38 Part : 09 December, 2014 C O N T E N T S - caa-ahm… · Ahmedabad Chartered Accountants Journal December, 2014 501 Volume : 38 Part : 09 December, 2014 E-mail: [email protected]

Ahmedabad Chartered Accountants Journal December, 2014 501

Volume : 38 Par t : 09 December, 2014E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamHappiness........................................................................................... CA. Arvind Gaudana.................503

Editor ialSwachh Mann, Swachh Bharat!..........................................................CA. Ashok Kataria .................... 504

From the President............................................................................CA. Shailesh C. Shah.................505

Ar ticles

Exemption under the head Capital Gains - Few Beneficial Issues........CA. Manthan Khokhani &CA. Jainee Shah.........................506

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................512

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 513

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 516

Unreported Judgements......................................................................CA. Sanjay R. Shah....................521Controversies......................................................................................CA. Kaushik D. Shah................. 523Judicial Analysis..................................................................................Adv. Tushar P. Hemani................529

FEMA & International Taxation

T.P. Implications on issue of shares to Associated Enterprise.............CA. Dhinal A. Shah.....................535

Returnee NRI - FEMA & Tax...............................................................CA. Rajesh H. Dhruva................540

FEMA Updates................................................................................... CA. Savan A. Godiawala............547

Indirect Taxes

Service Tax

Service Tax Decoded..........................................................................CA. Punit R. Prajapati................548Recent Judgements............................................................................. CA. Ashwin H. Shah...................551

Value Added TaxRecent Judgements and Updates........................................................ CA. Bihari B. Shah.....................553

Corporate Law & Others

Business Valuation..............................................................................CA. Hozefa Natawala.................555Corporate Law Update.......................................................................CA. Naveen Mandovara.............557

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 559

From the Government ......................................................................CA. Kunal A. Shah..................... 561

Association News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi...................563

ACAJ Crossword Contest....................................................................................................................564

Ahmedabad Chartered Accountants Journal December, 2014502

AttentionMembers / Subscr ibers / Authors / Contr ibutors1. Journals are carefully posted. If not received, you are requested to write to the Association's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Subscription for the Financial Year 2014-15 is ` 400/-. Single Copy (if avai lable) ` 40/-.4. Please mention your membership number/journal subscription number in all your correspondence.5. While sending Articles for this Journal, please confirm that the same are not published / not

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Published ByCA. Ashok Katar ia,on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers, NearGujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014.Phone: 91 79 27544232Fax : 91 79 27545442No part of this Publication shall be reproduced or transmitted in any form or by any meanswithout the permission in writing from the Chartered Accountants Association, Ahmedabad.While every effort has been made to ensure accuracy of information contained in this Journal,the Publisher is not responsible for any error that may have arisen.

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certi ficates of Appreciationafter being vetted by experts in the profession.

Articles and reading literatures are invited from members as well as from other professional colleagues.

Printed : Pratiksha Pr interM-2 Hasubhai Chambers, Near Town Hall, Ellisbridge, Ahmedabad - 380 006.

Mobile : 98252 62512 E-mail : [email protected]

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

CA. Gaurang Choksi CA. Jayesh Sharedalal CA. Mukesh KhandwalaCA. Naveen Mandovara CA. Rajni Shah CA. T. J. Advani

Ex-officioCA. Shailesh Shah CA. Abhishek Jain


The ultimate goal of a human being is to be happy.Each one of us wants to be happy and try in hisown way to find happiness. Some thoughtful peoplesay leave “sansar” and “ family” and you wouldbe happy, on the other side a strong argument ismade that happiness can be achieved even whilebeing part of this “sansar” and “family”. One thingis sure that happiness is a feeling, a state of mind.We general ly are happy when we get what wedesire, and are able to keep away from what we donot desire. A simple question whether a desire ismotivator or destroyer? It depends, on the qualityof the desire and by what means you fulfil l yourdesire. Hitler had a noble desire of uniting Europebut the instrument or method used was wrong andultimately there was 2nd world war.

Let us see an illustration:

A mother is happy because she nur tures her childwithout any expectation and her love is selfless,so one can say that happiness is in “sel f lessgiving”.

Against this, if you ‘get’ whatever you want, youare happy. For example, a small chi ld wants hermother and cries… (one who cries… for God likea li ttle chi ld, he definitely feels the “sparsh” of God)and when that child realizes her mother is around,the child is happy. Likewise, a student wants goodmarks and wants admission in MBBS and with hardwork he gets i t, he is happy. A person wants tobecome Prime Minister and he becomes the PrimeMinister, he is happy. The list can be of anything orobject but in nutshell , i f desire of “getting” issatisfied, one is happy. Thus, “Happiness” is inreceiving and also as seen above, in selfless giving.However, the basic difference is that the happinessachieved on fulfil lment of desires is dependent onexternal factors on which one does not have anycontrol . Happiness achieved on ful f i l lment ofdesires is a conditioned happiness. In fact, the Lordin verse 62 and 63 of Chapter 2 of Bhagwad Gitahas warned that desires are the root cause of thedownfal l of a human being.

MananaM

Happiness Thinking about sense objects br ings an attachmenttowar ds them. Attachment breeds desire, anddesi re leads to anger, which in turn leads todelusion. When you are deluded, you lose yourmemory and with the loss of memory, the poweror di scr iminat i on i s dest r oyed; wi th thedestruction of discr imination, your Self itself islost.

How to curtai l or leave these desires or improveupon the quali ty of desires requires a very deepstudy and a powerful determination. Are there anyprinciples for being happy? Yes,

In Bhagwat Gita it is said that:

Practising Yoga will vanquish the troubles of onewho per forms his duties di l igently, and who isdiscipl ined and balanced in his eating, sleepingand working hours. (Verse 17, Chapter 6)

One can be happy if he is regular and balanced inhis food, enjoyment, working habit and sleep Withdaily abhyas (study ) one can curtai l ‘kaam’,‘krodh’, ‘Trushna’ ‘Moh’ and Maad.

Let us do our work with our best efforts, completeplanning and confidence, respect everyone, respectour society and respect our nation. Whatever taskis performed should be judged with the standardsof scriptures, have faith in Almighty and surelysuccess and happiness will be at our doorsteps.

Hard work, self discipline and helping others arethe keys for gaining success. As far as hard work isconcerned, there is no shortcut, one has to workhard, be disciplined and get rid of temptations.

Emerson said” I t is one of the most beauti fulcompensations of l ife that no man can sincerely tryto help another without helping himself. Happinessis a perfume you cannot pour on others withoutgetting a few drops on yourself”.

“One is happy as a result of one’s own efforts, onceone knows the necessary ingredients of happiness—simple tastes, a certain degree of courage, sel f-denial to a point, love of work. And above al l, aclear conscience”.

-George Sand

CA. Arvind [email protected]


Swachh Mann, Swachh Bharat!The nation today, collectively, is trying hardto come out of the clutches of clutter, filth andmuck spread all around. The Prime Ministerof the country has initiated the campaign‘Swachh Bharat’ which was not just essentialbut in fact was long due, considering the stateof cleanliness in India. The probability of thesuccess of the initiative appears to be veryhigh for the simple reason that it is started bya person who has a great impact over themasses, especially the youth where his fanfollowing is more than anybody else in thecountry.

Di f ferent people are looking di f ferentlytowards the campaign. There are pessimistswho believe it is next to impossible to makeIndia a clean nation, and then are critics whoare busy concentrating more on persons ratherthan the idea. Third is the category of peoplewho appreciate the campaign but expect‘achhe din’ to happen on its own and lastly itis the people who are optimistic, taking onthemselves to do thei r bi t for theaccomplishment of the collective objective of‘Swachh Bharat’. The basic di f ferencebetween the last category of persons and restof the three is the mindset, their thoughts.

Generally, i t is the manner in which weapproach towards a thing makes it good orbad. To be positive it is necessary to have suchpositive attitude towards everything includingthe nation or profession. Better we have acheck on the quali ty of our thoughts weentertain or else we shall always be in thebracket of the first three categories of people.It is said that it is the quality of thoughts thatdetermine our resul t and not the action,

Editor ial [email protected]

because action is followed after a thought.The mission ‘Clean India’ is possible whenwe have a ‘Clean Mind’. It is only when wehave trained our mind, to be posi ti ve,constructive, appreciative, supportive, we canthink of having a clean India.

As a chartered accountant, to begin with, the‘Swachh Bharat’ campaign can be startedfrom our offices. Quite often we find, moreso at the time tax audits that our offices are ina state of complete mess. Why should anoffice of a professional be in such a state?Even at the times other than audits, our tablesare loaded with files and loose papers as iflying since ages. We don’t even bother to clearthe journals and mails received. It is not justabout the physical clearance of the files butthe problem is in setting our priorities in order.If we are able to set things right in throughplanning and execution, it gets reflectedphysical ly as wel l . As a benef i t, cleansurroundings always resul t in improvedefficiency.

Without a doubt, the Clean India campaign isa big task and would not be possible until allcontribute in it. It is very easy to turn a blindeye and move away but then a question arises,are we doing enough as a responsible and aneducated citizen of this great nation. It maynot be necessary to do great things but we candef i ni tely start in our own smal l way.Beginning with our home, offices and then tosurroundings, all can be achieved once weensure that we shall be living with a cleanmind!

Namaste,CA. Ashok Kataria


Dear Esteemed Readers

On the Independence Day, Prime Minister NarendraModi gave the slogan ‘Make in India’. The newconcept initiated by the Government of India is aprogram to promote India as a global manufacturingdestination, facili tate investment, foster innovation,and build best-in-class manufacturing infrastructure.India has already marked i ts presence as one of thefastest growing economies. Today India is rankedamong the top 3 attractive destinations for inboundinvestments and the manner in which the presentGovernment i s going about i ts foreign pol icy,investors al l round the globe seem to find a newinterest and a better opportunity.

The industrial output figures suggested that Indianmanufacturing sector is lagging behind for a longtime and thus the campaign has been perfectlytimed. The time when many global companies arelooking for an alternative to China in view of theri si ng producti ons costs, “Make i n India” i sappearing more luring to the investors. There is nodoubt that the ini tiative seeks to make India amanufacturi ng superpower and wi th thi s thegovernment is set to roll out a red carpet to globalcompanies and i nvi ti ng them to set upmanufacturing bases in India.A question arises in the minds of many people aboutthe success of the ‘Make in India’ campaign. Ireckon the probability of success is higher becauseof various and val id reasons. First of al l, India isfull of natural resources; secondly we are a countryof the youth having a large working population thatcan f i t wi th the producti ve cycle i n themanufacturi ng industry. Thi rdl y, the demandgenerated by the population of more than 1 bill ion.Lastly, the government’s willingness to support themanufacturing sector is a big strength that canchange the approach and atti tude of theindustrialists. If this sector develops it can cater tothe demand of various i tems that are importedimproving balance of foreign currency inflow andoutflow and can also boost e-commerce that is fasttaking over f rom the tradi ti onal methods ofbusiness. The biggest advantage that e-commerce

From the PresidentCA. Shailesh C. Shah

[email protected]

offers, is that it has a lot of variety to offer to theconsumer as compared to a physical store, since itdoes not have any constraints of physical space.

Make in India campaign of the Government wouldresult in increase in inbound investment, which inturn wi l l i ncrease the demand of CharteredAccountants. Assuming the success of the Make inIndia campaign I hope it will open up new avenuesfor the Chartered Accountants. With the openingup of new manufacturing industries the CharteredAccountants wi l l have new j ob opportuni ties.Similarly those who are in practice will have newavenues as advisor in the field of investment ,valuati ons, mergers and acquisi tion , transferprici ng, corporate law, securi ti es law, foreignexchange , management consultancy etc. Time willtell whether the India wil l become a super power inthe coming years as imagined by many includingour Prime Minister Narendra Modi or not but theprofession of chartered accountancy, for sure, wouldbe the largest beneficiary.

At the Association, with a view to have in depthstudy and proper understanding of how to submitdetai ls before the assessing officer, an intensivestudy program on the topi c of Income TaxAssessment Proceedings was organised, spreadingover 4 sessions. Al l the participants thoroughlyenjoyed, appreciated and actively participated inthe course. The detai ls of the forthcoming eventsare given in the Association news. This year’s sloganof the Association is ‘nurturing knowledge –fostering fellowship.’ Various educational programshave been organized till now to nurture knowledge.Now it’s time to foster fellowship. The Associationhas for the first time organized cricket tournamentwith tennis bal l so as to enable senior membersparticipate, apart from the regular cricket matchesthat are held over the years. All members are invitedto take part in the activities of the Association.

With regardsCA. Shailesh C. ShahPresident


1. Introduction

This article encompassing current issues inCapital Gains has been drafted consideringvarious pronouncements of Courts and IncomeTax Appellate Tribunals delivered recently. Theauthors have tried to meticulously analyze theprovisions and explain the relevant issueshoping that this would help the readers inmaking proper representation in the ongoingassessment proceedings. This article would beof great help and assistance to the practicingprofessionals and readers.

2. Issues ar ising under Section 54

2.1 Whether Exchange of old flat for a new flatunder a development agreement amountsto construction and thus extended time limitof 3 years is applicable?

Redevelopment of properties has become quitecommon off late. In such a situation, theassessee exchanges his old flat for a new flat inthe redevelopment scheme. In such a situation,the exchange amounts to transfer within themeaning of section 2(47) of the Act.

The issue that emerges for consideration is thatwhether the new flat acquired by the assesseequalifies as investment for the purpose ofclaiming exemption u/s. 54 of the Act?

The department has in several cases taken astand that acquisi ti on of f lat under thedevelopment agreement does not amount topurchase or construction within the meaningof section 54.

It is pertinent to note that whenever an assesseepurchases a flat from a builder as a part ofconstruction project, it amounts to construction

and not purchase. Similarly what happensunder a redevelopment agreement is that theassessee exchanges the old flat for a new flatto be constructed by the builder. Thus, such atransaction would amount to construction onlyand time limit of 3 years would be applicable.

Similar view has also been adopted In the caseof Jatinder Kumar Madan v/s ITO (I .T.A.No. 6921/Mum/2010) and Smt. Veena GopeShroff Vs. ITO [2013] 33 taxmann.com 344(Mum- Tr ib

Further, for the benefit of readers, it is herebyclarified that in such circumstances the FairMarket Value of the new house shal l beconsidered as the full value of considerationfor the sale of old house.

2.2 Can Capital Gain ar ising out of sale ofmultiple flats be invested in multiple flats toavail exemption u/s. 54?

Section 54 differs from the provisions of section54F on a point that under Section 54F, theexemption will not be available when theassessee owns more than one residential houseother than the new asset on the date of transferof the original asset.

However, Section 54 of the Act provides nosuch condition. There is no restriction placedanywhere in the Section 54 that exemption isavai lable only in relation to sale of oneresidential house. Therefore, in case theassessee has sold two residential houses, beinglong-term assets, the capital gain arising fromthe second residential house is also a capitalgain arising from the transfer of a long-termasset being a residential house. The provisionof Section 54 therefore will also be applicable

CA. Manthan [email protected]

Exemption under thehead Capital Gains –Few Beneficial Issues

CA. Jainee [email protected]


Exemption under the head Capital Gains – Few Beneficial I ssues

to the sale of second residential house andsimilarly to a third residential house and so on.Whenever the exemption available is restrictedto one asset, a suitable provision is incorporatedin the relevant section itself.

Thus in a case, there is sale of more than oneresidential house, the exemption wi l l beavailable in relation to each set of sale andcorresponding investment in the residentialhouses.

However, the exemption is not available onan aggregate basis but has to be computedconsidering each sale and the correspondingpurchase adopting a combination beneficial tothe assessee.

The said view also finds support from thedecision rendered in the case of Rajesh KeshavPillai V. ITO (ITA No 6661/M/2009) (Mum-Tr ib)

Note:

At present, when one house is sold andproceeds are invested in multiple houses whichare adjacent to each other, the exemption u/s.54 is available, having regard to the decisionrendered in the case of Ananda Basappa.However, after the amendment brought out byFinance Act 2014, such exemption is notavailable. Now, exemption is available inrespect of investment in one house only.However, i t is clarified that the decisionrendered in the case of Rajesh Pillai (Supra)would still hold good in a case when multipleflats are sold and consideration is invested inmultiple flats. What is proposed to be coveredby the amendment is a situation when a singleflat is sold and investment is made in multipleflats.

3. Issues ar ising u/s. 54EC

3.1 Whether fict ion created by Section 50extends to Section 54EC?

The issue that arises many times is that whetherthe exemption available under Section 54ECof the Income Tax Act is also available inrespect of short term capital gain arising fromthe transfer of ‘long term capital asset’ in wakeof deeming fiction created under Section 50 ofthe Act?

For the purpose of claiming exemption undersection 54EC there should be a transfer of longterm capital asset. Now, what is contemplatedby section 50 is that the gain on transfer oflong term capital asset being a depreciable assetshall be shor t term in nature. The fiction ofSection 50 by no means converts the long termcapital asset into a short term capital asset.

The Gujarat High Court has in the case of CITVs. Adi tya M edisales L td. (2013) 38taxmann.com 244 (Gujarat) held that thereis nothing in Section 50 to suggest that thefiction created in Section 50 is not onlyrestricted to Sections 48 and 49 but also appliesto other provisions. On the contrary, Section50 makes it explicitly clear that the deemedfiction created in sub-sections (1) and (2) ofSection 50 is restricted only to the mode ofcomputation of capital gains contained inSections 48 and 49. Secondly, i t is well-established in law that a fiction created by theLegislature has to be confined to the purposefor which it is created.

Thus, Section 54EC being an independentsection will not be bound by the provisions ofSection 50. The depreciable asset, if held formore than 36 months, shall be a long termcapital asset as per the provisions of section2(29A). Therefore, the exemption u/s. 54ECcannot be denied on account of fiction createdby section 50

3.2 Remedy to the Assessee if NHAI/REC bondsare not available at any point of time duringthe per iod of six months fr om date ofTransfer.


Section 54EC provides exemption from longterm capital gain arising from transfer of a longterm capital asset, provided investment is madein the specified bonds within 6 months fromthe date of transfer.

There may arise a si tuation wherein theassessee wishes to invest in the specified bondsi.e. NHAI and REC but subscription to thosebonds might not be open at the time when theassessee chooses so. In such a situation, thedelay in investment is not due to fault ofassessee but for the fact that the bonds are notavailable.

The High Court of Bombay has in the case ofCIT Vs. Cello Plast (ITA Nos. 3731 of 2010)(Bom.) held that the assessee is entitled to waittill the last date to invest in the bonds. Even ifthe bonds are available for a part of periodduring the 6 months from the date of transfer,but not as on the expiry of 6 months’ period itmakes no di f fer ence because theassessee�s r ight to buy the bonds upto thelast date cannot be prejudiced.

I t i s observed that Lex not cogi timpossibila (law does not compel a man to dothat which he cannot possibly perform)and impossibilum nulla oblignto est (law doesnot expect a party to do the impossible) are wellknown maxims in law.

The High Court has held that in such a case,an assessee would be entitled to a reasonableextension which must then be decided,depending upon the facts of each case. Further,the assessee cannot be forced to purchasealternative bonds if a particular bond is notavailable since 54EC confers a choice investingeither in the REC bonds or the NHAI bonds.

3.3 Definition of ‘month’ for the purpose ofSection 54EC

Sections 54E, 54EA, 54EB & 54EC requirethe investment to be made “within a period ofsix months after the date of such transfer”. The

subtle question is that whether the word“month” refers in this section a period of 30days or it refers to the month only. This phrasehas otherwise not been used by the legislatorin any other provisions of IT Act, 1961 or ITRule, 1982

The term ‘month’ is not defined in The IncomeTax Act. According to Section 3(35) of theGeneral Clauses Act, 1897 month means amonth reckoned according to the Br itishcalendar .

The question that emerges is whether “month”means a “lunar month” or a “calendar month”.The meaning would depend on intention forthe usage of the term “month”. In BritishCalendar a month is a unit of period used in aCalendar. It may not be out of context tomention that this system was invented byMesopotamia.

An average length of a month is 29.53 days;but in a calendar year there are 7 months with31 days, 4 months having 30 days and onemonth has 28/29 days. It can be possible thatunder common parlance probably it meant alunar month but in calculating the specifiednumber of months that had elapsed afteroccurrence of a specified event then a GeneralRule is that the period of a month ends on thelast day. Therefore, a month ends by the lastdate of that month. .

The Special Bench of Ahmedabad ITAT hasin the case of Alkaben P. Patel (ITA Nos.1973/Ahd/2012) held that in the absence ofany definition of the word ‘month’ in the Act,the definition of General Clauses Act 1897 shallbe appl icable and hence the period ofinvestment of six months for the purpose ofSection 54EC should be reckoned from the endof the month in which transfer of capital assettakes place. Similar view has been taken in thecase of Yahya E. Dhar iwala, 49 SOT 458(Mum) and Aquatech Engineers, 36 CCH167 (Mum Tr ib.),



3.4 Whether the time per iod of six months is tobe reckoned from date of transfer or receiptof consideration?

Section 54EC requires the assessee to investthe consideration received on transfer of capitalasset in specified bonds in order to availexemption from the capital gains earned.

However, there may arise a situation when theconsideration for sale of capital asset is receivedsubsequently, after the sale of capital asset. Insuch a case, a question arises as to whether theperiod of 6 months for the purpose ofinvestment u/s. 54EC is to be reckoned fromthe date of transfer of the asset or from the receiptof consideration.

Section 54EC requires the assessee to makethe investment within 6 months from the dateof transfer. Thus, if the language of the sectionis strictly construed, the assessee is required toinvest the consideration within 6 months fromdate of transfer even if the consideration isreceived several months after the date of transfer.

However, if the period of 6 months is reckonedfrom the date of transfer, then it would lead toan impossible situation by asking assessee toinvest money in specified asset before actualreceipt of the same.

This view also finds place in various judicialpronouncements. The Hon’ble Andhra PradeshHigh Court has in the case of S. Gopal ReddyVs. CIT (1990) 181 ITR 378 (AP) observedthat under the provisions of section 54E of theAct, what is to be invested in specified assets is“the consideration or any part thereof” andunless the consideration is received, or accrues,there is no question of investing it.

Few supporting decisions for the aforesaidproposition are CIT Vs. Janardhan Dass (latethrough legal heir Shyam Sunder) (2008) 299ITR 210 (All) and Chanchal Kumar SircarV. ITO (2012) 50 SOT 289 (Kol.)

3.5 Whether the exemption u/s. 54EC is to beconsider ed befor e claiming set off ofbrought forward capital loss or after?

The basic issue under consideration is whetherexercise of setting off of brought forward long-term capital loss is to be done before claimingdeduction under Section 54EC or post set offof such loss.

A joint reading of the provisions of section54EC and Section 74 would demonstrate thatthe exercise of setting off of the carried forwardcapital loss u/s. 74 is to be undertaken once theincome under the head capi tal gains iscomputed. Now in order to compute the incomeunder the head capital gains, exemption u/s.54EC ought to have been provided.

Hence, exemption u/s. 54EC is to beconsidered before claiming set off of broughtforward capital loss.

The decisions of courts and tribunals adoptingthe above view are Tata Power Co. L td V.Addl CIT (2011) 47 SOT 470 (Mum.) andCIT Vs. Vijay M. Mahataney (2013) 92 DTR180 (Mad.).

4. Issues ar ising u/s. 54F

4.1 Whether exemption u/s. 54F is available ifconstruction is not fully completed within 3years or sale deed is not executed within thestipulated period?

There may arise a si tuation wherein theassessee starts the construction of the house butthe construction could not be completed withinthe stipulated time period of 3 years. In such acase, the department normally takes a stand thatassessee shall not be entitled to a deductionu/s. 54F since the construction is not complete.

However, one has to bear in mind that S. 54Fis a beneficial provision for promoting theconstruction of residential house & requires tobe construed l iberally for achieving thatpurpose. The intention of the Legislature was



to encourage investments in the acquisition/construction of a residential houseand completion of construction or occupationis not the requirement of law.

The words used in the section are ‘purchased’or ‘constructed’. The condition precedent forclaiming benefit u/s 54F is that the capital gainshould be parted by the assessee and investedeither in purchasing a residential house or inconstructing a residential house.

If after making the entire payment, merelybecause a registered sale deed had not beenexecuted and registered in favour of the assesseebefore the period stipulated, he cannot bedenied the benefit of section 54F of the Act.Similarly, if he has invested the money inconstruction of a residential house, merelybecause the construction was not complete inall respects and it was not in a fit condition tobe occupied within the period stipulated, thatwould not disentitle the assessee from claimingthe benefit under section 54F of the Act

The above issue has also directly been coveredin favour of assessee by the following decisionof the Madras High Court in the case of CITv. Sardarmal Kothar i [2008] 302 ITR 286and of the the Karnataka High Court in thecase of CIT V. Sambandam Udaykumar(2012) 251 CTR 317 (Kar.).

4.2 Deduction u/s. 54F in case of joint names indeed of purchase

As a matter of common practice in our country,property is generally purchased in joint namesof family members. In such a situation, an issuearises as to whether only proportionatededuction i s avai lable to the assesseeparticularly when the co owner is merely aname lender and the payment is fully made bythe assessee under section 54F.

It is pertinent to note here that Section 54Fmandates that the house should be purchasedby the assessee. However it does not stipulate

that the house needs to be purchased in the nameof the assessee.

Such view has been affirmed in the decisionsrendered in the case of CIT Vs. Gurnam Singh(2010) 327 ITR 278 (P& H), Jt. CIT vs. Smt.Armeda K. Bhaya (2006) 99 TTJ 358, ITAT,Mumbai Bench and CIT vs. Kamal Wahal(2013) 351 ITR 4 (Del.),

Thus based on the above decisions, it seemsclear that mere inclusion of family member’sname in the purchase deed does not disentitlethe assessee from claiming exemption u/s. 54F.Exemption would be available to the assesseewhose funds have been used for the purposeof investment.

4.3 Can consideration ar ising out of sale ofmultiple assets be invested in a single assetfor the purpose of Section 54F?

Kindly consider the following situation. Mr. Xhas earned Long Term Capital Gains of Rs. 2cr., 3Cr. And 1 cr. For the AY 2010-11, 2011-12 and 2012-13 respectively. However, heinvests a sum of Rs. 8 crore for purchase a singleflat in AY 2011-12 and claims exemption fromthe Capital Gains earned for all three AY i.e.2010-11, 2011-12 and 2012-13. Can he do so?

Section 54F allows the assessee exemptionfrom long term capital gains provided hepurchases a residential house one year beforeor two years after the date of transfer of theasset.

The Mumbai Bench of ITAT has in the case ofSmt. Anagha Aj it Patnekar V. ITO (2006) 9SOT 685 (Mum.) held that from the languageof this section, legislature has provided leverageto the assessee for claiming deduction underSection 54F in the sense that assessee can buythe property first and claim deduction later oni.e., within one year or can have capital gainfirst and can claim deduction within two yearsby purchasing the residential flat.



Therefore, in respect of residential proper tytill cost of purchase of flat is exhausted bythe claim of the capital gain deductioncannot be denied. Sub-section (4) has beeninserted with a view to facilitate the assessee toclaim the capital gain exemption when assesseeopts for purchase of flat after arising of thecapital gain and deposit the sale considerationin the bank account till such appropriation.

The assessee cannot be expected to appropriatethe sale consideration in respect of the alreadypurchased flat. If such interpretation is accepted,it will frustrate the object of the provisions of s.54F and lead to absurdity.

Thus, from the aforesaid judgment of theMumbai ITAT it can be stated that there is nobar in Section 54F for claiming deductionsecond or third time for the same property, ifthe capital gain which has arisen in the case oftaxpayer is within the cost of the property.

5. Capital Gain on Retirement of Par tners

5.1 Whether cash received by par tners onretirement is taxable u/s. 45(4) par ticular lywhen par tners had brought cash at the timeof admission, which is used by the Firm topurchase a proper ty?

There may arise a situation when at the time ofretirement, the retiring partner is paid cashequivalent of his share in the partnership firm.The question that arises is whether in such asituation, section 45(4) can be invoked or not?

It has now been well settled that section 45(4)would be applicable in case of dissolution ofthe firm as well as at the time of retirement ofthe partner from the firm.

Following conditions are required to attractSection 45(4)

o There should be a distribution of capitalassets of a firm

o Such distribution should result in transferof a capital asset by firm in favour of thepartner

o on account of the transfer there should bea profit or gain derived by the firm

o such distribution should be on dissolutionof the firm or otherwise

When the firm gives money equivalent of hisshare to the partner on retirement, the firm doesnot transfer any property. Thus section 45(4) isnot attracted at all. This has been held in thecase of CIT V. Riyaz A. Sheikh (ITA No.1969 of 2011) (Bom.)

Further, there may be a situation in which theold partner who had brought property at thetime of admission to the firm retires afterintroduction of new partners and takes themoney value of his share in the firm. In such acase it cannot be said that the said transactionis a device adopted to transfer the immovableproperty to the new partners. The propertybelongs to the partnership firm and not to thepartners. The partners only have a share in thepartnership asset. When they retire they arenot relinquishing their interest in the immovableproperty of the firm. What they relinquish istheir share in the partnership. Therefore, thereis no transfer of a capital asset and no capitalgains or profit arises. The said view also findssupport from the decisions rendered in the caseof ITO Vs. M/s. Dynamic Enterpr ises, (ITANo. 1414/2006 Kar. HC)

6. Conclusion

The subject of Capital Gains is never endingand illimitable. The authors hope that the viewsdiscussed above shall help the readers inhandling the problems and issues arising duringthe course of assessment.

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Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

Negotiable I nst r uments Act, 1981-Offence of cheque dishonor

Section 138 of NI Act r.w.s. 177 of CrPC leavesno manner of doubt that the return of the chequeunpaid by the drawee bank alone constitutes thecommission of the offence of cheque dishonor andindicates the place where the offence is committed.The Parliament in its wisdom considered it just andproper to give to the drawer of a dishonouredcheque an opportunity to pay up the amount beforepermitting his prosecution, no matter the offence iscomplete the moment the cheque was dishonoured.

A coordinate Bench is bound to fol low thepreviously published view; it is certainly competentto add to the precedent to make it logically anddialectically compelling. However, once a decisionof a larger Bench has been delivered it is thatdecision which mandatorily has to be applied;whereas a coordinate Bench,, in the event that itfinds itself unable to agree with an existing ratio, iscompetent to recommend the precedent forreconsideration by referring the case to the ChiefJustice for constitution of a larger Bench.

Dashrath Rupsingh Rathod vs. ST. OfMaharashtra (2014) (9 SCC 129)

ESI Act , 1948- M eaning of Shop,establishment

The term “shop”, again, has not been defined inthe ESI Act. Therefore, the meaning assigned tothis word in dictionaries may be noticed. It can besaid that a “shop” is a business establishment wherea systematic or organized commercial activity takesplace with regard to the sale or purchase of goodsor services, and includes an establishment thatfacilitates the above transaction as well.

“Entertainment” is an activity that provides withamusement or gratification. Further, i t wouldinclude public performances, including games and

sports. Therefore, it can be said that horse racing isindeed a form of entertainment.

Every word of a language is flexible to connotedifferent meanings when used in different contexts.That is why it is said that words are not static, butdynamic and the court should adopt the dynamicmeaning which upholds the validity or scheme ofany legislation.

Bangalore Turf Club Limited vs. Regional Dir.ESIC (2014) (9 SCC 657)

Cour ts, Tr ibunals and Judiciar y-Judicial Process-Recusal by Judge.

A Judge is to decide every dispute in consonancewith law. If one is not free to decide in consonancewith his will, but must decide in consonance withlaw, the concept of a Judge being individualpossessing power and authority is but a delusion.

Correction of a wrong order would never putanyone to shame. Recognition of a mistake, and itsrectification, would certainly not put the presentBench to shame. The embarrassment would onlyarise when the order assailed is actuated by personaland/or extraneous considerations, and the pleadingsrecord such an accusation.

The oath of office of the Supreme Court requiresthe Bench to discharge its obligations, without fearor favour. The Supreme Court therefore alsocommends to all courts, to similarly repulse allbaseless an unfounded insinuations [of bias], unlessof course, they should not be hearing a particularmatter, for reasons of their direct or indirectinvolvement. The benchmark that justice must notonly be done but should also appear to be done,has to be preserved at all costs.

What is a Judge is taught during his arduous andonerous journey to the Supreme Court is, that hiscalling is based on the faith and confidence reposed

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contd. on page no. 520


CBDT Ci r cular s : T ime l imi t forselecting cases for Scrutiny assessment.Amal kumar Ghosh v/s. Asst. C.I .T.(2014) 361 ITR 458(Cal).

Issue:

Whether circulars are binding to Department?

Held:

CBDT issued circulars No.9 and 10, i .e. forCorporate/Non Corporate assesses for scrutinyselection.

Circular No. 9 reads as under :-

“The process of selection of cases for scrutiny ofreturns fi led up to March 31, 2004 must becompleted by October 15, 2004. For returns filedduring the current financial year 2004-2005, theselection of cases for scrutiny will have to becompleted within three months of the date of filingof the Return.”

When Return was filed on October 29, 2004 andthe case was selected for scrutiny on July 6, 2005,on challenge by the assessee, High Court has heldas under:

(i) Even assuming that the intention of the CBDTwas to restrict the time for selection of the casefor scrutiny to a period of three months, it couldnot be said that the selection in the case of theassessee was made within the period. Thereturn was filed on October 29, 2004 and thecase was selected for scrutiny on July 6, 2005.By any process of reasoning, it was not opento Tribunal to come to a finding that theDepartment acted within the four corners ofCircular No.9 & 10 issued by the CBDT. Thecirculars were evidently violated. The circularswere binding upon the Department u/s. 119.

CA. C. R. [email protected]

(ii) That even assuming that the circulars were notmeant for the purpose of permi tti ngunscrupulous assessees from evading tax, itcould not be said that the Department which isa State, can be permitted to selectively applystandards set by itself for its own conduct. Whenthe Department has set down a standard foritself the Department is bound by that standardand cannot act with discrimination. If it doesthen the act of the Department is bound to bestruck under Article 14 of the Constitution. Inthe facts of the case, it was not necessary todecide whether the intention of the CBDT wasto restrict the period of issuance of notice fromthe date of filing the return laid down u/s.143(2). Thus, the notice u/s. 143(2) was not inlegal exercise of jurisdiction.

Section 271 (1) (c) Explanation 1 :Requirements - CIT v/s. ManjunathaCotton & Ginning Factory (2013) 263CTR 153 ( Kar ): (2013) 359 ITR 565(Karn)

Issue:

What are the requirements for levy of penalty u/s.271 (1) (c)?

Held :

After insertion of Explanation 1 to Section 271(1)(c), the law on concealment and penalty has becomestiffer. The explanation as it stands now is acomplete code having the following features:

(1) Every dif ference between reported andassessed income needs an explanation.

(2) If no explanation is offered, levy of penaltymay be justified.

From the Courts

CA. Jayesh C. [email protected]

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(3) If explanation is offered but is found to be false,penalty will be exigible.

(4) If explanation is offered and it is not found tobe false, penalty may not be leviable. - if

(a) Such explanation is bonafide,

(b) The assessee has made available to theA.O. al l the facts and material snecessary in computation of income.

Therefore the Explanation I, understood in theproper context in particular, Clause (c) of Sub. Sec.(1) of Sec. 271 makes the intention of the legislaturemanifest. It clearly sets out when penalty is leviableand when penalty is not leviable. The conditionprecedent for levying the penalty is the satisfactionof the authority that there is concealment ofparticulars of the income or inaccurate particularsare furnished to avoid payment of tax.

Bur den on assessee and burden onDepar tment: Income Tax Act. Sec.68 -C.I .T. v/s. Smt. Sanghamitra Bharali(2014) 361 ITR 481 (Gauhati) [Thisdecision does not appear in CTR DVD]

Issue :

In Income-tax Act, for taxing Income what is theburden on Assessee and on Department?

Held :

In all cases in which receipt is sought to the taxedas income, the burden lies on the Revenue to provethat it is within the taxing provision; but once thatburden is discharged, the burden of proving that itis not taxable, because it falls within exemptionprovision under the I.T. Act. 1961, lies on theassessee. If the explanation offered by the assesseeabout the nature and source thereof, is, in theopinion of the A.O. not satisfactory and there areevidences and circumstances pointing out to theeffect that what has been shown was not real and ifthe assessee fails to contradict such facts andcircumstances, then such acts and circumstancescan certainly be used against the assessee to holdthat the receipt was in the nature of income.

In order to establish the receipt of cash credit asrequired u/s. 68, the assessee must satisfy threeimportant conditions:

(i) The identity of the creditor;

(ii) The genuineness of the transaction and,

(iii) The financial capability of the person givingthe cash credi t to the assessee i .e. thecreditworthiness of the creditor.

However, the onus of the assessee is limited to theextent of proving the source from which hereceived the cash credit. The creditworthiness ofthe creditor is to be judged vis-à-vis the transactionwhich had taken place between the assessee andthe creditor, and it is not the burden of the assesseeto find out the source or creditworthy capacity inorder to prove genuineness of transaction.

Capital Gain of depreciable assets andSection 54 EC. - C.I .T. v/s. Adi tyaMedisales L td. (2014) 266 CTR 98 (Guj)[This decision does not appear in CTRDVD]

Issue :

Whether relief of investment u/s. 54 EC is availablefor short term capital gain of long term depreciablecapital asset?

Held :

Capital gain of depreciable capital asset ifinvested in specified asset, exemption u/s. 54 ECcannot be denied only on account of the fact thatdeeming fiction is created u/s. 50 of the I.T. Act.Legal fiction created under u/s. 50 is thoughrestricted to computation of capital gains, suchdeeming fiction cannot restrict application of Sec.54 EC which allows exemption of capital gain, ifassessee makes investment in specified assets. Thus,the assessee cannot be charged to capital gains whenshort term gain of long term capital assets getinvested, in the assets specified under the law.

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Waiver of loan amount by Bank: Section41(1) does not apply - C.I.T. v/s. Dholgir iIndustr ies Pvt. L td. (2014) 266 CTR111 (MP)

Issue :

When Bank has waived loan taken, whetherprovision of Sec. 41(1) would apply for taxing thatamount?

Held :

The A.O. has committed error in treating the amountwaived by the bank to be amount earned by theassessee. The principle amount of loan being neverclaimed by the assessee as its expenditure, itswaiver will not amount to income of the assesseeand as such there is no infirmity in the orders passedby CIT (A) and I.T. A.T. in considering the amountas non-taxable and hence addition is not proper.

Section 14 A and availability of interestfree funds - C.I.T. v/s. Gujarat NarmadaValley Fer ti lizer Co. L td. (2014) 221Taxman 479 (Guj)

Issue :

Whether when interest free funds are available forinvestment in shares and UTI from which dividendis received, application of Sec. 14 A is proper?

Held :

The A.O. disallowed the interest expenditure onthe ground that as per the provisions of Sec. 14Athe expenditure in terms of investment whichpertained to the exempt income from interestbearing funds was not allowable.

On appeal the CIT (Appeals) held that the dividendincome was earned out of the investment made inthe earlier years. The assessee company had hugeshare capital and reserves and surplus, which didnot carry any interest. No disallowance was madeon the interest expenditure made in past and theA.O. could not establish any nexus between interestbearing borrowing and investment from whichexempt income was earned. He, therefore, deletedthe disallowance made by the A. O.

From the Cour ts

On second appeal the Tribunal held that no freshinvestment was made by the assessee during theyear under consideration. As per the Balance Sheetof the assessee huge interest free funds in the formof capital, reserves and surplus to the tune ofRs.84.45 Lakhs were available. Whereas investmentwas made only to the extent of Rs.22.70 Lakhs. Ittherefore, upheld order of CIT (Appeal).

High Court held that both the authorities below hadcorrectly approached the issue by setting aside theorder of disallowance under Sec. 14A of the Act,in respect of interest expenditure. When the verybasis for employing Sec. 14-A of the Act. on factualmatrix is lacking, the disallowance to the extent of10% of dividend income was not permissible.

Taxabi l i ty: Lack of taxable event -Chimanlal and Sons v/s. C.I.T. (2013) 353ITR 344 (Guj) : (2014) 221 Taxman 174(Guj .) (Mag.)

Issue:

Subsidy received long back by the firm, which istransferred to partners accounts can be taxable?

Held :

Assessee received subsidy from State Governmentin the year 1995. Since then such subsidy had beenreflected in firm’s Balance Sheet in subsidyaccount. During I.T.A.Y. 2004-05 such amount wastransferred to partners’ capital accounts makingreserve and subsidy nil and correspondingly,partners’ capital was increased by such amount.Consequently, assessment was sought to bereopened to examine taxability of such receipt. Sinceno taxable event did arise during the year underconsideration, mainly because assessee changednature of treatment for accounting purpose, it wouldnot permit revenue to examine taxability of suchreceipt in I.T. A.Y. 2004-05 and thus reassessmentlacked validity.

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M.Dinshaw & Co. (P.) L td. v. DCIT 150ITD 342 (Mum.) Assessment year : 2004-05 Order Dated: 14th July, 2014

Basic Facts

The assessee paid vehicle tax on purchase ofvehicle under Bombay Motor Vehicles Tax Act,1958. Vide an amendment to the said act, effective1995, the annual tax was converted into a one-timetax, so that it was required to be paid once duringthe life time of a vehicle, at the time of its purchase.The assessee’s contention was that the amendmentwould, however, not alter its character. The vehicletax under the pre-amended Act was beingcontinuously and undisputedly allowed as revenueexpenditure. The same would continue to be so in-as-much as a lump sum levy, for administrativereasons, would not change the nature of theexpenditure from revenue to capital. The revenueauthorities rejected assessee’s explanation andconcluded that payment is a part of cost of thevehicle to the assessee, a capital asset in its hands,and would accordingly form part of its cost.

Issue

Whether one time vehicle tax paid by assesseeis capital expenditure exigible to depreciationas against being revenue expenditure deductibleu/s 37?

Held

The matter that the motor car on which theimpugned tax stands paid are capital assets inassessee’s hands intended for primary use if notwholly, in Maharashtra, is not in dispute. It is amplyclear that the tax is under law applicable on motorcars or omnibuses registered in the State ofMaharashtra, as one time tax for the life of vehicle.Further, the tax is for user, active or passive of themotor vehicle in the territory to which the jurisdictionof the said Act extends i.e. the state of Maharashtra.

The Tribunal held that Section 43(1) which definesthe term ‘actual cost’, does not define it negatively,i.e., emphasizing the elements which would notform a part thereof, so that the principles ofcommercial accounting shall apply in determiningthe actual cost. The same is even otherwise tritelaw, so that in the absence of a statutory definitionor mandate, the accounting prescription shallprevail. It is only where the law specifically providesfor a particular course of action, inconsistent withthe accounting mandate, that the same shall prevailand override the latter, viz., section 43B. TheAccounting Standard (AS) in respect of accountingfor fixed assets, i.e., AS-10, issued by the Instituteof Chartered Accountants of India, defines ‘fixedasset’, also laying down the principles for itsvaluation (cost) or determining its cost. Therefore,the payment of tax which enables the vehicle beingput to its intended use represents a condition thereofand accordingly shall form a part of its cost. Themisconception arises as the assessee, in its mind,and without basis, links the provisions of the saidAct as it stood prior to the amendment of 1995 withthat as amended. There is nothing in law, as itstands, to suggest that the levy is in lieu of a seriesof annual payments. In fact, the amendment/s hasthe effect of altering the nature of the levy in-as-much as the pre-amended tax could be regarded asan annual charge for the user of the vehicle for oneyear at a time.In view of the above the tribunal heldthat the tax levied by the said act would form partof actual cost of the motor cars.

JSW Energy L td. v. ACIT 140 I TD406(M um) Assessment Year : 2005-06Order dated: 30th Apr il, 2013

Basic Facts

In the instant case, the assessee had set aside out ofthe profits Debenture Redemption Reserve andclaimed the same as deduction while computing

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

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profits u/s 115JB of the Act. The revenue held thesame to be reserve as appropriation of profits andnot ‘provision’ for meeting liability while computingthe profits u/s 115JB.

Issue

Whether amount set aside as ‘Debentur eRedemption Reser ve’ is deductible whi lecomputing book profits under MAT?

Held

Debenture is a loan liability i.e. borrowed capitalof the entity raising funds through the issue ofdebentures. The said liability is classified as asecured loan in the balance-sheet prepared underPart I of Schedule VI to the Companies Act, 1956.As the debenture funds form part of the capitalstructure of the enterprise, the relevant provisionsof the Companies Act provide that its profits are tothat extent, and over the period of its currency, setaside for the purpose. This ensures, simultaneously,two things. Firstly, that the debentures are redeemedout of the profits of the enterprise and, two, that theprofits are capitalized to that extent. The Companies(Acceptance of Deposit) Rules, 1975, as prescribedunder section 58A of the Companies Act, alsoprovide, similarly, for a set aside, over a period oftime, i.e., the tenure of the public deposits, of theprofits of the depositee-company, investing a partthereof in liquid government securities each year.This ensures that the terms of the redemption aremet in a timely manner (out of the fund so created),and there are no defaul ts by the deposi tee-companies, as where the company invests its profitson expansion or in business or otherwise dissipatesthem, as by way of dividends, so that the liquidfunds are not available for discharge of the loanliabili ty at the relevant time, i.e., the time ofredemption, but at hand through the sale/realizationof the liquid securities. This can also be consideredas a measure to protect investor’s confidence as wellas to promote investment climate and corporatediscipline. The set aside of profits is, therefore, onlya sinking fund to fund a capital liability (out of theprofits).The set aside of profits, though for meetinga liability, is of one on capital account so that neitherthe assumption thereof (the l iabil i ty) nor i ts

liquidation (discharge) would impact the operatingstatement of the enterprises, i.e., the company’sprofit and loss account prepared /to be preparedunder Parts I I and III of Schedule VI to theCompanies Act. The adjustments to the book profitunder section 115JB are also consistent with thepreparation of the profit and loss account under theCompanies Act. The set side of the profits is not tomeet a trading liability or a liability on revenueaccount, so as to form part of or get incorporatedtherein, i.e., the profit and loss account. As such aliability would itself be charged to the operatingstatement, reducing the profit to that extent. Thatis, even if not actually discharged out of the profits,as where the same stand locked up in an asset/s,the profits have been deemed to have been absorbedto that extent, so as to become the source of itsdischarge. Therefore, the revenue was not incorrectin stating that the said set aside of the profits is onlyan appropriation of profits, and would not amountto a provision, so as to qualify for deduction in thecomputation of the profit of the assessee-company.The issue, in fact, is not if it is a ‘provision’ againstan ascertained liability or a ‘reserve’ per se, butwhether it could be considered as deductible incomputing the profit of the enterprise. In short, theliability, for the discharge of which the profits arebeing set aside, is in the capital field, so that neitherthe liability (on its assumption) nor the profit setaside (for its discharge) could be considered as acharge against the profits. This is precisely thereason that the same is not either claimed or allowedas deduction in the computation of income underthe regular provisions of the Act.Accordingly, theadjustment made by the assessee in the computationof book profit under section 115JB gets validated.

ACI T v. H i tachi Home and L i feSolut ions (I ndia) L td. 150 ITD 454(Ahd). - Assessment Year: 2000-01, 2001-02, 2003-04 and 2004-05 Order dated:24th September, 2013

Basic Facts

In the case, additions had been made by the TPO,after comparing the rate of royalty paid by otherassociate enterprises with the rate paid by the

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assessee, using internal comparable uncontrolledtransaction (CUP) method. In the TP analysis, theassessee did not benchmark this transaction andsubmitted that the royalty rate is comparable to theroyalty payments in international market. It wasfurther submitted that the payment is approved bythe RBI. These arguments were rejected by theTPO.CIT(A)deleted the addition after observingthat on the basis of the chart submitted by theassessee, the royalty paid by it was less than thepayment made by the other associate enterprises.

Issue

Whether where it is proved that effective rateof royalty was paid by assessee was less thanroyalty paid by other AEs would addition bejustified?

Held

The Tribunal held that only stated rate is notdecisive and effective rate has to be considered andwhen the amount of royalty paid by the assessee isconsidered with ex-factory sale value, withoutdeducting various expenses, such as dealercommission, special commission, warranty etc.,then the effective rate worked out is only 2.3% onsale, as against 3% paid by other group entities.This f inding given by the CIT(A) was notcontroverted by Department. Hence based on thisaspect, the Tribunal upheld the order of the CIT(A).

Deraj Agrotech L td. Vs. ITO 164 TTJ495(Mum) Assessment Year : 2007-08Order dated: 29thJanuary, 2014

Basic Facts

The assessee company filed its return of income atNIL after set off of brought forward losses. The AOfinalized the assessment determining the income ofthe assessee at Rs.15.37 lakhs. During the assessmentproceedings AO found that the assessee companyhad not disallowed the deferred tax, fringe benefittax and prior year adjustment amounts debited to theProfit & Loss account. The AO disallowed the sameand initiated penalty proceedings. In penaltyproceedings the assessee stated that these amountswere not offered for tax through an inadvertent error.The AO held that the plea of the assessee that the

default was committed through an inadvertent errorwas too general to be accepted as a reasonable andaccordingly levied penalty under section 271(1)(c).On appeal, CIT(A) held that assessee had given alame excuse for the mistakes committed by it. Takingof a wrong base could not be termed as an inadvertentmistake. Further, assessee had considered those verysums for calculation to be made under section 115JB,hence there was no reason why same was not donefor computing taxable income. The wrong claim, sobasic and fundamental, was not acceptable as areasonable cause while deciding the cases ofconcealment penalty. Accordingly he upheld theorder of the AO.

Issue

Whether income not offered for tax through aninadver tent er ror would result in evasion oftaxes and the provisions of section 271(1) (c) beattracted?

Held

There is fundamental difference in a debatable claimand a patently wrong or false claim. There have tobe diverse opinions of courts about the claims madeunder the first category and where assessee can adoptone of the views. In such circumstances, one cansay that issue has not reached finality and if assesseehas opted for one of the possible views, he shouldnot be visited by penal provisions. But, the claimsmade under the second category have no legs of theirown to stand. Clearly, such claims are not tenablelegally or factually. If a claim of deduction putforward by the assessee is not legally valid and resultsin evasion of taxes, provisions of section 271(1)(c)comes in picture. So, it can be safely said thatwhenever any material fact for correct computationof incomeis not filed or if filed is inaccurate, thenpenalty has to be imposed. Further, it can be observedthat while computing the tax liability under section115JB the assessee had rel ied upon variousjudgments of the Tribunal and arrived at theconclusion that certain amounts were not to beconsidered while computing income under MATprovisions. It clearly shows and proves that theassessee company is well versed with the provisionsand procedure of law. It is not a case of an assessee

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who is a small time player and is ignorant of tax laws.A knowledgeable corporate-assessee cannot beal lowed to take shel ter of inadvertentmistake.Henceforth, the claim of deductions madeby the assessee with regard to FBT and prior periodexpenses was not justified and claims fall in thecategory of false claim. However amount of deferredtaxes was a deductible item at the time of assessmentwhich became disallowable because of retrospectiveamendment and therefore the claim for deductionthereof made by the assessee was not a false claimand no penalty is leviable in respect of said claim.

GFA Anlagenbau GM BH vs. DDI T(International Taxation) 165 TTJ 126(Hyd) Assessment Year : 2005-06 TO2009-10 Order dated: 27thJune, 2014

Basic Facts

The assessee was a foreign company incorporatedin Germany. It was engaged in the activity ofsupervision, erection, commissioning of plant andmachinery for steel and allied plants in India. Duringthe year under consideration, the assessee hadreceived contractual receipts from an Indiancompany for rendering technical and supervisionservices. The assessee had rendered services to theabove mentioned resident company by engagingforeign technicians at the work sites in India andthe total stay of technicians deputed by the assesseecompany on the projects exceeded 183 days .i.e.220 days. On the basis of these particulars of stay,Assessing Officer concluded that the assessee washaving Permanent Establ ishment within themeaning of article 5 of DTAA between India andGermany. The DRP held that the provisions ofrelevant contract agreement as well as the provisionsof article 5 of DTAA between India and Germanyclearly established that the assessee was havingPermanent Establishment in India during therelevant period. Further with regard to the deductionof expenditure DRP held that the assessee wasentitled to deduction of 50 per cent of gross receiptsfrom all projects towards expenditure.

Issue

Since technicians deployed by assessee merelyrendered supervisory services at project sites of

its clients and assessee did not by itself own oroperates such sites independently, whether it canbe concluded that assessee’s supervisory servicesconstituted a PE in India under article 5 of IndiaGermany DTAA?

Held

The term ‘Permanent Establishment’ is defined insection 92F (iiia) which includes a fixed place ofbusiness through which the business of the enterpriseis wholly or partly carried on’. The supervisoryactivities do not constitute a fixed place of businessin as much as the assessee rendered its services atthe project sites of its clients and does not by itselfown or operate such sites independently but ratherprovided under contract terms by its clients. In theinstant case, assessee is clearly doing the supervisionof project of the Indian company and has no fixedplace of business. Only its technicians deputed toIndia in one project stayed in India for more than180 days.Nothing was brought on record that thetechnicians are operating from a fixed place in thecustody of assessee. As per the terms the stay andtransportation are undertaken by Indian company.Applying the rationale of the Special Bench in caseof Motorola Inc. v. Dy. CIT it cannot be said thatthe assessee has a fixed place of business for itssupervisory activities.Further, Article 5(2) (i) talksabout supervisory activities and in the instant case asassessee do not have any building site or constructionsite of its own. The activities being of a technicalnature clearly fall under the Fees for Technical Service(FTS) i.e., Article 12 of the India-German DTAAand is taxable at the rates specified therein.

Aditi Technologies (P.) L td. V ITO 149ITD 515 (Bang) Order dated 14th March2014, Assessment Year 2008-09.

For the relevant assessment year, the assessee filedits return claiming deduction under section 10A inrespect of profits derived from the business ofmanufacture and export of computer software. TheCIT passed order under section 263 holding that theorder of the AO was erroneous and prejudicial to theinterest of the revenue, for the reasons that u/s 10Adeduction was al lowed for ten consecutiveassessment years beginning from the assessment year

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in which the assessee began to manufacture an articleor thing. According to the CIT, the assessee beganto manufacture article or thing from the assessmentyear 1995-96 and the period of ten years wouldexpire in Assessment year 2004-05 and in such asituation the assessee was not entitled to claimexemption u/s 10A in the assessment year in question.

Issue

Whether the assessee would be entitled todeduction u/s 10A and how to reckon the periodof 10 consecutive assessment years in the caseof the assessee?

Held

The fact that the assessee began manufacturing inAY 1995-96 was not disputed. Accordingly theassessee was entitled to deduction u/s 10A fromAY 1995-96. As per the law as it existed prior tosubstitution of section 10A by Finance Act 2001,the period was 5 consecutive assessment yearsfalling within a period of 8 years from the assessmentyear in which the undertaking began tomanufacture. As per the amended section thededuction was al lowed for a period of 10

consecutive years from the year of manufacture. Inthis case, the assessee had not claimed deductionfor AY 1995-96 to 1997-98. But the assesseeclaimed deduction u/s 10A for AY 1998-99 to2001-02. The assessee opted out of the provisionsof section 10A by virtue of the provisions of section10A(8) which gives such opting out to an assesseefor AY 2002-03 to 2004-05. In the case of theassessee the band of 10 years as per the amendedlaw would be 1995-96 to 2004-05 only. Opting outof the provisions of section 10A will not have theeffect of extending the band period of 10 years.The assessee could get the benefit of the amendedlaw applicable from assessment year 2001-02 onlyfor 2 more years viz., AY 2003-04 & 2004-05. Theprovision for opting out of the provisions of section10A is intended to facilitate an assessee who canget more benefits under any other provisions ofdeduction under Chapter VIA. That provisioncannot extend the period of benefit beyond 10 yearsfrom the previous year relevant to assessment yearin which the assessee begins to manufacture orproduce articles or things.

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Tr ibunal News

in him to serve his country, its institutions andcitizens. Each one of the above (the country, itsinstitutions and citizens), needs to be preserved.Each of them grows to prosper, with the others’support. Each of them has duties, obligations andresponsibi l i ties and also rights, benefi ts andadvantages. Their harmonious glory emerges fromwhat is commonly understood as “the Rule ofLaw”. The judiciary as an institution has extremelysacrosanct duties, obligations and responsibilities”.

Subrata Roy Sahara vs. UOI (2014) (8 SCC 470)

Recovery of tax-Membership card ofStock Exchange.

A reading of rules 5 and 9 of the Rules, By-Lawsand Regulations of BSE leads to the conclusionthat a membership card is only a personalpermission from the stock exchange to exercise therights and privileges that may be given to subject

to Rules. The moment a member is declareddefaulter, his right of nomination seizes and vestsin the exchange.

Government debts have precedents over unsecuredcreditors. The Income Tax Act, 1961 does notprovide for any paramountcy of dues by way ofincome tax. The moment the stock exchange has alien over the member’s securities; it would haveprecedence over income tax dues. The l ienpossessed by SE makes it a secured creditor andwhether it is a statutory lien arise out of agreement,does not make much of the difference as SE beinga secured credi tor would have priori ty overGovernment dues.

Stock Exchange, Bomaby vs. Y.S.Khandalgaonkar (2014) (368 ITR 296)

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contd. from page 512 Glimpses of Supreme Cour t Rulings

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In this issue we are giving gist of an importantdecision of Hon’ble Ahmedabad Tribunal in thecase of Shri K ishore R. Pithva, wherein an issueon which the appellant did not press his groundsbefore CIT(A) came to be agitated by assesseebefore Hon’ble Tribunal and the same was allowedby the Hon’ble Tribunal as the legal position wasin favour of the assessee.The Hon’ble Tribunal while deciding the matterreiterated old principle that there cannot be estoppleagainst the law and that there cannot be concessionin the matter of law. If the legal position is in favourof the assessee, the department has to grant relief tothe assessee irrespective of the fact that the assesseemay have waived his entitlement of the same.Present day, many a times, an assessee may beunder certain compulsions made to withdraw hisgrounds as not pressed even if the legal position isin favour of the assessee. In that situation suchdecision could be helpful.

In the Income Tax Appellate Tr ibunal atAhmedabad“D” Bench

Before S/Shr i G.C. Gupta, Vice-President andN.S. Saini, Accountant Member

ITA No. 2931/Ahd/2010[Asstt. Year : 2007-2008]

Shr i K ishore R. Pithva v/s ITO, Ward-12(2)Mathur Master Estate AhmedabadOpp: Babulal Zafarani PattiNagarwel Hanuman RoadAmraiwadi, Ahmedabad – 380 006PAN : ACRPP 9292 L

(Appellant) (Respondent)Assessee by ; Shr i M.K. PatelRevenue by : Smt. Sonia Kumar, Sr. DRDate of Hear ing : 8th September, 2014Date of Pronouncement : 17/10/2014

GistFacts :

CA. Sanjay R. [email protected]

Unreported Judgements

The relevant grounds before Hon’ble Tribunal wereas under :“2. The ground No.1 and 2 of the assessee are as

under :

“1. The ld. CIT(A) has erred in deciding theground of appeal ‘a’ as not pressed inrespect of non deduction of TDS u/s 194Cof the Act on expenses of Rs.7,97,850/-and Rs.1,75,000/- as not allowable u/s40(a)(ia) when the provisions of deductionof TDS for an individual assessee weremade applicable w.e.f. 01/06/2007 andalso brought to the notice of CIT(A) videsubmission dated 25/03/2010 that it werenot applicable during previous year 2006-07. The learned CIT(A) ought to havedeleted the expenses disallowance as notconsistent with legal provisions.

2. The ld. CIT(A) has erred in rejecting theground number ‘a’ of the ground of appealbefore him as not pressed vide order sheetentry dated 06/09/2010 in as much as theAR was not empowered to do so but asexplained to appellant he was forced to doso to avoid adverse consequences thereof.The acceptance of the AR for not pressingthe ground number ‘a’ be held to be illegaland bad in law and also as not in conformitywith the authority granted to AR.”

Rival Contentions :The Counsel for the assessee submitted that issueof disal lowance of expenses amounting toRs.7,97,850/- and Rs.1,75,000/- u/s 40(a)(ia) of theAct was not pressed by the Chartered Accountantof the assessee before CIT(A). It is submitted thatprovisions of TDS u/s 194C for an individualassessee were made applicable w.e.f. 01/06/2007and therefore were not applicable for the relevantassessment year 2007-08 and therefore theconcession made by C.A. of the assessee was under


misconception of the law. He submitted that issuebeing legal in nature, Revenue authorities shouldhave decided the same in accordance with the law.He relied on the decisions of Hon’ble Apex Courtin CIT v/s Shelly Products and Another, 261 ITR367 (SC) and the decisions of the Hon’ble GujaratHigh Court in P.V. Doshi v/s CIT, 113 ITR 22(Guj.) and S.R. Koshti v/s CIT, 276 ITR 165 (Guj.).On the other hand DR opposed the submission ofthe assessee and submitted that since the C.A. ofthe assessee had conceded the issue before CIT(A),the assessee should not be allowed to re-agitate thesame now before the Tribunal.

HeldThe Hon’ble Tribunal on consideration of the factsand legal position held as under:“5. We have considered rival submissions and have

perused the orders of theAO and the CIT(A), andalso decisions of various courts relied upon onbehalfof the assessee. We find that the assesseehas admitted that its Chartered Accountant has“not pressed” the issue before the CIT(A).However, we findthat there could not legally beno estoppel against the law. The disallowancewasmade for non-deduction of tax on expenses undersection 40(a)(ia) of theAct, although, the TDSprovision under section 194C on an individualassesseewas not applicable during the relevantperiod to the case of the assessee, beinganindividual, as this provision of TDS was madeapplicable w.e.f. 1-6-2007 incase of an individual.We find that there could not be any validagreement ofthe assessee with the department incontravention of the statute. It is not thecase ofthe department that the TDS provisionundersection 194C were in factapplicable to the factsof the case of the assessee during the relevantperiod.The only reasoning of the Revenueauthori ties was that since theassessee’srepresentative has conceded the issuebefore the CIT(A), the addition should beupheld.Such an interpretation of law, in our consideredopinion, shall lead toanomalies and also notsustainable in law. We are of the view that it istheresponsibility of the Revenue authorities tocompute the taxable income of theassesseecorrectly in accordance with the provision of law

applicable to the caseof the assessee. If theassessee under some misconception of the correctlegalprovision applicable to the relevant period,make a concession and agreed to getthe amounttaxed, which was otherwise not taxable as perthe scheme of theAct, the taxing authorities shouldrefrain themselves from taxing such amount. Thetaxing authorities have an equal responsibility ofassessing the correctincome of the assessee.However, in case the assessee concedes certainamountand agrees that the same may be taxedon the basis of pure factual position ofthe issue,the assessee may be bound by such concessionmade by himvoluntarily and with his free will. InCIT Vs. Shelly Products and Another(supra), theHon’ble Apex Court held that excess tax paid byassessee out ofabundant caution or owing to erroror non-taxability, the same has to berefunded tothe assessee. In P.V. Doshi Vs. CIT (supra), theHon’ble GujaratHigh Court held that as ajurisdictional provision which was mandatoryandenacted in public interest could never bewaived and the want of jurisdictionwas discoveredby the AAC, there was no question of waiver bythe assessee.In S.R.Koshti Vs. CIT, wherein therewas a over assessment due to mistake ofassesseein failure to claim exemption on voluntaryretirement compensationand the mistake wasrectified by the AO, it is held by the Hon’ble HighGujaratCourt that the order of the AO was notprejudicial to the interest of the Revenue.In viewof the various judicial pronouncements and thesettled legal position, asdetailed above, we are ofthe considered view that the amount in questioncouldnot be disallowed under section 40(a)(ia)of the Act merely because the assesseehasconceded the same through its CharteredAccountant before the CIT(A).We find that theCIT(A) has not considered the issue before himon merits, andaccordingly, we hold that it shallbe in the interest of justice to restore the issueinground no.1 and 2 before us to the file of theCIT(A) with direction to decidethe same de novoin accordance with law after providing reasonableopportunityto both the parties. We directaccordingly.

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Unrepor ted Judgements


Issue:

Can the Opening Stock be disturbed when valueof Closing Stock is changed due to a change invaluation method or due to any other reason?

Proposition:

Whenever the method of valuation of closing stockis changed and is for bona fide purpose, the methodof valuation of opening stock is not required to bechanged.

Relevant Provisions of the Act:

Section 145 of the Act “Method of Accounting” isas under :

(1) Income chargeable under the head “Profits andgains of business or profession” or “Incomefrom other sources” shal l, subject to theprovisions of sub-section (2), be computed inaccordance with either cash or mercantilesystem of accounting regularly employed bythe assessee.

(2) The Central Government may notify in theOfficial Gazette from time to time accountingstandards to be fol lowed by any class ofassessee’s or in respect of any class of income.

(3) Where the Assessing Officer is not satisfiedabout the correctness or completeness of theaccounts of the assessee, or where the methodof accounting provided in sub-section (1) oraccounting standards as notified under sub-section (2), have not been regularly followedby the assessee, the Assessing Officer maymake an assessment in the manner provided insection 144.

“Method of Accounting in certain cases”- Section145A of the Act reads as under :

Notwithstanding anything to the contrary containedin section 145,—

(a) The valuation of purchase and sale of goodsand inventory for the purposes of determiningthe income chargeable under the head “Profitsand gains of business or profession” shall be—

(i) In accordance wi th the method ofaccounting regularly employed by theassessee; and

(ii) further adjusted to include the amount ofany tax, duty, cess or fee (by whatevername called) actually paid or incurred bythe assessee to bring the goods to the placeof its location and condition as on the dateof valuation.

Explanation.— For the purposes of this section, anytax, duty, cess or fee (by whatever name called)under any law for the time being in force, shallinclude all such payment notwithstanding any rightarising as a consequence to such payment;

View Against the proposition:

In the case of CIT vs.The Ahmedabad New CottonMills Co. [1929] 4 ITC 245 (PC), the closing stockwas undervalued by the assessee. Assessee claimedthat it was also undervalued at the beginning of theyear. The commissioner rectified the value of thestock at the end of the year by substituting the truevalue of the stock as at that date, but he declined tomake the corresponding alteration as regards to thestock at the opening of the year, stating a well-known principle of accountancy that the openingvalue must be taken at precisely the same figure asshown in the closing books of accounts of theprevious year.

The Bombay High court observed that there is afallacy in adopting that as a universal rule it is

CA. Kaushik D. [email protected].

Controversies


incapable of any alteration. It also went on to notethat the method proposed by the Commissioner willresult in a fictitious profit and that it will not be atrue profit for the particular year in question.

Finally it concluded that a wrong valuation was puton the stock at the beginning of the year as well asat the end of the year. Then both the errors shouldbe corrected and not merely one.

However, the court guarded itself by commentingthat nothing is to be taken to lead any one to believethat it is open to an assessee to adopt any arbitrarymethod of valuation he may like, and still lest thathe may take any course which will tend to defraudthe revenue.

Supreme Court’s judgement in the case ofCommissioner of Income-tax Vs. British PaintsIndia Ltd.[1991] 188 ITR 44 (SC) is also worthmentioning. Assessee was engaged in business ofmanufacture and sale of paints. It had valued itswork in process and finished goods solely at costof raw materials. It has totally excluded theallocation of overhead expenditure in the stock. Thishad been the regular practice adopted by theassessee.

The Apex Court observed that “any system ofaccounting which excludes, for the valuation of thestock-in- trade, all costs other than the cost of rawmaterial for the goods in process and finishedproducts, is likely to result in a distorted picture ofthe true state of the business for the purpose ofcomputing the chargeable income. Such a systemmay produce a comparatively lower valuation ofthe opening stock and the closing stock, thus,showing a comparatively low difference betweenthe two.”

The Supreme Court, thus, directed the ITO torecalculate the figures of both the Opening Stockas well as the Closing Stock after adding theoverhead expenditures.

In the case of CIT Vs Mahavir Al luminiumLtd.[2008] 297 ITR 77 (Delhi High Court) inits closing stock for the relevant previous year the

assessee had charged MODVAT credit on certaininputs. While doing so, the assessee also made anadjustment in the opening stock. The AssessingOfficer was of the opinion that section 145A of theAct did not permit the assessee to make a change inthe valuation of the opening stock although itpermitted a change in the closing stock. He,therefore, did not allow the adjustment made bythe assessee. On appeal , the Commissioner(Appeals) upheld the order of the Assessing Officer.On further appeal, the Tribunal, relying upon theCBDT’s Circular as well as the Guidance Noteissued by the Institute of Chartered Accountants ofIndia, held that the adjustment on account ofMODVAT credit can be made in the opening stockalso; and that the assessee did not commit any errorin doing so. The Delhi High Court also took thesame view and decided in the favour of the assessee.

View in Favour of the proposition:

The case of Melmould Corporation v. CIT [1993]202 ITR 789 (Bombay High Court) is worth notingregarding the issue. During the relevant previousyear, the assessee had valued its opening stock onthe basis of costs plus overheads which was themethod adopted by the assessee in the years priorthereto. However, the assessee decided to changeits method of valuation by valuing the stock at costprice only excluding the overheads. The assesseeaccordingly valued i ts closing stock for theassessment year in question at cost price. TheIncome-tax Officer increased the gross profit ratein view of the difference in the method of valuationof opening stock and closing stock.

The assessee challenged the action of ITO inTribunal, which held that the correct profit can onlybe arrived at by valuing the opening stock andclosing stock at cost price excluding overheadexpenses. ITO was directed to re-determine thevalue of the opening stock at cost price afterexcluding all overheads.

The matter was further taken up to High Court. TheHigh Court barred itself from commenting uponwhether the method adopted for valuing the closing

Controversies


stock was in accordance with law and/or accountingpractice. But it noted that the change has to beeffected by adopting the new method for valuingthe closing stock which will, in its turn, becomethe value of the opening stock of the next year. If,instead, a procedure is adopted for changing thevalue of the opening stock, it will lead to a chainreaction of changes for all the previous years. Thecourt held that the direction of Tribunal was, thus,not justified.

The decision of Andhra Pradesh High Court inthe case of CIT Vs. Mopeds India Ltd.[1988] 173ITR 347 is also relevant to the issue. The assesseewas valuing its closing stock, in the past years, bywhat is known as the “total cost” method. In thismethod, proportionate overheads for administrativeexpenses, selling expenses and interest in stockvaluation were taken into account.

While valuing the closing stock for the assessmentyear under consideration, the assessee found theearlier system to be somewhat unscientific andproblematic and, therefore, switched on to what isrecognised as the “works cost” system whereadministrative overheads are not taken into account.The assessee explained that the change was madefor bona fide purposes and it was to replace asomewhat unscientific method of valuation by amore scientific and recognised method of closingstock valuation. The ITO did not accept theexplanation of the assessee. He valued the closingstock on the basis adopted in the past year and madean addition of the difference in the value of theclosing stock.

The High Court noted that “In the face of the findingthat the change adopted by the assessee was forbona f ide purpose and was not actuated byconsideration to reduce income for the income-taxpurpose, the revenue has no right to interfere withthe change in the method of valuation of the closingstock.” There was no suggestion made to changethe opening stock accordingly.

Where a particular method is consistently followed,it is necessarily to be accepted as held in Wallace

Flour Mills Co. Ltd v. Collector of Central Excise[1990] 186 ITR 441 (SC). Similar view has beentaken for Income Tax purpose in CaprihansIndialLtdv. Prakash Chandra [ 2002] 256 ITR721(Bombay) following the decision in HindustanLever Ltd. V. V.K.Pamdey, ft. CIT [2001] 251 ITR209 (Bombay) and CIT v. Sant Ram Mangat Ram[2005] 275 ITR 312 (P&H). It However, does notmean that there cannot be any change in the methodso as to adopt this method, because the change tosuch method, if consistently followed thereafter,should be acceptable as decided in CIT v.Amrithalakshmi [2008] 300 ITR 78.

Let me refer to the principles laid down in the caseof CIT vs. ChainrupSampatram’s24 ITR 481 (SC):

“If the Assessing Officer is of the view that the profitcould not be properly deducted from the accountsmaintained, he can apply the provisions of section145 of the Act. In the present case, the methodadopted by the assessee is to value the closing stockat the market value irrespective of the fact whetherthe market value of stock at the relevant time is morethan the cost value of the stock, which necessarilyresults in imaginary or notional profits to theassessee which he has not actually received. In factsuch notional imaginary profits cannot be taxed. Itis a well settled principle as held in Sir Kikabhai

Premchand v. CIT [1953] 24 ITR 506 (SC), theConstitution Bench Judgement that the firm cannotmake a profit out of itself. The transaction which isnot a business transaction and does not deriveimmediate pecuniary gain is not subject to tax. Inthe present case by showing the market value ofclosing stock the assessee has earned potentialprofits out of itself in as much as the stock-in-traderemained with the assessee at the closing of theaccounting year. Secondly, putting the stock at themarket value does not and cannot bring any realprofit which is necessary for taxing the incomeunder the Act as is held in ChainrupSampatram v.CIT [1953] 24 ITR 481 (SC) and CIT v. HindConstructions Ltd. [1972] 83 ITR 211 (SC). Thirdly,it is a settled principle to income-tax law that it isthe real income, which is taxable under the Act.

Controversies


This proposition was enunciated in CIT v. BirlaGwalior (P.) Ltd [1973] 89 ITR 266 (SC), whichwas pronounced in CIT v. ShoorjiVallabhdas andCo. [1962] 46 ITR 144 (SC).”

Summation:

It can be well established that there is no need tochange the valuation of opening stock for the yearwhen there is change in value of closing stock dueto a change in the method of valuation.

However, when there is a mistake in valuing theopening and closing stock, both the values need tobe recomputed and not only one. It also remains afact that when any adjustment is required to be madeby a statute (as for example section 145A of theAct), effect to the same should be given irrespectiveof any consequences on the computation of incomefor tax purposes.

The High Court i n the case of MelmouldCorporation v. CIT [1993] 202 ITR 789 (BombayHigh Court)relied upon the booklet titled Valuationof Stock and Work-in-Progress- Normally AcceptedAccounting Principles brought out by the IndianMerchant’s Chamber Economic Research andTraining Foundation, which may usefully beattracted here:

“2. Where change from one valid basis to anothervalid as is accepted, certain consequencesnormally follow. The opening stock of baseyear of change is valued on same basis as theclosing stock. Whether the change is to a higherlevel or to a lower level, the Revenue normallydoes not seek to revise the valuation of earlieryears. It neither seeks to raise additionalassessments, nor does it admit relief under the“error or mistake” provision.

3. It is not possible to define with precision whatamounts to a change of basis. I t i s aconvenience, both to tax payers and to theRevenue, not to regard every change in thevaluation as a change of basis. In particular,the Revenue encourages the view that changeinvolves no more than a greater degree of

accuracy, or a refinement, should not be treatedas a change of basis, whether change results ina higher or lower valuation. In such cases thenew change valuation is applied at the end ofthe year without amendment of the openingvalue.”

The recent decision of the High Court in CIT v.Modern Terry Towels Ltd. [2013] 357 ITR 750(Bombay) recognizes the principle repeatedly laiddown by the Courts as to why there should be nodifficulty in accepting the opening stock figure asan anchor for future computation not only onprinciple, but also on practical consideration. Theextract at Page 757-759 of this judgement reads asunder :

“Re Question (c): The respondent assessee has beenregularly following a method of valuing its closingstock on the basis of net realizable value. However,during the period relevant to the assessment year1997-98, the respondent changed the method ofvaluation of its closing stock form net realizablevalue to the cost or market value, whichever islower. As a consequence of the change in themethod of valuating closing stock the valuation ofclosing stock went down by Rs. 6.147 Crores. TheAssessing Officer did not accept the explanationoffered by the respondent assessee for change inthe method of valuing the Closing Stoc, viz.,accounting standard AS-2 required the closing stockto be valued at cost or market value, whichever islower. However, the Assessing Officer held that thechange in method of valuation has been effectedwith an intention to evade tax and approximatelyRs. 6.17 crores was added back to the declaredincome of the respondent assessee.

The CIT (Appeals) al lowed the respondentassessee’s appeal. It was held that the change in themethod of valuing closing stock was not done toundervalue the profit and there was no mala fideintention on the part of the respondent assessee.Consequently, the Assessing Officer was directedto delete the addition of Rs. 6.17 Crores on accountof valuation of closing stock.

Controversies


The Tribunal upheld the finding the Commissioner(Appeals). The Tribunal held that in view of theprovisions of the Companies Act the respondentassessee is obliged to comply with the accountingstandards issued by the Institute of CharteredAccountants Of India. The accounting standardissued by the Institute of Chartered Accountants OfIndia made it mandatory that the inventories shouldbe valued at lower of costs or net realizable value.The Tribunal also recorded the fact that for theearlier assessment year 1996-97 the auditors hadmentioned the fact that the respondent assessee hadnot followed the accounting standard AS-2. In thecircumstances, the change in the method ofvaluation of stock was because of a statutoryrequirement and could not be branded mala fide.The contention of the Revenue that the change inthe method of valuation of closing stock would resultin distortion of the profit earned as the opening stockhas not been disturbed was also negatived by theTribunal in view of the fact that there was a bonafide reason for change in the valuation of closingstock.”

Let me now refer to the decision of their lordshipsof Madras High Court in the case of CIT vs.Carborandum Universal. The Madras High Courtheld as under:

“The main contention if the Revenue in this case isthat the change in the method of valuation of thestock should be applied both to the opening stockas well as closing stock, which alone will indicatethe true or real profits as has been held in CIT vs.The Ahmedabad New Cotton Mills Co. [1929] 4ITC 245 (PC), and that is not open to the assesseeto apply the new method to the closing stock alonewithout reference to the opening stock. Thus,according to the learned counsel for the Revenue,whatever be the method of valuation adopted bythe assessee it should be applied to both the openingand closing stock, as otherwise it will give a distortedpicture of the assessee’s income. The Tribunal’sreasoning for rejection the contention of theRevenue is that so far as the first year when thechanges introduced is concerned, there is bound to

be a slight distortion in the profits but that will getadjusted in course of time as the new method ofvaluation of stock is going to be applied on apermanent basis year after year.”

Before concluding, it would be useful to refer tothe Compendium of Opinion of ICAI Vo. XXI,wherein the issue as to whether opening inventoriesand closing inventories should be valued on the samebasis as was considered by the expert advisorycommittee. In its opinion quoted at page no. , thecommittee has stated as follows:

“15. On the basis of the above, the committee is ofthe following opinion on the issue raised:

(a) Under the facts and circumstances of the query,the value of the opening inventories is notrequired to be changed. However, since thevalue of closing inventories should include theamount of provision for excise duty, the openingand closing inventories would not be valuedon the same basis for the purpose of quantifyingthe impact of the profit\loss for the year. Sincethe value of the opening inventories is notrequired to be changed, the question ofdisclosure as a prior period item or change inaccounting pol i cy wi th regard to suchinventories does not arise.”

Finally it is submitted that whenever change in themethod of valuation of closing stock is made bythe assesse which is bona fide and which is to beapplied in future as well, the method of valuationof closing stock is not required to be changed.

However, when method of valuation of closing stockis imposed on assesse as was done in the case ofCommissioner of Income-tax Vs. British PaintsIndia Ltd.[1991] 188 ITR 44, then method ofvaluation of opening stock is required to bechanged.

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Controversies



Recent decisions on inter pr etat ion ofprovisions of S.45(4) of the Income Tax Act,1961.

ACIT vs. Arbuda Estate Corporation (TaxAppeal No. 1152 of 2010) (Gujarat High Court)

1.0 The revenue has filed this appeal challengingthe judgment of the Tribunal dated 20.11.2009raising following question for consideration.

“Whether on the facts and in the circumstancesof the case, the tribunal was right in law indeleting the addition of Rs.1,79,49,012/- madeby the A.O. being long term capital gain u/s.45 of the I.T. Act, even though the assessee’scase clearly falls within the ambit of provisionsof section 45(4) of the Income Tax Act, sincethe assessee f i rm has distributed therevaluation reserve to the existing and retiringpartners during the year under consideration?”

2.0 The facts of the case in brief are stated asfollow:

2.1 The assessee is a partnership firm. During theprevious year relevant to assessment year1998-99, the assessee had revalued its capitalassets and the total amount of Rs. 1,79, 49,012/-. On the basis of such revaluation, theassets was taken in the revaluation reservedaccount and it was distributed amongstpartners in the following manner.

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2.2 The assessing officer was of the opinion thatin view of the provisions contained in section45 read with section 2(47) of the Income TaxAct, the assessee firm had to pay tax on thesaid amount of Rs.1,79,49,012/- by way ofcapital gains. The assessee approached CIT(Appeals). The CIT (Appeals) deleted theadditions made by the assessing officer. Therevenue therefore approached the tribunal.

Advocate Tushar [email protected]

Judicial Analysis

The Tribunal confirmed the order passed bythe CIT (Appeals). Hence, the present appeal.

3.0 The Tribunal in its judgment noted that sub-section (4) of section 45 refers to ‘capital assets’and not to the appreciated market value of thecapital assets which is taken to revaluationreserved account. The Tribunal observed thatthere has to be distribution of the ‘capital assets’in specie in order to attract the said sub-section.In the present case, there was no distribution ofcapital assets. The Tribunal further observed thatthe land and building continued to remain withthe firm even after the crediting of the revaluationreserve to the capital accounts of the partners.There was thus no distribution of any capitalassets. It is only that appreciation in the marketvalue of the land and building otherwise createdto a revaluation reserve account and was thentransferred to the partners’ capital account. TheTribunal, therefore, concluded as under:

“What actually happens when an asset isrevalued on the basis of the current marketvalue is that the asset account is debited withthe increase in the value and the revaluationreserve account is credited. The asset as wellas the appreciation in its market value belongto the partners since under the law ofpartnership the firm is only a compendiousname to describe the partners and they are thereal owners of the assets belonging to the firm.When the appreciated value of the asset iscredited to the account of the partner he onlygets his share in the assets which he is entitledto in law. The position however would bedifferent under section 45(4) when a capitalasset in specie is given to the partner by7 wayof distribution on dissolution or otherwisebecause the Act treats the firm and the partnersas different taxable entities.”


4.0 Having heard learned counsel for the revenueand having perused the documents on record,we are of the opinion that the Tribunalcommitted no error. Section 45(4) of the Actwhich reads as under:

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5.0 What sub-section (4) of Section 45 seeks tobring within the tax net in the form of capitalgain is the profit or gains arising from thetransfer of a capital asset by way of distributionof capital assets on the dissolution of a firm orother association of persons or body ofindividuals or otherwise. In the present case,there was neither dissolution of the firm northere was any distribution of capital assets onsuch dissolution or otherwise. The Tribunalcorrectly examined the position by holdingthat all that was done was that the assets wererevalued on the current market value and theresul tant increase was brought in therevaluation reserve account of the partnership.Since the partners held the property jointly inspecified shares, in proportion to the sharesthe revalued assets and the value thereof wasdistributed in the different accounts.

6.0 We are in agreement with the Tribunal that insuch circumstances there was no applicabilityof sub-section (4) of section 45 of the IncomeTax Act, 1961.

xxx…

CI T vs. K arnataka Agro Chemicals [49taxmann.com 324 (Karnataka)]

xxx…

2. In the course of assessment proceedings, theassessing Officer noticed that the assessee firmhad created and self-generated assets in theform of goodwill of business to an extent ofRs.7,59,28,000/- and transferred it to thecurrent accounts of the four partnersproportionately consequent to re constitutionof assessee firm. The assessing authority feltthat this good-will is chargeable to tax underthe head “capital gains” and accordingly,brought it to tax as “long term capital gains”.

xxx…

Insofar as goodwill is concerned, the remandreport showed that there is no transfer involvedwithin the terms of Section 45 and Section2(47) of the Income Tax Act. It is the case ofrevaluation of assests and the goodwill wascarried in the balance sheet of the firm. Therewere no transfer of any assets by the firm tothe retiring partners. No assets were allottedto the retiring partners. The accounts of theretiring partners were settled by actualpayment of sums due to them. Therefore, itheld that there is no transfer and in view ofCircular of CBDT notional transfer cannot besubjected to taxation and therefore an orderfor deduction of Rs.7,59,28,000/- was madeand accordingly, the appeal was allowed.Aggrieved by the said order, the revenuepreferred an appeal to the Tribunal.

xxx…

Insofar as addition on account of goodwill isconcerned, when the Appellate Authorityaccepted the contention of the assessee duringthe remand proceedings that there was notransfer of goodwill, Section 45(4) is notattracted and accordingly, it found no groundto entertain the appeal. Aggrieved by the saidorder, the present appeal is filed.

3. The learned Senior Counsel appearing forrevenue assailing the impugned order fairlyconceded that the finding of the AppellateAuthority insofar as unexplained cash creditof Rs.40,00,000/- is reflected in the accountsand properly explained and no grievance canbe had on that account. Insofar as the transferof goodwill which resulted in capital gains isconcerned, he submitted once the goodwill isvalued and it is proportionately distributed tofour partners, when two partners paid theconsideration while the other two partnerswalked out of the partnership firm after taking.the consideration for the goodwill which wascredited to their account, i t constitutes atransfer. He relied on the judgment of theBombay High Court wherein whi leinterpreting Section 45(4) of the Act it has

Judicial Analysis


explained the meaning of the word“otherwise”. Therefore, he submits that it fallsunder the category of “otherwise” and theappellate authorities were not justified ininterfering with the order passed by theassessing authority.

4. Per contra, the learned counsel appearing forthe assessee submitted that the conditionprecedent for attracting Section 45 is thereshould be transfer of asset. In the instant case,admittedly the retiring partners took moneyand walked out of the partnership firm. Noasset much less capital asset was transferredin their favour. Therefore, Section 45 is not atall attracted much less Section 45(4) of theAct. Therefore, he submits that the orderpassed by the authorities, cannot be found faultwith.

5. From the aforesaid facts and the rivalcontentions, it is clear that the assets of thepartnership was revalued and for the first timethey valued the goodwill at Rs.7,59,28,000/-. Thereafter it was credited to the four partnersin accordance with the profit sharing ratio.Two of the partners retired. They have beenpaid actual amount due to them in the booksof the partnership f i rm. The goodwi l lcontinued with the firm. No portion of thegoodwill is transferred to the retiring partners.Therefore, rightly in the remand report it hadbeen stated that there is no transfer of thecapital asset. If there is no transfer of capitalasset, Section 45(4) is not attracted. In factthe Full Bench of this Court while interpretingSection 45(4) of the Act after reviewing thecase law on the point has held as under:—

“Sub-Section (4) of Section 45 deals with adistribution of capital assets on the dissolutionof a firm or other association of persons orbody of individuals or otherwise. If in thecourse of such distribution of capital assetthere is a transfer of a capital asset by the firmin favour of a person and it results in profitsor gains to the firm, then the said profit or gainsshall be chargeable to tax as income of the

Judicial Analysis

firm and again for computing such income,Section 48 is attracted. In other words, in theprocess of a dissolution of a firm, if a capitalassets is transferred to a partner which resultsin profi ts or gains, then that income ischargeable at the hands of the firm under thisprovision. In order to attract sub-section (4)of section 45, the condition precedent is,

(1) there should be a distribution of capitalassets of a firm;

(2) such distribution should result in transferof a capital asset by firm in favour of thepartner;

(3) on account of the transfer there shouldbe a profit or gain derived by the firm;and

(4) such distribution should be on dissolutionof the firm or otherwise.”

Thereafter, it has proceeded to hold that toattract Section 45(4) there should be transferof capital asset from the firm to the retiringpartners, by which the firm ceases to have anyright in the property which is so transferred.In other words, the right to property shouldstand extinguished and the retiring partnersshould acquire absolute title to the property.

6. In the instant case, the partnership firm didnot transfer any right in the capital asset muchless the goodwill in favour of the retiringpartners. The partnership firm did not ceaseto hold the property. Consequently, its rightto the property is not extinguished. On theother hand, the retiring partners did not acquireany right in the property as no property wastransferred in their favour. In that view of thematter, we do not see any merit in this appeal.No substantial questions of law do arise forconsideration in this appeal.

xxx…

CIT vs. Dynamic Enterpr ises [359 ITR 83(Karnataka)(FB)]

xxx…


23. Sub-section (4) of Section 45 deals with adistribution of capital assets on the dissolutionof a firm or other association of persons orbody of individuals or otherwise. If in thecourse of such distribution of capital assetthere is a transfer of a capital asset by the firmin favour of a person and it results in profitsor gains to the firm, then the said profits orgains shall be chargeable to tax as income ofthe firm and again for computing such income,Section 48 is attracted. In other words, in theprocess of a dissolution of a firm, if a capitalasset is transferred to a partner which resultsin profi ts or gains, then that income ischargeable at the hands of the firm under thisprovision. In order to attract sub-section (4)of Section 45, the condition precedent is

(1) There should be a distribution of capitalassets of a firm;

(2) Such distribution should result in transferof a capital asset by firm in favour of thepartner; and

(3) On account of the transfer there shouldbe a profit or gain derived by the firm.

(4) Such distribution should be ondissolution of the firm or otherwise.

24. Therefore, in order to attract Section 45(4) ofthe Act, the capital asset of the firm should betransferred in favour of a partner, resulting infirm ceasing to have any interest in the capitalasset transferred and the partners shouldacquire exclusive interest in the capital asset.In other words, the interest the firm has in thecapital asset should be extinguished and thepartners in whose favour the transfer is madeshould acquire that interest. Then only theprofits or gains arising from such transfer isliable to tax under Section 45(4) of the Act.

25. In the instant case, the partnership firm hadpurchased the property under a registered saledeed in the name of the firm. The propertydid not stand in the name of any individualpartners. No individual partners brought thatcapital asset as capital contribution into the

firm. Five partners brought in cash by way ofcapital when the firm was reconstituted on28.04.1993. Nearly a year thereafter on01.04.1994 by way of reti rement, theerstwhile three partners took their share in thepartnership asset and went out of thepartnership. After the retirement of threepartners, the partnership continued to exist andthe business was carried on by the remainingfive partners. There was no dissolution of thefirm or at any rate there was no distribution ofcapi tal asset on 01.04.1994 when threepartners retired from the partnership firm.What was given to the retiring partners is cashrepresenting the value of their share in thepartnership. No capital asset was transferredon the date of retirement under the deed ofretirement deed dated 01.04.1994. In theabsence of distribution of capital asset and inthe absence of transfer of capital asset in favourof the retiring partners, no profit or gain arosein the hands of the partnership f i rm.Therefore, the question of the firm beingassessed under Section 45 (4) and chargingthem tax for the profits or gains which did notaccrue to them would not arise.

26. It was contended on behalf of the revenue thatfive incoming partners brought money into thefirm. Three erstwhile partners who retired fromthe partners on 01.04.1994 took money andleft the property to the incoming partners. It isa device adopted by these partners in order toevade payment of profits or gains. As rightlyheld by this Court in Gurunaths Talkies’ case(supra) it is taxable. This argument proceedson the premise that the immovable propertybelongs to the erstwhile partners and that afterthe retirement the erstwhile partners have takencash and given the property to the incomingpartners. The property belongs to thepartnership firm. It did not belong to thepartners. The partners only had a share in thepartnership asset. When the five partners cameinto the partnership and brought cash by wayof capital contribution to the extent of theircontribution, they were enti tled to the

Judicial Analysis


proportionate share in the interest in thepartnership firm. When the retiring partnerstook cash and reti red, they were notrelinquishing their interest in the immovableproperty. What they relinquished is their sharein the partnership. Therefore, there is notransfer of a capital asset, as such, no capitalgains or profit arises in the facts of this case. Inthat view of the matter, Section 45(4) has noapplication to the facts of this case.

27. In Gurunath Talkies’ case (supra), theDivision Bench of this Court followed thejudgment of the Bombay High Court in thecase CIT v. A.N. Naik Associates [2004] 265ITR 346/136 Taxman 107 (Bom.). In A.N.Naik Associates’ case (supra), the asset of thepartnership firm was transferred to a retiringpartner by way of a deed of retirement. Amemorandum of family settlement was enteredinto and the business of those firms as set outtherein was distributed in terms of the familysettlement as the party desired that variousmatters consisting the business and assetsthereto be divided separately and partitioned.The term has also provided that such of thoseassets or liabilities belonging to or due fromany of the firms allotted, the parties thereto inthe schedule annexed shall be transferred orassigned irrevocably and possession madeover and al l such documents, deeds,declarations, affidavits, petitions, letters andalike as are reasonably required by the partyentitled to such transfer would be effected. Itis based on this document and subsequentdeeds of retirement of partnership that theorder of assessment was made holding thatthe assessees are liable for tax on capital gains..

28. In that context, the Bombay High Court heldthat when the assets of the partnership istransferred to a retiring partner, the partnershipwhich is assessable to tax ceases to have aright or i ts right in the property standsextinguished in favour of the partner to whomit is transferred. If so read, it will further theobject and the purpose and intent of theamendment of Section 45. Once that be the

case, the transfer of assets of the partnershipto the retiring partners would amount to thetransfer of capital assets in the nature of capitalgains and business profits which is chargeableto tax under Section 45(4) of the Income TaxAct. In that context, it was held the word“otherwise” takes into its sweep not onlycases of dissolution but also cases of subsistingpartners of a partnership, transferring assetsin favour of a retiring partner. It is in thiscontext the Bombay High Court held thatSection 45(4) was attracted. Therefore, toattract Section 45(4) there should be a transferof a capital asset from the firm to the retiringpartners, by which the firms ceases to haveany right in the property which is sotransferred. In other words, its right to theproperty should stand extinguished and theretiring partners acquires absolute title to theproperty.

29. In the instant case, the partnership firm didnot transfer any right in the capital asset infavour of the retiring partner. The partnershipfirm did not cease to hold the property andconsequently, its right to the property is notextinguished. Conversely, the retiring partnerdid not acquire any right in the property as noproperty was transferred in their favour. TheDivision Bench in Gurunath Talkies’ case(supra) did not appreciate this distinguishingfactor and by wrong application of the lawlaid down by the Bombay High Court heldthe assessee in that case is also liable to paycapi tal gains tax under Section 45(4).Therefore, the said judgment does not laydown the correct law.

30. We would like to add that several other aspectsof Section 45(4) was addressed in the courseof the arguments by both sides which are notrelevant to adjudicate the present issue, as inthe present case there is no distribution ofassets and hence, one of the condi tionprecedent for invoking Section 45(4) does notexist and hence Section 45(4) is not attractedto the facts of this case.

❉ ❉ ❉

Judicial Analysis



The issue of Equity Shares to non-resident parentcompany has always been a hotbed for controversyunder Indian transfer pricing (TP) regulations. Thescope of international transaction as widened bythe Finance Act, 2012 w.r.e.f. 01.04.02 includeseven capital financing and business restructuringor re-organisation.

Since then the transfer pricing provisions haveremained a lucrative area to increase the taxrevenues for the Government. There have beeninstances where the tax authorities have adoptedaggressive approach and this has led todetermination of huge transfer pri cingadjustments.As per the annual report and statisticsreleased by Ministry of Finance recently, TPadjustments in cases which underwent TP auditsincreased exponentially in last two years i.e. INR700 billion in FY 2012-13 and INR 596 billion inFY 2013-14 from INR 445 billion in FY 2011-12.

A drastic increase in the amount of TP adjustmentsis attributable to TP disputes related to pricing oftransactions involving share capital infusion.

Recently, Bombay High Court in the case ofVodafone India Services Private Limi ted hasprovided relief to the taxpayer. Further as per mediareports the Attorney General of India has alsoadvised the government not to file Special LeavePetition (‘SLP’) in the Hon’ble Apex Court againstthe order of the Hon’ble Bombay High Court. Thishas led to the hopes that the long lasting controversywill now end soon.

It is clear from the judgment that the judiciary systemis unhappy and disappointed at the approach of theIncome Tax Department at an attempt to tax aperceived short fall in capital receipt which itself isnot taxable under the Act.

CA. Dhinal A. [email protected]

Transfer Pr icing Implicationson issue of shares toAssociated Enterpr ises

In the present article, we have analysed the recentjudgment of Hon’ble Bombay High Court in thecase of Vodafone India Services Private Ltd1 (alsoknown as Vodafone IV), which has dealt withtheimplications of issuing shares to the AE under Indiantransfer pricing provisions. The ruling surely comesas a morale booster for investors’ confidence; andalso improving the overall image of the Indian taxsystem.

Background

Vodafone India Services Private L imi ted(“VISPL”), a wholly owned subsidiaryof VodafoneTele-Services (India) Holdings Ltd. (“VodafoneMauritius”), issued 289,224 equity shares of facevalue of INR 10 each ata premium of INR 8,509per share in August 2008. The FMV of the issueofequi ty shares was determinedby VISPL inaccordance with the methodology prescribed forcapital issues by the Central Government underFEMA and was also reported in the 3CEB as aninternational transaction. Further, Form 3CEB alsocontained a note stating that thistransaction was onlyreported as a matter of abundant caution and didnot affect the income of VISPL.

Strictly speaking, TP provisions ought not to applyon transactions involving capital receipt and whichdon’t have a bearing on the taxable income of ataxpayer. The Indian Income tax laws defines theterm‘international transaction’ as a transactionbetween two or more AEs, either or both ofwhomare non-residents, in the nature of purchase, sale orlease of tangible or intangible property, or provisionof services, or lending or borrowing money, or anyother transaction having a bearing on theprofits,income, losses or assets of such enterprises. Thus,a transaction having a bearing on the profits,income,losses or assets is an important pre-condition forattracting the application of TP provisions.


Since the transaction involving issuance of sharesby an Indian subsidiary to its foreign shareholderon account of capital infusion does not give rise toany income in the hands of the Indian subsidiary,the same ought not be subject to TP provisions, asthe entire exercise of determination of the arm’slength price in such case would be an academicexercise only.

However, the transfer pricing officer (‘TPO’) issueda show–cause noti ce to VISPL as to whyconsiderationfor such issue of shares should not becomputed having regard tothe Arm’s LengthPrice(‘ALP’). VISPL contendedin all its responsesthat the IndianTP provisions are not applicable tothe issue of equity shares and the notice was withoutjurisdiction of the TPO.

Issue

The TPO proceeded to compute the ALP oftheshare issue transaction statingthat the AssessingOfficer (‘AO’) would determine whether anyincome had arisen or been affected by theinternational transaction and accordingly, enhancedthe value of each share to INR 53,775. The TPOtreated the difference in the value of shares asincome of VISPL. Further, the TPO made a“secondary adjustment” by treating the short receiptof consideration for issue of shares as a deemedloan by the Tax payer to its AE and charged anotional interest of 13.5% for si x months.Accordingly, a TP adjustment of INR 13.97 billion(approx. US$ 232.88 million) was determined. TheAO confirmed the position adopted by the TPO inits draft assessment order without dealing with theTax payer’s principal contention that the Indian TPprovisions would not apply to issues of equity sharesto AEs.

VISPL further filed an appeal before the DisputeResolution Panel (‘DRP’). However, the DRPupheld the adjustment determined by the TaxAuthorities and held that the short-fall in thereceiptof the premium is income arising from issue ofsharesand also held that the AO has jurisdiction to

invoke Indian TP provisions. The Taxpayer filedawrit petition with the Bombay HC challenging theTP adjustment.

Arguments of the Assessee

(i) Chapter X of the Act will not apply as the issueof equity shares by the Petitioner to its holdingcompany does not give rise to any income;

(ii) Chapter X of the Act wil l not apply as noexpendi ture i s incurred that impactscomputation of the taxable income;

(iii) Chapter X of the Act will not apply as issue ofshares is transaction on capital account and thusdoes not impact computation of income; and

(iv) Other issues raised were with regard to nojurisdiction to split a single transaction of issueof shares into issue of shares and grant off i nancial accommodation. This re-characterizing/re-classi fying a businesstransaction is not permitted.

Contentions of the Tax Author ities

(i) Chapter X of the Act is a separate code by itselfand the difference in valuation between ALPand the contract/transaction price would giverise to income;

(ii) Income as defined in Section 2(24) of the Actis inclusive definition and it does not prohibittaxing capital receipts as income;

(iii) The forgoing of premium on the part of theassessee amounts to extinguishment/relinquishment of a right to receive fair marketvalue. Therefore, the issue of shares is atransfer within the meaning of Section 2(47)of the Act; and

(iv) The meaning of International Transaction asgiven in clauses (c) and (e) of the Explanation(i) to Section 92B of the Act would includewi thin i ts scope even capi tal accounttransaction.

International Taxation


Ruling of the Bombay High Cour t

· Interpretation of the term “income” andapplicability of TP provisions

The HC held that “income” arising from aninternational transactionis a condition precedentfor appl ication of TP provisions. Whileinterpreting the term “income,” the HC heldthat the Act defines the term “‘income” in aninclusive manner. Income, in i ts normalmeaning, will not include capital receipts unlessit is so specified. The amounts received on issueof share capital including the premium areoncapital account.

In this case, what is being sought to be taxed iscapital not received from a non-resident i.e.,premium allegedly not received on applicationof ALP. Therefore, due to the absent expresslegislation, no amount received, accrued orarisingon capital account transactions canbesubjected to tax as “income.”

The HC further held that the transaction oncapital account or on account of restructuringwould become taxable to the extent itimpactsincome i.e., under reporting of interest receivedor over reporting of interest paid or claiming ofdepreciation. It is that income which is to bedetermined having regard to the ALP and it isnot a tax on the capital receipts. In any case,theentire exercise of taxing the amounts allegedlynot received as share premium fails, as no taxis charged on the amount received assharepremium. The TP provisions are invoked toensure that the transaction is taxed only onworking out the income after arriving attheALP of the transaction. This is only toensurethat there is no manipulation of prices/consideration between AEs. Hence, the entireconsideration received would not be a subjectmatter of taxation.

In view of the above, the HC found substancein VISPL’s case that neither the capital receiptsreceived by the assessee on issue of equity

shares to its AE nor the shortfall between thealleged FMV of its equity shares and the issueprice ofthe equity shares can be considered asincome within the meaning of the expressionas defined in the Act and hence not subject toTP provisions in India. The HC also held thatthe reasoning that if the ALP were received,the assessee would be able to invest the sameand earn income, proceeds on a meresurmise/assumption and that this cannot be the basis oftaxation.

· Interpretation of Section 92(2)

Section 92(2) of the Act deals with a situationwhere two or more AEs enter into anarrangement whereby they are to receive anybenefit, service or facility then the allocation,apportionment or contribution of thecorresponding cost or expenditure is to bedetermined for each AE based on ALP. It isgenerally understood that this section is meantto cover cases of cost sharing arrangements and/or cost contribution arrangements. The IncomeTax Department relied on this section of thecode to argue that differences between the ALPandthe price charged for issue ofshares is thebenefit conferred upon the holding company.Thus, the passing of the benefit to theholdingcompany is the cost to the Taxpayer, whichshould be taxed.

The HC rejected the submission of the TaxAuthorities and held that ignoring words in astatute to achieve a predetermined objective isnot permissible and the same would amount tore drafting the legislation, which is beyond thejurisdiction of the Courts.

Section 92(2) would have no application incases like the presentone, where there is nooccasion to allocate, apportion or contribute anycost and/or expenses between the assessee andits AE.

· Interpretation of TP provisions



The HC rejected the contention of the TaxAuthorities that in view of the TP provisions,notional income is to be taxed and real incomeisnot relevant. The HC held that the entireexercise of determining the ALP is only toarrive at the real income earned. The HC heldthat the TP provisions laid out in the Act are inthe nature of machinery or computationalprovisions to arrive at the ALP of a transactionbetween AEs. Even income arising frominternational transactions between AEs mustsatisfy the test of “income” under the Actandmust f ind i ts home under one ofthecharging provisions. It is a re-computationexercise to be carried out only when incomearises in case of an international transactionbetween AEs. I t does not warrant re-computation of a consideration received/givenon capital account except in cases of interestpaid/received on loans taken/given,depreciation taken on machinery, etc.

Thus, in theabsence of a charging provision totax issue of shares at a premiumto a non-resident, the occasion to invoke thecomputational TP provisions does not arise.Further, given the inclusion of issue of shares,by a company to another resident, at a price inexcess of FMV in the definition of “income”under the Act, the HC noted that, there isconscious intention of the Parliament to not taxamounts received from a non-resident for issueof shares, as it would discourage capital inflowfrom abroad.

For all the above reasons, the HC held that inthe present facts, issue of shares at a premiumby the Tax payer to its non-resident AE doesnot give rise to any income from an admittedinternational transaction and thus, Indian TPprovisions are not applicable in such a case.

· Vodafone IV followed in various cases

o Shell India Markets Private Limited2

Hon’ble Bombay HC in the case of Shell IndiaMarkets Private Limited on the similar issueof taxability of the receipt of the amounts onissue of share capital along with the sharepremium followed the ratio laid down inVodafone IV. The Hon’ble HC dismissed thecontention of the Department holding that theissue on merits stands covered by the decisionof Vodafone IV and is binding on all theauthorities within the State till the Hon’ble ApexCourt takes a different view on this issue.

Further, the counsel for the Revenue placed anargument that since the assessee has notdisclosed the above transaction in Form 3CEB,and hence the amount received on issue of sharecapital needs to be taxed.The Hon’ble HCturned down the contention of the counsel ofthe Revenue and held that mere non filing ofForm 3CEB would not give jurisdiction to theRevenue to tax amount for which it does nothave jurisdiction to tax.

o Conversion of CCD into equity shares-EquinoxBusiness Parks Private Limited3

The assessee in this case issued equity sharesand compulsory convertible debentures(‘CCD’) to its non-resident AEs. The DRPheld that the shortfall on the issue of equityshares as well as the issue of CCDs should betaxed in the hands of the assessee consideringas the receipt in the hands of the assessee.Further, the revenue went a step further andheld that CCDs issued by the assessee will beconverted into four equity shares being availableto the holders and hence the CCDs are also inthe nature of equity shares and accordingly theissue of CCDs also needs to be benchmarkedto determine the ALP. The assessee filed a writpetition before the Hon’ble Bombay HCchallenging the order of the DRP. The Hon’bleHC allowed the petition of the assessee holdingthat the decision of Vodafone IV squarelyapplies in this case and held that issue of equityshares and CCDs cannot be considered as aninternational transaction.



o Conversion of Preference Shares into equityshares-Leighton India Contractors Pvt. Ltd.4

The assessee in this case issued equity sharesand convertible preference shares to its non-resident AEs. The TPO while passing the draftassessment order held that the shortfall on theissue of equity shares as well as the issue ofconvertible preference shares should be taxedin the hands of the assessee considering as thereceipt in the hands of the assessee. Theassessee filed objection before the DRP againstthe draft order and also filed a writ petitionbefore the Hon’ble Bombay HC against theaction of the TPO. The Hon’ble Bombay HCheld that the issue is squarely covered by theruling of Vodafone IV and accordingly noincome would arise in respect of issue ofequityshares to non-resident share holder andthe conversion of preference shares into equityshares held by the non-resident AEs.

Implications

The long lasting controversy regarding the transferpricing implications of issue of shares to the AEshas now come to a rest.

The approach of the Tax Authorities in making TPadjustments on transactions involving issue ofshares to AEs hasbeen one of the concernsexpressed by several foreign investors.

In general, Indian TP provisions apply to incomearising from an international transaction. Even ifallotment of shares is regarded as an internationaltransaction, as consideration received is notregarded as income subject to tax,TP provisionsmay not apply to such transactions.

Further, the HC ruling acknowledges that merereporting of an international transaction on abundantcaution would not make the same taxable as thereisno “income” arising from such internationaltransaction. The HC’s ruling upholding this viewmay be welcomed by foreign investors as it isexpected to address one of the TP challenges theywere facing in India in recent times.

This decision couldn’t have been timelier thananticipated in light of the major national initiativeMake in India, launched by the Hon’ble PrimeMinister Narendra Modi recently. ‘Make inIndia’initiative, which aims to transform India intoa global manufacturing hub, requires significantFDI inbuilding up best-in-class manufacturinginfrastructure in the country. An investor friendlytax envi ronment and certainty around theadministration of tax laws of country is critical forattracting billions of dollars of FDI in the country.This decision reinforces the independence of theIndian judiciary and sends a positive message toinvestors around the globe. The ruling will benefitmultinationals which are facing similar transferpricing adjustments.

Further, the Attorney General’s advice (based onmedia reports) to the Government for notchallenging the decision of Hon’ble Bombay HCbefore the Hon’ble Apex Court signifies that thiscontroversy will now come to an end. One can onlyhope that wiser counsel wil l prevail and thedepartment as also the Government will accept thedecision, issue a circular clarifying that except forspecific charging provisions capital receipts are nottaxable and generally, use this as an opportunity towin/regain the faith of Foreign and Indian taxpayersand investors.

Footnotes:

1 Vodafone India Services Private Ltd. v. Unionof India (50 taxmann.com 300)

2 Shell India Markets (P.) Ltd. v. ACIT, LTU (51taxmann.com 519)

3 Equinox Business Parks Pvt. Ltd. v. Union ofIndia &Ors. (W.P. 1273 of 2014)

4 Leighton India Contractors Pvt. Ltd. v. Unionof India &Ors. (W.P. 732 of 2014)

❉ ❉ ❉



CA. Rajesh H. [email protected]

At long last take off the shoes ; hang the coat andrelax in a rocking arm-chair - back in your hometown in India is almost every Non Resident Indian’s[ NRI�s ] long cherished dream which more oftenremains a dream only . It’s seldom that NRIs leavetheir comfort zones of friends , neighbors andforeign land to settle back in India. Howeverdevelopments in Infotech sector back homehas been instrumental for great many NRI- techiesto take up assignments in Indian subsidiaries orother Indian companies and return to India whilefew courageous ones indeed retire in India.

Provisions of Foreign Exchange Management Act,1999 [FEMA] and Income tax Act, 1961 effectIndian as also overseas assets and also taxability ofincomes of these returning NRIs which arediscussed herein.

I. 1 Residential Status Under FEMA : TheResidential Status under FEMA is thegoverning factor for NRIs as also returningNRIs.

2 Under FEMA, which has replaced theForeign Exchange Regulation Act, 1973[FERA] with effect from 1st June, 2000,an Indian citizen or a person of Indianorigin is defined as “a person Residentoutside India”[ PROI], popularly knownas a “Non-Resident Indian”.[NRI] whensuch person leaves India or is permanentlyresiding outside India for purpose ofemployment, profession, vocation,business or any other reasons. [ Section2(v) r.t.w. Section 2(w) of FEMA ’99 ]

3 An overseas resident Indian / NRI is saidto be “a person Resident in India” [ PRII ]when such NRI returns to India forpermanent settlement, i.e. for taking upemployment or to commence business,

profession, vocation or any other reasonincluding retirement which indicates hisintention of settlement in India.

.02 The definition incorporates a condition forsuch returnee NRI to be covered by thedefinition of a Resident in a financial yearprovided his stay in preceding financialyear exceeds 182 days. However thesepart of definition is in contradiction of mostof the requirements for a returnee NRI’sNRE/NRO bank accounts ; Life policies ;investment in Firms and Companies toname a few and hence to avoid ambiguityit is advisable to treat a person who hasreturned for settlement as a “Resident “under FEMA since the date of his returnto India.[ Section 2(w) r.t.w. Section 2(v)of FEMA ’99 ]

.03 As FEMA regulations require a ReturneeNRI to redesignate NRE account asresident account or transfer balance toResident Foreign Currency Account [RFC)immediately upon return to India forsettlement. Hence if the NRE accounts areredesignated as Resident accounts, theinterest will of course be liable to tax inIndia.

.04 However if erroneously the returnee NRIhas continued to hold NRE account intactnot redesignating the same as Residentaccount technical l y he can claimexemption of interest of such NRE accountas in all probabi l i ty his stay in yearpreceding the year of return would be lessthan 181 days whereby he would not becovered by the strict definition of PRII andas such will continue to be defined asPROI / NRI. But taking misadvantage of

Returnee NRI -FEMA & Tax :


technicality can for sure create heat anddust during assessment and hence shouldnot be followed.

4 “A person of Indian origin” is defined as:”acitizen of any country other than Pakistan orBangladesh, who, at any time, -

01. has held an Indian passport, or

02. himself or either of his parents or any ofhis grandparents have been citizens of Indiaor

03. is a spouse of an Indian citizen or is aspouse of a person covered in 01 & 02above.

[Regulation-2(xii) of Foreign ExchangeManagement (Deposit)Regulations, 2000]

5. It may be noted that a returnee NRI will becovered by the definition of Person Residentin India [PRII] and will be treated as a Residentirrespective of his citizenship or continuedoverseas residency status or rights.

.02 As such if a US citizen or Green CardHolder returns to India for taking upemployment or commence business he willbe a PRI I / Resident under FEMAi rrespecti ve of the fact of hi s USCitizenship or continuation of Green Card/ US Residency.

I I . Residential Status under I .T. Act :

1. Under the Income-tax Act, 1961 [I.T.Act], anindividual’s Residential Status is determined bythe number of days of his stay in India orotherwise.

02. A person is “Resident” in a financial yearcommencing from 1st April and ending on 31stMarch, if such person’s stay in India :

(i) totals to 182 days or more in the financialyear or

(ii) totals to 60 days or more in the financialyear wedded with stay of 365 days or more

in 4 years immediately preceding thatfinancial year. [Sec. 6(1) of I.T.Act ]

2. In case of an NRI i.e. an overseas Indian thisnumber of 60 days is substituted by 182 daysand hence in case of an NRI only decidingfactor is stay of 182 days or more in a givenfinancial year. [ Exp. (b) to 1 to Sec. 6 ofI.T.Act]

3. A person who is a Resident is further definedto be “Resident but Not Ordinarily Resident - [R but NOR] “ in a financial year if -

(i) he has been “Non-Resident” in 9 out of10 financial years immediately precedingthe relevant/current financial year, or

(ii) his stay in India totals to 729 days or lessin 7 years immediately preceding therelevant/current financial year. [ Sec. 6(6)of I.T.Act]

4. THEREFORE a person defined as “ Resident“ in a financial year will further be defined as ”Resident & Ordinarily Resident -( R & OR ) “ if :

01. he is not “ Non Resident “ in 9 out of 10financial years immediately preceding thatfinancial year, and also

02. his stay in India totals to 730 days or morein 7 years immediately preceding thatfinancial year. [ Sec. 6(6) of I.T.Act]

5. .02 NOW THEREFORE a returnee NRI notbeing covered by Exp. (b) to Sec. 6(1) ofthe I.T.Act both the conditions of Sec. 6(1)for determining residential status will applyand need examination.Qui te of tenprofessionals examine returnee NRI’s stayexceeding 181 days in year of return onlyand determine the status which i serroneous. If such returnee NRI’s stayexceeds 59 days in the year of return and364 days in immediately preceding 4 yearshe would be a Resident under the I.T.Actin the year of return and will be subject tofurther scrutiny of stay of preceding 7 and

Returnee NRI - FEMA & Tax


10 years to determine his status asRbutNOR or R&OR.

I I I . Scope of Income & Taxability :

1. Now, based on the residential status, the scopeof tax and total income of a given financial year, i.e. a year commencing on 1st April and endingon 31st March is determined as under :

.01 Resident

(i) all incomes arising or accruing in India.

(ii) all incomes received in India, and

(iii) all incomes arising or accruing outsideIndia i.e. global income.

.02 Non Resident :Subject to exemptions andconcessions provided in I.T.Act) :

(i) all incomes arising or accruing in India,and

(ii) all incomes received in India.

.03 R but NOR :(Subject to exemptions andconcessions provided in I.T..Act) :

(i) all incomes arising or accruing in India,and

(ii) all incomes received in India.

2. Normally returnee NRIs are having followingkinds of income in INDIA.

- Interest income from bank deposits. i.e.NRE/FCNR/NRO/Resident account etc.

- Dividend income of shares and mutualfunds.

- Capital gains from shares, debentures,securities and mutual funds.

- Income from house property. i.e. RentIncome

- Income from post office schemes and RBIBonds investment being made while theNRIs were eligible to subscribe.

- Salary income f rom employmentundertaken in India.

- Profits or gains of business of professioncommenced in India.

IV. Filing Income Tax Return :

1. Permanent Account Number [PAN] :

.02 If a returnee NRI’s total income during afinancial year exceeds the maximumamount which is not chargeable to IncomeTax or if he is required to file tax return onaccount of overseas assets he has to applyfor Permanent Account Number to theIncome Tax Office. If the returnee NRI isan Indian citizen application is in form No.49A whereas in case of a foreign citizenForm 49AA will apply even though suchreturnee Foreign citizen is a Resident.

2. Filing of Income-Tax Return :

.02 If a returnee NRI’s total income during afinancial year exceeds the maximumamount which is not chargeable to IncomeTax then he has to file his return of Incomebefore due date .

.03 If the returnee NRI is defined as Residenthe will be eligible for benefits of seniorcitizen.And if Resident he will be requiredto file tax return and disclose overseasassets even if he doesnot have taxableincome in India .

V. Tax Free Income :

1. A returnee NRI like all resident tax-payers andin some cases l ike NRIs can earn certainincomes free of tax in India under the I.T.Actbeing :

01. Interest on continued FCNR and RFCdeposi t so long as returnee NRI’sresidential status is determined as “NonResident” or “Resident but Not OrdinarilyResident” under I.T. Act.

02. Dividend earned from shares of IndianCompanies.



03. Dividend earned from units of IndianMutual Funds.

04. Interest earned on PPF accounts.

05. Long Term Capital Gain on Sale of equityshares of Company provided securitytransactions tax is applicable and paid.

06. Long term Capital Gains on sale of EquitySchemes of Indian Mutual Funds providedsecurity transactions tax is applicable andpaid.

07. Overseas income so long as returnee NRI’sresidential status is determined as “NonResident” or “Resident but Not OrdinarilyResident” under the I.T. Act.

VI . FEMA : Returnee NRI’s Bank A/cs inIndia:

1. Non Resident (External) Rupee Account[NRE] :

1.1 Upon return to India for settlement , areturnee NRI is required immediately uponreturn, to transfer the balance in NREaccount to:

.01 Resident Foreign Currency (RFC) Accountor

.02 designate the account as Resident RupeeAccount.

1.2 As Banks software normally doesnotfacilitate conversion of NRI’s accounts asResident account NRE account is to beclosed and balance is to be transferred tonewly opened Resident bank account.Thisregulation also compels foreclosure ofNRE deposits which quite often results inloss of interest .[Para 7 of Sch.1 of ForeignExchange Management (Deposi t)Regulations,2000]

2. Foreign Currency Non Resident (B) Account[ FCNR ] :

.01 can be continued until maturity as such and

.02 upon maturi ty, the balance may betransferred to a Resident Rupee Accountor said FCNR account may be designatedas an RFC account

[Para 10 of Sch.2 of Foreign ExchangeManagement (Deposit) Regulations, 2000]

3. Resident Foreign Currency Account (RFCAccount) :

.01 A Returning NRI upon return to India forsettlement can maintain Resident ForeignCurrency account [RFC] in India for anindefinite period.

.02 Such accounts could be maintained ascurrent, savings or term deposit accounts.

.03 Presently RFC can be maintained in US$,GBP,Euro or JY.

[Reg. 5 of Foreign Exchange Management(Foreign Currency Accounts byPerson Resident in India) Regulations,2000]

4. Non Resident (Ordinary) Account [ NRO ] :

.01 Upon return for permanent settlement,NRO account is to be redesignated asResident Account.

[Para 8 of Sch.3 of Foreign ExchangeManagement (Deposi t) Regulations,2000]

1. Interest earned on NRE Accountdesignated as Resident Rupee Account isliable to tax in India from the date of returnto India and even if an NRE account iscontinued by mistake, interest earned sincethe date of return will be taxable as interestfrom NRE account is exempt only in caseof an individual who is “person residingoutside India” PROI as defined in Sec 2(v)r.t.w. Sec 2(w) of FEMA[ Sec 10(4)(ii) ofI.T. Act ]

2. Interest on continued FCNR deposi tis exempt from tax in India so long as



returnee NRI’s residential status i sdetermined as “Non Resident” or “Residentbut Not Ordinarily Resident” under the I.T.Act. [ Sec. 10(15)(iv)(fa) of I.T.Act ]

3. Interest earned on RFC deposit is exemptfrom tax in India so long as returnee NRI’sresidential status is determined as “NonResident” or “Resident but Not OrdinarilyResident” under the I .T. Act. [Sec10(15)(iv)(fa) of I.T.Act ]

VII . Continuity of Concessional Tax Rate :

1. A returnee-NRI is eligible for concessionaltax rate of 20% on the income arising fromfollowing assets held up till maturity:-

01. Deposits with Indian Public Company. Itmay be noted that Indian Banks are covered by the def ini tion of IndianCompanies ;

02. Debentures of Indian Public Company;

03. Central Government Securities. [Sec 115Hof I.T.Act]

[Section 115H of the IT Act - Annex.5 ]

VII I . Necessary Procedures Upon Return :

1. Upon return for settlement a returnee NRIshould :

01. apply and obtain Permanent AccountNumber [PAN].

02. examine the applicability of income-taxand if income exceeds maximum amountnot chargeable to tax than examineapplicability of advance-tax rules, and ifso, pay advance-tax in specified equalinstallments.

03. file Income-Tax Return in the prescribedform together with proof of payment ofapplicable tax within specified time afterthe year end.

04. file tax return even if income in India isbelow taxable limits if he is Resident andhas overseas assets.

05. examine the applicability of wealth-tax andif market value of taxable wealth exceedsmaximum amount not chargeable to taxthan fi l e Weal th-Tax Return in theprescribed form together with proof ofpayment of applicable tax within specifiedtime after the year end.

06. inform banks about change of residentialstatus and opt for necessary change in NREand NRO a/c. and FCNR accounts uponmaturity.

07. inform Insurance Companies, DepositoryParticipant providing Demat accountfacility or Companies wherein shares areheld, Mutual Funds, Partnership Firmswherein investments are held and otherInstitutions re: change of residential statusand about return to India for settlement.

IX. Clubbing Provisions :

1. In the Middle East NRIs enjoy tax free incomeswhile in USA husband and wife often file jointtax returns.

2. As such segregation of personal wealth orcapital is not necessary so long as they areabroad .

3. But in India income arising out of gifts oramounts transferred by husband to wife or viceversa is clubbed into the income of theDonor.[Section 64(1)(iv) of the I.T.Act] Andincome by way of Salary, Commission or Feesetc. paid in cash or kind to spouse, from aconcern in which such individual has asubstantial interest is also to be clubbed in theincome of the payer except in cases wherespouse possesses technical or professionalqualification.[ Sec 64(1)(ii) of the IT Act ]

4. .02 Therefore it would be necessary for NonResident Indians(NRIs) to segregate andidentify each returning NRI husband and



wife’s personal assets independently.Itwould be appropriate to segregate andmaintain separate Bank accounts andholding of all investments whereby forhusband’s assets he is first holder and wifemay be a joint holder in wife’s assets wifeis first holder and husband is a secondholder.

5. Investment income of minor children (not beinga minor chi ld suffering from any severedisability) other than income earned throughmanual efforts or personal skills and talent isalso to be clubbed into the income of the parentwho has higher / more income.

02. Therefore if children have passive income inIndia or abroad the same be includedappropriately.

X. Global Income and Double Tax Treaties :

1. A returning NRIs global income is not liableto tax in India as long as residential status underthe I.T. Act is determined as “ Non Resident “ (NR) or “ Resident but Not Ordinari l yResident “ (R but NOR).

2. Upon the residential status under the I.T. Actbeing determined as “ R and OR”, returningNRI’s entire global income will be liable to taxin India.

3. However, if a Double Tax Treaty exists betweenIndia and the country wherefrom the NRI isreturning, the provisions of such Double TaxTreaty will apply if the same are more beneficialand if the tax payer so chooses.

4. Normally, Double Tax Treaties have threealternative methods of taxation namely:

01. Tax and withholding tax of specifiedpercentage by the country of origin andbalance tax to be charged by India. Forexample, Indo-USA Tax Treaty providesfor withholding tax @ 15% in USA on theinterest payable by a Company in USA toa resident of India.

011.In said case, upon being determined asR&OR , while computing returnee NRI’sinterest income in India, interest earned inUSA will be included being global incometaxable in India and credit will be providedfor the tax of 15% withheld / paid in USA.

02. Total tax being charged by either of thecountry, for example, pension paid byGovernment of USA is liable to tax inUSA alone in case of returning NRI whois a USA citizen residing in India.

03. Incomes which are not specifically coveredby the Double Tax Treaty are liable to taxas per the provisions of tax laws ofrespective countries. In such case, questionof possibility of double taxation arises.

031.In case of dual taxation, normally, credit isgranted for tax payable in one countrywherein the tax payer is tax resident fortax paid in another country on incomeswhich are subject matter of taxation in boththe countries.

XI. Wealth Tax :

1. The most common fallacy amongst NRIs andreturnee NRIs is that they are exempt fromalmost all taxes in India and in particular Wealth Tax. Often professionals as also taxauthorities are casual about wealth tax liabilityof NRI’s taxable assets in India.

.02 The reality is that NRIs and returnee NRIsboth are at par with residents and are topay Wealth Tax on chargeable assets inIndia i.e. immovable properties, jewelerand vehicles on its market value as on 31stMarch as much as residents are to.

.03 Returnee NRI who are Indian citizens willalso be subject to wealth tax for taxableoverseas assets while Foreign citizens enjoyexemption therefrom.

2. Taxable Assets in India :



At the cost of repetition it may be worthwhileto view taxable Assets for residents as alsoNRIs, which are :

01. Buildings or land apparent there to otherthan, one house property or plot of landhaving area of 500 square meters or less.

02. Value of personal vehicles i.e. motor cars,boats, air crafts,

03. Jeweler, i.e. ornaments made of gold, silver,platinum, or any other precious metal andbullion including utensils and furnituremade of gold, silver or other preciousmetals.

04. Cash on hand in excess of Rs. 50,000/-.

05. Urban land that is land situated :

(i) within the Jurisdiction of Municipalityand having population of 10,000 andmore or

(ii) in any area within 8 kilometers fromthe local limits of municipality.

.02 However taxable wealth does not include :

01. One house meant exclusively forresidential purposes or plot of land adm.not more than 500 square meters;

02. Any house for residential or commercialpurposes which forms part of stock-in-trade;

03. any house which is occupied by the owner for the purposes of any business orprofession carried on by him ;

04. any residential property that has been let-out for a minimum period of three hundreddays in the financial year ;

05. Any property in the nature of commercialestablishments or complexes ;

06. Motor cars used by the assessee in thebusiness of running them on hire or as stockin trade. ;

07. Yachts, boats & aircrafts used by theassessee for commercial purpose ;

08. Urban Land, if

(i) construction of bui lding i s notpermissible

(ii) construction of building can be madeonly subject to special approval ofappropriate authority.

(iii) It is unused land held for industrialpurpose for two years.

(iv) forms part of stock in trade for a periodof 10 years.

.03 Import of gold & silver :

NRIs being granted concessional import dutyand permission to import gold & silver oftenimport large quantity of gold / silver. If themarket value of such gold / silver exceeds Rs.3mn together with the market value of othertaxable wealth & the same is held in India ason 31st March, such returnee NRI is liable topay wealth tax @ 1% on such value exceedingRs. 3 mn & file wealth tax return.

3. Wealth Tax Exemptions

In case of returnee NRI special wealth taxexemption is granted for :

01. money and the value of the assets broughtby him into India upon return &

02. value of assets purchased by him out offunds remitted from abroad or balancesheld in NRE/FCNR account within 1 yearbefore return to India for settlement or atany time within seven years after return.

Such exemption is available for a period of 7years from the date of return.

[Sec 5(1)(v) of the W.T.Act ]

❉ ❉ ❉



CA. Savan A. [email protected]

Expor t of Goods / Software / Services –Per iod of Realisation and Repatr iationof Expor t Proceeds – For expor ter sincluding Units in SEZs, Status HolderExpor ter s, EOUs, Units in EHTPs,STPs and BTPs

A.P. (DIR Series) Circular No. 52 dated November20, 2012 extended the enhanced period forrealization and repatriation to India, of the amountrepresenting the full value of exports, from sixmonths to twelve months from the date of export.This relaxation was available up to March 31, 2013.Thereafter, in terms of A.P. (DIR Series) CircularNo. 105 dated May 20, 2013, this period wasbrought down from twelve months to nine monthsfrom the date of export, valid till September 30,2013. Further, in terms of A.P. (DIR Series) CircularNo. 35 dated April 01, 2002, A.P. (DIR Series)Circular No. 25 dated November 01, 2004 and A.P.(DIR Series) Circular No. 108 dated June 11, 2013,the Units located in SEZs, Status Holder Exporters,EOUs, Units in EHTPs, STPs & BTPs shall realizeand repatriate full value of goods/software/services,to India within a period of twelve months from thedate of export.

It has been decided, in consultation with theGovernment of India, that henceforth the period ofrealization and repatriation of export proceeds shallbe nine months from the date of export for allexporters including Units in SEZs, Status HolderExporters, EOUs, Units in EHTPs, STPs & BTPsuntil further notice. The provisions regarding theperiod of realization and repatriation to India of thefull exports made to warehouses established outsideIndia remain unchanged.

For Full Text refer to A.P. (DIR Series) CircularNo. 37

http://www.rbi .org.in/Scripts/Noti f i cat ionUser.aspx?Id=9342&Mode=0

Acquisit ion/Tr ansfer of I mmovableproper ty – Payment of taxes

In accordance to Foreign Exchange Management(Acquisition and Transfer of immovable propertyin India) Regulations, 2000 noti f i ed videNotification No. FEMA 21 /2000-RB dated 3rd

May 2000 as amended f rom time to time,observations show that doubts persist in themembers of publ ic regarding requirement ofpayment of taxes while undertaking propertytransactions under these regulations.

It is clarified that transactions involving acquisitionof immovable property under these regulations shallbe subject to the appl i cable tax laws inIndia.Reserve Bank has since amended the PrincipalRegulations through the Foreign ExchangeManagement (Acquisi ti on and Transfer ofimmovable property in India) (Amendment)Regulations, 2014 notified vide Notification No.FEMA.321/2014-RB dated September 26, 2014c.f. G.S.R. No.733€ dated October 17, 2014.

For Full Text refer to A.P. (DIR Series) CircularNo. 38

http://www.rbi .org.in/Scripts/Noti f i cat ionUser.aspx?Id=9345&Mode=0

❉ ❉ ❉

FEMA Updates

4142


CA. Punit R. [email protected]

that too without intention to evade service tax.Section 73(3) provides immuni ty fromproceedings and penalties with fol lowingconditions and for following circumstances.1. As provided in Section 73(4), benefit of

section 73(3) is not available if service taxis not paid by the reason of fraud, collusion,wilful mis-statement, suppression or facts orcontravention of law with intent to evadeservice tax. Thus, benefit of section 73(3)can be availed only in normal circumstances.

2. Tax payer has to pay service tax.3. Such a payment may be on the basis of

own ascertainment of tax payer or on thebasis of tax ascertained by Central ExciseOfficer.

4. Such payment should be made beforeservice of notice under section 73(1) of theAct (i.e. Show Cause Notice).

5. It may not be pre-condition to pay interestbefore service of notice interest due undersection 75 of the Act is required to be paid.

6. Central Excise Officer shall be informedabout such payment in writing.

7. Once such intimation is given to the CentralExcise Officer, such officer shall not serveany Show Cause Notice to the tax payerin respect of amount so paid. Meaningthereby proceeding to recover penaltiescan’t be even initiated by the department.

8. It is also clarified that no penalty under anyof the provision of the Act or rules madethereunder shall be imposed in respect ofpayment of tax and interest made undersection 73(3) of the Act.

9. It is worth noting that immunity is grantedonly for the amount already paid. If anyservice tax is still payable in opinion of theCentral Excise Officer, proceeding torecover such tax may be initiated.

Service Tax Decoded

Safety Nets Against Contravention of ServiceTax Law

People contravene a law either knowingly orunknowingly. Those, who contravene the lawunknowingly should be given chance to rectify theirmistake without imposition of penalties. Theyshould not be treated at par with the person whocontravenes the law knowingly. Even, people whocontravene the law knowingly may be forced bythe circumstances to contravene the law against theirwillingness to follow the law. Even, person whocontravenes the law willfully should be given achance to rectify his wrong deeds and join the mainstream of the genuine tax payers. Such a chancegiven to him might be given with some penaltiesbut not with too harsh penalties which discouragehim to rectify his wrong deeds.

Service tax law also recognises this principle andhas incorporated certain provisions in the ChapterV of the Finance Act, 1994 (the Act) which providesome safety nets to such assessees. These provisionsdon’t only give a chance to the tax payers but alsohelps department to reduce or avoid administrationand cost of litigation. Assessee can walk away safelywithout imposition of penalties or with lesserpenalties.

Different provisions are provided for differentsituations and different stages of investigation,adjudication or litigation. These provisions arediscussed herein below.

I . Section 73(3) of the Finance Act, 1994

It may happen that service tax is not paid dueto bona fide belief that it is not payable or notpaid due to any other unintentional reason. Insuch situation, assessee is ready to pay servicetax but worries about penalties like penaltyunder section 76 which may be imposed fordelay in payment of service tax even for a day


II . Section 73(4A) of the Finance Act, 1994

During audit, investigation or verification it maybe found that service tax is not paid. In suchsituation it may be argued that unless such audit,investigation or verification has been conducted,such non-payment would have never unearthedand hence department may charge assessee withintention to evade service tax. In such situationhigher penalties may be imposed. In suchsituation safety net has been provided underSection 73(4A). Benefit available under thisprovision is subject to following conditions andcircumstances as follows.1. Non-payment of tax is to be found during

any audit, investigation or verification.2. True and complete details of transaction are

available in specified record. In terms ofexplanation to Section 73(4A) specifiedrecords means records includingcomputerized data, as required to bemaintained by the assessee in accordancewith any law for the time being in force orwhere there is no such requirement, theinvoices recorded by the assessee in thebooks of accounts.

3. Tax payer may accept the tax liability andpay the same along with interest.

4. He is also required to pay reduced penaltyequal to 1% of tax, each month, for theperiod of delay, up to a maximum of 25%of tax.

5. Above payment of tax and penalty shallbe made before service of notice.

6. It seems that unlike section 73(3), interest isalso required to be paid before issuance ofnotice to avail the benefit under this section.

7. Tax payer shall inform the Central ExciseOfficer in writing about the payment made.

8. On above mentioned payment andintimation, no notice shall be served by thedepartment. However, in opinion CentralExcise Officer if any service tax remainsto be paid, he shall proceed to recover thesame.

9. It is not necessary that assessee shall acceptall service tax being payable in view of

audit party or other officers. Assessee mayagree to certain issue/s and may opt forbenefit granted under the Section 73(4A)for that particular issue/s.

10. It can be seen from the provision of Section73(4A) that safety net has been providedto the assessee who is ready to pay servicetax, along with interest found to be unpaidduring the audi t, i nvestigation orverification. He may agree to pay theservice tax either on acceptance of liabilityor to buy peace of mind and does not wantto face the music of l i tigation due toamount involved or any other reason.

11. It may be noted that penalty prescribedunder Section 73(4A) is not mandatory butan option given to the assessee.

12. Once such payment of service tax, interestand penalty has been paid, Central ExciseOfficer can’t even serve notice for suchservice tax and propose to impose variouspenalties. Thus, litigation can’t be eveninitiated by the department at all. Further,proceeding in respect of service tax paid isdeemed to have been concluded and hencedepartment can’t further compel theassessee to comply with other provisionssay for example furnish the return alongwith payment late fees.

13. Unlike Section 73(3), benefit of thissection is available irrespective of the factthat non-payment was intentional or not.

I I I . Second proviso to Section 78(1) of theFinance Act, 1994

It may happen that assessee has not agreed oraccepted any liability during initial stage andShow Cause Notice has been issued andadjudicated and demand has been confirmedon the assessee. He may prefer not to stretchthe litigation further. In this case he is given afurther safety net as follows.

1. At this stage, he has been given benefit ofreduced penalty of 25% of service tax ascompared to 50% of service tax as imposableunder first proviso to Section 78(1).

Service Tax Decoded


2. Benefit of reduced penalty under thisSection is available if service tax along withinterest is paid within 30 days from the dateof communication of order of Central ExciseOfficer determining such service tax.

3. Penalty as stated above is also required tobe paid within 30 days from the date ofcommunication of order.

4. Unlike section 73(3), interest is alsorequired to be paid within 30 days to availthe benefit under this proviso.

5. In case small service provider (whoseturnover of taxable service does not exceedRs. 60 lakhs), period of 90 days has beengranted instead of 30 days as stated above.

6. Normally, penalty under Section 78 is100% of service tax. However, if true andcomplete details of transaction are recordedin specified records, amount of penaltyshall be reduced to 50%. Benefit of 25%penalty, as granted under Second Provisoto Section 78(1) is available only if trueand complete details of transaction arerecorded in specified records and not in thecase where penalty is imposable at 100%of service tax.

7. It is to be noted that benefit granted underthis proviso is limited to penalty payableunder Section 78 only. No immunity hasbeen granted against any other penalty.Assessee is required to pay penalties underother section of the Act imposed in theorder. It is worth noting that penalty underSection 76 is not payable if penalty underSection 78 is payable.

8. Opting of reduce penalty under this provisodoes not mean that assessee surrenders hisright to appeal further. To avoid higherpenalty in future, he may opt to pay reducedpenalty under this proviso and go for appealagainst the order determining liability.

IV. Waiver of penalties under Section 80 of theFinance Act, 1994

Certain penalties are to be imposed irrespectiveof intention on the part of the assessee. This

may result in imposition of penalty even in thecases where contravention was unavoidable bythe assessee. In such situation, safety net isprovided under Section 80 of the Act forgenuine tax payers who have contravenedprovision of the law due to reasonable cause.Section 80 of the Act provides that if any failurereferred to in Section 76 or 77 in the saidprovisions but there was reasonable cause forthe failure, no penalty shall be imposable onthe assessee. Although, discussion in this regardwas written in the last article, at cost ofrepeti ti on, i t i s reproduced below forjustification to the subject of the article.

1. Term “reasonable cause” is not defined inthe Act. It is a question of fact and may bedecided in case to case basis. Question ofinterpretation of law, newly implemented/amended law, different opinion by variouscourts, revenue neutrality, facts known tothe department, proper disclosure todepartment, illness of proprietor or keymanagement personnel, bona fide belief,misguiding opinion by consultants etc. maybe considered a reasonable cause.

2. Though “reasonable cause” i s verysubjective word, but once it is establishedthat there was a reasonable cause, nopenalties under section 76 and 77 shall beimposed.

3. It is worth noting that benefit of Section80 is available only for the penaltiesimposable under section 76 and 77 and notfor the penalty imposable under Section 78of the Act. In any case penalty undersection 78 is imposable only if there wasevasion (i.e. intentional non-payment) ofservice tax and it is hard to envisageexistence of reasonable cause along withintention to evade tax.

4. Burden of proof is on the assessee toestablish that there was a reasonable causefor the contravention.

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Service Tax Decoded


CA. Ashwin H. [email protected]

Vishal Packaging vs. CCE, Raipur 201436 STR 465 , Tr ibunal , Delhi.

Manufacture of cor rugated boxes from craftpaper on job work basis, whether amounts tomanufacture?

Facts :-

Assessee manufacturing corrugated boxes fromcraft paper on job work basis. Department arguedthat the said activity does not amount to manufactureand will be liable to service tax under the categoryof business auxiliary.

Held:-

It was held by tribunal that process of making ofcorrugated boxes from craft paper on job work basisamounts to manufacture and therefore not liable toservice tax under Business Auxiliary Service.

Commissioner of Central Excise v. Shr iShanker Engineer ing Works , [2014] 47taxmann.com 153 , CESTAT, NewDelhi.

Fabr ication of storage tanks and str ucturesamounts to manufacture and their erection andinstal lat ion is, ther efor e, not cover ed byBusiness Auxiliary Service

Facts:-

Assessee was engaged in fabrication of steel storagetanks, dozers, settlers, steel structures, platforms,railing, foundation frames etc. and their erection andinstallation in factory. Department alleged that sincesteel items after being erected and installed becomeembedded to earth and become non-excisablegoods, hence, activity of assessee would beBusiness Auxiliary Service.

Service Tax -Recent Judgements

Held:-

It was not specified by Department as to which sub-clause of definition of Business Auxiliary Servicecovers this activity. Probably department wants tocover this activity under ‘Production or processingof goods for or on behalf of a client, which doesnot amount to manufacture’. But fabrication of steelstorage tanks and steel structures would amount tomanufacture and their erection and installationwould certainly not be covered by BusinessAuxiliary Service.

M.R. Patel & Sons v. Commissioner ofService Tax, Ahmedabad [ 2014 ] 41taxmann.com 344 (Ahmedabad -CESTAT)

Merely supervising loading of coal and co-coordinating with railway author ities withoutany supervision work being car r ied out at coalmines does not amount to ‘clear ing’ and/or‘forwarding’ of coal and is, therefore, not liableto service tax under Clear ing and ForwardingAgent’s Services.

Facts:-

Under terms of contract with Gujarat ElectricityBoard, assessee was required to : (a) make pre-payment of railway freight, (b) remain vigilant aboutroute where coal is moved, (c) co-ordinate withrailway authorities and (d) supervise loading of coalinto rakes. Department sought levy of service taxunder Clearing and Forwarding Agent’s serviceson ground that assessee had received goods/coalfrom premises of supplier and made suitablearrangement for dispatch of said coal as perdirection of Gujarat Electricity Board by engagingrailway wagon. Assessee argued that it had notcarried out any clearing activity.

36

38

37


Held:-

It was held that assessee had not done any activityof clearing coal from mines; assessee was onlysupervising loading of coal in railway yard and wasnot doing supervision at mines end. In order to getcovered under Clearing & Forwarding Agentservices, assessee must have ‘cleared’ as well as‘forwarded’ goods. In this case, both clearing andforwarding activities were absence and, prima facie,therefore, assessee had made out a case for fullwaiver of pre-deposit .

Commissioner of Service Tax v. ShahCoal (P.) Ltd [2014] 44 taxmann.com 269( Mumbai – CESTAT)

Activity of supervision and loading of coal doesnot come under category of ‘Clear ing andForwarding Agent’s Service’.

Facts:-

Assessee entered into a contract with M/s. AmbujaCement for movement of client’s coal from variouscollieries to its plants involving : (a) supervision ofcoal loading at collieries; and (b) transportation ofcoal by rail or road to cl ient’s plant/factory.Department classified said services under ‘Clearing& Forwarding Agent’s Services’

Held:-

It was held that since assessee’s activities did notfall under any of categories specified in saidCircular, activity of supervision and loading of coaldoes not come under category of ‘Clearing andForwarding Agent’s Service’. Circular No. B-43/7/97-TRU, dated 11-7-1997 issued by Board at timeof inception of levy needs to be given dueweightage, following principles of ‘administrativeconstruction’ of statutes.

Manav Sansadhan Vikas Ani SanodhanManch vs. CCE (2014) 35 STR 385(Tribunal- Mumbai)

Trust engaged in treatment of ai lments bycombination of Yoga and Medicine.

Facts:-

Assessee Trust registered under Maharastra statewas engaged in treatment of ai lments bycombination of yoga and medicine. Department heldthat the assessee is liable for service tax under thecategory of ‘Health & Fitness Service’.

Held:-

It was held that appellant is trust registered to teachyoga and yoga is therapeutic and restorative andhence services provided by them are covered underthe category of Health & Fitness Service.

CCE vs. Surenderkumar (2014) 36 STR327 ( Tr ibunal – Delhi)

Loading and unloading of sugar bags from oneplace to another place , whether liable to servicetax under the category of ‘Cargo HandlingService’.

Facts:-

Assessee engaged in business of shifting of sugarbags from floor to mill house to godown and fromone godown to another.

Held:-

It was held by the tribunal that the said activities ofloading, unloading and shifting of sugar bags fromfloor to mill house to godown and from one godownto another would not be liable for service tax underthe category of ‘cargo handling service ‘.

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Service Tax - Recent Judgements

39

41

40


CA. Bihar i B. [email protected].

Statute Updates

[I] Impor tant Notifications / Circulars :Vide notification dated 23.09.2014 tax creditavailable on the taxable turnover of purchasesis to be reduced by 1% instead of 2%, if thegoods are sold/resold in the course of inter statetrade and commerce or the goods are used asinputs in the manufacturing of taxable goodswhich are sold in the courts of inter state tradeor commerce.Descr iption of Goods:a) The description of the goods from which

input tax credit is to be reduced by 1% areall goods of Schedule II of the Act exceptBull ion, Gold, Silver, Cotton, whetherginned or unginned, baled, pressed orotherwise Isabgul, Jira, Variali, Methid,Ajma, Asalia, Kalingda seeds, khas khas,Dhana, Dhana Dal and Pepper, all seds ofall types and Bidi Leaves.

b) The Part II of the Notification prescribes thatthe Tax Credit @ 2% is to be reduced incase of following goods :

Crude Oil, Furnace Oil, Aviation Turbinefuel, High Speed Diesel Oil, Light DieselOil, Solvent, Petrol, Lower Sulphur heavystock, Linear Alkyl Benzene, Bitumen,L iqui f i ed Petroleum Gas and otherPetroleum Products and Natural Gas.

[II] Important Judgments:[1] Judgment delivered by the Hon. Allahabad

High Cour t in case of Laxmi Doors.Issue:The Registration Number of the dealer iscancelled ab-initio and the dealer has notpaid the tax collected on its sales, under thecircumstances no tax credit can be deniedin the case of purchaser and the tax is to becollected from the seller.

Facts:In this case, the dealer has purchased the Timberfrom registered dealers including one viz. M/s.Heena Timbers. The seller has issued the TaxInvoice. The registration certificate of M/s.Heena Timbers has been cancelled ab-initioand the department has disallowed the tax creditof Laxmi Doors. The purchaser has preferredappeal at various stages and lastly Hon.Allahabad High Court has set aside the orderof Tribunal stating that is absolutely illegal. Asthe di f ferent view is taken by the Hon.Allahabad High Court, as compared to Hon.Gujarat High Court, in the case of MadhavSteel, therefore this judgment is important.The judgment is very important and thereforetotal judgment is reproduced hereunder for thebenefit of the readers as there is a burning issuein the State of Gujarat for ab-initio cancellation.The appellant is aggrieved by the order of theTrade Tax Tribunal dated 12.9.2013.Briefly stated that the facts of the case are thatthe appellant is a registered dealer having a TINNo. 09552300340 and he is carrying on thebusiness from Vi l lage Semara, Chinhat,Lucknow. During the year 2008-09 the Firmhas made certain purchases of raw materialnamely timber from registered dealers includingone M/s. Heena Timbers, Bahraich having TINNo. 09555700834. For these purchases taxinvoices, 9R’s as well as gate passes of theMandi Samiti were also issued. M/s. HeenaTimbers was also a registered dealer and itsregistration certi f i cate continued up to23.12.2009 but thereafter the registration wascancelled by the department. On 23.12.2009 afirst information report was also lodged againstM/s. Heena Timbers under sections 420, 424,467, 468 and 120B I .P.C. by the Asst.Commissioner, Tax, Bahraich in Police StationKesarganj, Dist. Bahraich. The grievance ofthe appellant is that while making assessment

VAT - Recent Judgementsand Updates


for tax for the year 2008-09, the claim of theAppellant Firm for credit of input tax wasdisallowed by the Assessing Authority and theTax Invoice, 9R’s and gate passes issued byM/s. Heena Timbers were not accepted andassessment of tax was thereafter made on thebasis of best judgment assessment.Aggrieved by the order of the Assessing Officer,the Appellant Firm preferred an appeal beforethe Addl. Commissioner (Appeals), CommercialTax, Lucknow which was also dismissed.The aggrieved appellant firm preferred an appealbefore the Commercial Tax Tribunal, Lucknowwhich has also been rejected, on the groundthat the tax invoices issued by M/s. HeenaTimbers are forged and that the said firm hasnot deposited the VAT collected by it.In the present revision the grievance of theappellant is that the tax invoices showingpayment of tax by M/s. Heena Timbers wasissued to the revisionist Firm along with MandiSamiti gate passes and there was no reason forthe appellant Fi rm to disbelieve the saiddocuments or to believe that M/s. HeenaTimbers had evaded the payment of tax. If inthe assessment proceedings against M/s. HeenaTimbers it came to light before the TaxingAuthorities that M/s. Heena Timbers was guiltyof evasion of tax, the said liability could nothave been fastened upon the appellant Firm andif at all any tax allegedly evaded was requiredto be recovered the same should have beenrecovered from M/s. Heena Timbers inproceedings to that effect.Learned counsel for the appellant furthersubmitted that the mere fact that certainconsignment of timber has been purchased fromM/s. Heena Timbers in cash and the sale hadnot been shown by M/s. Heena Timbers in theirregisters or cash book it cannot lead to apresumption that there was a fraudulent salewith the intention to evade tax so far as theAppellant Firm was concerned and thereforethe findings of the Tribunal to that effect wasabsolutely illegal and arbitrary. In addition tothe assessment made by the AssessingAuthority, the Tribunal has also held theAppellant Firm liable to payment of penalty u/

VAT - Recent Judgements and Updates

s. 54(1)(19) of the U.P. VAT Act, 2008. Section54(1)(19) of the U.P. VAT Act provides forimposition of penalty of a sum equal to fivetimes of the amount of the input tax credit wherea dealer or any other person falsely orfraudulently claims an amount of input taxcredit. So far as the books and registers of theAppellant Firm are concerned, the entriestherein have not been doubted and it is not thecase of the Revenue that the entries madetherein did not tally with the invoices.The submission is that once the tax invoiceshave been duly issued by M/s. Heena Timbers,the Tribunal ought to have recorded a findingas to whether the said invoices were actuallyissued by M/s. Heena Timbers or not and inthe absence of any such finding recorded bythe Tribunal. The Tribunal could not have cometo a conclusion that the said documents werefalse or fraudulent for the purposes ofimposition of penalty against the appellant firmunder section 54(1)(19) of the U. P. VAT Act.The learned counsel for the appellant wasplaced reliance upon a judgment of this courtin case of M/s. Waterflow Industries GaurKender Mathura vs. The Commissioner ofCommercial Tax U.P. Lucknow MANU/UP/3395/2010: 2010 NTN (VOL.44) – 324wherein the claim of revenue that since theassessee has claimed benefit of set off theburden lies upon the assessee to prove thegenuineness of the invoices has been rejectedby the Court.In the present case also there is no findingrecorded by the Tribunal that the Tax Invoicesfor claiming benefit of input tax credit was notgenuine and in the absence of such an exerciseno liability to tax or penalty could have beenimposed against the revisionist firm.For the reasons aforesaid, the order of theTribunal is absolutely illegal and arbitrary and isaccordingly set aside and the matter is remittedto the Tribunal for reconsideration in the light ofthe observations made therein above.

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CA. Hozefa [email protected]

Estimating the cost of equity is more challenging.Unlike debt’s explicit cost, the cost of equity isimplicit. The cost of equity is higher than the costof debt because equity’s claim is junior. But nosimple method exists to estimate the cost of equity.Cost of Capital rate is normal ly derived bydetermining the cost of each component formingpart of invested capital and taking the weightedaverage of that. The discount rate so arrived istermed as Weighted Average cost of Capital(WACC). The WACC reflects the business as wellas financial risk of the enterprise. The discountingrate to be applied with free cash flow to equity isthe expected rate of return on equity (%cost ofequity) only.The weighted average cost of capital (WACC) is aweighting of a firm’s cost of equity and costs ofdebt. The general principle when developing theWACC is that it must be consistent with the overallvaluation approach. To be consistent with the freecash flow approach, the estimate of cost of capitalmust comprise a weighted average of the costs ofall sources of capital, meaning long term debt, shortterm debt, equity etcetera, since the free cash flowrepresents cash available to all providers of capitalwithin the firm. It must be computed after taxessince the free cash flow is stated after taxes. Thediscount rate will change with time as interest rates,inflation, and other factors affecting the environmentthe company operates in, are changing. Therefore,the assumption that it will remain the same for theentire forecasting period is not realistic.Each component of WACC is discussed in detail inthe following paragraphs.Cost of EquityUnlike debt, which the company must pay at a setrate of interest, equity does not have a concrete pricethat the company must pay. But that doesn’t meanthat there is no cost of equity. Equity shareholdersexpect to obtain a certain return on their equityinvestment in a company. From the company’sperspective, the equity holders’ required rate ofreturn is a cost, because if the company does notdeliver this expected return, shareholders willsimply sell their shares, causing the price to drop.Therefore, the cost of equity is basically what itcosts the company to maintain a share price that issatisfactory (at least in theory) to investors.

Business Valuation

The Income Approach (DCF - Discounted Cash Flow Method)Last time we have gone through the basics ofDiscounted Cash Flow (DCF) Method. Asmentioned in that column, business valuationthrough DCF is an estimation job and uncertaintyis invariably attached with estimation. So, theappraiser should concentrate on building the bestmodels they can with as much information as theycan legally access, trying to make their best estimatesof business specific components and being asneutral as they can on economic variables like rateof interest or growth rate etc. As new informationcomes in, they should update their valuations toreflect the new information. There is no place forfalse pride in this process.Using this method, we can derive value of equityholders by (i) choosing present value of free cashavailable to equity holders and (ii) choosing presentvalue of the cash flow avai lable to fi rm andsubtracting the present value of debts there from.The fundamentals to estimate value under thistechnique are cash flows and discounting rate. Wehave brief ly gone through fundamental ofdesigning the cash flow. Now, we wil l see theimportance of discount rate in this article:Estimation of Discount RatesHaving projected the firm’s free cash flow for thenext “n” years, we will need to figure out what thesecash flows are worth today. That means coming upwith an appropriate discount rate which we can useto calculate the net present value (NPV) of the cashflows. So, what should be this discount rate? That’sa crucial question, because a difference of just oneor two percentage points in discounting rate canmake a big difference in firm’s fair value. Thisdiscounting rate is the most critical item of DCFvaluation. In order to find a present value of periodiccash flow to firm, we need to discount it by anappropriate rate. The cost of capital is an estimateof the rate of return an investor (this may be owneror financer to business) demands to invest inbusiness or in asset or, said differently, an investor’sopportunity cost. As such, the cost of capital is theproper rate for discounting future cash flows to apresent value. Most companies finance theiroperations largely through debt and equi ty.

Approaches to Valuation


The cost of equity can be derived either by the riskand return approach or by dividend expectationapproach. Free cash flow to equity is not just thedividend pay outs by the enterprise but it is freecash f low avai lable to equi ty holders fordistribution. Considering this, generally the riskreturn approach is used to work out the cost ofequity. The most common approach to estimatingthe cost of equity is the capital asset pricing model(CAPM). The CAPM says a company’s cost ofequity equals the risk-free rate plus the product ofthe equity risk premium and beta.The CAPM is the most widely accepted method ofestimating the cost of equity capital.Under CAPM, the cost of equity is defined as under:Cost of equity = Risk Free Return + [Beta * EquityRisk Premium]Cost of Equity (Re) = Rf + Beta (Rm-Rf).Where,Risk Free Return is the return expected by equityholder where default risk is zero. Governmentissued securities or RBI bonds generally provide agood proxy for the risk-free rate. Estimates for theequi ty ri sk premium and beta prove morechallenging.Beta is the sensitivity of a particular stock vis a visMarket or Index. Arithmetically, beta can becalculated as: Beta = Covar iance (X,Y) /Var iance (X)Beta attempts to reflect the sensitivity of a stock’sprice movement relative to the broader market. Abeta of 1.0 means the stock tends to move in linewith the market. A beta below 1.0 suggests a stockmoves less than the market, while a beta above 1.0implies moves greater than the market. All thingsequal, finance theory associates a higher beta withhigher risk and reward.Equity Risk Premium = return generated by themarket - risk free returnEquity Risk Premium is the return above andbeyond the risk-free rate an investor expects to earnas compensation for assuming greater risk. Likebeta, the equity risk premium is ideally a forward-looking estimate. Most analysts rely on past equityrisk premiums, which, depending on the time frame,may not give a reasonable sense of the returnoutlook. Most of the problems with the cost of capitalcome from stale inputs for beta and the equity riskpremium.Once the cost of equity is calculated, adjustmentscan be made to take account of risk factors specific

to the company, which may increase or decreasethe risk profile of the company. Such factors includethe size of the company, pending lawsui ts,concentration of customer base and dependence onkey employees. Adjustments are entirely a matterof investor judgment and they vary from companyto company.Cost of DebtCost of Debt is the long-term cost of debt of abusiness. Cost of debt for each of the long termdebt forming part of invested capital is to be derivedseparately and those will form the part of calculatingWACC. Cost of Debt Compared to cost of equity,cost of debt is fairly straightforward to calculate.The rate applied to determine the cost of debt (Rd)should be the current market rate the company ispaying on its debt. If the company is not payingmarket rates, an appropriate market rate payable bythe company should be estimated.As companies benefit from the tax deductionsavailable on interest paid, the net cost of the debt isactually the interest paid less the tax savingsresulting from the tax-deductible interest payment.Therefore, the after-tax cost of debt is Rd (1 -corporate tax rate).Cost of Preference SharesCost of preference shares is the dividend rate of thepreference share. The dividend distribution taxbeing part of cost of shares here it will be added toarrive cost of preference shares.Weighted Average Cost of Capital (WACC)The Weighted Average Cost of Capital is theweighted average of the costs of the differentcomponents of financing used by an enterprise.Arithmetically, WACC is calculated as follows:WACC= [(Cost of Equity*Weightage) + (Cost ofDebt 1*Weightage) + (Cost of Debt 1*Weightage)+ (Cost of Preference Shares* Weightage)]/[Weightage of Equity + Weightage of Debts +Weightage of Preference Shares]The weighted average Cost of Capital so derivedwill be used as denominator or a discounting rateto arrive at the present value of free cash flow tofirm.Note : One should remember that “Never mix andmatch cash flows and discount rates”. Means FCFFshould be used with WACC and FCFE should beused with Cost of equity only. Using FCFF withcost of equity will not give the correct estimationof value.

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Business Valuation


CA. Naveen [email protected]

(A) MCA Updates:

1. The Company L aw Boar d (Fees onApplications and Petitions) AmendmentRules, 2014

Corporate Law Update

Following shall be inserted after the Sr. No.33, in the Schedule of the Company LawBoard (Fees on Applications and Petitions)Rules, 1991:

Sr. Relevant Section Par ticulars AmountNo. No. of Companies (In Rs.)

Act, 2013

34 2 (41) Allowing any period other than April to March as 5000/-Financial Year.

35 58 & 59 Rectification of Register of Members. 500/-

36 73 (4) read with Directing the company to pay the sum due or for any loss 100/-section 76 or damage incurred as a result of such non-payment.

37 74 (21) Allow further time as considered reasonable to the Company 5000/-to repay the deposit.

2. Clar i f i cat ion on mat ter s r elat ing toCompanies [Cost Record and Audit] Rules,2014:

MCA has clarified in the matter of Rule 5(1)and 6(2) of the Companies (Cost Records andAudit) Rules, 2014 regarding maintenance ofCost Records and f i l i ng of noti ce ofappointment of the Cost Auditor in the formCRA-2 in the electronic mode.

- The date of filing of the said Form CRA-2 has been extended without any late fee/penalty up to 31st January, 2015. CRA-2wil l be made avai lable on the MCAwebsite soon.

- Those Companies who have filed Form-23AC for appointment of Cost Auditor forthe year 2014-15 need not file the FormCRA-2 afresh for the year 2014-15.

[General Circular No. 42/2014 dated 12/11/2014]

3. I ssue of Foreign Currency Conver tibleBonds (FCCBs and Foreign Cur rencyBonds (FCBs) – Clar ification regardingapplicability of provisions of Chapter I I Iof the Companies Act, 2013:

In the matter of the applicability of provisionsof Chapter III of the Companies Act, 2013(Act) to the issue of Foreign CurrencyConvertible Bonds (FCCBS) and ForeignCurrency Bonds (FCBs) by Indian companiesexclusively to persons resident outside Indiain accordance wi th appl icable sectoralregulatory provisions, the MCA has clarifiedthat unless otherwise provided in the Issue ofForeign Currency Convertible Bonds andOrdinary Shares (Through Deposi toryReceipts Mechanism) Scheme, 1993 andReserve Bank of India through its variousdirections/regulations, provisions of ChapterIII of the Act shall not apply to an issue of aFCCB or FCB made exclusively to persons

[F. No. 1/19/2014-CL-V dated 03/11/2014]


resident outside India in accordance with theabove mentioned regulations.


4. Extension of Company Law SettlementScheme, 2014 (CLSS-2O14)

In continuation to the Ministry’s GeneralCircular No. 34/2014 dated 12/08/2014 and40/2014 dated 15/10/2014, the ministry hasextended the company law settlement scheme(CLSS-2014) up to 31st December, 2014.


5. Extension of time for holding AnnualGeneral Meeting (AGM) under section96(1) of the Companies Act , 2013-Companies registered in State of Jammuand Kashmir :

Looking to the unprecedented floods in theState of Jammu and Kashmir the MCA hasadvised to the Registrar of Companies, Jammuand Kashmir, to exercise powers conferred onhim under the third proviso to section 96(1)of the Companies Act, 2013 to grant extensionof time up to 31/12/2014 to those companiesregistered in the State of Jammu and Kashmir,who could not hold their AGMS (other thanfirst AGM) for the financial year 2013-14within the stipulated time


(B) LATEST JUDGMENTS:

1. Shr i Ashlesh Gunvantbhai Shah,Ahmedabad Vs. SEBI [Appeal No. 271 of2014]:

The appellant had disposed 74,547 shares ofthe “Target Company”, which represented6.2% of the total shareholding of the targetcompany. Since that disposal of shares was inexcess of the limit prescribed under regulation13(3) of PIT Regulations, 1992 and regulation29(2) of SAST Regulations, 2011, it was

obligatory on part of the appellant to makedisclosures of sale to the target company. Sincedisclosures were not made, show-cause noticewas issued, and by the impugned order, apenalty of Rs. 5 lac was imposed upon theappellant.

It was concluded that appellant being a persondealing in securities ought to have known hisrights and obligations. Therefore, in the factsof present case, no fault can be found with thedecision of SEBI in imposing nominal penaltyupon the appellant.

In other words, irrespective of disclosuresmade by the Company, obligation on part ofappellant to make disclosures under therespective regulations being mandatory,appellant cannot escape penal liabil ity onaccount of failure to make requisite disclosuresunder the SAST Regulations, 2011 and PITRegulations, 1992 on ground that the failurewas unintentional, technical and inadvertent.

2. Golden Tobacco L td. and GHCL Limited,Gujarat Vs. SEBI [Appeal No. 181 and183 of 2013]

The matter in dispute was that “Whether alisted Company under the format annexed toclause 35 of the Listing Agreement is requiredto disclose to the Stock Exchange, details of‘OTHERWISE ENCUMBERED’ shares ofthat listed Company held by the promoter/promoter group, even though there is noobligation cast upon the promoter/ promotergroup to make such disclosures to the listedCompany?

It was held that impugned decisions of theAdjudicating Officer of SEBI in holding thatin view of the words ‘shares pledged orotherwise encumbered’ in the format annexedto clause 35 of the Listing Agreement (asamended), appellants were obliged to discloseto the Stock Exchanges details of shares whichare otherwise encumbered by the promoter/promoter group and since the appellants have

Corporate Law Update

contd. on page no. 562


AS 22– Accounting for Taxes on Income

Significant Accounting Policies and Notes onAccounts for the year ended 31st March, 2014

Petronet LNG L imited

Provision is made for deferred tax for all timingdifferences arising between taxable incomes andaccounting income at currently enacted orsubstantially enacted tax rates.

Deferred tax assets are recognized, only if there isreasonable / virtual certainty that they will berealized and are reviewed for the appropriatenessof their respective carrying values at each BalanceSheet date.

Bajaj Corp L imited

Tax expense comprises of current and deferred tax.Current income tax is measured at the amountexpected to be paid to the tax authorities inaccordance with the Income-tax Act, 1961 enactedin India. Deferred income taxes reflects the impactof current year timing differences between taxableincome and accounting income for the year andreversal of timing differences of earlier years.

Deferred tax is measured based on the tax rates andthe tax laws enacted or substantively enacted at thebalance sheet date. Deferred tax assets and deferredtax liabilities are offset, if a legally enforceable rightexists to set off current tax assets against currenttax liabilities and the deferred tax assets and deferredtax liabilities relate to the taxes on income leviedby the same governing taxation laws. Deferred taxassets is reasonable certainty that sufficient futuretaxable income will be available against which suchdeferred tax assets can be realized. In situationswhere the company has unabsorbed depreciationor carry forward tax losses, all deferred tax assetsare recognized only if there is virtual certaintysupported by convincing evidence that can berealized against future taxable profits.

In the situations where the Company is entitled to atax holiday under the Income-tax Act, 1961 enactedin India or tax laws prevailing in the respective taxjurisdictions where it operates, no deferred tax (assetor liabil ity) is recognized in respect of timingdifferences which reverse during the tax holidayperiod, to the extent the company’s gross totalincome is subject to the deduction during the taxholiday period. Deferred tax in respect of timingdifferences which reverse after the tax holidayperiod is recognized in the year in which the timingdifferences originate.

The carrying amount of deferred tax assets arereviewed at each balance sheet date. The companywrites-down the carrying amount of a deferred taxasset to extent that it is no longer reasonably certainor virtually certain, as the case may be, thatsufficient future taxable income will be availablewhich deferred tax asset can be realized.

Take Solutions L imitedTax expense comprising of both current tax anddeferred tax are included in determining the netresults for the period.

Deferred tax reflects the effect of timing differencesbetween the assets and liabilities recognized forfinancial reporting purposes and the amounts thatare recognized for current tax purposes. As a matterof prudence deferred tax assets are recognized andcarried forward only to the extent, there isreasonable certainty that sufficient future taxableincome wil l be available against which suchdeferred tax assets can be realized.

Current tax is determined based on the provisionsof the Income Tax Act of the respective countries.

KPR Mill L imitedCurrent tax is the amount of tax payable on thetaxable income for the year as determined inaccordance with the provisions of the Income taxAct, 1961.

CA. Pamil H. [email protected]

From Published Accounts


Minimum Alternate Tax (MAT) paid in accordancewith the tax laws, which gives future economicbenefits in the form of adjustment to future incometax l iabil ity, is considered as asset i f there isconvincing evidence that the Company will paynormal income tax. Accordingly, MAT is recognizedas an asset in the Balance sheet when it is highlyprobable that future economic benefit associatedwith it will flow to the Company.Deferred tax is recognized on timing differences,being the differences between the taxable incomeand the accounting income that originate in oneperiod and are capable of reversal in one or moresubsequent periods. Deferred tax is measured usingthe tax rates and the tax laws enacted orsubstantively enacted as at the reporting date.Deferred tax liabilities are recognized for all timingdifferences. Deferred tax assets are recognized fortiming differences of items other than unabsorbeddepreciation and carry forward losses only to theextent the reasonable certainty exists that sufficientfuture taxable income will be available againstwhich these can be realized. However, if there areunabsorbed depreciation and carry forward oflosses, deferred tax assets are recognized only ifthere is virtual certainty that there will be sufficientfuture taxable income available to realize the assets.Deferred tax assets and liabilities are offset if suchitems relate to taxes on income levied by the samegoverning tax laws and the Company has a legallyenforceable right for such set off. Deferred tax assetsare reviewed at each balance sheet date for theirrealisability.Current and deferred tax relating to items directlyrecognised in reserves are recognised in reservesand not in the Statement of Profit and Loss.Manugraph India L imitedTax expense comprises of current and deferredtaxes.Current income tax is measured at the amountexpected to be paid to the authorities in accordancewith the Indian Income Tax Act, 1961.Deferred income taxes reflects the impact of currentyear timing differences between taxable income andaccounting income for the year and reversal of timingdifferences of earlier years. Deferred tax is measuredbased on the tax rates and the tax laws enacted or

From Published Accounts

substantively enacted at the balance sheet date.Deferred tax assets and deferred tax liabilities areoffset, if a legally enforceable right exists to set-offcurrent tax assets against current tax liabilities andthe deferred tax assets and the deferred tax liabilitiesrelated to the taxes on income levied by samegoverning taxation laws. Deferred tax assets arerecognised only to the extent that there is reasonablecertainty that sufficient future taxable income willbe available against which such deferred tax assetscan be realized. In situations where the company hasunabsorbed depreciation or carry forward tax losses,all deferred tax assets are recognised only if there isvirtual certainty supported by convincing evidencethat they can be realized against future taxable profits.The carrying amount of deferred tax assets arereviewed at each balance sheet date. The Companywrites down the carrying amount of a deferred taxasset to the extent that it is no longer reasonablycertain or virtually certain, as the case may be, thatsufficient future taxable income will be availableagainst which deferred tax asset can be realized. Anysuch write-down is reversed to the extent that itbecomes reasonably certain or virtually certain, asthe case may be, that sufficient future taxable incomewill be available.KNR Constructions L imitedProvision for current tax is made based on theliability computed in accordance with the relevanttax rates and tax laws applicable. Provision fordeferred tax is made for timing differences arisingbetween taxable income and accounting incomeusing the tax laws and tax rates enacted orsubsequently enacted as of the balance sheet date.Deferred Tax Assets are recognized only if there isa virtual certainty that there will be sufficient taxableincome in future.During the year under consideration, we havearrived at the net tax payable after claimingdeduction of profits under section 80IA of theIncome Tax Act., on eligible projects taking intoaccount, the decisions of Tribunal, in cases ofvarious asessees. As a result the taxable income isreduced by Rs. 52,99,08,798/-as per the IncomeTax Act., and provision for tax has been calculatedaccordingly.

❉ ❉ ❉


CA. Kunal A. [email protected]

From the Government

245N falling within any such classor category of person as notified bythe Central Government in exerciseof the powers confer red by sub-clause (i ia) of clause (b) of thatsection, ( newly inser ted)

- in Form No. 34E in respect of aresident falling within any such classor category of person as notified bythe Central Government in exercise ofthe powers conferred by sub-clause (iii)of clause (b) of section 245N,

- in Form No. 34EA, in respect of anapplicant referred to in sub-clause (iiia)of clause (b) of section 245N of theAct and shall be verified in the mannerindicated therein.”b) CBDT herebyinserts sub-rule (3) and (4) after sub-rule (2).

Sub-rule-3 – Every application the in the formas applicable shall be accompanied by the proofof payment of fees as specified in sub-rule(4),Sub-rule 4 – Chart of fees payable along withthe application for advance ruling.(For ful l text and new form 34DA refernotification no.74 dated 28/11/2014.Theabove notification shall come into force onthe date of its publication in the OfficialGazette)

3) In pursuance of Chapter XIX-B ( AdvanceRuling) , CBDT hereby vide notification no73, dated 28/11/2014 specifies a resident, inrelation to his tax liability arising out of one ormore transactions valuing rupees one hundredcrore or more in total which has beenundertaken or proposed to be undertaken, beingsuch class of persons as application for thepurpose of advance ruling. The said notificationshal l come into force on the date of i tspublication in the Official Gazette.

Income Tax

1) Notification regarding Bank Term DepositScheme,2006In pursuance of section 80C of the Incometax Act, 1961 (43 of 1961), the CentralGovernment hereby makes the fol lowingamendments to the Bank Term Deposi tScheme, 2006, namely:-

(1) This scheme may be called the Bank TermDeposit (Amendment) Scheme, 2014.

(2) It shall come into force on the date of its publication in the Official Gazette.

2) In the Bank Term Deposit Scheme, 2006, inpara 3, in clause (1), for the words ”onelakh rupees�, the words �one hundred and fifty thousand rupees� shall be substituted.

[Notification No. 63/2014, dtd 13/11/2014]2) Noti f icat ion r egar ding amendment in

income-tax rules relating to advance rulingand inser tion of form 34DAa) CBDT hereby substitutes sub-rule (1)

of rule 44E of the Income Tax Rules,which is as under :-- An application for obtaining an advance

ruling under sub-section (1) of section245Q shall be made in quadruplicate,

- in Form No. 34C in respect of a non-resident appl icant referred to insubclause (i) of clause (a) of section245N,

- in Form No. 34D in respect of a residentapplicant referred to in sub-clause (ii) ofclause (a) of section 245N seekingadvance ruling in relation to a transactionundertaken or proposed to be undertakenby him with a nonresident,

- in Form No. 34DA in respect of aresident applicant r efer red to insubclause (iia) of clause (a) of section


Service Tax

1) Notification regarding amendment in rule5A ( Access to a registered premises) of theService Tax Rules, 1994.

CBDT hereby substitutes sub-rule (2) of rule5A , which reads as under:-

Every assessee, shal l , on demand makeavailable to the officer empowered under sub-rule (1) or the audit party deputed by theCommissioner or the Comptroller and AuditorGeneral of India, or a cost accountant orchartered accountant nominated under section72A of the Finance Act, 1994,-

(i) the records maintained or prepared by himin terms of sub-rule (2) of rule 5;

(ii) the cost audit reports, if any, under section148 of the Companies Act, 2013 (18 of2013); and

(iii) the income-tax audit report, if any, undersection 44AB of the Income-tax Act, 1961(43 of 1961),

for the scrutiny of the officer or the audit party,or the cost accountant or chartered accountant,within the time limit specified by the said officeror the audit party or the cost accountant orchartered accountant, as the case may be.

(Notification No. 23, dtd. 5th December, 2014)❉ ❉ ❉

contd. from page 558 Corporate Law Update

failed to make such disclosures, appellantshave violated clause 35 of the ListingAgreement as well as PFUTP Regulations isunjustified, because:,

· Firstly, neither any regulation framed bySEBI nor clause 35 of the L istingAgreement cast an obligation on thepromoter/promoter group to make suchdisclosures to the listed Company, and inthe absence of such disclosure made bypromoter/ promoter group, SEBI is notjustified in directing the listed Company todisclose to the Stock Exchanges details ofshares which are ‘otherwise encumbered’by the promoter/ promoter group.

· Secondly, as per the press release issued bySEBI on January 21, 2009, clause 35 of theListing Agreement was to be amended sothat details of pledged shares and release/saleof shares are first made by promoter/promoter group to the listed Company andin turn, the listed Company would disclosethe same to the public through the StockExchanges. Since the promoter/ promotergroup are not obliged to disclose to the listedCompany details of shares that are otherwiseencumbered by them, SEBI is not justifiedin directing the listed Company to disclose

to the Stock Exchange details of ‘otherwiseencumbered’ shares which are not furnishedto it by the promoter/promoter group.

· Thirdly, when an Adjudicating Officer ofSEBI has already construed the words‘shares pledged or otherwise encumbered’and held that the said words would coverparticulars relating to pledged shares only,the Adjudicating Officer in the present caseis not justified in taking a contrary view thattoo without assigning any reasons. Such aconduct on part of the Adjudicating Officeris highly objectionable. It was advised thatthe officers of SEBI shall henceforth ensurethat no orders are passed by them whichare mutually contradictory to each other.

For the reasons stated hereinabove, the Benchset aside the penalty of Rs.1crore and Rs. 1.25crore imposed on each appellant by SEBI onground that the appellants have failed todisclose to the Stock Exchanges, fact that theshares of the appellant Company held by therespective promoter/promoter group have beenencumbered pursuant to an order passed bythe arbitrator in the arbitration proceedingsbetween the promoter/promoter group andsome third party.

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Association News

CA. Abhishek J. JainHon. Secretary

CA. Nirav R. ChoksiHon. Secretary

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For thcoming Programmes

Date/Day Time Programmes Speaker Venue

20.12.2014 8.00 a.m. to Cricket Match - - Sardar Patel Stadium,Saturday 1.00 p.m. President XI Vs. Secretary XI Navrangpura, Ahmedabad

03.01.2015 9.00 a.m. to Controversial Issues under the Shri Tushar ATMA Hall,Saturday 12.30 p.m. Income Tax Act Hemani, Opp. Citi Gold,

Advocate Ashram Road, Ahmedabad.

04.01.2015 8.00 a.m. to Cricket Match - - Motera Stadium, Ground -B,Sunday 1.00 p.m. CAA Ahmedabad Vs. Motera, Ahmedabad.

Baroda Branch of WIRC of ICAI

01.02.2015 8.00 a.m. to Cricket Match - - Sardar Patel Stadium,Sunday 1.00 p.m. CAA Ahmedabad Vs. IT Bar Navrangpura, Ahmedabad

Association Ahmedabad

Glimpses of events gone by:1. “Intensive Study on Income Tax Assessment Proceedings” on 10th, 12th, 14th and on 16th of November

2014 at the office of the Association.

(L to R CA. Abhishek J. Jain, CA. NaishalH. Shah, CA. Shailesh C. Shah, Speaker

CA. Priyam R. Shah, CA. Mehul S. Shah)

Participants at Study Circle Meeting

2. On 1st December 2014, 6th Study Circle Meeting was held on the topic of “Important Amendmentsand Issues under GVAT” at K. V. Patel Hall, Ahmedabad Branch of WIRC of ICAI, Ahmedabad.


Across

1. One of the qualities of a devotee, “Purity ofMind or Heart” ___________________.

2. Penal ty u/s 272 B i s l i nked vis-à-vis___________ and not with number of defaults.

3. Law without _______ is a toothless tiger.

Down

4. The cash flow for life span of business includesgrowth period cash flow and ________ value.

5. I will not let anyone walk through my ____with their dirty feet.

6. All keymen insurance policies are now taxablein the hands of _______ on receipt of sum evenafter assignment of such policy.

ACAJ Crossword Contest # 8

Notes:

1. The Crossword puzzle is based on previousissue of ACA Journal.

2. Three lucky winners on the basis of a drawwill be awarded prizes.

3. The contest is open only for the members ofChartered Accountants Association and nomember is allowed to submit more than oneentry.

ACAJ Crossword Contest # 7 - SolutionAcross1. Religions 2. Cenvat3. Seller

Down4. Oil and Gas 5. Temple6. Fraud

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Winners of ACAJ Crossword Contest # 7

1. CA. Jainee Shah

2. CA. Kush Desai

3. CA. Rinkesh Shah

4. Members may submit thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 31/12/2014.

5. The decision of Journal Committee shall be finaland binding.

Documents

38 Part : 09 December, 2014 C O N T E N T S - caa-ahm… · Ahmedabad Chartered Accountants Journal December, 2014 501 Volume : 38 Part : 09 December, 2014 E-mail: [email protected]