at par and apply the specific definition of ‘plant and machinery’ to all its cases.

6 Commissioner of Income-tax vs. Vatika Township (P.) Ltd. [2009] 
178 Taxman 322 (SC) & Tata Motors Ltd. v. State of Maharashtra and Others
 [(2004)5 SCC 783

ANALYSING ‘PLANT AND MACHINERY’

With retrospective amendment proposed w.e.f. 1st July, 2017 term ‘plant and machinery’ is applicable to both in-house construction and sub-contracted construction. The term has an inclusive portion to include apparatus, equipment and machinery and their structural or foundational support but specifically excludes land, building or other civil structures, telecommunication towers and pipelines outside the factory. Under the said definition, generic meanings of apparatus, equipment and machinery would continue to have prominence. The functionality test would still be applied to the fixtures, installations, etc., housed in the civil structures and makes them amenable to be termed as ‘plant and machinery’. What has been now overturned by the retrospective amendment to section 17(5)(d) is that the functionality test which could have been hitherto applied to land/ buildings, civil structures, to shift treat ‘buildings/ civil structures’ as ‘apparatus / equipment’ for a particular business function, is now not available. In view of the specific exclusion to the phrase ‘plant and machinery’, any building / civil structure in whatever form/usage could be excluded from the term plant and machinery. This position which was restrictive only to section 17(5)(c) (i.e. works contract inputs) is not extendable also to section 17(5)(d) (i.e. all goods and services where construction is on own account).

TECHNICALITIES ON THE PHRASE “OWN ACCOUNT”

The other exception to the applicability of the block credit was cases where the construction was ‘not for own account’ but ‘other’s account’. The phrase ‘own account’ has not been dealt with in much detail by the Supreme Court except for the conclusion that construction for onward sale/ lease/ license etc., to third party occupants does not amount ‘construction on own account’. The Court bestowed parity to entry 2 and entry 5(b) of Schedule II by quoting that where under-construction buildings are intended for sale credit is available. Similarly, under-constructed buildings intended for onward lease would also be a construction for ‘other’s account’. An interesting concept of under-construction lease is now evolving based on this observation of the Court.

While a ‘build-to-suit’ model is a classic case to fit into this proposition, many a times the commercial reality is fairly more complex. There may be a change in use of a structure either during construction or after issuance of the occupancy certificate. A strict reading of the clause suggests that only if the intent of lease is established during construction then the credit would be eligible. Where the intent of lease is not established up to occupancy certificate, such credit could be disputable on the sheer ground that construction in such cases would be for own account and not for lease. This is still an emerging area of study and will be engaged by revenue authorities if one argues the point of the construction being for other’s account.

BRIEF OF THE BHARTI AIRTEL CASE(S)

Moving onto the other case of the Supreme Court w.r.t the eligibility of Cenvat Credit of Base Transmission Stations (BTS), Telecommunication Towers, Antennas, Pre-fabricated Shelters (PFBs) etc., based on the argument of whether they are goods a.k.a. movable property. The Court examined the meaning of the phrase ‘immovable property’ under the General Clauses Act 1897 and the Transfer of Property Act, 1882 which include land, benefits arising out of land and things permanently attached or fastened to earth for the beneficial enjoyment of the building or land. In this context, the Court re-affirmed the long-standing principles extracted from series of decisions of the Supreme Court under Central Excise to assess whether a thing was immovable in nature, namely:

  •  Nature of annexation: This test ascertains how firmly a property is attached to the earth. If the property is so attached that it cannot be removed or relocated without causing damage to it, it is an indication that it is immovable.
  •  Object of annexation: If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable. Conversely, if the attachment is merely to facilitate the use of the item itself, it is to be treated as movable, even if the attachment is to an immovable property.
  •  Intendment of the parties: The intention behind the attachment, whether express or implied, can be determinative of the nature of the property. If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable.
  •  Functionality Test: If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, it is an indication that such fixation is for the benefit of the article, such the property is movable.
  •  Permanency Test: If the property can be dismantled and relocated without any damage, the attachment cannot be said to be permanent but temporary and it can be considered to be
    movable.
  •  Marketability Test: If the property, even if attached to the earth or to an immovable property, can be removed and sold in the market, it can be said to be movable.

Applying these tests to the telecommunication towers it was held that the towers were movable in nature and hence goods for the purpose of availment of CENVAT Credit. This rationale was adopted by the Delhi High Court in Bharti Airtel Ltd’s case once again to hold that telecommunication towers are movable in nature and hence the question of applying the definition of plant and machinery as applicable to section 17(5)(d) is irrelevant. The entire BTS/BSS, PFBs, etc. though being attached to earth/building are not for the purpose of beneficial enjoyment of the land/building to which they are attached but for technical reasons and efficient operations. Interestingly, the decision has treated the phrases ‘plant or machinery’ and ‘plant and machinery’ at equivalence and yet rendered that the explicit mention of telecommunication towers under the phrase ‘immovable property’ would not render the telecommunication towers as blocked items for input tax credit. This decision would hold the fort despite the retrospective amendment to the provisions of section 17(5)(d) and go a long way in deciding whether items are movable/ immovable in nature under the GST context. The innumerable advance rulings which have held that air conditioners, lift / elevator installations, electrical/ plumbing fixtures, fire extinguishers, etc., form part of the immovable property would need to be re-visited based on the above tests. In all likelihood the said items would fall outside the scope of immovable property based on the tests carved from the General Clauses Act & the Transfer of Property Act.

COMBINED INTERPRETATIVE DESIGN

Now both these decisions lead to a particular sequence of analysis to be factored before reaching a conclusion on block credits:

The above sequence suggests that entire blocked credit is founded upon the fundamental point of whether the goods or services in question are used for construction of an ‘immovable property’. If this primary test fails, there is absolutely no requirement even to examine the remaining contents of the said provisions. But where one doubts the outcome of this primary test to a particular building/ civil structure, it becomes essential to move to a secondary test of examining whether the same is plant and machinery. Land, buildings and other civil structures may still face the brunt of input tax credit blockage even if they are functionally operating as a ‘apparatus, equipment or machinery’. Interestingly, cases which are prima-facie blocked on account of it being considered as immovable property (other than plant and machinery) u/s 17(5)(d) (i.e. in-house construction) may still be granted input tax credit if they fall under a tertiary test of being construction for ‘onward leasing’ or ‘sale’.

INDUSTRY-WISE APPLICATION OF THE ABOVE SCHEMA

Commercial / Shopping Complexes – The Supreme Court had remanded the matter back to the Orrisa High Court to apply the functionality test in deciding whether such commercial constructions fall within the mischief of section 17(5)(d) (notably cases which covered u/s 17(5)(c) are not within the High Court’s purview and hence must be independently examined). Civil Structure portion of in-house constructions of commercial complexes would now be excludible from the phrase ‘plant and machinery’ (as retrospectively amended) as they fall under the blocked component. The HVAC, electrical / plumbing installations, fire equipment, movable fixtures, hoardings, digital displays, elevators, MLC parking structure, etc., may not be immovable. Even if they are said to be immovable they could be termed as technical equipment, apparatus, machinery and hence fall within the term ‘plant and machinery’ and this component of the construction costs would become eligible for input tax credit. The exclusion in the explanation to plant and machinery would have to be examined restrictively as being only w.r.t. to the ‘land, building, civil structure’ and not with reference to the installations/ fitments housed in such buildings.

Warehouse / Logistic Chains – A typical warehousing contains civil structures, prefabricated shelters, overhead sheets, etc. Certain items (such as foundation, concrete platforms, etc.) would qualify as civil structures and become ineligible for input tax credit. There are also components affixed to said civil structure which are dismantlable and capable of being re-assembled at alternate locations (such as pre-fabricated iron and steel girders, trusses and other structural components which are affixed with nut and bolt system to the civil foundation). One may claim that these are movable in nature based on the nature of annexation test specified above. But on a deeper analysis the object of affixation is for creating a permanent warehousing shed with these items and such affixation results in beneficial enjoyment of the immovable property itself. Moreover, the intent of establishment of the overall outer structure is to function as shelter for storage and would be excluded even if one forcefully argues them as being ‘equipment/ apparatus or machinery’. Therefore, such warehousing structures would form part of immovable property itself and may not be eligible for input tax credit. However, if the case falls under section 17(5)(d) (i.e. in-house construction) and the owner constructs these structures for onward leasing rather than own occupation/ storage, the Safari retreat’s case grants an opportunity to avail input tax credit on the argument of the structure being construction for other purposes and not on own account.

Hotels / Theatres / Convention Centres – The Supreme Court in the Safari retreat case has in its wisdom placed a blanket bar on treating such civil structures as plant u/s 17(5)(d). Be that as it may, the decision in Anand Theatres does not overrule the decision of Taj Hotels in so far as treating sanitary / electrical fittings, installations, fixtures affixed to such premises as being in nature of ‘plant’. Seating arrangements in theatres, sound-proofing panelling, air-conditioning systems, digital screens/ projectors, iron and steel fixtures which are affixed to the immovable property for functional utility need to be tested based on object and mode of affixation. The guiding principle would be to examine whether they are part of the civil structure for better occupation or for technical utility. On both counts of movability and functionality (under the explanation to plant and machinery), many of the above items can be treated as eligible for input tax credit. To reiterate, if the entire premises has been self-constructed with binding intent of onward leasing / licensing or sale, then the construction could termed as being for ‘other’s account’, thus granting a window to argue that the clause itself is not applicable. Challenge arises where certain hotels are leased out under an operator model to large hotel chains (such as Raddisson, etc.). Hotels have a complex formular for payment of fee based on the revenue collections/ occupancy and deduction of certain premises related expenditure. Since models do not fall under the traditional lease model, it would be an uphill task for one to claim that the construction is for ‘others account’.

Port Infrastructure – Port Corporations have developed substantial civil structures in the form of jetty, dock yards, terminals, breakwater walls, etc., which have technical functionality in its field of business. These items being civil in nature could be treated as apparatus / tool to function as port. But the critical counter argument of the revenue is that these are ‘other civil structures’ in the nature of land, building, etc., and hence not eligible. The company in which the phrase ‘civil structure’ is used gives an opportunity to argue that only those items which are immovable and meant for ‘occupancy’ like a building are to be treated as civil structure. The case of the Municipal Corporation of Greater Mumbai vs. Indian Oil Corporation7on storage tanks being termed as things attached to land despite being a technical structure would guide the revenue to pursue that these are in nature of civil structures and hence not eligible for input tax credit to the Port Corporation.

7 1991 SCC (SUPP) 2 18

Factory Constructions – Pre-fabricated structures constituting the walls and sheds of factory structures are part of the overall plant/ machinery. There does not seem to be any doubt on the internal concrete foundations, etc. which are necessary foundational/structural support to the machinery. The external walls / partitions and administrative buildings have been targeted as being ineligible for credit. Strictly speaking, the definition of plant and machinery specifically excludes buildings, civil structures. Though the issue could stand at rest here and credit may be denied, the perspective of these structural being movable needs to be tested. Re-iterating the discussion in the context of warehouses, there is certainly a case for the department to deny stating that the intent of fixation is for permanent enjoyment / occupation of the land and hence constitutes an immovable property.

Co-working spaces / Shared spaces – Internal Fixtures in bare shell civil structures to convert them to co-working space is a common phenomenon. Many of the fixtures are modular in nature and fitted with nuts and bolts (such as cabins, desks, partitions, cupboards, etc.) for enhancement of the workspace. While there are other fixtures which are affixed to the immovable property as a permanent feature. One would have to run a filter of these test and test the movable character of each of the items. The rest which are considered as immovable property and part of the building itself, can be denied even if they are said to be functionally essential for creation of a co-working space.

Residential PG accommodation – Apart from other issues, the unique issue with such accommodation is that the revenue stream is not in the form of a lease rental but akin to hotel models where it is for monthly or short-term basis on a per-bed / room basis. Now the Supreme court states that ‘hotels’ are not plant or machinery. By forming a parallel between PG accommodations and hotels, credit would certainly become a formidable challenge. One argument still prevailing after the retrospective amendment would be in cases where the construction is suited for ‘overall lease as a PG accommodation’ with local municipal licenses evidencing this fact. But where the owner himself operates such business, the operating income being in the nature of short-term accommodation would not permit it to claim credit based on the SC’s decision. Revenue will argue that this is not lease in the sense articulated by the Supreme Court and since the operations of the premises is under the occupation and control of the owner of the premises. Therefore, credit on such structures would fairly deniable.

On an overall basis it is slightly intriguing that business contributing to GST revenue using civil structures are being denied credit. An input in the form of lease rentals which comprises of all the capex cost of a civil structure are eligible but similar inputs where construction has been performed for self-occupation are being termed as ineligible. Is this encouraging unwarranted tweaks to business models merely for availing ITC benefit? These rulings have left an indelible mark on the future of the input tax credit on construction matters and would guide business decisions on account of the sheer volume of ITC involved. The legal fraternity would refer to these decisions time and again to press their respective contentions on a subject matter. The last word on this subject is yet to be told…!!

Part A | Company Law

18. Global One (India) Private Limited.

Registrar of Companies, NCT of New Delhi and Haryana

Adjudication Order No. ROC/D/Adj/Order/203/GLOBAL ONE/5224-5226

Date of Order: 31st January, 2025

Adjudication order for violation of section 203 of the Companies Act 2013(Act): Delay in appointing Whole Time Company Secretary.

FACTS

  •  The Company had earlier filed a compounding application before the Regional Director (NR) for the period starting from 1st November, 2013 to 1st May, 2023 for non-appointment of CS. During the hearing for compounding, it was indicated that for the period starting from 2nd November, 2018, the said default is under adjudication mechanism and accordingly, a separate application has to be filed before the ROC, NCT of Delhi & Haryana.
  •  In the adjudication application filed thereafter, it is stated that due to the financial constraints, the management was unable to find a suitable candidate for the purpose of appointment of Whole Time Company Secretary on Board.
  •  The CS could only be appointed on 1st May, 2023 and accordingly there has been a delay of 1642 days (i.e. from 2nd November, 2018 to 1st May, 2023) in the appointment.
  • Accordingly, a show cause notice for the default was issued to the company and its officer and a response was received to the notice. In its reply, the company put forth its business condition wherein it is submitted that the Company is part of the Orange Business Group i.e. multinational business group from France with Govt. of France. The Company had to carry certain business operations with Videsh Sanchar Nigam Limited (VSNL) but due to VSNL being wound up, this Company also did not pursue the business goals further. The company stated that it was neither carrying any business nor it had any revenue  from business operations so it could not appoint the CS to meet the requirement of the Companies Act. The company also requested for oral hearing in the matter.
  •  The authorised representative who appeared for oral submission in the matter requested to take a lenient view while levying penalty on the company and its officers as company is not making any revenue from its operations since many years.

EXTRACT FROM THE PROVISIONS OF THE ACT IN BRIEF:

Section 203 (Appointment of Key Managerial Personnel):

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and (iii) Chief Financial Officer:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or
Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,

(a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. ………

(5) “If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees”

Rule 8A (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 8A. Every private company which has a paid-up share capital for ten crore rupees or more shall have a whole-time company secretary.

FINDINGS AND ORDER

The Company has failed to appoint to whole time company secretary for a significant period. There has been a delay of 1642 days (i.e. from 2nd November 2018 to 1st May, 2023) in appointment of CS. Further, the submission of the company to grant any remission in the penalty cannot be considered as the law provides for a fixed penalty. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.

Thereafter in exercise of the powers conferred on the AO vide Notification dated 24th March, 2015 and having considered the reply submitted by the subject Company in response to the notice, the following penalty was imposed on the Company and its officers in default under Section 203 of the companies act 2013 for violation as follows:

  •  Penalty on Company of ₹5,00,000 being Maximum Penalty
  •  Penalty on each of the directors subject to Maximum of ₹5,00,000 per director

19. M/s HIND WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED

Registrar of Companies, Chandigarh

Adjudication Order No. ROC CHD/ADJ/ 860 TO 865

Date of Order: 27th November, 2024.

Adjudication Order for Non-disclosure of interest or concern in other body corporate or entities by the Directors in Form MBP-1at the first Board Meeting of the Financial Year as required under the provisions of the Section 184 of the Companies Act 2013.

FACTS OF THE CASE

Registrar of Companies (ROC) or Adjudication Officer (AO) during its inquiry on M/s HWAHMPL under Section 206 of the Companies Act, 2013 found that the directors had failed to disclose their interest or concern in other companies or body corporate, including their shareholding, at the first board meetings for the financial years 2020-21 and 2021-22 and necessary Form MBP-1 was not submitted/filed by the directors to the M/s HWAHMPL.

Thereafter, ROC issued a show-cause notice (SCN)on November 7, 2024 to directors for violation of Section 184 (1) of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules, 2014. However, directors did not provide any response or communication to the said SCN.

PROVISIONS

Section 184(1): “Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.”

Section 184(4): “If a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be liable to a penalty of one lakh rupees.”

Section 446B: “Notwithstanding anything contained in this Act, if penalty is payable for non­-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

Explanation. —For the pit/ poses of this section

(a) “Producer Company” means a company as defined in clause (1) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

Rule 3(12) of Companies (Adjudication of Penalties) Rules, 2014 “While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely.

a) size of the company

b) nature of business carried on by the company,

c) injury to public interest,

d) nature of the default,’

e) repetition of the default,’

f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default: and

g) the amount of loss caused to an investor or group of investors or creditors as a result of the default.

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.”

Rule 3(13) of Companies (Adjudication of Penalties) Rules, 2014 which read as under: “In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.”

ORDER

AO, after having considered the facts and circumstances of the case concluded that the directors of M/s HWAHMPL were liable for penalty as prescribed under section184(4)of the Companies Act 2013 for default made in complying with the requirements.

Hence, AO imposed an aggregate penalty of ₹5,00,000/- (Rupees Five Lakhs Only) i.e. ₹50,000/- (Rupees Fifty Thousand Only) on Each of the Director in default of M/s HWAHMPL for non-disclosure of interest or concern in other bodies corporate or entities at the first Board Meeting held for the Financial year 2020-21 and 2021-22 in form MBP-1 undersection 184 (4) of the Companies Act 2013 read with Section 446B of the Companies Act 2013.

Manufacturing’s Missing Might: India’s Growth Puzzle

Manufacturing’s crucial role in economic prosperity, highlighted by Prof. Kaldor’s research, prompted India to launch multiple initiatives like the National Manufacturing Policy 2011, Make in India and PLI Schemes. However, the sector’s performance remains weak, with manufacturing IIP growing at just 3.1 per cent CAGR (FY 2012–24) and 1.9 per cent (FY 2019–24), well below policy targets of 12–14 per cent. The sector’s GDP share has declined from 16 per cent to 13–14 per cent since the mid-2000s, challenging India’s vision of becoming a high-income nation by 2047 (Viksit Bharat). This underperformance persists despite favourable demographics, strong infrastructure spending, and healthy corporate balance sheets.

THE STRUCTURAL SHIFT: FROM PRODUCTION TO FINANCIALISATION

Manufacturing’s sluggish performance is commonly attributed to ill-defined external factors and reform gaps — a tenuous explanation without rigorous analytics. In contrast, the real reasoning emerges from an analysis of RBI’s comprehensive database, spanning over 2.33 lakh company-years across six decades, which reveals two key trends: Corporates’ declining productive investment and increasing financialisation since the mid-2000s [See Table]. Public Limited Companies (PLCs) experienced a significant shift in asset allocation between 1961 and 2023. The average share of Gross Fixed Assets (GFA) in total assets declined steadily from 70 per cent in the pre-liberalisation period [1961–90] to 55 per cent in recent years [2011–23], while the share of the financial investments surged from 3 per cent to 21 per cent. This trend suggests a notable shift from physical assets to financial ones. Private Limited Companies [Pvt LCs] followed a similar pattern, albeit at a moderate pace. The coincidence of import liberalisation, China’s entry into the WTO in the early 2000s and the subsequent accelerated growth in its exports to India are not merely coincidental. Further, corporates’ liquidity balances in terms of cash, cash equivalents and bank balances show a higher share during the last two decades compared to the first four decades, despite exponential growth in digital payments. The real factors behind these two shifts remain unaddressed and un-analysed.

Table: Non-Govt. Non-Financial Public & Pvt. Ltd Companies’ Financial Ratios as per cent of Total Assets

Sources: RBI: Compendium on Private Corporate Business Sector in India FY1951–2009 and DBIE Database

UNDERSTANDING THE INVESTMENT SLOWDOWN

Despite the increasing need for capital investment in advanced machinery and technology to enhance productivity and value addition in the manufacturing sector, corporate capital deepening has lagged behind expectations. This decline stems significantly from the opaque pricing of mis-invoiced and covert Chinese imports, creating severe uncertainties in cost structures and investment returns that ultimately jeopardise the viability of new manufacturing projects. As a consequence, it fosters assembly-focused operations and reliance on Chinese critical inputs, hindering capital deepening and the associated gains in total factor productivity growth. The corollary fall-out of under-investment in manufacturing is poor skill development and technological progress, and reduced productivity and competitiveness. This contrasts with India’s IT sector, where hands-on experience has driven skill development and success.

These issues are covered in the 145th Parliamentary Standing Committee Report (2018), the Directorate of Revenue Intelligence report (2015), the Global Financial Integrity Report (2019), George Herbert’s Research (2020), and Jha and Truong’s Analysis (2014). Research by Rhodium Group highlights that China can compel its companies to collude, fix prices and manipulate market dynamics to favour its export. No other country’s trade practices receive as frequent media coverage as those of China and its firms for their alleged tax evasion, hawala transactions, under-invoicing, breach of intellectual property rights, dumping, and transhipment. Harvard Prof. Graham Allison described China as the “most protectionist, mercantilist, and predatory major economy in the world.” China’s exploitation of WTO benefits while maintaining non-market practices, its predatory pricing, currency manipulation, various export subsidies, and export of counterfeits have triggered global anger and defensive responses. Some attribute China’s large export subsidies to contributing to China’s large public debt.

The massive gap between official trade data — shown by 19.5 per cent CAGR of Chinese imports [USD] over FY 2002–24 dwarfing India’s 2.6 per cent export CAGR to China coupled with huge volumes of unaccounted covert and mis-invoiced imports, illustrate the scale of predatory trade practices described above and sluggish manufacturing growth and employment. In addition to stifling manufacturing growth and capex, it led to NPA accumulation in the 2010s; drained savings, and hindered both job creation and on-the-job skill development.

Anecdotally, the severe impact of Chinese steel dumping on India’s steel industry is well-documented, with press headlines emphasising its consequences. In contrast, the full extent of the damage to many other industries caused by mis-invoiced and illicit Chinese imports remains largely unarticulated and unexplored.

When corporates face limited opportunities for productive capital investment, they tend to divert funds towards financial assets. The share of financial investment in total assets increased by 2.5 times and 2 times for PLCs and Pvt. LCs, respectively, since the 2000s. (See Table) Anecdotally, RBI’s Financial Stability Report (June 2014) highlighted a striking case of corporate over-financialisation- in FY 2013, the financial income of the top 10 corporates exceeded the treasury income of the top 10 banks.

TRADE CREDIT: DRIVING MANUFACTURING GROWTH FOR VIKSIT BHARAT 2047

A dysfunctional trade credit repayment ecosystem, coupled with massive illicit and mis-invoiced Chinese imports, is severely impacting India’s manufacturing sector. Trade credit, a vital enabler of cash flow, production, and operational continuity, is increasingly hindered by delayed payments and external pressures, stifling its role in driving economic growth. India can address these challenges by learning from successful digital lending models in China and Vietnam, where streamlined trade credit systems process millions of SME loans daily and have significantly strengthened their manufacturing bases. Integrating trade credit platforms with GSTN for real-time monitoring and enforcing payment discipline can create a robust B2B credit ecosystem. This approach can mitigate risks, enhance competitiveness, and position Indian manufacturers more effectively in global value chains.

The impact of this dysfunctional ecosystem is particularly evident in corporate liquidity patterns. Despite the exponential growth in digital payments, companies, especially smaller ones, are forced to maintain higher transactional liquidity levels than in the 1980s and 1990s due to uncertain receivables realisation and inconsistent trade credit availability, further straining their operational efficiency.

NAVIGATING THE PATH FORWARD

Addressing the structural challenges of India’s manufacturing sector requires a two-pronged approach. First, implementing rigorous, frequent, and surprise inspections at ports and airports to combat unscrupulous imports and dumping is crucial. Digital tracking systems should complement this administratively feasible and WTO-compatible strategy, enhanced quality testing infrastructure, and expedited anti-dumping investigations. Second, strengthening India’s trade credit payment ecosystem by learning from successful international models where streamlined trade credit payment discipline and invoice discounting systems have empowered SMEs to overcome financial constraints, boost exports, and improve their position in global value chains through enhanced innovation and productivity. This comprehensive approach can revitalise India’s manufacturing sector, fostering increased capital investment, technological advancement, and sustainable growth.

Evolution of Audit: From Paper to Pixels

In this article, the evolution of audit practices from paper-based documentation to digital platforms is illuminated, highlighting how technology has revolutionized the approach towards Audit. This Article further explains how this transition to electronic documentation (“E-Documentation”) has helped significantly in improving efficiency, accuracy and transparency in audits. It allows for secure storage, easy retrieval and structured organization of audit files, which enhances internal and external review processes. Digital tools like automated resource management, cost management and certain electronic tools streamline the operations, while advanced data analytics techniques for sampling and journal entry testing bolster audit effectiveness by detecting errors and anomalies with greater precision. Embracing these innovations enables audit firms to elevate their practices, moving from routine tasks to insightful analyses, ensuring consistent and efficient audit procedures in the digital age.

“Change is the only constant”, as rightly quoted by Heraclitus, a Greek philosopher. The field of audit has embraced this notion of believing that change has always been by its side.

From handwritten documentation to digital algorithms, the evolution of audit has been a journey “from paper to pixels”. In this article, we explore the advancements that have shaped the audit scope, exploring how technology has upgraded the way audits are conducted and how professionals navigate to understand the audit processes adopted in the digital age.

As industries adapt to the rapid pace of technological advancement, the audit profession has been at the forefront of innovation, embracing digitalisation to revolutionise its practices. From the rigorous scrutiny of paper documents to the swift analysis of digital data, the evolution of audit has been nothing short of extraordinary.

In this article, we will delve into the importance of the article by discussing the following aspects:

  •  The shift from paper-based to digital audit practices.
  •  Evaluating the risk of the client before accepting a new client or an existing client.
  • Facilitating communication between the client and the engagement team.
  •  Advanced tools like data analytics which enhance transparency, accuracy and efficiency.

In the field of auditing, the transition from paper-based processes to digital platforms has resulted in exceptional efficiency, accuracy and transparency.

DIGITALISATION OF AUDIT DOCUMENTATION – “E-DOCUMENTATION”

Before digitalisation, audit documentation was primarily done using physical / paper-based methods. This involved extensive manual processes like paperwork, handwritten notes, printed financial statements and physical files for audit engagement. Auditors would manually document their findings, observations and procedures. The process of compiling and organising audit documentation was labour-intensive and time-consuming. Storage and retrieval of paper-based audit files posed significant challenges in terms of  space, security, confidentiality and maintaining documents in a systematic way. Overall, the pre-digitalisation era of audit documentation relied heavily on manual processes, paper-based records and physical documentation, which were susceptible to inefficiencies, errors and limitations in terms of accessibility and flexibility.

The era of digitalization paved the way for ‘E- documentation’. E- Documentation stands for Electronic Documentation and refers to securing, maintaining confidentiality and storing the documents electronically. This revolutionary change has proved to be significant for all the professionals pursuing the practice of audit.

The introduction of electronic documentation with various accounting and auditing tools, such as Suvit, facilitates the process of audit documentation. This has various built-in features, such as risk evaluation forms, auto-populated workpapers / questionaries, and communications within the audit team and between the audit team and the management. The auditor can analyze the level of risk for a particular audit engagement as well as it shall also help the auditor to design effective audit procedures to be undertaken for the audit engagement. Moreover, the work performed, findings and reports of an auditor right from the audit planning phase to the conclusion phase can be stored for a prolonged period of seven years as per SA 230 and can be retrieved whenever required. This features robust functionality for maintaining compliance with the maker-checker policy. Additionally, it incorporates a mechanism to imprint immutable timestamps, ensuring the integrity and non-editable nature of the records. E-Documentation serves as a trail for all the actions performed by the auditor during an audit.

Some of the merits of E-Documentation are mentioned below:

  •  Internal review

The cloud-based tool can be accessed by the audit team at any point in time. This facilitates smooth review within the audit team and between the audit team and the Subject Matter Experts (‘SMEs).

  •  External review

Due to the storage of documentation in a structured manner, it helps in efficient reviews by the external person as well (such as a peer reviewer, or any other regulatory body). All the relevant information and data related to the entity being audited is stored in a centralised manner. E- Documentation also ensures retrieval for a prolonged period, which enables any person to review the work done at any point in time.

  •  Roll forward

Apart from the merits mentioned above, the documentation stored in the audit file for a particular year can be utilised in subsequent years by rolling it forward. This process involves transferring audit documentation such as audit memos, workpapers, checklists, auditor’s assessment and conclusion from the previous year to subsequent years. This feature facilitates in planning procedures for subsequent year’s audits.

  •  Standard checklists

E-Documentation tool includes checklists designed to facilitate and support auditors’ work. These checklists feature questions related to audit procedures conducted related to various critical areas such as Going concern, impairment of investments / assets, etc. Audit firms can embed/customize standard checklists on Accounting Standards (AS), Auditing Standards, Company Auditor’s Report Order (CARO), 2020, Internal Financial Control, Companies Act, etc., in the software to ensure uniformity across all the engagements / clients. The audit team uses these checklists to document their actual work performed in the respective areas under examination. Further, these checklists also help in ensuring that any important thing in relation to the audit is not missed out.

  •  Restricted access

Further, access to the E-Documentation tool can be restricted to the audit team until and unless access is granted to the extended team members with prior approvals. This ensures privacy, confidentiality and security of sensitive client information and data. Further, since working papers are the property of the auditor, utmost care should be taken so that the independence of the audit is maintained before access is granted to any external member.

EVALUATING RISKS AT THE FIRM LEVEL — CLIENT ONBOARDING

The client acceptance procedures shall be focused on ensuring that the clients who are chosen to serve should represent an appropriate balance of risk and reward. The firm minimises the exposure to high-risk clients by identifying each before accepting any engagement and then determining whether the firm is willing to manage the exposure. Additionally, internal risk evaluations, annual inspections, practice risk assessment and continuous monitoring are all integral for ensuring that when a firm chooses to serve a client, the firm follows the policies and procedures and meets the industry standards. The client acceptance process shall be workflow-driven and shall be dependent on the type of services warranted by the client and the size of the engagement. It must require more than one level of approval (in terms of maker and checker), each of which shall be generated electronically to avoid any bias.

  •  Apart from assessing a new client, it is equally important to assess the existing client relationships / engagements as well. Hence, evaluating client continuance should be a periodic process due to which the risk parameters of an existing client are revalued/reassessed. Further, the client assessment should also be carried out if there is a significant change in the composition of Those Charged with Governance (TCWG).
  •  Engagement acceptance is required to be performed prior to initiating a new engagement, irrespective of whether the firm has continuously performed the engagement for an existing client or will be performed for a new client. The EAF shall be completed and approved prior to the commencement of an engagement.

Hence, the firm should have these kinds of electronic forms which help in assessing the acceptance of a client or an engagement, and if there is any risk on account of any fraud, litigation, etc., against the TCWG / management, then the tool will populate the risk to the engagement team to evaluate the matter in detail.

EFFICIENT ELECTRONIC DATA EXCHANGE BETWEEN THE CLIENTS AND AUDIT TEAM

As mentioned above, in the pre-digitalisation era, exchanging data within the audit team and between the audit team and the client used to be chaos. Various difficulties were faced with respect to its storage and collation; to a certain extent, this might have hampered the overall quality of the audit. However, the digitalisation of the audit processes has led to better work management.

These tools automate the preparation of detailed requirement lists and facilitate secure file sharing, which enables auditors to manage audits effectively. These tools facilitate a collaborative environment for auditors and the client, ensuring real-time progress tracking and simplifying data management. These tools function as centralized digital platforms that manage and organize documents, making it easier for users to locate and access necessary information by arranging documentation within a unified digital repository. It also facilitates the retention of data and information for a prolonged period.

Due to such pioneering change, since the storage of data is now centralized, it has become easier to streamline the audit.

DIGITAL TOOLS

Let us delve into the use of various digital tools and their purpose, which can be used in the audit processes. Maximising audit effectiveness entails harnessing the power of data analytics to transform traditional auditing practices. By integrating sophisticated data analytical tools and techniques, auditors can revolutionize: Resource and cost management; communicating initial audit requirements to the client; selection of samples & vouching and testing of journal entries (JE).

A. RESOURCE MANAGEMENT

Resource management involves planning, allocation and optimisation of resources efficiently to achieve the goals of the firm. Keeping meticulous track of time spent on engagements is pivotal for preserving the trust and transparency vital to professional relationships. The time spent by the audit team and keeping a record of this is of utmost importance. This helps in demonstration of the time spent by partner and manager on engagements which is paramount in ensuring the success and credibility/quality of the overall audit.

This brings a wealth of experience and expertise to the table, which is essential for maintaining high-quality standards throughout the audit process. Their involvement is crucial in overseeing audit procedures meticulously, analyzing financial statements accurately and drawing well-supported audit conclusions.

Moreover, partners and managers play a pivotal role in managing audit risks effectively by identifying potential issues early on and implementing appropriate responses. Their technical knowledge allows them to address complex accounting matters with precision, ensuring compliance with auditing standards and regulatory requirements. Beyond technical aspects, their interaction with clients fosters clear communication, manages expectations and strengthens client relationships.

Additionally, partners and managers provide rigorous review and oversight of audit work performed by junior staff, ensuring thoroughness and accuracy in audit findings. Ultimately, the time invested by partners and managers in audit engagements not only enhances the quality of audits but also upholds the firm’s commitment to integrity, independence and ethical practices in auditing. By aligning costs with the services provided, clients are assured of fair invoicing, reinforcing confidence in the partnership. Moreover, this practice facilitates efficient resource allocation and project management, empowering firms to evaluate process effectiveness, pinpoint areas for enhancement and refine future resource distribution strategies.

B. EFFECTIVE COST MANAGEMENT

The documentation of work conducted during engagements serves multifaceted purposes. It not only provides a detailed record of audit procedures but also furnishes invaluable support for quality control evaluations. Assigning unique job codes to each engagement streamlines this process, simplifying cost analysis and bolstering accountability by correlating time expenditures with specific client projects or internal endeavours. This systematic methodology not only optimises billing procedures but also fortifies project management structures, culminating in an overall improvement of operational efficacy across the organisation.

C. COMMUNICATING INITIAL AUDIT REQUIREMENTS “PREPARED BY THE CLIENT (PBC)”:

“PBC” stands for “Prepared by Client.” This term refers to the documents and schedules that the client prepares and provides to the auditors as part of the audit process. These documents facilitate the auditors’ examination of the Company’s records and support the information presented in the financial statements. This typically includes reports, schedules, listings, vouchers and reconciliations.

Numerous interactions between clients and auditors make it challenging to track all the requirements and communications. To address this, an electronic PBC tool can be adopted to streamline the process. This tool allows the insertion of agreed timelines for data sharing and ensuring deadlines are met. It provides a robust review mechanism and enables task assignment to team members on both the auditor and the client sides. It also helps in improving collaboration and accountability. Importantly, it allows critical issues to be highlighted for partners or managers efficiently.

Adopting an electronic PBC tool enhances transparency and efficiency in the audit process. It ensures all communications and document submissions are tracked accurately, which reduces the risk of oversight.

This technology fosters a more organized and effective audit, leading to better outcomes and smoother operations for both auditors and the client.

D. SAMPLING AND VOUCHING

Diverse sampling methods in auditing, such as statistical, random, systematic, stratified, block, judgmental and haphazard sampling, offer tailored approaches to the auditor. Each method presents distinctive benefits, ensuring comprehensive, effective and efficient audit.

A FEW OF THE SAMPLING METHODS ARE EXPLAINED BELOW:

Statistical sampling: A method of selecting a subset of items from a population using statistical techniques to ensure that the selected subset is representative of the entire population.

Random sampling: A technique where each item in the population has an equal chance of being selected, eliminating bias and ensuring that the sample is representative of the entire population.

Systematic sampling: A method where items are selected at regular intervals from the entire population, starting from a randomly chosen number and then every 10th item of the entire population.

Stratified sampling: A technique where the population is divided into distinctive sub-groups (strata) based on specific characteristics, and samples are extracted from each sub-group to ensure that the selected sub-group is representative of the entire population.

Block sampling: A method where the population is divided into blocks or clusters, and entire blocks / clusters are selected randomly to form the  sample, often used when items within blocks / clusters are more like each other than items in the other blocks / clusters.

Judgmental sampling: A non-random method where the auditor selects items based on professional judgment, often used when specific items are believed to be significant, and the selection will be representative of the entire population.

Haphazard sampling: A non-random method where items are selected without any specific plan or pattern.

Further, for vouching, the audit team can also deploy data analytics, which enhances transaction verification, automates tasks and improves accuracy, thus streamlining processes and conserving resources. Advanced data analytical tools enable efficient cross-referencing of transactions with source documents which further helps in minimising errors.

E. JOURNAL ENTRY (JE) TESTING

JE Testing involves reviewing and verifying the accuracy and validity of financial transactions recorded in the Company’s books of account. Through data-driven approaches, auditors can identify patterns, anomalies and trends within large datasets, allowing for more targeted and efficient sampling methodologies (to a certain extent mentioned in the earlier sections).

Advanced data analytics enable auditors to scrutinise transactions with greater precision, enhance the detection of errors and irregularities, and ensure a more thorough examination of financial transactions, thus providing the outcome efficiently. Further, these data analytical tools help in scrutinising journal entries for accuracy and legitimacy, which facilitates the auditor to flag suspicious entries and provide deeper insights into financial transactions.

VARIOUS TESTS IN JE TESTING ENCOMPASS:

  •  Keyword analysis: Search for specific words or phrases like “bribe” or “charity” within worksheets.
  •  Year-End entries: Analyse journal entries made nearer to year-end dates.
  •  Public holiday entries: Review entries on holidays to detect unusual or large transactions and assess their reasonability.
  •  Weekend entries:Scrutinise entries, especially passed on weekends and evaluate their nature.
  •  Materiality assessment: Review entries above the materiality to identify unusual transactions.
  •  Single entry verification: This means that basic accounting method where each transaction is recorded once rather than using a double-entry system. It is important to ensure that no single entries are mistakenly passed into the books of account.

Incorporating digital tools and data analytics enhances audit effectiveness by optimising resource management, improving cost efficiency and facilitating clear communication of audit requirements. Advanced sampling techniques and JE testing with data analytics further strengthen accuracy and reliability, ensuring thorough scrutiny of financial transactions. These innovations not only streamline processes but also uphold integrity, independence and compliance with auditing standards, ultimately fostering robust audit outcomes and client & regulatory satisfaction.

CONCLUSION

Hence, the suggested tools for audit digitalization and optimization are merely a starting point and not an exhaustive list. These tools exemplify how technology can significantly enhance the audit process, from manual documentation to resource management to risk assessment; effective communication between the client and the engagement team and using Digital tools truly harnesses the benefits of these advancements.

Audit firms and their quality control departments must mandate the use of these digital tools, ensuring consistent, accurate and efficient audit practices.

By embracing these innovations, audit firms can transform their practices from routine tasks to insightful analyses, unlocking new levels of precision and efficiency. The future of auditing is bright and with these tools, firms will be well-equipped to lead the charge into this exciting new era

Key Year End Audit Considerations

Statutory Audit of financial statements is mandatory for all companies under the Companies Act, 2013. Whilst audit process commences well before the close of the financial year, for issuing the audit report attention needs to be paid to certain key matters as at the financial year end. Regulators like SEBI, NFRA, ROC, etc. are also keeping a close watch on the information contained the financial statements and the audit report through inspection of the audit work papers and other documents. The focus areas for the regulators generally cover matters regarding modified audit report, reliance on estimates, fraud risk factors, related party transactions, communication to those charged with governance and compliance with laws and regulations keeping in mind the overarching principle of materiality. Any slippages in these critical areas can make or break the reputation of the audit firms and their personal.

1. INTRODUCTION

Presentation and disclosure in financial statements play an important role in providing transparency to stakeholders. They help users to understand the financial health and performance of a company. Regulators are putting more emphasis on presentation and disclosures in financial statements due to increased stakeholder expectations, higher focus on public interest, and ongoing efforts to enhance global harmonization and prevent financial irregularities and frauds.

In today’s volatile market, every company is grappling with multiple challenges. Uncertainty in laws and regulations and economic volatility have put immense pressure on companies. Whereas earlier the annual reports were a thin booklet, currently, their size has increased manifold, which includes the financial statements and statutory auditors report issued to the members of a company under the Indian Companies Act, 2013 “(the Act”). Further, even though the audit report is addressed to the members since the annual report is mandatorily required to be hosted on the company’s website by listed companies under SEBI guidelines, there is no limit on the public accessibility thereof, making companies more accountable.

Finally, regulators like the Securities and Exchange Board of India (SEBI), Registrar of Companies (RoC), National Financial Reporting Authority (NFRA), etc., are keeping a close watch on the information, especially the audited financial statements and the report thereon which are available in public domain.. These regulators have regulatory powers to conduct inspections to delve into the working papers and documents of an audit firm to check if there is any lacuna in the audit procedures followed by the auditor and whether the auditor has complied with relevant Standards on Auditing (“SAs”).

With the end of the financial year (FY) 2024-25 around the corner, the hustle and bustle of audit have already commenced. This article presents some of the key year-end considerations for the auditors that they should keep in mind while performing the audit.

KEY CONSIDERATIONS PERTAINING TO AUDITOR’S REPORT

On completion of the audit, the auditor is required to issue an audit report to express the audit opinion. The following Standards on Auditing deals with respect to audit conclusions and reporting:

  •  SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
  •  SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
  •  SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
  •  SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
  • SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information

SA 700 (Revised) prescribes the content of an audit report, which should, at a minimum, be forming part of the audit report. The following are certain issues requiring careful consideration:

A. QUANTIFICATION IN QUALIFICATIONS

It is pertinent to note that pursuant to paragraph 21 of SA 705 (Revised) if there is a material misstatement of the financial statements that relate to specific amounts in the financial statements (including quantitative disclosures in the notes to the financial statements), the auditor is required to include in the Basis for Opinion paragraph a description and quantification of the financial effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial effects, the auditor is required to state that fact in this section. Where an accurate quantification is not possible, but a management estimate is available, the auditor performs such audit tests on those management estimates as are possible and clearly indicates that the amount quantified is based on management’s estimate. If it is impracticable for the auditor to quantify or estimate the effect of the misstatement, this fact needs to be included in the Basis for Modified Opinion paragraph.

Therefore, the auditor needs to quantify the financial effects of the misstatement, and only if it is impracticable, the auditor can include the qualification without quantification. The word ‘impracticable’ is not defined in Standards on Auditing but is commonly understood as ‘after making every reasonable effort’ to do so.

B. OTHER MATTER

As per paragraph 10 of SA 706 (Revised), if the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor is required to include an “other matter” paragraph in the auditor’s report, provided:

  •  That is not prohibited by law or regulation; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

An auditor should not include other matter paragraph for matters adequately disclosed in the financial statements. It can be included, for example, to highlight that in case the audit of some of the components of a company has been audited by other auditors, then this fact is required to be presented in the audit report to the consolidated financial statements under the “Other Matters” paragraph. However, in view of the recommendation by NFRA for revision of SA-600 on the lines of ISA 600, it needs to be seen whether the reference to the work of other auditors will be permissible.

C. EMPHASIS OF MATTER VS. QUALIFIED OPINION

Another important area is the use of the ‘Emphasis of matter’ (EOM) paragraph in the auditor’s report.
As per paragraph 8 of SA 706 (Revised), if the  auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor’s report provided:

  •  The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

EOM paragraph should not be included as a substitute for modification. For example, if the company has not provided adequate requisite disclosures in its financial statements, the auditor should evaluate the requirement to express a qualified opinion on the basis of the requirement of SA 705 (Revised) and should not include an EOM paragraph.

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are:

  •  Uncertainty relating to the future outcome of exceptional litigation or regulatory action.
  •  A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
  •  Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.
  •  A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

KEY CONSIDERATIONS PERTAINING TO ESTIMATES (INCLUDING USING THE WORK OF MANAGEMENT EXPERTS)

The auditor is required to perform adequate procedures to obtain sufficient appropriate audit evidence for estimates and complex transactions. The auditor should maintain documentation in sufficient detail to demonstrate the following:

  •  Competence, capabilities and objectivity of management experts have been determined (the auditor should consider the self-interest threat of the management expert when numerous valuation assignments from other group companies were being performed by the same valuer);
  •  Evaluating for management bias;
  •  Procedures performed in order to determine the reasonableness of the assumptions/methods used by management experts;
  •  Procedures performed by the auditor over management assessment;
  •  Professional judgements made by the auditor in concluding on high-estimate areas;
  •  In case of critical estimates/balances, involve internal experts for determining the appropriateness of the assumptions/methods used for valuation;
  •  In case there are caveats in the valuation report, legal opinions, etc., documentation on how the auditor has dealt with those

KEY CONSIDERATIONS PERTAINING TO COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (TCWG)

SA 260 (Revised), Communication with TCWG requires the auditor to communicate significant findings from the audit with those charged with governance. This is another key focus area for the regulators. Some of the key considerations are as follows:

  •  TCWG comprises a Board of Directors, Audit Committee and Management. Communication with the Audit Committee is not sufficient.
  •  Auditors should maintain documented evidence for:

– Communication of the planned scope and timing of the audit with TCWG.

– Minutes (“what and when”) of meeting with the TCGW/Audit Committee, including the team’s conclusion on the matters discussed.

– Accounting/auditing matters discussed with TCWG during the initial planning meeting and their final resolution

  •  Critical matters should be communicated to TCWG, and regular discussions with the management should be documented.
  •  Audit committee presentation contains only management’s estimate/representation, does not include audit procedures performed and auditor’s conclusion
  •  Minimum communication with TCWG to ensure compliance with SA 260

– Auditor Independence

– The Auditor’s Responsibilities in Relation to the Financial Statement Audit

– Planned Scope and Timing of the Audit

– Significant Findings from the Audit, including the auditor’s assessment

– Inquiries with TCWG and response thereto

NFRA recently issued “The Auditor-Audit Committee Interactions Series 1”, which draws the attention of the auditors to the potential questions the Audit Committee / Board of Directors (BoD) may ask them in respect of accounting estimates and judgements. The first in the series in this regard includes aspects pertaining to the audit of Expected Credit Losses (ECL) for financial assets and other items as required by Ind AS 109, Financial Instruments.

SA 260 also requires the auditor to communicate with TCWG about qualitative aspects of the accounting practices, policies and disclosures. The reason behind such a communication is that the views of the auditor would be particularly relevant to TCWG in discharging their responsibilities for oversight of the financial reporting process.

This series put forwards some key questions relating to the following topics which the BoD / Audit Committee may ask the auditor regarding the audit of ECL:

  •  Audit of ECL computation
  •  Test of design and operating effectiveness of control mechanism over recognition and measurement of ECL
  •  Audit of methodology used for ECL computation

KEY CONSIDERATIONS RELATED TO INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR)

The auditor has to report under section 143(3) of the Act as to whether the company has adequate internal financial controls in place and the operating effectiveness of such controls. As per the Act, the term ‘internal financial controls’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to the company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The Guidance Note on Audit of Internal Financial Controls Over Financial Reporting states that the auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. Because a company’s internal controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment.

Some of the key areas which require careful consideration are as follows:

  •  Evaluation of controls over management override as part of entity-level controls; the auditor should maintain adequate documentation and procedures for controls around management override (remain cautious that deviation to the process might be a red flag for management override).
  •  Evaluation of management testing of ICFR is critical, and its impact on ICFR conclusion should be documented. Inquiries with the internal auditor and evaluation of the role of the internal auditor, and a review of internal audit reports and the auditor’s conclusion should also be documented.
  •  Adequate testing/focus even on non-critical areas (e.g. PPE)

KEY CONSIDERATIONS RELATING TO SIGNIFICANT UNUSUAL OR HIGHLY COMPLEX TRANSACTIONS

Material misstatement of financial statements, including fraudulent financial reporting, can arise from significant unusual or highly complex transactions, including situations that pose difficult “substance over form” questions, such as transactions not in the ordinary course of business undertaken with related parties. The Standards on Auditing give particular attention to the accounting for and disclosure of such transactions in the context of the auditor’s identification and assessment of risks of material misstatement, whether due to error or fraud and the auditor’s responses thereto.

The auditors are required to exercise professional judgment and maintain professional skepticism throughout the planning and performance of an audit and, among other things, identify, assess and respond to risks of material misstatement, whether due to fraud or error. Accordingly, the auditor plans and performs an audit with professional skepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of overlooking unusual circumstances. The auditor is required to:

  •  Evaluate whether information obtained about the entity indicates that one or more fraud risk factors are present; for example:

♦ Significant related party transactions not in the ordinary course of business or with related entities not audited or audited by another firm; and

♦ Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions

♦ Inquire of management and others within the entity as appropriate about the existence or suspicion of fraud, including, for example, employees involved in initiating, processing or recording complex or unusual transactions and those who supervise or monitor such employees;

♦ Inquire of management and others within the entity, and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to:

♦ authorise and approve significant transactions and arrangements with related parties; and

♦ authorise and approve significant transactions and arrangements outside the normal course of business;

If the auditor identifies significant transactions outside the normal course of business, inquire management about the nature of these transactions and whether related parties could be involved.

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Management override of controls or other inappropriate involvement by management in the financial reporting process may involve such techniques as omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period or engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. The auditor is required to treat the risk of management override of controls as a risk of material misstatement due to fraud and, thus a significant risk.

COMPLIANCE WITH LAWS AND REGULATIONS

Compliance with laws and regulations is a crucial aspect which engages the attention of auditors for which they need to keep in mind the requirements laid down in SA-250. Auditors are primarily concerned with the non-compliance with Laws and Regulations that materially affect financial statements, which includes the following, amongst others:

  •  Form and content of financial statements, including amounts to be reflected and disclosures to be made (Schedule III, Banking Regulation Act, Insurance Act, SEBI Mutual Fund guidelines, etc.)
  •  Conducting of business including licensing and registration (Banks, Mutual Funds, NBFCs, Pharmaceutical companies, fertilizer companies, etc.), which could have potential going concern issues
  •  Operating aspects of the business (Provisioning, valuation, taxation, safety aspects etc.) with possible financial consequences like fines, penalties, etc.

Adequate and appropriate procedures need to be performed to identify instances of non-compliance:

  •  Inquiries with the Management.
  •  Inspecting correspondence with relevant statutory authorities.
  •  Reading the minutes.
  •  Appropriate Control and Substantive procedures for industry-specific requirements like provisioning, valuation, accrual of expenses for retirement benefits, computation of incentives and subsidies etc.

Following are some of the instances of non-compliance which need to be considered in the context of year-end financial reporting:

  •  Non-payment / delayed payment of statutory dues (CARO reporting).
  •  Non-compliance with certain statutory and procedural requirements under various laws in respect of certain transactions or investigations by government departments resulting in fines and penalties or other demands and consequential disclosure of contingent liabilities or making provisions.
  •  Unsupported transactions, especially with related parties.

KEY CONSIDERATIONS PERTAINING TO MATERIALITY

The concept of materiality is the final test which determines the nature and extent of reporting and the issuance of the final opinion in the audit report as to whether the financial statements present a fair view. It helps to determine the material misstatements. As per SA 320, misstatements are material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of the users taken on the basis of financial statements. Whilst generally materiality is determined on a quantitative basis, in certain situations, misstatements may be qualitatively material, which needs to be kept in mind during year-end reporting as follows:

  •  Transactions resulting in changing loss into profit and vice versa.
  •  Transactions having an impact on compliance with debt covenants (e.g. current ratio, DSCR, etc.)
  •  Transaction has an impact on contractual agreements.
  •  Transaction has an impact on compliance with regulatory provisions.
  •  Transaction has an effect on variable compensation payable to Key Managerial Person.
  •  Transaction resulting in fraud or omission or commission.

The following are the different stages in the calculation of materiality.

  •  Planning Materiality: It is computed as the overall materiality representing a threshold above which the financial statements could be misstated and would affect the economic decision of the user of the financial statements. It depends on the size of the organization, types of transactions, character of management and auditor’s judgement and is set as a percentage of the profit, assets or net worth depending upon the nature of the entity.
  •  Performance Materiality: It is an amount less than overall materiality and acts as a safety buffer to lower the risk of aggregate uncorrected and undetected misstatements, which could be material for overall financial statements.
  •  Specific Materiality: It is established for a class of transactions, account balances and disclosures.

The materiality must be appropriately calculated since that has a bearing on the aggregate uncorrected and undetected misstatements and the consequential impact on the overall audit opinion.

CONCLUSION

Audit of financial statements is no longer about simply issuing an audit report but demonstrating and documenting the conclusions reached in respect of all auditing standards, as applicable to a particular company, especially in respect of matters requiring modification, reliance on estimates, fraud risk factors and related party transactions, amongst others whilst at the same time ensuring compliance of all relevant laws and regulations keeping in mind the overarching principle of materiality. With the constant inspections to which the auditors are exposed, any material deviations, especially in the aforesaid critical areas, can make or break the reputation and hard work built by the audit firms and the individual partners/proprietors and senior audit team members with severe consequences like fines and penalties and debarring the firm from undertaking audits.

Non-Repatriable Investment by NRIs and OCIs under FEMA: An Analysis – Part – 1

This is the 11th Article in the ongoing NRI series dealing with “Non-repatriable Investment by NRIs and OCIs under FEMA — An Analysis.”

Summary

“What cannot be done directly, cannot be done indirectly – Or can it be?”

FEMA’s golden rule has always been that what you cannot do directly, you cannot do indirectly—but then comes Schedule IV, sneaking in like that one friend who always finds a way out. It’s the ultimate legislative exception, allowing NRIs and OCIs to invest in India as if they never left, minus the luxury of an easy exit. Curious? Dive into the fascinating world of non-repatriable investments — you won’t be disappointed (unless, of course, you were hoping to take the money back out quickly!)

INTRODUCTION AND REGULATORY FRAMEWORK

Non-resident investors — including Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and even foreign entities — can invest in India under the Foreign Exchange Management Act, 1999 (FEMA). FEMA provides a broad statutory framework, which is supplemented by detailed rules and regulations issued by the government and the Reserve Bank of India (RBI). In particular, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) (issued by the Central Government) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Reporting Regulations) (issued by RBI) lay down the regime for foreign investments in “non-debt instruments.” These are further elaborated in the RBI Master Direction on Foreign Investment in India, which consolidates the rules and is frequently consulted by practitioners.

Under this framework, foreign investment routes are categorised by schedules to the NDI Rules. Of particular interest are Schedule I (Foreign Direct Investment on a repatriation basis), Schedule III (NRI investments under the Portfolio Investment Scheme on a repatriation basis), Schedule IV (NRI / OCI investments on non-repatriation basis), and Schedule VI (Investment in Limited Liability Partnerships). This article focuses on the nuances of non-repatriable investments by NRIs / OCIs under Schedule IV, contrasting them with repatriable investments and other routes. We will examine the legal definitions, eligible instruments, sectoral restrictions, compliance obligations, and the practical implications of choosing the non-repatriation route, with a structured analysis suitable for legal professionals.

DEFINITION OF NRI AND OCI UNDER FEMA; ELIGIBILITY TO INVEST

Non-Resident Indian (NRI) – An NRI is defined in FEMA and the NDI Rules as an individual who is a person resident outside India and is a citizen of India. In essence, Indian citizens who reside abroad (for work, education, or otherwise) become NRIs under FEMA once they cease to be “person resident in India” as per Section 2(w) of FEMA. Notably, this definition excludes foreign citizens, even if they were formerly Indian citizens – such persons are not NRIs for FEMA purposes once they have given up Indian citizenship.

Overseas Citizen of India (OCI) – An OCI for FEMA purposes means an individual resident outside India who is registered as an OCI cardholder under Section 7A of the Citizenship Act, 1955. In practical terms, these are foreign citizens of Indian origin (or their spouses) who have obtained the OCI card. OCIs are a separate category of foreign investors recognized by FEMA, often extending the same investment facilities as NRIs. In summary, NRIs (Indian citizens abroad) and OCIs (foreign citizens of Indian origin) are both eligible to invest in India, subject to the FEMA rules.

Eligible Investors under the Non-Repatriation Route – Schedule IV specifically permits the following persons to invest on a non-repatriation basis):

  •  NRIs (individuals resident outside India who are Indian citizens);
  •  OCIs (individuals resident outside India holding OCI cards);
  •  Any overseas entity (company, trust, partnership firm) incorporated outside India which is owned and controlled by NRIs or OCIs.

This extension to entities owned / controlled by NRIs / OCIs means that even a foreign-incorporated company or trust, if predominantly NRI / OCI-owned, can use the NRI non-repatriation route. However, as discussed later, such entities do not enjoy certain repatriation facilities (like the USD 1 million asset remittance) that individual NRIs do. Moreover, it is important to note that while these NRI / OCI-owned foreign entities are eligible for Schedule IV investments, they cannot invest in an Indian partnership firm or sole proprietorship under this route — only individual NRIs / OCIs can do so in that case.

NRIs and OCIs have broadly two modes to invest in India: (a) on a repatriation basis (where eventual returns can be taken abroad freely), or (b) on a non-repatriation basis (where the investment is treated as a domestic investment and cannot be freely taken out of India). Both modes are legal, but they carry different conditions and implications, as explained below.

WHAT ARE NON-DEBT INSTRUMENTS? – PERMISSIBLE INVESTMENT INSTRUMENTS

Under FEMA, all permissible foreign investments are classified as either debt instruments or non-debt instruments. Our focus is on non-debt instruments, which essentially cover equity and equity-like investments. The NDI Rules define “non-debt instruments” expansively to include:

• Equity instruments of Indian companies – e.g. equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares, and share warrants. (These are often referred to simply as “FDI” instruments.)

• Capital participation in LLPs (contributions to the capital of Limited Liability Partnerships).

• All instruments of investment recognized in the FDI policy, as notified by the Government from time to time (a catch-all for any other equity-like instruments).

• Units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).

• Units of mutual funds or Exchange-Traded Funds (ETFs) that invest more than 50 per cent in equity (i.e. equity-oriented funds).

• The junior-most (equity) tranche of a securitization structure.

• Immovable property in India (acquisition, sale, dealing directly in land and real estate, subject to other regulations).

• Contributions to trusts (depending on the nature of the trust, e.g. venture capital trusts, etc.).

• Depository receipts issued against Indian equity instruments (like ADRs / GDRs).

All the above are considered non-debt instruments. Thus, when an NRI or OCI invests on a non-repatriation basis, it can be in any of these forms. In practice, the most common instruments for NRI / OCI non-repatriable investment are equity shares of companies, capital contributions in LLPs, units of equity-oriented mutual funds, and investment vehicles like AIFs / REITs.

It is important to note that debt instruments (such as NCDs, bonds, and government securities) are governed by a separate set of rules (the Foreign Exchange Management (Debt Instruments) Regulations) and generally fall outside the scope of Schedule IV. NRIs / OCIs can also invest in some debt instruments (for example, NRI investments in certain government securities on a non-repatriation basis are permitted up to a limit, but those are subject to different rules and are not the focus of this article.

REPATRIABLE VS. NON-REPATRIABLE INVESTMENTS: MEANING AND LEGAL DISTINCTION

Repatriable Investment means an investment in India made by a person resident outside India which is eligible to be repatriated out of India, i.e. the investor can bring back the sale proceeds or returns to their home country freely (net of applicable taxes) in foreign currency. In other words, both the dividends/interest (current income) and the capital gains or sale proceeds (capital account) are transferable abroad in a repatriable investment without any ceiling (subject to taxes). Most foreign direct investments (FDI) in India are on a repatriation basis, which is why repatriable NRI investments are treated as foreign investments and counted towards foreign investment caps. For instance, if an NRI invests in an Indian company under Schedule I (FDI route) or Schedule III (portfolio route) on a repatriable basis, it is counted as foreign investment (FDI / FPI), with all attendant rules.

Non-Repatriable Investment means the investment is made by a non-resident, but the sale or maturity proceeds cannot be taken out of India (except to the limited extent allowed). The NDI Rules define it implicitly by saying, “investment on a non-repatriation basis has to be construed accordingly” from the repatriation definition. In simple terms, this means the principal amount invested and any capital gains or sale proceeds must remain in India. The investor cannot freely convert those rupee proceeds into foreign currency and remit abroad. Such investments are essentially treated as domestic investments –— the NDI Rules explicitly deem any investment by an NRI / OCI on a non-repatriation basis to be domestic investment, on par with investments made by residents. This distinction has crucial legal effects: NRI/OCI non-repatriable investments are not counted as foreign investments for regulatory purposes. They do not come under FDI caps or sectoral limits (since they are treated like resident equity). This was confirmed by India’s DPIIT (Department for Promotion of Industry and Internal Trade) in a clarification that downstream investments by a company owned and controlled by NRIs on a non-repatriation basis will not be considered indirect FDI. Effectively, non-repatriable NRI / OCI investments enjoy the flexibility of domestic capital but with the sacrifice of free repatriation rights.

Advantages of Non-Repatriation Route: The non-repatriable route (Schedule IV) offers NRIs and OCIs significant advantages in terms of flexibility and compliance:

  •  No Foreign Investment Caps: Since it is treated as domestic investment, an NRI/OCI can invest without the usual foreign ownership limits. For example, under the portfolio investment route, NRIs cannot exceed 5 per cent in a listed company (10 per cent collectively), but under non-repatriation, there is no such limit — an NRI could potentially acquire a much larger stake in a listed company under Schedule IV (outside the exchange) without breaching FEMA limits. Similarly, total NRI / OCI investment can go beyond 10/24 per cent aggregate because Schedule IV holdings are not counted as foreign at all.
  •  Simplified Compliance: Many of the onerous requirements applicable to FDI – e.g. adherence to pricing guidelines, filing of RBI reports, sectoral conditionalities, mandatory approvals — are relaxed or not applicable for non-repatriable investments (since regulators treat it like a resident’s investment). We detail these compliance relaxations below.
  •  Current income can be freely repatriable: Current income arising from such investments like interest, rent, dividend, etc., is freely repatriable without any limits and is not counted in the $1mn threshold.
  •  Deemed Domestic for Downstream: As noted, if an NRI/OCI-owned Indian entity invests further in India, those downstream investments are not treated as FDI. This can allow greater expansion without triggering indirect foreign investment rules.

Drawbacks of the Non-Repatriation Route: The obvious trade-off is illiquidity from an exchange control perspective. The investor’s capital is locked in India. Specifically:

  •  Inability to Repatriate Capital Freely: The principal amount and any capital gains cannot be freely
    converted and sent abroad. The investor must either reinvest or keep the funds in India (in an NRO account) after exit, subject to a limited annual remittance (discussed later).
  •  Perpetual Rupee Exposure: Since eventual proceeds remain in INR, the investor bears currency risk on the investment indefinitely, which foreign investors might be unwilling to take for large amounts.
  •  Exit Requires Domestic Buyer or Special Approval: To actually get money out, the NRI / OCI may need to convert the investment to repatriable by selling it to an eligible foreign investor or seek RBI permission beyond the allowed limit. This adds a layer of uncertainty for the exit strategy.
  •  Not Suitable for Short-Term Investors: This route is generally suitable for long-term investments (often family investments in family-run businesses, real estate purchases, etc.) where the NRI is not looking to repatriate in the near term. It is less suitable for foreign venture capital or private equity, which typically demand an assured exit path.

INVESTMENT UNDER SCHEDULE IV: PERMITTED INSTRUMENTS AND SECTORAL CONDITIONS

What Schedule IV Allows: Schedule IV of the NDI Rules (titled “Investment by NRI or OCI on the non-repatriation basis”) lays out the scope of investments NRIs / OCIs can make on a non-repatriable basis. In summary, NRIs/OCIs (including their overseas entities) can, without any limit, invest in or purchase the following on a non-repatriation basis:

  •  Equity instruments of Indian companies – listed or unlisted shares, convertible debentures, convertible preference shares, share warrants – without any limit, whether on a stock exchange or off-market.
  •  Units of investment vehicles – units of AIFs, REITs, InvITs or other investment funds — without limit, listed or unlisted.
  •  Contributions to the capital of LLPs – again, without limit, in any LLP (subject to sectoral restrictions discussed below).
  •  Convertible notes of startups – NRIs / OCIs can also subscribe to convertible notes issued by Indian startups, as allowed under the rules, on a non-repatriation basis.

Additionally, Schedule IV explicitly provides that any investment made under this route is deemed to be a domestic investment (i.e. treated at par with resident investments). This means the general FDI conditions of Schedule I do not apply to Schedule IV investments unless specifically mentioned.

Sectoral Restrictions – Prohibited Sectors: Despite the broad freedom, Schedule IV carves out certain prohibited sectors where even NRI / OCI non-repatriable investments are NOT permitted. According to Para 3 of Schedule, an NRI or OCI (including their companies or trusts) shall not invest under non-repatriation in:

  •  Nidhi Company (a type of NBFC doing mutual benefit funds among members);
  •  Companies engaged in agricultural or plantation activities (this covers farming, plantations of tea, coffee, etc., and related agricultural operations);
  •  Real estate business or construction of farmhouses;
  •  Dealing in Transfer of Development Rights (TDRs).

These mirror some of the standard FDI prohibitions, with a key addition: agricultural / plantation is completely off-limits under Schedule IV (whereas under FDI policy, certain agricultural and plantation activities are permitted up to 100 per cent with conditions). The term “real estate business” is defined (by reference to Schedule I) to mean dealing in land and immovable property with a view to earning profit from them (buying and selling land/buildings). Notably, the development of townships, construction of residential or commercial premises, roads or infrastructure, etc., is specifically excluded from the definition of “real estate business”, as is earning rent from property without transfer. So, an NRI / OCI can invest in a construction or development project or purchase property for earning rent on a non-repatriation basis (since that is not considered a “real estate business” for FEMA purposes) but cannot invest in a pure real estate trading company.

Implication – Some Sectors Allowed on Non-Repatriation that are Prohibited for FDI, and vice versa: Because Schedule IV’s prohibited list is somewhat different from Schedule I (FDI) prohibited list, there are interesting differences:

  •  Additional Sectors Open under Schedule IV: Certain sectors like lottery, gambling, casinos, tobacco manufacturing, etc., which are prohibited for any FDI under Schedule I, are not mentioned in Schedule IV’s prohibition list. This may imply that an NRI / OCI could invest in such businesses on a non-repatriation basis. For example, a casino business in India cannot receive any FDI (foreign investor money on a repatriable basis), but it could receive NRI/OCI investment as a domestic investment under Schedule IV. However, such investments may be subject to provisions or prohibitions in various other laws and Statewise restrictions in India, and therefore, one must be careful in making such investments.
  •  From a policy perspective, this leverages the idea that an Indian citizen abroad is still treated akin to a resident for these purposes. Thus, apart from the specific exclusions in Schedule IV, all other sectors (even those barred to foreign investors) are permissible for NRIs / OCIs on non-repatriation. This provides NRIs/OCIs a unique opportunity to invest in sensitive sectors of the economy, which foreigners cannot, theoretically increasing the investment funnel for those sectors via the Indian diaspora.
  •  Conversely, Some Investments Allowed via FDI Are Barred in Non-Repatriation: There are cases where FDI rules are more liberal than the NRI non-repatriable route. A prime example is plantation and agriculture. Under FDI (Schedule I), certain plantation sectors (like tea, coffee, rubber, cardamom, etc.) are allowed 100 per cent foreign investment under the automatic route (with conditions such as mandatory divestment of a certain percentage within time for tea). However, Schedule IV flatly prohibits NRIs from investing in agriculture or plantation without exception. Thus, a foreign company could invest in a tea plantation company on a repatriable basis (counting as FDI), but an NRI cannot invest in the same on a non-repatriable basis, ironically. Another example: Print media — FDI in print media (newspapers / periodicals) is restricted to 26 per cent with Government approval under FDI policy. If an Indian company is in the print media business, an NRI / OCI could still invest on a non-repatriable basis (since Schedule IV’s company restrictions don’t list print media) — meaning potentially up to 100% as domestic investment. However, if the print media business is structured as a partnership firm or proprietorship, Schedule IV (Part B) prohibits NRI investment in it. We see a regulatory quirk: an NRI can invest in a print media company on non-repatriation (domestic equity, no specific cap) but not in a print media partnership firm. These inconsistencies require careful attention when structuring investments.

In summary, NRIs / OCIs have a broader canvas in some respects under Schedule IV, but must be mindful of the specifically forbidden areas. As a rule of thumb, apart from Nidhi, plantation / agriculture, real estate trading, and farmhouses / TDRs, most other activities are allowed. NRIs have leveraged this to invest in real estate development projects, infrastructure, and even sectors like multi-brand retail by ensuring their investments are non-repatriable (thus not triggering the foreign investment prohibitions or caps). On the other hand, they cannot use this route for farming or plantation businesses even if foreign investors could via FDI.

Special Case – Investment by NRIs / OCIs in Border-Sharing Countries: In April 2020, India introduced a rule (now embodied in NDI Rules) that any investment from an entity or citizen of a country that shares a land border with India (e.g. China, Pakistan, Bangladesh, etc.) requires prior Government approval, regardless of sector. This was to curb opportunistic takeovers. This rule applies to NRIs / OCIs as well if they are residents of those countries. However, notably, that restriction is relevant only for investments on a repatriation basis. If an NRI / OCI residing in, say, China or Bangladesh wants to invest under the non-repatriation route, Schedule IV does not impose the same approval requirement. In effect, an NRI/OCI in a neighbouring country can still invest in India as a de facto domestic investor under Schedule IV without going through government approval, whereas the same person investing under a repatriable route would face a clearance hurdle. This exception again underscores the policy view of NRI non-repatriable funds as akin to Indian funds. Whilst permissible, in view of authors, considering the geo-political climate, care and caution need to be exercised. Loophole or policy openness may not be the final answer, as national interest always comes first.

PRICING GUIDELINES AND VALUATION — ARE THEY APPLICABLE?

One significant compliance relief for non-repatriable investments is in pricing regulations. Under FEMA, when foreign investors invest in or exit from Indian companies on a repatriation basis, there are strict pricing guidelines to ensure shares are not issued at an unduly low price or purchased at an unduly high price (to prevent outflow/inflow of value unfairly). For instance, the issue of shares to a foreign investor must typically be at or above fair market value (as per internationally accepted pricing methodology), and transfer from resident to foreign investor cannot be at less than fair value, etc. These pricing restrictions do not apply to investments under Schedule IV. Since Schedule IV investments are treated as domestic, the law does not mandate adherence to the pricing formulae of Schedule I.

Practical effect: Indian companies can issue shares to NRIs / OCIs on a non-repatriation basis at face value or book value or any concessional price they choose, even if that is below the fair market value, without contravening FEMA. Similarly, NRIs/OCIs could potentially buy shares from resident holders at a negotiated price without being bound by the ceiling that would apply if the NRI were a foreign investor on a repatriation basis. This flexibility is often useful in family arrangements or preferential allotments where prices may be deliberately kept low for the NRI (which would otherwise trigger questions under FDI norms). For example, an Indian family-owned company can allot shares to an NRI family member at par value under Schedule IV, even if the fair value is much higher — a practice not allowed if the NRI were taking them on a repatriable basis. The only caution is that the Income Tax Act’s fair value rules (for deemed income on undervalued transactions) might still apply, but from a FEMA standpoint, it’s permissible.

To illustrate, the RBI Master Directions explicitly note that pricing guidelines are not applicable for investments by persons resident outside India on a non-repatriation basis, as those are treated as domestic investments. Thus, NRIs / OCIs have an advantage in valuation flexibility under Schedule IV.

REPORTING AND COMPLIANCE REQUIREMENTS

Another area of divergence is in regulatory reporting. Normally, any foreign investment coming into an Indian company must be reported to RBI (through its authorised bank) via forms on the FIRMS portal (previously Form FC-GPR for new issues, Form FC-TRS for transfers, etc.). However, investments by NRIs / OCIs on a non-repatriation basis do not require filing the typical foreign investment reports like FC-GPR. The rationale is that since these are not counted as foreign investments, the RBI does not need to capture them in its foreign investment data.

Indeed, no RBI reporting is prescribed for a fresh issue / allotment of shares under Schedule IV. An NRI/OCI investing on a non-repatriable basis can be allotted shares without the company filing any form to RBI (By contrast, if the same shares were issued under FDI, a Form SMF/FC-GPR would be required within 30 days.) That said, it is a best practice for the investee company or the NRI to intimate the AD bank in a letter about the receipt of funds and the fact that the shares are issued on a non-repatriation basis. This helps create a record, so that if in future any question arises, the bank/RBI is aware those shares were categorized as non-repatriable from the start.

One exception to the no-reporting rule is when there is a transfer of such shares to a person on a repatriation basis. If an NRI/OCI holding shares on a non-repatriable basis sells or gifts them to a foreign investor or NRI on a repatriable basis, that transaction does trigger reporting (Form FC-TRS) because now those shares are becoming foreign investments. The responsibility for filing the FC-TRS lies on the resident transferor or transferee, as applicable. We will discuss transfers shortly, but in summary: no reporting when NRIs invest non-repatriable initially, but reporting is required when the character of investment changes to repatriable via a transfer.

It’s important to maintain proper records in the company’s books classifying NRI / OCI holdings as non-repatriable. Practitioners note that if a company mistakenly records an NRI’s holding as repatriable FDI and files forms or treats it as a foreign holding in compliance reports, it could lead to regulatory confusion or even penalties. For instance, it might appear the company exceeded an FDI cap when, in reality, the NRI portion should have been excluded. Therefore, both the investor and investee company should internally document the nature of the investment (e.g. through a board resolution noting the shares are issued under Schedule IV, non-repatriation).

In summary, compliance for Schedule IV investments is lighter: no entry-level RBI approvals (it’s an automatic route in all cases), no pricing certification, and no routine filing for allotments. Contrast that with Schedule I investments, where one must comply with valuation norms and file forms within the prescribed time. This ease of doing business is a key attraction of the non-repatriable route for many NRIs.

Mode of Payment and Repatriation of Proceeds

Funding the Investment: An NRI/OCI investing on a non-repatriation basis can fund the investment through any of the standard channels for NRI investments. Permissible modes include:

  •  Inward remittance from abroad through normal banking channels (i.e. sending foreign currency, which is converted to INR for investment).
  •  Payment out of an NRE or FCNR account maintained in India (these are rupee or foreign currency accounts which are repatriable).
  •  Payment out of an NRO account in India (Non-Resident Ordinary account, which holds the NRI’s funds from local sources in INR).

Use of an NRO account is notable — since NRO balances are non-repatriable (beyond the USD 1 million a year), routing payment from NRO naturally aligns with the non-repatriable nature of the investment. But even if funds came from an NRE/FCNR (which are repatriable accounts), once invested under Schedule IV, the money loses its repatriable character for the principal and becomes subject to Schedule IV restrictions.

Credit of Sale / Disinvestment Proceeds: When an NRI / OCI eventually sells the investment or the Indian company liquidates, the sale proceeds must be credited only to the NRO account of the investor. This rule is crucial — it ensures the money remains in the non-resident’s ordinary rupee account (NRO), which is not freely repatriable. Even if the original investment was paid from an NRE account, the exit money cannot go back to NRE; it has to go to an NRO (or a fresh NRO if the investor doesn’t have one). Once in NRO, those funds are under Indian jurisdiction with limited outflow rights.

Repatriation of Proceeds — The USD 1 Million Facility: FEMA does provide a limited facility for NRIs / OCIs to remit out funds from their NRO accounts/sale proceeds under the Remittance of Assets Regulations, 2016. A Non-Resident Indian or PIO is allowed to remit up to USD 1,000,000 (One Million USD) per financial year abroad from an NRO account or from the sale proceeds of assets in India, including capital gain. This is a general limit for all assets combined per person per year. This means an NRI who sold shares that were on a non-repatriable basis can utilise this route to gradually repatriate the money, up to $ 1M (USD One Million) annually. Notably, this facility is only available to individuals (NRIs / PIOs) and not to companies or other entities. So, if an NRI made a large investment and eventually exited, they could take out $1M each year (approximately ₹8.75 crore at current rates) from India. Any amount beyond that in a year would require special RBI approval.

In practice, RBI approval for exceeding the USD 1M cap is rarely granted except in exceptional hardship cases. RBI typically expects the NRI to stagger the remittances within the allowed limit across years. Therefore, investors should plan accordingly if the sums are large – it could take multiple years to fully repatriate the corpus unless they find some other mechanism (like transferring the shares to a repatriable route investor before sale, etc.). It has been observed that RBI is generally not inclined to allow one-time large remittances beyond the automatic limit, emphasizing that the non-repatriable route is meant for money that essentially stays in India with only a slow trickle out.

No $1M facility for foreign entities: As mentioned, if the investor was not an individual but an overseas company or trust owned by NRIs / OCIs, that entity does not qualify as an NRI or PIO under the Remittance of Assets rules. Thus, it cannot directly avail of the $1M automatic repatriation. Such entities would have to apply to RBI for any repatriation, which is uncertain. This is why advisors often recommend that if repatriation might eventually be desired, the investment should be structured in the individual NRI’s name (or at least eventually transferred to the individual NRI before exit). By keeping the investor as a natural person, the exit flexibility using the $1M per year route remains available.

Repatriation of Current Income: Importantly, current income (yield) from the investment is freely repatriable even if the investment itself is non-repatriable. FEMA distinguishes between repatriation of capital versus repatriation of current income such as dividends, interest, or rent. As a general rule, any dividend or interest earned in India by an NRI can be remitted abroad after paying due taxes, irrespective of whether the underlying investment was on a non-repatriation basis. RBI Master Circular confirms that authorised dealers may allow remittance of current income (like dividends, pension, interest, rent) from NRO accounts, subject to CA certification of taxes paid. This means an NRI who invested in shares under Schedule IV can still have the company declare dividends, and the NRI can get those dividends out of India without dipping into the $1M capital remittance limit. Likewise, interest on any NRO deposits of the sale proceeds is repatriable as current income. This provision is a relief because it allows NRIs/OCIs to enjoy returns on their investment globally, even though the principal stays locked.

To summarize, the inflow of funds for non-repatriable investments is flexible (NRE/FCNR/NRO all allowed), but the outflow of funds is tightly controlled. NRIs should channel the exit money into NRO and then plan systematic remittances of up to $1M a year unless they intend to reuse the funds in India. Many simply reinvest in India, treating it as part of their India portfolio.

“And That’s a Wrap… for Now!”

Congratulations! If you’ve made it this far, you’re officially a FEMA warrior—armed with the wisdom of Schedule IV and the art of non-repatriable investments. We’ve explored how NRIs and OCIs can invest in India like residents and enjoy the flexibility that even FDI can’t offer. But wait—what happens when it’s time to exit? Can you sell, transfer, or gift these investments? Will FEMA let you walk away freely, or will it make you fill out just one more RBI form?

All this (and more!) is in Part 2, where we unlock the secrets of transfers, repatriation limits, downstream investments, and compliance puzzles. Stay tuned—because just like FEMA regulations, this story isn’t over yet!

Allied Laws

52. Sunkari Tirumala Rao and Ors. vs. Penki Aruna Kumari

2025 LiveLaw (SC) 99

17th January, 2025

Partnership Firm — Unregistered — Suit instituted by partners for recovery of money from another partner — Suit not maintainable — Registration of Partnership firm compulsory — Mandatory provision. [S. 69, Partnership Act, 1932].

FACTS

The Petitioners (Original Plaintiffs) had instituted a suit for recovery of money in their capacity as the partners of an unregistered partnership firm against the Respondent (Original Defendant), who was also a partner of the said unregistered firm. The Respondent had challenged the maintainability of the said suit on the ground that, as per section 69 of the Partnership Act, 1932 (Act), no suit can be filed by a partner of an unregistered firm. However, the learned Trial Court held that since the partnership firm had not commenced business, the Petitioners were entitled to file a suit for recovery of money under section 69 of the Act. In the revision proceedings before the Hon’ble Andhra Pradesh High Court at Amravati, the Hon’ble Court held that the provisions of section 69 are mandatory in nature, and a suit can only be filed by partners of a registered partnership firm.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court after relying on its earlier decision in the case of Seth Loonkaran Sethiya and Others vs. Mr. Ivan E. John and Others (1977) 1 SCC 379, along with other decisions, reiterated that provisions of section 69 are mandatory in nature and also apply to unregistered partnership firms that have not commenced their business. The Petition was, therefore, dismissed, and the order of the Hon’ble High Court was upheld.

53. Surendra G. Shankar and Anr. vs. Esque Finamark Pvt. Ltd. and Ors.

Civil Appeal No. 928 of 2025 (SC)

22nd January, 2025

Condonation of delay — Appeal — Appellate Court restricted to adjudicate the matter only on the delay aspect — Cannot adjudicate on merits.

FACTS

The Appellants had filed a complaint before the Maharashtra Real Estate Regulatory Authority (RERA) for possession of a flat. The said complaint was filed against the Respondent and one M/s. Macrotech Developers Ltd. (Respondent No. 2). Thereafter, Respondent No. 2 was discharged from the proceedings vide order dated 23rd July, 2019 citing no privity of contract between the Appellant and Macrotech Developers Ltd (Respondent No. 2). Thereafter, a final order was passed on 16th October, 2019 dismissing the complaint of the Appellant. Aggrieved, an appeal was preferred before the RERA Tribunal against the order dated 16th October, 2019. The Appellant also appealed against the order of the RERA dated 23rd July, 2019 (wherein Respondent No. 2 was discharged) along with an application for condonation of delay. However, the RERA Tribunal dismissed the delayed appeal. Thereafter, the appellants filed a second appeal before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court condoned the delay and thereafter proceeded to decide the issue on merits, resulting in the dismissal of the appeal.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that once the Hon’ble High Court had condoned the delay of the Appellant, it ought to have restored the matter back to the file of the RERA Tribunal since the scope of appeal was limited to the condonation of delay. This was further strengthened by the fact that the RERA Tribunal had not commented / adjudicated on merits. Therefore, the decision of the Hon’ble High Court was set aside, and the matter was restored to the file of the RERA Tribunal with a direction to decide the appeal on merits without being prejudiced by the observations made by the Hon’ble High Court. The appeal was, therefore, allowed.

54. Central Bank of India vs. Smt. Prabha Jain and Ors.

2025 LiveLaw (SC) 103

9th January, 2025

Suit Property — Possession Debt Recovery Tribunal — Powers / jurisdiction — Possession can be given only to the borrower or possessor. [S. 17, 34, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002; Order VII, Rule 11, Code for Civil Procedure, 1908.].

FACTS

Respondent No. 1 (Ms. Prabha Jain, Original Plaintiff) had instituted a suit for possession of the suit property. According to Ms. Prabha Jain, she had inherited a 1/3rd share in the suit property after the death of her husband in 2008. However, the suit property was illegally sold by one Mr. Sumer Chand Jain (brother of the deceased husband, Appellant / Original Defendant) to one Mr. Parmeshwar Das Prajapati (Appellant / Original Defendant). Thereafter, Mr. Parmeshwar Das Prajapati executed a mortgage deed in favour of Central Bank of India (Appellant-Bank) for obtaining a loan. Thereafter, the Appellant-Bank took over the possession of the suit property under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act, 2002 and published an advertisement for putting the suit property on auction. Consequently, Ms. Prabha Jain filed a suit to declare the said sale deed by Sumer Chand Jain to Mr. Parmeshwar Das Prajapati as illegal and to hand over the possession of the suit property to her. The Appellant-Bank, however, challenged the maintainability of the said suit on the ground that as per section 34 of the SARFAESI Act, no civil court has the jurisdiction to entertain any suit or proceedings in respect of matter which Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered to. The said contention of the Appellant-Bank was accepted by the learned Civil Court, which was, thereafter, reversed by the Hon’ble Madhya Pradesh High Court.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court by the Appellant-Bank.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Original Plaintiff (Ms. Prabha Jain) had prayed for three reliefs before the learned Civil Court. The first two reliefs related to declaring the sale deed by Sumer Chand Jain to Parmeshwar Das Prajapati and the consequent mortgage deed in favour of Appellant-Bank as invalid. The third relief was with regard to handing over the possession of the suit property back to the Plaintiff. At the outset, the Hon’ble Court observed that the first two reliefs, undisputedly, were under the jurisdiction of a civil court and not under the DRT. With respect to the third relief, the Hon’ble Supreme Court observed that according to section 34 r.w.s. 17(3) of the SARFAESI Act, the DRT has some power to ‘restore’ the suit property to an individual who is a borrower or a possessor of the property. However, in order to ‘restore’ the suit property, Ms. Prabha Jain (Original Plaintiff) was neithera borrower nor a possessor of the suit property when the Appellant-Bank took over the possession of the property. Therefore, the Hon’ble Supreme Court confirmed that DRT had no jurisdiction to entertain the suit, and Ms. Prabha Jain had rightly instituted the suit before the civil court. The Hon’ble Supreme Court further noted that if a plaint/suit is filed before the civil court wherein, the Plaintiff has urged multiples reliefs (as in the present case), and if it is noticed that some of the reliefs are barred by law, then, the Civil Court cannot reject the entire plaint under Order VII, Rule 11 of the Code for Civil Procedure, 1908. In such a scenario, the Civil Court must address the issues / reliefs which are not barred by the law and avoid commenting on issues/reliefs which are barred by law. Before parting ways, the Hon’ble Court opined a need for the Reserve Bank of India to develop a standardised and practical framework for preparing title search reports (by the bank officials) before a loan has been sanctioned by the banks. Further, the Court opined that in the said framework, the liability of the erring bank official who had sanctioned the loan must also be determined.

The appeal was thus allowed.

55. Rakesh Brijal Jain vs. State of Maharashtra

CRA No. 379 of 2016 (Bom)(HC)

21st January, 2025

Offence of money laundering — Punishment for money — laundering — Allowing the Criminal Revision application the Court awarded exemplary cost ₹1 lakh each on complainant and Enforcement Director ( ED) for invoking criminal action and harassing the Developer with criminal action — Breach of agreement – Purchaser and Developer — Law Enforcement Agencies like ED should conduct themselves within parameters of law and that they cannot take law in to their own hands without application of mind and harass citizens. [S. 3, 4, Prevention of Money Laundering Act, 2002; Indian Penal Code 1860, S. 120B, 406, 418, 420]

FACTS

The police station forwarded the charge sheet to the Enforcement Director (ED). The ED lodged a criminal case against a developer. Criminal Revision Application was filed challenging the legality and validity of the order dated August 08, 2014, issuing process passed by the learned Special Judge, Mumbai under the Prevention of Money Laundering Act, 2002. The Criminal Revision Application sought setting aside of the order, principally on the ground that prima facie no offence whatsoever was made out under Sections 406, 418, 420 read with 120B Indian Penal Code, 1860.

HELD

Allowing the petition, the Court held that a mere breach of promise, agreement or contract does not, ipso facto, constitute an offence of criminal breach of trust without there being a clear case of entrustment. Clearly, the allegation / charge under Section 406 of the IPC has no basis. Once it is established that there is no cheating involved under the IPC then there are no proceeds of crime involved under Section 2(1)(u) of PMLA and therefore there is no Money Laundering involved under Section 3 of PMLA in the present case prosecution. ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. At the highest, if the complainant is aggrieved due to delay in receiving possession, his remedy lies in a Civil Court under the Sale Agreement, which he has already invoked. No offense of cheating or Money Laundering exists qua the prosecution, and ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. ED has supported the complainant’s false case without application of mind or without going through the record delineated hereinabove. The attachment of the two flats and garage purchased by the Applicant is cancelled.

56. Tomorrowland Limited vs. Housing and Urban Development Corporation Limited and Another

2025 LiveLaw (SC) 205

13th February, 2025

Director’s Responsibility — Dishonour of Cheque — Twin conditions — in charge and responsible of management of company. [S. 141, Negotiable Instruments Act, 1881]

FACTS

The case involves a contractual dispute between the Appellant and Respondent regarding the allotment of land for a 5-star hotel at Andrew’s Ganj, New Delhi. In 1990, the Ministry of Urban Development (MUD) decided to develop a 71-acre land parcel in Andrew’s Ganj through HUDCO. HUDCO invited bids, including for a 99-year lease of land to develop a 5-star hotel and an adjacent car park. Tomorrowland emerged as the highest bidder and was issued an allotment letter. Disputes arose between the Tomorrow land (Appellant) and HUDCO (Respondent).

A complaint was lodged against the Appellant and the company’s directors regarding the dishonour of a cheque under the Negotiable Instruments Act, 1881. Seeking to have the complaint quashed, the Appellant approached the High Court, arguing that the said-director had no role in the company’s daily operations and was not a signatory to the cheque in question. However, the High Court declined to intervene, ruling that the matter required further examination. Consequently, the appeal was dismissed, and the Court imposed a monetary cost on the Appellant. Dissatisfied with this decision, the Appellant filed the present appeal before the Hon’ble Supreme Court.

HELD

It was inter alia held that, there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act. In the complaint, it must be alleged that the person who is sought to be held liable by virtue of vicarious liability, at the time when the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company. A Director who is in charge of the company and a Director who was responsible to the company for the conduct of the business are two different aspects. The requirement of law is that both the ingredients of sub-Section (1) of Section 141 of the 1881 Act must be incorporated in the complaint.

Appeal was allowed.

Whether Obtaining Prior Approval For Reopening Of Assessment Has Become An Empty Ritual?

I. INTRODUCTION

The Finance (No. 2) Act, 2024, inserted new sections 148, 148A, and 151 relating to the reopening of assessment in the Income Tax Act, 1961 (“the Act”).

Sections 148 inter alia provides for procedure for reopening of assessment and section 148A inter alia provides for passing of an order before issuance of notice for reopening of assessment under section 148. As per these sections, the acts of issuing notice for reopening of assessment and passing an order before the issue of notice for reopening of assessment can be done by the Assessing Officer only after obtaining prior approval of the specified authority laid down under section 151, which states that specified authority for section 148 and 148A shall be the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director as the case may be.

In this write-up, an attempt is made to show the manner in which the rigours of provisions relating to obtaining prior approval for the reopening of assessment have been toned down as per the recent amendment, and thus, the said provisions have become an empty ritual.

II. IMPORTANT OBSERVATIONS OF THE COURTS IN THE CASE OF REOPENING OF ASSESSMENT

It would be apposite to refer to the important observations of the Courts in the case of reopening of assessment as under :

  1.  The Gujarat High Court in the case of P. V. Doshi vs. CIT (1978) 113 ITR 22 has held that provisions relating to the reopening of assessment are to lay down the necessary safeguards in the wider public interest by way of fetters on the jurisdiction of the authority itself, and they could not be said to be merely for the private benefit of the individual assessee concerned.
  2.  The Supreme Court in the case of ChhugamalRajpal vs. S. P. Chaliha (1971) 79 ITR 603 has held that the provisions of section 151 must be strictly adhered to because it contains important safeguards.
  3.  The Supreme Court in the case of ITO vs. LakhmaniMewal Das (1976) 103 ITR 437 has held that the powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that the income of the assessee has escaped assessment.
  4.  The Supreme Court, in the case of has observed, “We must keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfilment of certain preconditions, and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, the review would take place”.
  5.  The Bombay High Court, in the case of German Remedies Ltd. vs. DCIT (2006) 285 ITR 26, has held that it is a settled position of law that though the powers conferred under section 147 of the Income Tax Act for reopening the concluded assessment are very wide, the said power cannot be exercised mechanically or arbitrarily.

Thus, in spite of the fact that Courts have held that the provisions relating to the reopening of assessment are to lay down the necessary safeguards in the wider public interest, by the recent amendments by the Finance (No. 2) Act, 2024, the provisions relating to obtaining approval of the specified authority for the reopening of assessment, which acted as an important safeguard, have been watered down to facilitate carrying out of reassessment by the assessing authorities, by toning down the rigours of the provisions relating to “approval” as discussed hereafter.

III. AMENDMENT OF SECTION 151 OF THE INCOME-TAX ACT

It would be apt to have the background of the following provisions of the Act before discussing the provisions relating to approval as provided under section 151 of the Act.

  1.  Earlier, prior to 31st March, 1989, the definition of the “Assessing Officer” under section 2 (7A) of the Act included only the Assistant Commissioner, the Income Tax Officer or the Deputy Commissioner. Thereafter, consequent to subsequent amendments to sub-section (7A) to section 2 from time to time, other officers were included in the definition of “Assessing Officer”, which has been stated hereafter.
  2.  (i) Presently, subsection (7A) to section 2 of the Act, which defines “Assessing Officer” as meaning the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income Tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under subsection (1) or sub-section (2) of section 120 or any other provisions of this Act and the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to an Assessing Officer under this Act.

(ii) Sections 116 to 118 deal with the Income Tax Authorities, both quasi-judicial and executive. As per the notifications issued by the Board from time to time pursuant to powers vested in it under section 118, the hierarchy of these authorities is in the same order as provided in section 116. The relevant portion of the said section 116 has been reproduced as under, just to indicate which of these authorities fall within the ambit of the definition of “Assessing Officer” as per section 2 (7A) of the Act :

(a) xx

(aa) xx

(b) xx

(ba) xx

(c) xx

(cc) Additional Directors of Income Tax or Additional Commissioners of Income Tax or xx.

(cca) Joint Directors of Income Tax or Joint Commissioners of Income Tax or xx

(d) Deputy Directors of Income Tax or Deputy Commissioners of Income Tax or xx

(e) Assistant Directors of Income Tax or Assistant Commissioners of Income Tax

(f) Income Tax Officers

(g) xx

(h) xx

(iii) As per section 2 (28C), the Joint Commissioner includes an Additional Commissioner. Further, as per section 2 (28D), the Joint Director includes an Additional Director. Therefore, as per notification issued under section 118 r.w.s. 116, Joint Commissioner of Income Tax is subordinate to Additional Commissioner, but by virtue of section 2 (28C), the rank of Joint Commissioner and Additional Commissioner is at par. Similarly, as per notification issued under section 118 r.w.s. 116, the Joint Director is subordinate to the Additional Director, but by virtue of section 2 (28D), the rank of Joint Director and Additional Director is at par.

3.  Under the then provisions of section 151 operative up to 31st March, 1989, no notice under section 148 could be issued :

a. After the expiry of eight years from the end of the relevant assessment year without the approval of the Board.

b. After the expiry of four years from the end of the relevant assessment year without the approval of the Chief Commissioner or Commissioner.

After the amendment of section 151 w.e.f. 1st April, 1989, the sanctioning authorities depended upon whether an earlier assessment was made under section 143 (3) or section 147 of the Act or not, and also the period after the expiry of the assessment year beyond which the assessment is reopened. The said section provided that where the notice is issued after the expiry of four years from the end of the assessment year, the approval of the Chief Commissioner or the Principal Chief Commissioner or the Principal Commissioner or the Commissioner was required.

From the above provisions, it is clear that where the assessment is reopened beyond the expiry of four years from the end of the assessment year, the approving authorities were not assessing authorities.

But sub-section (2) of section 151 permitted approval of certain Assessing Authorities where the assessment earlier made under section 143 (3) or section 147 is reopened within four years from the end of the assessment year. Thus, approving authorities and Assessing Authorities happened to be the same only in specified cases where the reopening of the assessment was made within four years from the end of the assessment year. It is submitted that the said provisions relating to the approval of assessing authorities were not in tune with the ratio of the Supreme Court decisions discussed hereafter. After the rationalisation of provisions relating to the reopening of assessment by the Finance Act, 2021, and further amended by the Finance Act, 2023, the approving authorities depended upon whether less than three years or more than three years have elapsed from the end of the relevant assessment year. But in both the said cases, the approving authorities were not assessing authorities. From the aforesaid discussion, it is clear that prior to the amendment made by the Finance Act, 2021 and the Finance Act, 2023, earlier section 151 made the distinction between the reopening of assessments after the expiry of a specified number of years or those which are not, as also whether assessment made earlier was under section 143 (3) or section 147. In such cases, where the reopening of assessment was made beyond a specified number of years or in cases where an earlier assessment was made under section 143 (3) or section 147, the approval of Superior Authorities, who were not assessing authorities, was required. The amendments to section 151 made by the Finance Act, 2021 and the Finance Act, 2023 mandated the approval of Superior Authorities who were not Assessing Authorities in all cases, depending upon whether the reopening of assessment was made within three years or beyond the period of three years from the end of the assessment year. Shockingly, as per the recent amendment to section 151 by the Finance (No. 2) Act, 2024, reopening of assessment can be made with the approval of specified authorities who happen to be the assessing authorities. The Superior Authorities, like the Principal Chief Commissioner, Principal Commissioner, etc., have not been included in the definition of “specified authority” under the amended section 151 of the Act.

The Uttaranchal High Court in the case of McDermott International Inc. vs. Addl. CIT (259 ITR 138) has held that the provision for sanction under section 151 is a safeguard so that the assessee need not be unnecessarily harassed by the Assessing Officer.

After the present amendment to section 151, the specified authorities for the purposes of sections 148 and 148A are the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, as the case may be. The specified authorities enumerated under section 151 fall within the definition of “Assessing Officer” as per section 2 (7A) of the Act, the hierarchy of which is given as above as per section 116 of the Act. If approval of any of them is to be obtained, then the same must be sought by the Assessing Authority who is below their rank as specified authorities are themselves Assessing Officers. Thus, the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, who are themselves the Assessing Authorities, can give approval to the Assessing Authorities below their rank to reopen the assessment. As all these authorities fall within the definition of “Assessing Officer” as per section 2 (7A) of the Act, the amendment made is manifestly arbitrary and unreasonable. This is for the reason that the Superior Authorities like the Board, the Principal Chief Commissioner of Income Tax, the Principal Commissioner of Income Tax, etc., have been removed from the definition of “specified authority” under section 151 of the Act, with the result that important safeguards in the form of approval of superior authorities as hitherto provided under the predecessor section 151 and earlier section 151, have been removed, with the result that the rigours of obtaining approval have been substantially toned down.

IV. MEANING OF ASSESSMENT AND APPROVAL AND MIX–UP OF ASSESSING POWER AND APPROVING POWER NOT PROPER

Black’s Law Dictionary defines “assessment” as the process of ascertaining and adjusting the shares respectively to be contributed by several persons towards a common beneficial object according to the benefit received. It is often used in connection with assessing property taxes or levying property taxes. The same Dictionary defines “approval” to mean an act of confirming, ratifying, assenting, sanctioning or consenting to some act or thing done by another. In the case of Vijay S. Sathaye vs. Indian Airlines & Others (AIR SCW 6213), the Supreme Court has held that approval means confirming, ratifying, assenting, and sanctioning some act or thing done by another. In the case of Manpower Group Services India Pvt. Ltd. vs. CIT (430 ITR 399), the Delhi High Court has held that approval means to agree with the full knowledge of the contents of what is approved and pronounce it as good. In the case of Dharampal Satyapal Ltd. V/s. Union of India (2018) 6 GSTROL 351, it has been observed by the Gauhati High Court that grant of approval means due application of mind on the subject matter approved, which satisfies all the legal and procedural requirements. In the context of the Land Acquisition Act, 1894, the Supreme Court, in the case of Vijayadevi Naval Kishore Bhartia v/s. Land Acquisition Officer (2003) 5 SCC 83, has drawn the distinction between the approving authority and the appellate authority. It has been observed that the Collector, after assessing the land, makes an award for its acquisition and works out compensation payable under section 11 of the said Act, and his award is sent to the Commissioner for his approval as per proviso to section 11 (1) of the said Act. It has further been observed that the said Act has not conferred an appellate jurisdiction on the Commissioner under the proviso to section 11 (1) of that Act, but the appropriate government exercises the appellate power. On the same logic, there is a distinction between the assessing authority and the approving authority. Thus, the assessing power, approving power and appellate powers are separate and distinct, and there should not be a mix-up of the said powers.

Reading section 151 of the Act with section 2 (7A) of the Act, the approving authorities, i.e. Additional Commissioner or the Additional Director or Joint Commissioner or the Joint Director, may act as the assessing authorities as also approving authorities. Further, the Joint Commissioner and Additional Commissioner are of the same rank. Again, the Joint Director and the Additional Director are of the same rank. It is a paradox that all these authorities perform dual functions of assessing and approving authorities.

In certain circumstances, the provisions of section 151 may become unworkable.

For example, the Assessing Authority who proposes to issue notice under section 148 may be a Joint Commissioner. How can the Additional Commissioner accord his sanction for reopening as both the Joint Commissioner and the Additional Commissioner are of equal rank? The same reasoning applies in the case of the Joint Commissioner and the Joint Director, as both are of equal rank. In such cases, the sanction for reopening would be vitiated by official bias, resulting in a violation of the principles of natural justice. Reliance is placed on the ratio of the following decisions :

i. In GullapalliNageshwara Rao vs. A. P. State Road Transport Corporation (Gullapalli I) AIR 1959 SC 308, the petitioners were carrying on the motor transport business. The Andhra State Transport Undertaking published a scheme for nationalisation of motor transport in the State and invited objections. The objections filed by the petitioners were received and heard by the Secretary, and thereafter, the scheme was approved by the Chief Minister. The Supreme Court upheld the contention of the petitioners that the official who heard the objections was ‘in substance’ one of the parties to the dispute, and hence, the principles of natural justice were violated.

ii. In Mahadayal vs. CTO AIR 1961 SC 82, according to the Commercial Tax Officer, the petitioner was not liable to pay tax, and yet, he referred the matter to his superior officer and, on instructions from him, imposed tax. The Supreme Court set aside the decision.

iii. Again, no man can be a judge in his own cause. If it is so, his action is vitiated.

V. LEGAL POSITION OF APPROVAL/SANCTION

1. In the case of the State (Anti–Corruption Branch) Government of NCT of Delhi &Anr. vs. R. C. Anand& Another (2004) 4 SCC 615, it has been held by the Supreme Court as under :

“The validity of the sanction would, therefore, depend upon the material placed before the sanctioning authority and the fact that all the relevant facts, material and evidence, including the transcript of the tape record, have been considered by the sanctioning authority. Consideration implies the application of the mind. The order of sanction must ex-facie disclose that the sanctioning authority had considered the evidence and other material placed before it. This fact can also be established by extrinsic evidence by placing the relevant files before the Court to show that all relevant facts were considered by the sanctioning authority.”

2. In the case of Chhugamal Rajpal v/s. S. P. Chaliha (Supra), which related to the reopening of assessment, it was observed by the Supreme Court that the report submitted by the Income Tax Officer under section 151 (2) did not mention any reason for concluding that it was a fit case for the issue of a notice under section 148 and the Commissioner mechanically accorded his permission. On these facts, it was held by the Supreme Court that important safeguards provided in sections 147 and 151 were lightly treated by the Income Tax Officer as well as by the Commissioner, and therefore, notice issued under section 148 of the Act was invalid and had to be quashed.

From the aforesaid decisions of the Supreme Court, it is clear that the approving / sanctioning authority, while approving the documents placed before him, should apply his mind, and the approval / sanction must ex–facie disclose that the approving/sanctioning authority had considered the evidence and other material placed before it. Therefore, if the assessment order is passed by the Additional Commissioner, who is also the Sanctioning Authority, the question arises as to how the aforesaid provisions would be workable. This question arises because the specified authorities stated under section 151 include the Additional Commissioner, who can happen to be the Assessing Officer, as per the definition of Assessing Officer under section 2 (7A) of the Act.

VI. PRIOR APPROVAL OF THE SUPERIOR AUTHORITIES – A CASUAL APPROACH

It is submitted that though the legislature considered obtaining approval / sanction of the Superior Authorities as a safeguard provided to the assessees, the Assessing Officers consider the said provisions of obtaining approval lightly, and the Superior Authorities also act casually in granting approval. The same is evident from the observations of the Bombay and the Allahabad High Courts in the below-noted cases.

  1.  In the case of German Remedies Ltd. v/s. DCIT (2006) 287 ITR 494 in the context of obtaining sanction for the reopening of assessment, the Bombay High Court has observed as under :
    “It is not in dispute that the Assessing Officer on 15th September, 2003, had himself carried file to the Commissioner of Income-tax and on the very same day, the rather same moment in the presence of the Assessing Officer, the Commissioner of Income-tax granted approval. As a matter of fact, while granting approval, it was obligatory on his part to verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year. It was also obligatory on the part of the Commissioner to consider whether or not the power to reopen is being invoked within 4 years from the end of the assessment year to which they relate. None of these aspects have been considered by him, which is sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind. In the above view of the matter, the impugned notices and, consequently, the order justifying the reasons recorded are unsustainable. The same are liable to be quashed and set aside.”
  2.  In the case of PCIT vs. Subodh Agarwal (2023) 450 ITR 526 in the context of obtaining sanction for issuing notice to conduct search assessment, the Allahabad High Court has observed as under :

“In the instant case, the draft assessment order in 38 cases, i.e. for 38 assessment years placed before the Approving Authority on 31-12-2017, was approved on the same day, i.e., 31st December, 2017, which not only included the cases of respondent-assessee but the cases of other groups as well. It is humanly impossible to go through the records of 38 cases in one day to apply an independent mind to appraise the material before the Approving Authority. The conclusion drawn by the Tribunal that it was a mechanical exercise of power, therefore, cannot be said to be perverse or contrary to the material on record.”

VII. CONCLUSION

Though the specified authorities of the rank above the assessing authorities can give their approval/sanction for the issue of notice for reopening of assessment under section 148 and passing of order before the issue of notice under section 148 for the reopening of assessment under section 148A, there will not be any accountability as all of them are the Assessing Officers who, perform their duties sitting in the offices usually situated in the same floor of a building. There are chances of getting substantive irregularities getting cured as superior Authorities, such as the Principal Chief Commissioner, Principal Commissioner, etc., have no role to play in giving approval / sanction. Thus, the provisions relating to obtaining prior approval have become an empty ritual. The obtaining of prior approval in such cases may also suffer from a bias, and there is every chance of assessees being harassed by the Assessing Authorities. See the observation of the Uttaranchal High Court in the case of McDermott International Inc. vs. Additional CIT (Supra). Further, the Supreme Court in the case of Manek Lal v/s. Premchand AIR 1957 SC 425 has observed that reasonable apprehension or reasonable likelihood of bias is a vitiating factor.

One is reminded of the Chief Justice of the USA, Justice John Marshall, who had said in the year 1801 that “the power to tax involves the power to destroy”. The fitting reply came about a hundred years later from another Judge from the USA, Justice Holmes, who said, “The power to tax is not the power to destroy while this Court sits”. Such is the importance of Courts. The eminent Jurist and the legendary Tax Counsel Late Mr Nani Palkhivala had said in one of his famous budget speeches that “the bureaucrats are the unacknowledged legislatures of India.” Thus, it is submitted that they have amended section 151 in such a manner that their colleagues do not face any problem in obtaining prior approval while issuing notice for reopening of assessment. The amended provisions have ensured that no matter goes to the Courts on the ground of invalid approvals / sanctions for reopening of assessment by eclipsing several Court decisions where the Courts have quashed reopening of assessment only on the ground of invalid approval / sanction.

In spite of the fact that Courts have observed that for a wider public interest, adequate safeguards should be provided for resorting to the reopening of assessment, the legislature has been making amendment after amendment by removing adequate safeguards to implement the above provisions and making such provisions simple and smooth for the assessing authorities to execute the same. The Hon’ble Finance Minister, while presenting the (Finance No. 2) Bill 2024 in para 140 of her Budget Speech, has stated, “I propose to thoroughly simplify the provisions for reopening and reassessments.” One should ask her a question as to whether such simplification is for the benefit of the Income Tax officials or the benefit of taxpayers.

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

13. General Motors Company USA vs. ACIT, International Taxation

[2024] 166 taxmann.com 170 (Delhi – Trib.)

ITA No: 2359 and 2360 (Delhi) of 2022

A.Y.: 2014-15 & 2015-16

Dated: 5th September, 2024

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

FACTS

General Motors Company USA was a single-member LLC incorporated under the laws of the USA that received fees for technical/included services from two Indian entities. The Assessee claimed the rate of taxation was 15% as per Article 12 of the India-USA DTAA, which is beneficial compared to the rate of 25% under Section 115A for the relevant AY.

The AO believed that the LLC was not subjected to taxation in its own hands as per US tax laws and could not qualify as a ‘resident’ under Article 4 of DTAA. Further, the LLC is not liable to tax in US as it is a fiscally transparent entity and is not partnership or trust to get covered by Article 4(1)(b) of the treaty.. Accordingly, the AO concluded that even if the member of the LLC was a resident of the USA and pays tax on their share of the LLC’s income, the single-member LLC was not entitled to the treaty benefits.

The DRP concurred with the draft order.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The status of a corporation has to be determined based on the laws in which such LLC is formed. Publication No. 3402 of the Department of Treasury, IRS, USA explained the taxation of LLCs. Depending on its election, a two-member LLC could have been regarded as a corporation, partnership, or disregarded entity for federal tax purposes. A single-member LLC could be regarded as a corporation or a disregarded entity, and income is taxed in the hands of the owner.
  •  Instruction No. 8802 provides instructions for the application for a Tax Residency Certificate (‘TRC’) by an entity subject to US Tax. Further, Form No. 6166 provides that a fiscally transparent entity formed in the US that does not have US owners is not entitled to a TRC.
  •  The TRC issued by the IRS shows that the income of the single-member LLC is taxed in its owner’s hands; hence, the LLC was liable to tax, and the scope of such phrase had to be determined as per US tax laws.
  •  The Assessee satisfied the requirement of being a resident under Article 4 by incorporation and its separate existence from its member. Therefore, it qualifies as a person under DTAA and is entitled to benefits under DTAA.

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

12. TBEA Shenyang Transformer Group Company Limited vs. DCIT (International Taxation)

[2024] 169 taxmann.com 145 (SB)

ITA No: 581 (Ahd.) of 2017

A.Y.: 2012-13

Dated: 11th November, 2024

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

FACTS

The Assessee, a tax resident of the Republic of China, obtained a contract for offshore and onshore supply and services via separate agreements. A PO was formed in India to carry out onshore supply and service. A portion of onshore services had been subcontracted to third parties. The HO in China had received and also made payments on behalf of the PO due to the non-availability of a bank account in India at the relevant time.

The AO treated the transaction as reimbursement and referred it to the TPO for ALP determination. The TPO found that the rates received from PGCIL (contractor) for civil work were lower than those paid to subcontractors, suggesting that the PO was not adequately compensated at arm’s length price (ALP), leading to losses.

A Special Bench was constituted on a reference made by the Division Bench because of apparently conflicting views on the applicability of TP provisions to the transactions between an HO and its PE.

Assesses’ Arguments before SB

  •  Even if the PE is considered an enterprise per Section 92F, it does not treat PE as separate from its foreign company.
  •  There is no international transaction as per Section 92 and only fund movement between HO and PO, and the actual transactions are between PE and third parties.
  •  The Taxpayer argued that under Section 90 of the Act, the DTAA provisions override the Act to the extent they are beneficial. Further, Article 9 stipulates that TP adjustments are applicable only when one of the enterprises involved is a resident of the other contracting state. Since neither the HO nor the PE is considered a resident, the Taxpayer contended that transactions between them should not be subject to TP adjustments as per the DTAA.

HELD

  •  The object of fair and equitable tax allocation should be kept in mind while interpreting transfer pricing provisions. The crucial aspect of the case is that the PO had incurred losses while rendering services on behalf of the HO, and an evaluation of whether an independent party would enter such a contract to perform similar services is required.

Whether PE is a separate enterprise

  •  The determination of ALP is computed for an ‘enterprise’, and not for a person. There is a clear distinction between the two terms under the Act. Interpreting the term enterprise as a person will make certain provisions redundant; hence, such interpretation should be avoided.
  •  The SB referred to Article 7(2) and observed that the PE had to be treated as a separate and distinct enterprise to determine business profits.

Income arising from International Transactions

  •  The HO had undertaken the receipts and payments on behalf of the PE. The agreement entered by the HO had a bearing on the PE’s revenue and consequential income. Hence, income had to be understood in a commercial and business sense.
  •  Section 92F(v) defines the term ‘transaction’ and includes arrangement or understanding. The arrangement entered by HO led to a substantial loss in the hands of PO; hence, it must be subject to transfer pricing.

Associated Enterprise

  •  Sections 92A(1) and 92A(2) must be read together and satisfied cumulatively. Section 92A(2) provides scenarios by which an enterprise may participate in management, capital, or control of another.
  •  The SB noted that in cases involving a PE, traditional tests like holding voting power through shares or appointment of directors may not apply, as a PE does not have its own share capital or directors. The SB however indicated that the clauses of the AE definition that refer to the control by one enterprise over the other enterprise on account of certain commercial relationships (e.g. dependence on intangible property or substantial supplier or customer relationships etc.) may apply in HO-PE situations.
  •  The SB directed the division bench to analyze the applicability of Section 92A(2) clauses based on the facts and circumstances.

Deemed International Transactions

  •  The SB also highlighted the difference between Sections 92B(1) and 92B(2). The SB observed that under 92B(1), an international transaction is evaluated at an associated enterprise level, whereas under 92B(2), it was evaluated at a transaction level.
  •  The SB observed that section 92B(2) was triggered when the transaction between an enterprise and an unrelated person was influenced by the associated person of the enterprise. Such influence may be in the form of price or terms and conditions.
  •  The PO carried out the obligations of the contract entered by the HO and incurred substantial losses. When the PO was made to accept the contract terms concluded by HO, provisions of Section 92B(2) may apply.
  •  The SB directed the division bench to analyze the applicability of 92B(2) based on the facts and circumstances.

Treaty Override

  •  The purpose of Article 9 is limited to broadly confirming that similar rules exist in domestic law. Article 9(1) does not bar adjustment of profit under the domestic law even if the conditions differ from those of Article 9(1).
  •  Even if the DTAA is assumed to prevail, profits must be attributed to the PE as if it were an independent enterprise, in line with Article 7 of the DTAA. The SB concluded that this approach aligns with the arm’s length principle and found no conflict between Article 9 of the DTAA and TP regulations of the Act.
  •  Article 7(2) provided that PE had to be treated as a separate and distinct enterprise to determine profits. This reflects the transfer pricing principles, which intend to evaluate how the independent parties would have dealt in an uncontrolled situation. Thus, contention of the assessee that there is a conflict between Article 9 of DTAA and Act is rejected.

Sec. 43A: Where the assessee claimed expenses on account of foreign exchange fluctuation, which were merely reinstatement of losses as per accounting standards and there was no actual payment or remittance, section 43A could not apply.

75. Bando (India) (P.) Ltd. vs. DCIT

[2024] 114 ITR(T) 275 (Delhi – Trib.)

ITA NO.: 7743 (DEL) OF 2018

A.Y.: 2014-15

Date of Order: 11th July, 2024

Sec. 43A: Where the assessee claimed expenses on account of foreign exchange fluctuation, which were merely reinstatement of losses as per accounting standards and there was no actual payment or remittance, section 43A could not apply.

FACTS

During the year the assessee had claimed losses on account of foreign exchange fluctuation of ₹6,42,33,238/-. The AO had disallowed amount of ₹4,20,57,880/- u/s 37(1) treating exchange fluctuation as capital expenditure on account of ECB loan being utilized for purpose of acquiring capital asset which had enduring benefit. Aggrieved by the order, the assessee was in appeal before CIT(A). The CIT(A) in its order sustained the disallowance by invoking the provisions of section 43A instead of section 37 invoked by the AO.

Aggrieved, the assessee filed an appeal before the Tribunal –

HELD

The ITAT observed that the assessee had reinstated income or loss from fluctuation of currency as per accounting standards AS11 and the assessee was regularly following the same system of accounting in the previous years and subsequent years.

The ITAT observed that disallowance u/s 37 and u/s 43A of the Act, both operate in different spheres. Section 43A is a deeming provision for adding or deducting, the fluctuation loss or profit, from the cost of asset whereas disallowance u/s 37 was however for the reasons that capital expenditures are specifically disallowed.

The ITAT held that there was no ground to invoke section 43A since there was merely reinstatement of losses on account of fluctuation in foreign exchange currency and there was no actual payment or remittance. The ITAT following the concept of consistency, allowed the losses claimed for foreign exchange fluctuation.

The appeal of the assessee was accordingly allowed.

Sec. 68: Where the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No.2, though notice u/s 133(6) was not complied with by the investor company, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company for addition u/s 68 in respect of share capital and share premium.

74. ITO vs. Shree Banke Bihari Infracon (P.)Ltd.

[2024] 115ITR(T) 223(Raipur – Trib.)

ITA NO.:95 (RPR) OF 2020

CO.: 8(RPR) OF 2023

AY.: 2013-14

Date of Order: 18th March, 2024

Sec. 68: Where the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No.2, though notice u/s 133(6) was not complied with by the investor company, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company for addition u/s 68 in respect of share capital and share premium.

FACTS

The assessee company was engaged in the business of real estate and building work. The assessee company had e-filed its return of income on 21st December, 2013 declaring a total income of ₹229,982/-. The assessee company’s case was selected for scrutiny proceedings u/s 143(2) of the Act.

During the course of assessment proceedings, it was observed that the assessee company had claimed to have received share capital and share premium of ₹2.05 crores from M/s. Modakpriya Merchandise Pvt. Ltd [the investor company].

The AO had issued notices u/s 142(1) of the Act which was returned unserved by postal authority. The A.O. sought for a direction from the Jt. CIT, Range-4, Raipur, and under his direction issued a commission u/s. 131(1)(d) of the Act. The A.O. directed his Inspector to carry out a spot verification about the existence of the investor company at its old address. The Inspector vide his report dated 23rd March, 2016 informed the A.O. that the investor company was neither available at the address that was provided to him nor any board evidencing the availability of the investor company was found at the said address.

The AO observed that the assessee company had failed to discharge the onus that was cast upon it as regards proving the authenticity of its claim, the identity of the investor company was not established and except for the aforesaid transaction of payment made towards share capital / premium, the bank account of the investor company revealed no other transaction.

Accordingly, the AO being of the view that the assessee company in the garb of share capital/premium had laundered its unaccounted money, thus, made an addition of the entire amount of Rs.2.05 crore (approx.) u/s. 68 of the Act. Aggrieved by the order, the assessee company filed an appeal before the CIT(A).

The CIT(A) observed that the inquiry was done on the back of the assessee company and results of enquiry were not confronted to the assessee before making the addition. The CIT(A) further observed that the AO made inquiry at wrong address of Synagogue Street Kolkata instead of correct address of Mango Lane, Kolkata. The CIT(A) observed that the availability of the investor company could not be gathered by the AO for the reason that the necessary inquiries were carried out at an incorrect address, i.e., the old address of the assessee company. It was also observed that the ARs were attending hearing before the AO and AO could have very well informed the result of the inquiry across the table to the AR. All the documents in respect of M/s Modakpriya Merchandise Pvt. Ltd. such as ITR, audited balance sheet, bank account statement, ROC certificate were furnished. It was observed by CIT(A) that the investment of ₹2.05 crore made by the investor company with the assessee company was sourced from the sale of its investments, and complete details of the same were filed with the AO. Without finding any fault in the documents furnished by the appellant, no adverse finding can be made by the AO.

The CIT(A) observed that the assessee had discharged its onus to prove the existence of the investor company, genuineness of the transaction and the creditworthiness of the investor company and thus, deleted the addition made by the AO.

The revenue being aggrieved with the order of the CIT(Appeals) filed an appeal before the ITAT.

HELD

The ITAT observed that the investor company had shifted from its old address “Synagogue Street, Kolkata” to its new address: “3, Mango Lane, 4th Floor, Kolkata(WB)-700 001”, however, the spot verification was carried out at its old address. The ROC records of the investor company also revealed its new address. The AO himself on Page 3 of his order had referred to the new address of the investor company. In spite of the above facts, the AO drew the adverse inference about the unavailability of the investor company at its old address and doubted the genuineness of the transactions. The ITAT did not approve the adverse inferences drawn by the AO.

The ITAT observed that the department had accepted the investment of ₹39.99 lacs (approx.) made by the investor company with M/s. Rupandham Steel Pvt. Ltd. during A.Y.2017-18, vide its order u/s. 143(3) dated 31st December, 2019 while framing the assessment for A.Y 2017-18 of M/s. Rupandham Steel Pvt. Ltd. and thus it dispels all doubts about the existence of the investor company.

The ITAT further observed that the AO had issued notice u/s. 133(6) of the Act at the new address of the investor company but it had carried out necessary verifications at its old address. The ITAT held that though notice u/s 133(6) was not complied with, the AO on the said standalone basis could not draw adverse inferences in the hands of the assessee company.

The ITAT observed that the assessee company had placed on record with the AO supporting documentary evidence substantiating the authenticity of its claim of having received share application money from the investor company, viz. confirmation of the investor company, bank statement, copies of the return of income, financial statements of the investor company, copy of share application forms, copy of PAN, copy of memorandum and articles of association, copy of board resolution and return of allotment in Form No. 2. The ITAT also observed that on a perusal of the bank account of the investor company, the amount remitted to the assessee company as an investment towards share application money was not preceded by any cash deposits in the said bank account but is sourced from bank transfers made through RTGS and had filed the confirmations of the source of RTGS as well.

The ITAT held that the assessee company had discharged the double facet onus that was cast upon it as regards proving the authenticity of its claim of having received genuine share application money from the investor company –

i by substantiating based on documentary evidence the “nature” and “source” of the amount so credited in its books of account, i.e. receipt of the share application money from the investor company; and

ii by coming forth with a duly substantiated explanation about the “nature” and “source” of the sum so credited in the name of the investor company, as per the mandate of the “1st proviso” to Section 68 of the Act.

In the result, the appeal of the revenue was dismissed.

S. 12AB–CIT(E) cannot deny registration under section 12AB on the ground that some of the objects of the applicant-trust had an element of commerciality.

73. (2025) 170 taxmann.com 198 (IndoreTrib)

Aruva Foundation vs. CIT

ITA No.: 398 & 399(Ind) of 2024

A.Y.: N.A.

Date of Order: 11th December, 2024

S. 12AB–CIT(E) cannot deny registration under section 12AB on the ground that some of the objects of the applicant-trust had an element of commerciality.

FACTS

The assessee-company was incorporated under section 8 of the Companies Act, 2013 with the objects of, inter alia, selling and marketing of products developed by the weaker sections of the society. It was granted provisional registration / approval under section 12AB and section 80G. Subsequently, it applied to CIT(E) for grant of final registration / approval under section 12AB as well as section 80G.

CIT(E) rejected assessee’s application under section 12ABon the ground that some of the objects of the assessee as mentioned in the Memorandum of Association clearly showed that its intention was to carry out various commercial activities and also to engage in trading of various products and therefore, it was not eligible to obtain registration under section 12AB. He also rejected the application under section 80G on the ground that as a consequence of denial of registration under section 12AB, approval under section 80G was not available to the assessee. Further, the said application was also belated.

Aggrieved, the assessee filed appeals before ITAT.

HELD

The Tribunal observed that-

(a) Proviso to section 2(15) defining ‘charitable purpose itself allows commerciality in the activities of assessee but up to a ceiling limit of 20 per cent. Further, section 11(4A) grants exemption to commercial or business activity on fulfillment of certain requirements.

(b) Section 13(8) also provides that the exemption under section 11/12 shall be denied in that previous year only in which the proviso to section 2(15) is violated. Therefore, these provisions of law clearly show that even if any object or activity of assessee, out of various multiple objects and activities, has element of commerciality, that would result in denial of exemption under section 11/12 to that extent and in that particular previous year only; but the CIT(E) in exercise of power under section 12AB cannot deny registration to assessee.

(c) It was also a fact that the assessee had done only charitable activities till date and had not undertaken any activity contemplated under the said “commercial” objects. Therefore, as and when the said activity was actually undertaken by assessee in future, it would be a prerogative of Assessing Officer in that particular year, to ascertain the quantum of exemption under section 11/12 available to assessee.

In the result, the appeal of the assessee was allowed and CIT(E) was directed to grant registration under section 12AB.

With regard to the approval under section 80G, the Tribunal observed that the assessee had already filed a fresh application to CIT(E) within the extended timeline of 30.6.2024 [as extended by Circular No. 7/2024 dated 25.04.2024] and therefore, remitted the matter back to the file of CIT(E) for an appropriate adjudication.

S. 12A–If the charitable institution had filed its return of income belatedly but within time allowed under section 139(4), then the tax department must allow exemption under section 11.

72. K M Educational & Rural-development Trust vs. ITO

(2024) 169 taxmann.com 617(Chennai Trib)

ITA No.: 1326(Chny) of 2024

A.Y.: 2018-19

Date of Order: 4th December, 2024

S. 12A–If the charitable institution had filed its return of income belatedly but within time allowed under section 139(4), then the tax department must allow exemption under section 11.

FACTS

The assessee-trust was registered under section 12A. For AY 2018-19, it filed its return of income belatedly on 30th November, 2018 [due date for filing of return under section 139(1) was 30th September, 2018] declaring total income of ₹NIL and claimed a refund of ₹1,96,656. While processing the return of income under section 143(1), the Central Processing Centre (CPC) did not allow the exemption under section 11 on the ground that the return of income / audit report was not filed within the due date under section 139(1).

On appeal, CIT(A) upheld the action of CPC.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Citing CBDT Circular No.F.No.173/193/2019-ITA-I dated 23rd April, 2019 the Tribunal held that CPC and CIT(A)erred in restricting the time limit for filing return of income to the due date under
section 139(1) and therefore, if the assessee had filed its return of income within the time allowed under section 139, that is, even if it is filed belatedly, then CPC was required to allow the exemption under section 11 by rectifying its intimation under section 143(1)(a).

Accordingly, the Tribunal allowed the appeal of the assessee and restored the issue back to the file of CIT(A) with a direction to pass rectification order as required vide CBDT Circular dated 23rd April, 2019(supra).

S. 54F–Deduction under section 54F is allowable to the assessee even if the new residential property was purchased by him in the name of his wife.

71. VidjayaneDurairaj -VidjayaneVelradjou vs. ITO

(2024) 169 taxmann.com 625 (ChennaiTrib)

ITA No.:1457 (Chny) of 2024

A.Y.: 2012-13

Date of Order: 4th December, 2024

S. 54F–Deduction under section 54F is allowable to the assessee even if the new residential property was purchased by him in the name of his wife.

FACTS

During FY 2011-12, the assessee sold three immovable properties for consideration of ₹50,40,000 and received the sale proceeds in cash. Out of the sale proceeds, he had deposited ₹19,75,000 into his own bank account and an amount of ₹36,00,000 in his wife’s bank account. Thereafter, a residential property was purchased in the assessee’s wife’s name for ₹44,27,994. The assessee did not file his return of income for AY 2012-13.

Vide notice under section 148 dated 27th March, 2018, the Assessing Officer (AO) reopened the assessment on the ground that he had received information from ITS Data that the assessee had deposited cash into his UCO Bank account to the tune of ₹19,75,000. In response thereto, the assessee filed his return of income claiming deduction of ₹44,27,994 under section 54F being capital gain invested into residential property purchased in his wife’s name. The AO did not allow the claim of deduction under section 54F on the ground that the residential property in question was purchased in the name of the assessee’s wife who was also assessed to tax separately and not in the assessee’s name.

The assessee preferred an appeal before CIT(A) who dismissed the same citing the decision of Punjab and Haryana High Court in Kamal Kant Kamboj vs. ITO, (2017) 88 taxmann.com 541 (Punjab & Haryana).

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

HELD

The Tribunal noted that the predominant judicial view is that for the purpose of section 54F, new residential house need not be purchased by the assessee in his own name and therefore, following the decision of jurisdictional High Court in erred in CIT vs. V. Natarajan,(2006) 154 Taxman399/287 ITR 271 (Madras), the Tribunal directed the AO to allow deduction under section 54F to the assessee.

 

Penalty levied under section 270A deleted where the assessee having fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act made a belated application under section 270AA and no opportunity was given to the assessee as also no order passed by the AO rejecting the assessee’s application.

70. Bishwanath Prasad vs. CIT(A)

ITA Nos. 163 to 166/Patna/2023

A.Ys. : 2017-18 to 2020-21

Date of Order: 29th August, 2024

Sections: 270A, 270AA

Penalty levied under section 270A deleted where the assessee having fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act made a belated application under section 270AA and no opportunity was given to the assessee as also no order passed by the AO rejecting the assessee’s application.

FACTS

All the appeals were against orders passed under section 270A of the Act levying penalty for under-reporting of income. The facts in each of the years under appeal being the same, the Tribunal considered the facts in the case of Nand Kumar Prasad Sah for assessment year 2017-18 and apply the decision to all other appeals.

The assessee, an individual, filed return of income under section 139(1), for AY 2017-18, declaring total income of ₹8,35,425. Subsequently, consequent to search conducted at the business premises of the assessee, the assessee in response to a notice issued under section 153A of the Act filed the return of income declaring therein a total income of ₹13,97,271. The assessment of the assessee for AY 2017-18 stood abated.

The Assessing Officer (AO) completed the assessment under section 153A of the Act by accepting the income returned in response to notice issued under section 153A of the Act. The AO levied penalty with reference to the difference between income assessed under section 153A and the income declared in return of income filed under section 139(1).

The assessee belatedly filed an application under section 270AA for grant of immunity from levy of penalty and initiation of prosecution. The AO rejected the application and levied a penalty of ₹6,20,495.

Aggrieved, the assessee preferred an appeal to CIT(A) claiming that since returned income has been assessed there is no under-reporting under section 270A(2) of the Act. It was also argued that the AO ought to have considered the application for grant of immunity. The CIT(A) dismissed the contentions and confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal before the Tribunal where two-fold arguments were raised viz. relying on decision of Delhi High Court in PCIT vs. Neeraj Jindal [(2017) 399 ITR 1] it was contended that once the assessee is subjected to search and notice u/s 153A of the Act is issued for furnishing the return and the assessee furnished return since the return filed originally gets abated and become non-est. Therefore, since there is no difference between the returned income and assessed income, no penalty is leviable u/s 270A of the Act. Second fold of the arguments was that the AO erred in rejecting the assessee’s application for grant of immunity without granting an opportunity of being heard which is contrary to the principles of natural justice. Relying on the decision of the Madras HC in Natarajan Anand Kumar vs. DCIT [(2024) 159 taxmann.com 637 (Mad)] it was contended that the ratio of the said decision squarely applies to the present case and that the AO ought to have condoned the delay in furnishing application under section 270AA because the assessee satisfied all the conditions required to be satisfied for grant of immunity.

HELD

The Tribunal observed that there is no difference between the income returned under section 153A and assessed income. The Tribunal examined the second fold of the arguments first viz. that the case of the assessee was covered by the decision of the Madras High Court in Natarajan Anand Kumar (supra) and therefore the AO ought to have condoned the delay and granted immunity.

The Tribunal noted that there was no tax and interest payable as per assessment order passed under section 143(3) r.w.s. 153A and assessee had not preferred any appeal against the order of assessment. The application for grant of immunity is required to be filed within one month from the end of the month in which the assessment order is received. Assuming that the assessment order is received by the assessee on the very same date of its passing viz. 31st March, 2022 there is a delay of 45 days in filing an application for grant of immunity. The application of the assessee has been rejected without providing any opportunity of being heard.

The Tribunal observed that –

i) the Madras High Court has in Natarajan Anand Kumar (supra) dealt with almost identical issue and held that it was a fit case to condone the delay of 30 days in filing the application for grant of immunity. The Court condoned the delay;

ii) the Delhi High Court in the case of Ultimate Infratech Private Limited v. National Faceless Assessment Centre in WP 6305/2022 dated 20th April, 2022 where the Court has held that upon satisfaction of the conditions mentioned in section 270AA the assessee acquires a right to be granted immunity under section 270AA;

iii) the Rajasthan High Court in GR Infraprojects Ltd. vs. ACIT [(2024) 158 taxmann.com 80] has held that “Sub-section (4) of section 270AA provides that the Assessing Officer shall pass an order accepting or rejecting any application filed by the assessee seeking immunity from imposition of penalty under section 270A within a period of one month from the end of month in which the application under sub-section (1) is received.

The Tribunal held that the ratio laid down in the above decisions is squarely applicable in favour of the assessee and therefore, it was of the considered view since, the assessee has fulfilled the conditions for grant of immunity from levy of penalty u/s 270AA of the Act, the actions of the AO levying penalty u/s 270A of the Act, is not justified because firstly, no opportunity was given to the assessee and secondly, no order has been passed by the AO rejecting the assessee’s application.

The Tribunal held the case of the assessee to be a fit case for immunity of penalty u/s 270AA of the Act and on this ground itself deleted the impugned penalty. In view of the decision of the Tribunal on the second fold of the arguments of the assessee, the Tribunal held that the first fold of the arguments became academic in nature. The penalty levied by AO and confirmed by the CIT(A) was deleted and the appeals filed by the assessee were allowed.

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.

Tech Mantra

Padlet

Padlet is an online Bulletin Board for group collaboration. It helps you to collect, organise and present anything.

Every Board begins as a blank slate. You add text, image, video and more. Then you can share the board with others who do the same. You can grow the group to collaborate to create something wonderful. It is simple, beautiful and capable.

You can post almost anything and organise your ideas visually. It helps you present and share in many ways and collaborate in real-time. You can post almost anything — images, audio, video, link to YouTube, Tweets or any web page. You can draw, sing and dance!

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You can use Padlet anywhere on any device — it is available in 45 languages with Apps for web, Chromebook, Mac, PC, iOS, Android.

With 40 million users in Business, Education and Home, it is one of the most popular Sharing Boards available. Try it — you might just get hooked!

https://padlet.com/

Gamma.app

Gamma is a new medium for presenting ideas —powered by AI. Create beautiful presentations, documents and even websites by giving just textual prompts. No design or coding skills are required.

You can access best-in-class AI for text, images and search for your presentations and apply eye-catching, expert-level designs and layouts. You can even quickly rewrite or autocomplete your content.

The app allows you to import documents, presentations or just plain text to create eye-catching presentations instantly. Once done, you can share the link to the presentation online or export it to PDF or PPT files instantly.

Gamma is more visual than a document, more collaborative than a slide deck, and more interactive than a video. Try it today!

https://gamma.app/

Lumolight

Lumolight is an open-source flashlight app that can perform both front and back flash.

It uses the screen as a front flash by brightening up and showing some static colours (defined by the user) and it uses the flashlight for the torch mode. It has “Tile support” where you can use the front flash without even opening the app, and also adjust the brightness using the volume keys.

The customisation option is one of the strong parts of this app. For the front flash, you can choose:

Colours: Which color do you want to light up

Duration: For how long it will be active.

Brightness: The level of brightness you want.

For the back flash:

Duration: For how long it will be active.

BPM (Blink per minute): You can blink your flashlight and also adjust its value.

Flash-strength: You can also adjust the flashlight’s strength. (Supported devices only)

A very interesting app for managing the flashlight functions

Android :https://bit.ly/3Zmf6oo

Braindump

Braindump transforms your voice memos into accurate, ready-to-use text notes, with AI summaries that highlight your main ideas. Just record your voice and convert it into text for easy review later. Instead of the full-length audio, you also have the option to summarise the session. You may use it for meetings, lectures, and even the occasional spontaneous ideas!

You have the option to playback your voice notes to review a lecture or a meeting discussion to ensure that Braindump has captured the essence accurately.

There are options to organise your notes systematically so that finding them becomes a breeze.

An interesting productivity tool worth considering!

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.

YouTube Link:

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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.

YouTube Link:

QR code:

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/

QR Code:

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.”