JOURNAL COMMITTEEthe receiver. We too need to master the secrets of Body language and be more resourceful professionals. World over, the most ardent users of body language are the

July, 2011

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E D I T O R I A LE D I T O R I A LE D I T O R I A LE D I T O R I A LE D I T O R I A L

PRES IDENT 'S MESSAGEPRES IDENT 'S MESSAGEPRES IDENT 'S MESSAGEPRES IDENT 'S MESSAGEPRES IDENT 'S MESSAGE

F INANCE ACTF INANCE ACTF INANCE ACTF INANCE ACTF INANCE ACT , 2011, 2011, 2011, 2011, 2011CA. P. N. ShahCA. H. N. Shah

APPL ICAB IL ITY OF SECT ION 2 (22 ) ( E ) . . . . .APPL ICAB IL ITY OF SECT ION 2 (22 ) ( E ) . . . . .APPL ICAB IL ITY OF SECT ION 2 (22 ) ( E ) . . . . .APPL ICAB IL ITY OF SECT ION 2 (22 ) ( E ) . . . . .APPL ICAB IL ITY OF SECT ION 2 (22 ) ( E ) . . . . .CA. Parag R. Raval

FROM THE COURTSFROM THE COURTSFROM THE COURTSFROM THE COURTSFROM THE COURTSCA. C. R. SharedalalCA. J. C. Sharedalal

TR IBUNAL NEWSTR IBUNAL NEWSTR IBUNAL NEWSTR IBUNAL NEWSTR IBUNAL NEWSCA. Yogesh G. Shah

UNREPORTED JUDGMENTSUNREPORTED JUDGMENTSUNREPORTED JUDGMENTSUNREPORTED JUDGMENTSUNREPORTED JUDGMENTSCA. Sanjay R. Shah

C O N T R O V E R S I E SC O N T R O V E R S I E SC O N T R O V E R S I E SC O N T R O V E R S I E SC O N T R O V E R S I E SCA. Kaushik D. Shah

JUDIC IAL ANALJUDIC IAL ANALJUDIC IAL ANALJUDIC IAL ANALJUDIC IAL ANALYS I SYS I SYS I SYS I SYS I SAdvocate Tushar Hemani

COMMERC IAL ASPECTS OF C IV I L . . . . .COMMERC IAL ASPECTS OF C IV I L . . . . .COMMERC IAL ASPECTS OF C IV I L . . . . .COMMERC IAL ASPECTS OF C IV I L . . . . .COMMERC IAL ASPECTS OF C IV I L . . . . .CA. Sandesh Mundra

INTERNAINTERNAINTERNAINTERNAINTERNAT IONAL TAXT IONAL TAXT IONAL TAXT IONAL TAXT IONAL TAX AAAAAT IONT IONT IONT IONT IONCA. Dhinal ShahCA. Nehal Sheth

FEMA UPDFEMA UPDFEMA UPDFEMA UPDFEMA UPDAAAAATETETETETECA. Savan Godiawala

F INANCIAL REPORF INANCIAL REPORF INANCIAL REPORF INANCIAL REPORF INANCIAL REPORT ING STT ING STT ING STT ING STT ING STANDANDANDANDANDARDSARDSARDSARDSARDSCA. Manish Iyer

INDIRECT TINDIRECT TINDIRECT TINDIRECT TINDIRECT TAXES CORNERAXES CORNERAXES CORNERAXES CORNERAXES CORNERCA. Bihari B. Shah

C S T C S T C S T C S T C S T L AL AL AL AL AW UPDW UPDW UPDW UPDW UPDAAAAATETETETETECA. Priyam R. Shah

SERV ICE TAX REV IEWSERV ICE TAX REV IEWSERV ICE TAX REV IEWSERV ICE TAX REV IEWSERV ICE TAX REV IEWCA. Ashwin H. Shah

CORPORACORPORACORPORACORPORACORPORATE LATE LATE LATE LATE LAWS UPDWS UPDWS UPDWS UPDWS UPDAAAAATETETETETECA. Chirag M. Shah

FROM PUBL ISHED ACCOUNTSFROM PUBL ISHED ACCOUNTSFROM PUBL ISHED ACCOUNTSFROM PUBL ISHED ACCOUNTSFROM PUBL ISHED ACCOUNTSCA. Pamil H. Shah

B ITS & BYTESB ITS & BYTESB ITS & BYTESB ITS & BYTESB ITS & BYTESCA. B. M. Zinzuvadia

FROM THE GOVERNMENTFROM THE GOVERNMENTFROM THE GOVERNMENTFROM THE GOVERNMENTFROM THE GOVERNMENTCA. Chandrakant H. PamnaniCA. Kunal A. Shah

HEALHEALHEALHEALHEALTH & FUNTH & FUNTH & FUNTH & FUNTH & FUNCA. Ganesh Nadar

ASSOCIAASSOCIAASSOCIAASSOCIAASSOCIAT ION NEWST ION NEWST ION NEWST ION NEWST ION NEWSCA. Kunal A. ShahCA. Ashok C. Kataria

JOURNAL COMMITTEEJOURNAL COMMITTEEJOURNAL COMMITTEEJOURNAL COMMITTEEJOURNAL COMMITTEE

CA. Darshan A. ShahCA. Darshan A. ShahCA. Darshan A. ShahCA. Darshan A. ShahCA. Darshan A. ShahChairman (Editor)

CA. Parimal S. ShahCA. Parimal S. ShahCA. Parimal S. ShahCA. Parimal S. ShahCA. Parimal S. ShahConvener

CA. Chandrakant H. PamnaniCA. Chandrakant H. PamnaniCA. Chandrakant H. PamnaniCA. Chandrakant H. PamnaniCA. Chandrakant H. PamnaniPresident (Ex-Officio)

CA. Kunal A. ShahCA. Kunal A. ShahCA. Kunal A. ShahCA. Kunal A. ShahCA. Kunal A. ShahHon. Secretary (Ex-Officio)

CA. Ketul R. PatelCA. Ketul R. PatelCA. Ketul R. PatelCA. Ketul R. PatelCA. Ketul R. PatelExe. Committee Member

CA. Kaushik C. PatelCA. Kaushik C. PatelCA. Kaushik C. PatelCA. Kaushik C. PatelCA. Kaushik C. PatelExe. Committee Member

MEMBERSMEMBERSMEMBERSMEMBERSMEMBERS

CA. Bijal J. GandhiCA. Bijal J. GandhiCA. Bijal J. GandhiCA. Bijal J. GandhiCA. Bijal J. Gandhi

CCCCCA. Ganesh TA. Ganesh TA. Ganesh TA. Ganesh TA. Ganesh T. Nadar. Nadar. Nadar. Nadar. Nadar

CCCCC A. HarA. HarA. HarA. HarA. Hard ik Vd ik Vd ik Vd ik Vd ik Voraoraoraoraora

CA. N. K. AswaniCA. N. K. AswaniCA. N. K. AswaniCA. N. K. AswaniCA. N. K. Aswani

CA. Rajni M. ShahCA. Rajni M. ShahCA. Rajni M. ShahCA. Rajni M. ShahCA. Rajni M. Shah

CA. Sanjay R. ShahCA. Sanjay R. ShahCA. Sanjay R. ShahCA. Sanjay R. ShahCA. Sanjay R. Shah

CCCCCA. TA. TA. TA. TA. T. J. A. J. A. J. A. J. A. J. Adwanidwanidwanidwanidwani

A H M E D A B A DA H M E D A B A DA H M E D A B A DA H M E D A B A DA H M E D A B A DC H A R T E R E DC H A R T E R E DC H A R T E R E DC H A R T E R E DC H A R T E R E DA C C O U N TA C C O U N TA C C O U N TA C C O U N TA C C O U N TA N T SA N T SA N T SA N T SA N T SJ O U R N A LJ O U R N A LJ O U R N A LJ O U R N A LJ O U R N A L

Annexe to Insurance BuildingNear Income Tax,Ashram RoadAhmedabad - 380 014.Phone : 91 79 27544232Fax : 91 79 27545442E-mail : [email protected] : www.caa-ahm.org

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PUBLISHED BYPUBLISHED BYPUBLISHED BYPUBLISHED BYPUBLISHED BYShri Chandrakant F. Patel, on behalf of CharteredAccountants Association, Ahmedabad, Annexe toInsurance Building, Near Income Tax, Ashram Road,Ahmedabad - 380 014.Phone : 91 79 27544232 Fax : 91 79 27545442

No part of this Publication shall be reproduced ortransmitted in any form or by any means without thepermission in writing from the Chartered AccountantsAssociation, Ahmedabad.

While every effort has been made to ensure accuracyof information contained in this Journal, the Publisheris not responsible for any errors that may have arisen.

ATTENTIONATTENTIONATTENTIONATTENTIONATTENTION

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Journals are carefully posted. If not received,you are requested to write to the Association'sOffice within one month. A copy of the Journalwould be sent, if extra copies are available.

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Please mention your Association's membershipnumber/journal subscription number in all yourcorrespondence.

While sending Articles for this Journal, pleaseconfirm that the same are not published / noteven meant for publishing elsewhere. Nocorrespondence will be made in respect ofArticles not accepted for publication, nor willthey be sent back.

The opinions, views, statements, resultspublished in this Journal are of the respectiveauthors / contributors and Chartered AccountantsAssociation, Ahmedabad is neither responsiblefor the same nor does it necessarily concurwith the authors / contributors.

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The best articles published in this Journal in thecategories of 'Direct Taxes', 'Company Law and Auditing'and 'Allied Laws and Others' will be awarded the Trophies/Certificates of Appreciation after being vetted by expertsin the profession.

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

QUOTES FOR THE MONTHQUOTES FOR THE MONTHQUOTES FOR THE MONTHQUOTES FOR THE MONTHQUOTES FOR THE MONTH

A soft nature of person does not meanA soft nature of person does not meanA soft nature of person does not meanA soft nature of person does not meanA soft nature of person does not meanweakness, Remember…weakness, Remember…weakness, Remember…weakness, Remember…weakness, Remember…

Nothing is softer than water…Nothing is softer than water…Nothing is softer than water…Nothing is softer than water…Nothing is softer than water…But its forBut its forBut its forBut its forBut its force can brce can brce can brce can brce can break the streak the streak the streak the streak the strongongongongongest of Rocks…est of Rocks…est of Rocks…est of Rocks…est of Rocks…

A Good heart and A Good nature are twoA Good heart and A Good nature are twoA Good heart and A Good nature are twoA Good heart and A Good nature are twoA Good heart and A Good nature are twodifferent issues, A good heart can builddifferent issues, A good heart can builddifferent issues, A good heart can builddifferent issues, A good heart can builddifferent issues, A good heart can build

many relationship but a good nature can winmany relationship but a good nature can winmany relationship but a good nature can winmany relationship but a good nature can winmany relationship but a good nature can winmany good hearts.many good hearts.many good hearts.many good hearts.many good hearts.

"The new source of power is not money in"The new source of power is not money in"The new source of power is not money in"The new source of power is not money in"The new source of power is not money inthe hands of a fewthe hands of a fewthe hands of a fewthe hands of a fewthe hands of a few, b, b, b, b, but information in theut information in theut information in theut information in theut information in the

hands of many"hands of many"hands of many"hands of many"hands of many"- John Naisbitt

American author

July, 2011


The ability to read a person’s attitude and thoughts by his behavior was the original communication

system used by the humans before the evolution of languages spoken by people in the world. Juxtapose

this to the silent movies of 1960’s and before.

Body LanguagBody LanguagBody LanguagBody LanguagBody Language - The unspoken language - The unspoken language - The unspoken language - The unspoken language - The unspoken languageeeee

EDITORIALEDITORIALEDITORIALEDITORIALEDITORIAL

Body language is the language of non verbal communication.It is the language of minds. It is used for negotiatinginterpersonal attitudes and in some cases is used as asubstitute of verbal message. In reality, body language travelsfaster than the spoken language when communicator andreceiver are within the sight of each other. The very visibility(i.e. appearance) of a person sends vibrations which theopponent receives and primary reactions are formed in hiswithin.

There is a rigid link between body language and words. TheBody language is the entry point for entering into any type ofverbal negotiation or communication. The effect created bythe body language is to be sustained or removed by thespoken words.

In “The Definitive Book of Body Language”, Alan andBarbara Pease, on page378-379 have decoded Six Secretsof Attractive Body Language:

Face: Have an animated face and make smiling a part ofyour regular repertoire. Make sure you flash your teeth.

Gesture: Be expressive but don’t overdo it. Keep your fingersclosed when you gesture, your hands below chin level andavoid arm or feet crossing.

Head Movement: Use Triple Nods when talking and HeadTilt when listening. Keep your chin up.

Eye Contact: Give the amount of eye contact that makeseveryone feel comfortable. Unless looking at others is acultural no-no, lookers gain more credibility than non lookers.

Posture: Lean forward when listening. Stand straight whenspeaking.

Territory: Stand as close as you feel comfortable. If theother person moves back, don’t step forward again.

Mirror: Subtly mirror the body language of others.

One must realize that the entire body is to body language asthe speech organs are to the spoken language. Eachmovement or position of body has adaptive, expressive anddefensive functions – some conscious, some unconscious.

Posture, movements, eye contacts, expressions, appearance,clothing portray a person prior to the spoken words. Theyare the pilots of the communicator and create aspirationsand expectations in the mind of the opponent.

All over the world, the politicians, the theatrical actors, thebeauty pageants are known for their ability to exploit thenuances of body language. We professionals claim to beless than 0.05% of the total population and therefore are rarespecies. We struggle to master the spoken language whichis effective only when the decibels we generate can reachthe receiver. We too need to master the secrets of Bodylanguage and be more resourceful professionals.World over, the most ardent users of body language are thepoliticians. The plausible explanation is they have to dealwith human beings on a larger scale than any other livingsoul - rest of the human species exhibit the body languageonly when needed. The participants of a beauty pageant aretrained how to sit, walk, stand, gesture, pose. Theirmovements are tested and accurate. The celluloid and smallscreen artists too do not lag behind. We all experience theoutcome of their proficiency at using the body language.One will never be able to change the body characters – likefeatures, voice tone, frame structure etc. You cannot besomebody else. So love yourself the way you are. Do notworry about what you cannot change.But do know that stinking body, stinking clothes, ruffled attire,ill fitted clothing are the great adversaries of meaningful bodylanguage. Presence of either of them will make the presenterwork harder than normal to achieve the desired goal.One can purposefully project negative body language byflattening pitch of voice, by stripping it off of all emotions,deadpanning face to eliminate emotions, very cleverly feedingwrong body movements. Here also, the manipulator has tobe very smart because same disaster results when the personis too inhibited and awkward to use the correct gestures orjust not knowing what is right.A word of caution – the exaggerated use of a limited amountof body language makes the user a fair game to mimic.Unconsciously, we all are playing the game of body languagethroughout the life time. Now, start playing it consciously.Break a few rules and see what happens. It will be surprisingand sometimes a bit frightening, adventurous, revealing andfunny, but I promise, it won’t be dull.CA DARSHAN SHAHEDITORPlease do read “The Definitive Book of Body Language”,Alan and Barbara Pease.

July, 2011


July is the month where we begin by celebrating the CA day on 1st of July, and I would say the celebrationscontinued for the Association and its members by way of Brain Trust meeting on 2nd July on the topic ofAudits under the Income Tax Act. It was indeed a brain storming session and very well lead by the learnedspeaker from Mumbai CA Ameet Patel. The various events at the Association are lined up with an importantevent of 38th Residential Refresher Course (RRC) at Jaipur to be held from 6th to 9th August 2011 in primefocus. The process of registration of members for the RRC is going on and I am hopeful that large number of

members would come forward for the RRC.

The rule 12 of the Income Tax Rules has been amendedwhereby w.e.f. 1-7-2011, Firms / Individuals / HUF liable toaudit under section 44AB are now required to compulsorilyfile the return of income under digital signature. With theelectronic filing of returns and processing of these returnsby the department at the CPC various issues arose that werebrought to the notice of the Association by the membersconcerned that included processing of returns with incorrectfigures, non receipt of refunds, adjustment of incorrectdemands, mismatch of tax credit with form no. 26AS. I ampleased to inform the members that the representation onissues referred and many others arising on account ofprocessing returns was made by the Association to the ChiefCommissioner of Income Tax-I, Ahmedabad and we areinformed by the Hon. CCIT that same has been forwarded toD.G.(Systems), New Delhi for further action.

The issue of 2G spectrum has been talked about so manytimes and it continues to haunt back. The matter has broughtin the discussion on the concept of “Presumptive Loss”. TheDeputy Chairman of Rajya Sabha Mr. M.K.Rahman Khanhas suggested that ICAI must take up accounting and auditingrelated issues like presumptive loss and also suggestmeasures to the Government so as to improve the efficiencyof public expenditure. (source - www.businessline.in). It isone more occasion of taking pride for being a part of theprofession which is looked upon with a great degree ofintegrity.

The second week of the month has once again witnessedthe terror attacks in Mumbai. Three bomb blasts at busyplaces of the city has resulted in loss of many lives. Thecity being the financial hub of the country and consideringits geographical location and cosmopolitan culture has always

DEAR PROFESSIONAL FRIENDS,DEAR PROFESSIONAL FRIENDS,DEAR PROFESSIONAL FRIENDS,DEAR PROFESSIONAL FRIENDS,DEAR PROFESSIONAL FRIENDS,

PRESIDENT'S MESSAGEPRESIDENT'S MESSAGEPRESIDENT'S MESSAGEPRESIDENT'S MESSAGEPRESIDENT'S MESSAGE

been an easy and prime target for such kinds of attacks.The spirit of Mumbai and the resilience of the people aremuch talked about in the media. It is the time to look into thespirit of the family that gets shattered and affected by suchattacks and whether any option lies apart from being resilientconsidering the number of attacks Mumbai has had overlast decade. The spineless government’s inaction andimpotency to deal with such episodes have also been thereason of disappointment amongst the civil society.

Not favoring the culprits of these attacks or pardoning themfor the barbaric acts on mankind, there are two ways to lookinto. One, there is this world of hatred that causes theseterror attacks and another world filled with love that gives usstrength and has the power to overcome hatred. Confirmingit is the poem by Robert Frost “Fire and Ice” with which Iwould conclude:

“Some say the world will end in fire,

Some say in ice,

From what I’ve tasted of desire,

I hold with those who favor fire,

But if I had to perish twice,

I think I know enough of hate,

To say that for destruction ice,

It is also great

And would suffice,

Regards,

CA. C.H.Pamnani.

July, 2011


PART - III

DIRECT TAXES CODE BILL - 2010

1. Background

1.1 The Finance Minister, in the first UPA Government,had announced in 2006 – 07 that there was need tosimplify the Direct - Tax Laws. First, Dr. KelkarCommittee (Task Force) was appointed in 2004. Itsreport was received in July, 2004. Thereafter, aninternal committee was appointed to draft a new DirectTax Code Bill which would replace the existing Incometax Act, 1961 (ITA) and Wealth tax Act, 1957 (WTA).Based on this, the present Finance Minister, ShriPranab Mukherjee, announced in his Budget Speechdelivered in the Parliament on 6th July, 2009, thatDirect Taxes Code, along with a Discussion Paper,will be released to the public for debate. He also statedthat the Government will finalize the Direct Taxes CodeBill for introduction in the Parliament, after consideringinputs received, sometime during the Winter Session.

1.2 Shri Pranab Mukherjee released the “Direct TaxesCode Bill, 2009” (DTC) with a discussion paper forpublic debate on 12th August, 2009. In his Forewardto this document he observed as under:

“The thrust of the Code is to improve the efficiencyand equity of our tax system by eliminating distortionsin the tax structure, introducing moderate levels oftaxation and expanding the tax base. The attempt isto simplify the language to enable bettercomprehension and remove ambiguity to fostervoluntary compliance. The new Code is designated toprovide stability in the tax regime as it is based onwell accepted principle of taxation and best internationalpractices. It will eventually pave the way for a singleunified taxpayer reporting system. It will speciallymeet the aspirations of our young and professionallymobile population.”

1.3 The above Direct Taxes Code Bill, 2009, and thediscussion paper issued in August, 2009, wasdiscussed by the members of the public, taxprofessionals, trade, industry and professionalassociations and representations were made to theGovernment. Based on these representations, theFinance Ministry issued a Revised Discussion Paper

on Direct Taxes Code on 15th June, 2010. In thisrevised discussion paper the Ministry identified elevenissues and announced that changes will be made inthe Direct Taxes Code Bill. These issues are as under.

(i) Minimum Alternate Tax (MAT) - It was announcedthat MAT will be levied on book profit of the companyand not on the gross assets of the company asoriginally proposed.

(ii) Tax Treatment on Savings - It was announced thatExempt Exempt Exempt (EEE) method will continuein respect of Government P.F., Public P.F.,Recognised PF and certain approved Pension Funds,Insurance Products etc. In respect of other existinginstruments for which EEE method is recognised atpresent will continue in respect of these instrumentsissued before the date of commencement of DTC.However, for these instruments issued after DTCcomes into force, the Exempt, Exempt Tax (EET) asoriginally proposed will be introduced.

(iii) Taxation of Income from Employment - It wasannounced that the valuation of perquisite in the natureof rent free accommodation based on market value,as originally proposed, will not be introduced. Theperquisites in relation to medical facilities /reimbursement, as per the existing law will continuewith appropriate enhancement of monetary limits. Themethod of valuation of other perquisites will beappropriately provided in the Rules.

(iv) Taxation of Income from House Property - It wasannounced that the rental value of house property letout will be computed on the basis rent received orreceivable basis. If the house is not let, rental incomewill be ‘Nil’ and no deduction for expenses will beallowed in such cases. However, in respect of onehouse which is not let, interest on monies borrowedfor acquiring /constructing the house, subject to ceiling

CA. H. N. Shah

CA. P. N. ShahThe author is the past President of ICAI. He can bereached at [email protected]

July, 2011


Article : Finance Act, 2011

of Rs.1.5 lacs, will be allowed.

(v) Taxation of Capital Gains - It was decided to modifythe original proposal as under:

(a) Income from capital gain will not be considered asincome from ordinary sources.

(b) Asset held for more than one year from the end of thefinancial year will be considered as long term capitalasset.

(c) Securities Transaction Tax (STT) will continue.

(d) For long term capital gains indexation benefit willcontinue. The existing date of 1.4.1981 will now befixed as 1.4.2000.

(e) Capital Gains Savings Scheme will be introduced.

(f) A new scheme for taxation of capital gains oninvestment assets has been proposed to reduce theburden of tax.

(g) Income of FIIs from share trading will be consideredas capital gains and not business income.

(vi) Taxation of Non-Profit Organisations (CharitableTrust and Institutions) (NPO)

The following modifications to original proposals wereannounced:

(a) Registration u/s 12 A / 12 AA given under the existinglaw will continue for the existing charitable trusts.

(b) The term “permitted welfare activity” as originallyproposed changed to “charitable purpose”.

(c) NPO will be permitted to accumulate 15% of netincome or 10% of gross receipts whichever is higherfor 3 years subject to certain conditions.

(d) Tax rate on net taxable income in excess of Rs.1 lacwill be 15% of such excess.

(e) NPO can maintain books on cash method ofaccounting.

(f) Certain other beneficial provisions are proposed.

(vii) Special Economic Zones (SEZ) - It was proposedthat specific provisions for protecting such deductionin the case of SEZ for the unexpired period will beprovided. Similarly, provision to protect profit linkeddeductions to existing SEZ units will also be made.

(viii) Concept of Residence in the case of ForeignCompanies - Instead of the original proposal thefollowing provisions will be made:

(a) A Foreign company will be treated as resident in India

if its “place of effective management” is situated inIndia.

(b) A new concept of “Controlled Foreign Company (CFC)will be introduced as an anti-avoidance measure.

(ix) Double Taxation Avoidance Agreements (DTAA) -The existing provision which states that DTAA orDomestic Law which is more favourable to theassessee will apply, is proposed to be continued underDTC. However, when (i) General Anti Avoidance Rule,(ii) Controlled Foreign Company provisions or (iii)Branch Profits Tax provisions are invoked, theDomestic law will apply.

(x) Wealth Tax - This tax will be levied on ‘UnproductiveAssets” as at present. List of such assets will bemodified and explained. This tax will be payable by allassessees except NPOS. The threshold limit and rateof tax will be modified.

(xi) General Anti - Avoidance Rule (GAAR) - Thefollowing modifications were announced.

(a) CBDT will issue guidelines to provide for thecircumstances under which GAAR may be invoked.

(b) GAAR provisions will be invoked only in respect of anarrangement where tax avoidance is beyond specifiedthreshold limit.

(c) The forum of Dispute Resolution Panel (DRP) wouldbe available where GAAR provisions are invoked.

1.4 Based on the above Revised Discussion Paper, theFinance Ministry has revised the Direct Taxes Code,Bill, 2009, originally drafted in 2009. The revised DirectTaxes Code Bill, 2010, was, accordingly, introducedin the Parliament by the Finance Minister on27.8.2010. While introducing this Bill he has explainedthe objective for replacing the present Income tax Act,1961 and Wealth Tax Act, 1957 by the new DirectTaxes Code (DTC) as under:

“The Income tax Act, 1961, has been subjected tonumerous amendments since its passage fifty yearsago. It has been considerably revised, not less thanthirty-four times, by amendment Acts besides theamendments carried out through the annual FinanceActs. These amendments were necessitated by policychanges due to the changing economic environment,increasing sophistication of commerce, increase ininternational transactions as a result of globalization,development of information technology, attempts tominimize tax avoidance and in order to clarify thestatue in relation to judicial decisions. As a result of

July, 2011



all these amendments, the basic structure of theIncome tax Act has been over burdened and itslanguage has become complex. Tax administrators,accountants and tax payers have raised concernsabout the complex structure of the income tax Act. Inparticular, the numerous amendments have renderedthe Act difficult to decipher by the average tax payer.The Wealth tax Act, 1957 has also witnessedamendments.

The Government, therefore, decided to revise,consolidate and simplify the language and structureof the direct tax laws. A draft Direct Taxes Code alongwith a Discussion Paper was released in August, 2009for public comments. It proposed to replace the incometax Act, 1961 and the Wealth tax Act, 1957 by a singleAct, namely the Direct Taxes Code. Public andstakeholder feedback on the proposals outlined inthese documents was analysed and suggestions foramendments received from members of the public,business associations and other bodies were takeninto account. Thereafter, a Revised Discussion Paperaddressing the major issues was released in June,2010. The present Bill is the outcome of this process.”

1.5 The Direct Taxes Code Bill, 2010 (Code or DTC)contains 319 sections divided into 20 Chapters. Thebasic concepts are stated in these sections. However,details about computation of income, procedures tobe followed, rates of taxes, rates of depreciation etc.are given in 22 schedules annexed to the Bill. Thefirst four schedules give rates of taxes applicable tovarious types of assessees, TDS rates etc. This is adeparture from the existing Income tax Act under whichrates of taxes, TDS rates etc. are announced everyyear in the Finance Bill. Now, if the rates have to bechanged, these schedules will be amended by theParliament through the Amendment Act or FinanceAct. This is a welcome change. Reading the Code asa whole, it will be noticed that several new conceptsare proposed to be introduced. In this article, theprovisions of the Code are briefly discussed. It is statedthat the DTC is under consideration of the StandingCommittee for Finance. After its Report is submitted,the Parliament will consider the Bill and the proposalsfor modification, before enacting the Code. Theintention of the Government is to make the Codeeffective from 1.4.2012. Therefore, if the Code isenacted by the Parliament in 2011, the income for theF.Y. 1.4.2012 to 31.3.2013 and onwards will beassessed as provided in the Code.

2. Some Salient Features of the Code

2.1 Both the Direct Tax Laws i.e. Income tax Act andWealth tax Act are combined in the Code so that allprocedural provisions will be common. The assesseewill have to file only a single return for both the taxesand only one common assessment order for levy ofIncome tax and Wealth tax will have to be passed bythe A.O. Similarly, the appellate procedure againstthe levy of income tax and Wealth tax will also becommon. Therefore, if an assessee has taxableincome he will have to file a tax return which will includeparticulars of wealth even if the taxable net wealth isbelow taxable limit. Similarly, if he has taxable wealthbut the total income is below the taxable limit, he willhave to give details of his wealth as well as totalincome.

2.2 The language used in each section of the code issimple. Each sub-section has short sentencesintended to convey only one point. Similarly, the useof “proviso or Explanation” in the section is done awaywith. More importantly, keeping in view the fact that atax law is essentially a commercial law, extensiveuse of formulae and tables has been made.

2.3 The structure of the statute has been developed in amanner which is capable of accommodating thechanges in the structure of a growing economy withoutresorting to frequent amendments. Therefore, to theextent possible, the essential and general principleshave been reflected in the statute and the matters ofdetail are contained in the Schedules or will be clarifiedin the Rules to be prescribed.

2.4 At present, the rates of taxes are stipulated in theFinance Act of the relevant year. Therefore, there is acertain degree of uncertainty and instability in theprevailing rates of taxes. Under the Code, all rates oftaxes are prescribed in the First to the Fourth Scheduleto the Code itself. The changes in the rates, if any,will be done through appropriate amendments to theSchedule brought before Parliament in the form of anAmendment Bill or the Finance Bill.

2.5 At present, definitions of certain words and terms aregiven in different sections. Some times, the same wordor term is defined differently in different sections. Inthe Code, Section 314 gives definitions of 297 wordsor terms. Thus, definitions of all words or terms usedin the Code are available at one place.

2.6 The Code seeks to adopt, to the extent possible, acomprehensive definition of income. Therefore, income

July, 2011


for the purposes of this Code will, in general, includeall accruals and receipts of revenue and capital natureunless otherwise specified. Further, on account of theassignment of the taxing powers under the Constitutionto the States, agricultural income has been excludedfrom the scope of this Code.

2.7 Two new concepts, as a measure of anti-avoidancemeasure, have been introduced in the Code. Theserelate to introduction of “General Anti – AvoidanceRules” (GAAR) in sections 123 and 124 and “Controlled

Foreign Company” (CFC) Rules as provided inSchedule - 20.

3. Chapters and Schedules

As stated earlier, there are 20 Chapters divided into319 sections and 22 Schedules. For the purpose ofunderstanding the provisions of the Code one has torefer to the relevant sections, definitions of certainwords or terms in section 314 and also refer to therelevant schedules. In section 314 there are 297 sub-sections defining the various words and terms usedin the Code.

Briefly stated these sections and schedules are as under.

Chapter Topics Schedules

1. Short Title, Extent and CommencementSec. 1 -

2. Basis of ChargeSec. 2 - 11 (i) 1 (Rates of Income tax)

(ii) 6 (Exclusion from Total Income)

(iii) 7 (Entities not taxable)

3. A. Computation of Total Income

GeneralSec. 12 - 19 (i) 6 (In Exclusion from Total Income)

(ii) 9 ( Income from Special sources)

B. Heads of Income

(i) Income from EmploymentSec. 20 - 23 -

(ii) Income from House PropertySec. 24 - 29 -

(iii) Income from BusinessSec. 30 - 45 (i) 8 - Profits of Insurance Business

(ii) 10 - Profits of Shipping Business

(iii) 11 - Profits of Mineral Oil and Natural Gas Business

(iv) 12 - Profits of SEZ Units

(v) 13 - Profits of Specified Businesses

(vi) 14 - Presumptive Income

(vii) 15 - Depreciation Rates

(viii) 22 - Allowance of Deferred Revenue Expenditure

(iv) Capital GainsSec. 46 - 55 17 - Determination of Cost of

Acquisition of Assets


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Chapter Topics Schedules

(v) Income from Residuary SourcesSec. 56 – 59 20 - Determination of Income of

Controlled Foreign Company (CFC)

C. Aggregation of IncomeSec. 60 - 67 -

D. Tax IncentivesSec. 68 - 86 16 - Deduction for approved Donations.

E. Maintenance of Accounts and otherrelated mattersSec. 87 – 89 -

4. Computation of Total Income ofNon-profit OrganisationsSec. 90 - 103 7 (Persons not liable to tax)

5. Computation of Book ProfitSec. 104 - 107 2 (Rates of tax)

6. Taxation of Venture Company / FundSec. 108 -

7. Taxation of Dividend Distribution byCompaniesSec. 109 2 (Rates of tax)

8. Taxation of Distributed Income fromM.F. and Life InsurersSec. 110 2 (Rates of tax)

9. Branch Profit taxSec. 111 2 (Rates of tax)

10. Wealth TaxSec. 112 - 114 2 (Rate of tax)

11. Provisions relating to Avoidance of TaxSec. 115 - 125

12. Tax Administration and Procedure

A. Tax AdministrationSec. 126 - 143

B. Assessment ProcedureSec. 144 - 163

C. Assessment in Special CasesSec. 164 - 177

D. Appeals and RevisionSec. 178 - 192 21 - Appealable orders before CIT(A)

13. Collection and Recovery of TaxA. Deduction of Tax at Source

Sec. 193 - 201 3 (TDS rates for Residents)

4 (TDS rates for Non - Residents)

B. Collection of Tax at SourceSec. 201 - 204

C. Advance TaxSec. 205

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APPLICABILITY OF SECTION 2(22)(E) IN CASEOF LOAN ADVANCED BY ONE COMPANY TOANOTHER COMPANY HAVING A COMMONSHAREHOLDER

Where to be taxed?

Mumbai Special Bench in case of Bhaumik Colour P. Ltd.v ACIT [2009] 313 ITR 146 has held that deemed dividendcan be assessed only in the hands of a person, who is ashareholder of the lender company and not in the hands of aperson other than a shareholder.

The expression “shareholder” referred to in section 2(22)(e)refers to both a registered shareholder and beneficialshareholder.

ITAT Mumbai has also supported this view in case of ShrutiProperties P. Ltd. [2010] 4 ITR 186. The effect of thesedecisions is that in a case where loan is advanced by onecompany to another company having common shareholder,the amount of such loan would be caught under the mischiefof the provisions of section 2(22)(e) and deemed dividendwill be assessed in the hands of such common shareholder.Say loan is advanced by X Ltd. (Lender Company) to Y Ltd.(Borrower Company) and Mr. A holds 10% or more equityshares in X Ltd. and also substantially holds 20% or moreequity shares in Y Ltd., then following the decision of MumbaiSpecial Bench, deemed dividend can be assessed in thehands of Mr. A and not in the hands of Y Ltd. to the extent ofaccumulated profits.

Thus, in all cases where loan is advanced by one companyto another, even for genuine purpose, the ruling of SpecialBench would result into taxing of deemed dividend in thehands of a common shareholder. However, before concludingthis, it is relevant to consider the following:

Whether it is taxable?

Section 2(22)(e):

Section 2(22)(e) has three limbs, which are as under:

“Any payment by a company, not being a company in whichthe public are substantially interested, of any sum (whetheras representing a part of the assets of the company orotherwise) made after 31-5-1987, by way of advance orloan:

First limb

(a) to a shareholder, being a person who is the beneficialowner of shares (not being shares entitled to a fixedrate of dividend whether with or without a right toparticipate in profits) holding not less than ten percent of the voting power.

Second limb

(b) or to any concern in which such shareholder is amember or a partner and in which he has a substantialinterest hereafter in this clause referred to as the saidconcern.

Third limb

(c) or any payment by any such company on behalf, or forthe individual benefit, of any such shareholder, to theextent to which the company in either case possessesaccumulated profits.

Intention behind enacting section 2(22)(e):

The Finance Minister in his budget speech while introducingclause (e) to section 2(6A) of the IT Act, 1922 (whichcorresponds to section 2(22)(e) of IT Act, 1961);acknowledged the fact that the insertion of this clause wasbased on recommendations of Taxation Enquiry Commission(Report of 1953-54 Volume II Chapter X). The intention laiddown therein was that closely held companies (i.e.,companies in which public are not substantially interested),which are controlled by a group of members, even thoughthe company has accumulated profits would not distributesuch profit as dividend, because if so distributed the dividendincome would became taxable in the hands of theshareholders. Instead of distributing accumulated profits asdividend, companies distribute them as loan or advances toshareholders or to concern in which such shareholders havesubstantial interest or make any payment on behalf of or forthe individual benefit of such shareholder. In such an event,

CA. Parag Raval

Author is the Central Council Member andcan be reached at

July, 2011


by the deeming provisions such payment by the company istreated as dividend. The deeming provisions as it appliesto the case of loans or advances by a company to aconcern in which its shareholder has substantial interest,is based on the presumption that the loan or advanceswould ultimately be made available to the shareholdersof the company giving the loan or advance.

Conditions for invoking second limb of section 2(22)(e):

(i) Loan or advance is given by a closely held company.

(ii) Such loan is given to a concern.

(iii) One of the shareholders’ is beneficially holding 10%equity share capital in the closely held company andhas substantial interest in the concern.

(iv) Such loan or advance is treated as deemed dividend tothe extent of accumulated profits of the company.

Inspite of the above conditions, the essence for invokingthe provisions of section 2(22)(e) is that the loan oradvance given should confer individual benefit to theshareholder. Though this condition is not envisaged in thesection itself, various courts have held that without thefulfillment of this pre-requisite, provisions of section 2(22)(e)can not be invoked as it would abandon the purpose behindthis section. Some important decisions in this context areas under:

(a) Calcutta High Court in case of Mukundray K. Shah vCommissioner of Income Tax [2005] 146 Taxman0743 has observed that notwithstanding the fact thatthe company undisputedly satisfies all qualifications laiddown for invoking section 2(22)(e), the criticalqualification that should be examined is that whetherthe payment made was for the benefit of the shareholderor person or such persons having substantial interest.In absence of this qualification, the provisions of section2(22)(e) can not be invoked.

On appeal being made to Supreme Court in the abovecase [290 ITR 433], the honorable Apex Court confirmedthe assertion of Calcutta High Court that section 2(22)(e)can be invoked only if there is individual benefit conferredupon the shareholder. However, the Apex Court heldagainst the assessee due to fact that there existed co-relation between the RBI bonds purchased by theassessee and the payments made by a private limitedcompany to two partnership firms wherein the assesseewas a shareholder and partner respectively.

Thus, the basis for forming this decision was that there

was individual benefit conferred upon the shareholder,without which the provisions of section 2(22)(e) can notbe invoked.

(b) Calcutta High Court in case of Nandlal Kanoria v CIT[1980] 122 ITR 405 has held that in order to invokesection 2(22)(e), there should be some co-relationbetween:

(i) The payment made by the lender company toborrowing company and

(ii) An advantage or benefit flowing from borrowingcompany to shareholder.

(c) Rajasthan High Court in case of Hotel Hiltop v CIT [2009] 313 ITR 0116 has also supported this view bystating that the substance of the requirement forinvoking section 2(22)(e) is that the payment should bemade on behalf of or for the individual benefit of theshareholder. Section 2(22)(e) is intended to attractliability of tax on the person, on whose behalf, or forwhose individual benefit, the loan is advanced by thelender company.

Thus, the motive or intention of the lender company whileadvancing the loan is important to analyze because forinvoking section 2(22)(e), there should be some “benefit”which is flowing to the shareholder. In absence of thiscondition, the provisions of section 2(22)(e) can not be invokednotwithstanding the fact that all the other conditions arefulfilled.

Genuine business transactions are outside the scope ofsection 2(22)(e):

The provisions of section 2(22)(e)(ii) states that where loanis advanced to a shareholder by a company in its ordinarycourse of business where money lending is substantial partof its business, the provisions of section 2(22)(e) would notget attracted. Does this mean that those assessees whichare not in money lending business, can not be waived of theprovisions of this section on giving loans in their ordinarycourse of business?

Delhi High Court in case of CIT vs Creative Dyeing &Printing (P.) Ltd. [2009] 184 Taxman 483 held that theprovisions of section 2(22)(e)(ii) gives an example only ofone of the situations where the loan or advance will not betreated as deemed dividend. The same can not be expandedfurther to take away the basic meaning, intent and purposeof the main part of this section. Once it is held that thebusiness transactions do not fall within the provisions of thissection as they do not correspond to the intention behind

Article : Applicability of Section 2(22)(E).....

July, 2011


this section, there is no need to go further to section2(22)(e)(ii).

Chandigarh Tribunal in case of Deputy Commissioner ofIncome Tax v Lakra Brothers 2007-(162)-Taxman -0170 –TCHD has observed that the provisions of section 2(22)(e)can not be stretched to include even legitimate businesstransactions carried out in ordinary course of business wherethe intention is neither to give shareholder any money out ofthe amount of loan nor for his individual benefit. There shouldbe actual payment i.e. outflow of money from the companyto the shareholder. This condition is not satisfied in a casewhere the lender company advances money to lend financialsupport to another company, which is utilized by the borrowingcompany for genuine business purpose to bestow benefitupon its business and not upon the common shareholder.Where the real intention of the loan transaction is to facilitatethe borrowing company in carrying on its business, with noother hidden purpose, it can be said that the provisions ofsection 2(22)(e) can not be invoked. This view is supportedin the decisions of:

(i) CIT vs Raj Kumar [2009] 181 Taxman 155 (Delhi)

(ii) CIT vs Ambassador Travels (P.) Ltd. [2008] 173 Taman407 (Delhi)

(iii) CIT vs Nagindas M. Kapadia [1989] 177 ITR 393(Bombay)

Similarly, Delhi Tribunal in the case of Sunil Seth v DeputyCommissioner of Income Tax [2008] 026 SOT 0095 heldthat simply because of the fact that the sum of money wasgiven to the shareholder, section 2(22)(e) can not be invoked.Enough material or evidence should be brought on record toprove that the loan advanced was not for benefit of businessbut for shareholder’s individual benefit.

The burden to prove the same is on the revenue as held byKerala High Court in case of Commissioner of IncomeTax v P. V. John [ 1980] 181 ITR 0001.

At this point, it is essential to consider the case of M. D.Jindal v. CIT [1987] 164 ITR 28 ([1986] 28 Taxman 509)(Cal.). In this case, a company dealing in iron materials hadsupplied iron rods to the assessee who controlled the companyalongwith his wife, which were utilized by the assessee inconstruction of his house. The assessee contended that thistransaction was not in nature of loan as it amounted to saleof iron rods by the company and the consideration to be paidagainst it was adjusted against the amount payable by thecompany to the assessee in lieu of purchase of flats, whichwere constructed by him using the said iron rods. It was

observed that if the assessee had got the iron rods beforeentering into an agreement for sale of flats, it would haveclearly invoked section 2(22)(e). Instead of doing that way,the assessee thought of a device to circumvent the provisionsof section 2(22)(e) and made an arrangement with thecompany by which the company was made debtor of theassessee. The sale of flats to the company was observed tobe an “arranged affair” to avoid taxing of deemed dividend inthe hands of the assessee. Hence, value of iron rods wereheld to be taxable in the hands of the assessee as deemeddividend.

Notional entries are to be excluded:

In order to attract section 2(22)(e), there should be outgoingor flow of money from the lender company to the shareholderas held in case of Lakra Brothers(Supra). Thus, notionalpayment by way of book entries will not be included in thecalculation of the amount of deemed dividend. Thus, if interestis charged by the lender company or notional entry forexpenses is passed in the books, in any case, the same willhave to be excluded from the computation of deemed dividendin the hands of shareholder.

Conclusion:

In order to attract the mischief of section 2(22)(e), there shouldbe two findings of facts, namely, the factum of payment bythe lender company and the motive or intention of the companymaking such payment, namely, benefit accruing to theassessee shareholder. The crux for invoking the provisionsof section 2(22)(e) is that the amount of loan given by thecompany should confer any kind of individual benefit to theshareholder. The loans advanced on the ground of businessexpediency can not be constituted as “loan” for the purposeof section 2(22)(e).

Thus, inspite of the decision of Special Bench in case ofBhaumik Colours (Supra), in every case of loan advancedby one company (i.e. X Ltd.) to another company (i.e. YLtd.) having common shareholder (i.e. Mr. A), it is not possibleto conclude that the provisions of section 2(22)(e) would applyto tax deemed dividend in the hands of such commonshareholder (Mr. A), where the borrower company (Y Ltd.)did not act as conduit pipe through which money came fromthe lender company (X Ltd.) to shareholder (Mr. A). Moreover,as regards taxability of deemed dividend in hands of Y Ltd.,it can be said that unless and until Y Ltd. is a registered andbeneficial shareholder, the provisions of section 2(22)(e) cannot be invoked to tax dividend in hands of Y Ltd.

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Article : Applicability of Section 2(22)(E).....

July, 2011


INTEREST ON REFUND OF SELF ASSESSMENTTAX :

CIT V/S. SUTLEJ INDUSTRIES LTD. (2010) 325 ITR 331(DELHI)

Issue :

Whether assessee is entitled to interest on refund of selfassessment tax?

Held :

It is a trite law that wherever the assessee is entitled torefund, there is a statutory liability on the Revenue to paythe interest on such refund on general principles. Sec. 244Aof the I.T. Act, 1961, was inserted in the statute as a measureof rationalization to ensure that the assessee is dulycompensated by the Government by way of payment ofinterest for monies legitimately belonging to the assesseeand wrongfully retained by the Government without any gaps.On an analysis of Sec. 244A of the Act it is seen that where“Refund of any amount” becomes due to the asseesee, theassessee is entitled to simple interest thereon. The modeand manner of calculating such interest in laid down in clauses(a) and (b) of sub-section (1) of Sec. 244. Even though theshort title to Sec. 140A makes it clear that there is nodifference between (i) the tax paid u/s 115WJ, which dealswith advance tax in respect of fringe benefits; or (ii) the taxcollected at source u/s 206C or (iii) any tax paid by way ofadvance tax or any tax treated as paid u/s 199, which dealswith credit for tax deducted, which are provided u/s 244(1)(a).Hence where self assessment tax is paid by the assesseeu/s 140A is refunded, the assessee should be on principleentitled to interest thereon since the self assessment taxfalls within expression “ refund of any amount”. Thecomputation of interest on self assessment tax has to be interms of section 244(1)(b), i.e. from the date of payment ofsuch amount upto the date on which refund is actually granted.

FAILURE TO PRODUCE PERSONS & SEC. 145(3) :

CIT V/S. JAS JACK ELEGANCE EXPORTS (2010) 191TAXMAN 386 (DELHI)

Issue :

Whether provision of sec. 145(3) can be invoked for failureof the assessee to produce persons to whom payments aremade?

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CA. Jayesh C. SharedalalThe author is the past President of CAA,practising since 1981. He can be reached [email protected].

CA. C. R. SharedalalThe author is the past President of CAA,practising since 1953. He can be reached [email protected].

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Held :

As regards failure of the assessee to produce the persons towhom payments were made by the assessee for fabrication,embroidery and dyeing and finishing etc, the AssessingOfficer was at liberty to summon any or all of them in casehe wanted to verify the genuineness of the payments madeto them. No such course of action was, however adopted byhim. Failure of the assessee to produce those persons couldnot have been a ground for rejecting the accounts u/s 145(3) of the Act.

“RELIANCE PETRO PRODUCTS” DECISIONEXPLAINED

CIT V/S. VIJAY KUMAR JAIN (2010) 325 ITR 378(CHHATISGARH)

Issue :

What are the necessary ingredients for levy of penalty u/s271(1)(c)?

Held :

In this decision for levy of penalty u/s 271(1)(c), High Courthas explained the decision in “Reliance Petro Products” asunder :

The Supreme Court in its latest decision in the matter ofCIT v/s. Reliance Petro Products P. Ltd. (2010) 322 ITR158 while considering the applicability of Sec. 271(1)(c) ofthe Act, held that in order to impose penalty under theaforesaid section, there has to be concealment of particularsof income of the assessee and the assessee must havefurnished inaccurate particulars of his income. The meaningof the word “Particulars” used in section 271(1)(c) would

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From the Courts

embrace the details of the claim made. Where no informationgiven in the return is found to be incorrect or inaccurate, theassessee cannot be held guilty of furnishing inaccurateparticulars. In order to expose the assessee to penalty,unless the case is strictly covered by the provision, thepenalty provision cannot be invoked. By no stretch ofimagination can making an incorrect claim tantamount tofurnishing inaccurate particulars. There can be no disputethat every thing would depend upon the return filed by theassessee, because that is the only document where theassessee can furnish the particulars of his income. Whensuch particulars are found to be inaccurate, the liability wouldarise. To attract penalty, the details supplied in the returnmust not be accurate, not exact or correct, not according tothe truth or erroneous. Where ‘there is no finding’ that anydetails supplied by the assessee in its return are found to beincorrect or erroneous or false there is no question of invitingthe penalty u/s 271(1)(c). A mere making a claim, which isnot sustainable in law by itself, will not amount to furnishinginaccurate particulars regarding the income of the assessee.Such a claim made in the return cannot amount to furnishinginaccurate particulars.

SEC. 194-C : APPLICABILITY : CONTRACT OFWORK V/S. CONTRACT OF SALE : THREE

SITUATIONS.

CIT V/S. GLENMARK PHARMACUTICALS LTD.2010) 191TAXMAN 455 (BOM) / (2010) 324 ITR 199 (BOM)

Issue :

How the provisions of Sec. 194-C would be applicable inthree different situations?

Held :

Court had an occasion to discuss three different situation forapplicability of provision of Sec. 194-C.

(1) The pharmaceutical company itself manufacturespharmaceutical preparations which are sold under itsbrand name.

(2) It involves loan licensing where the raw materials aresupplied by the pharmaceutical company to the licensemanufacturer who, in turn manufactures pharmaceuticalproduct on behalf of the company.

(3) One whereby an agreement between the pharmaceuticalcompany and a manufacturer, it is manufacturer whoprocures the raw materials and manufactures the productunder the specifications of the company and sells theend product to the company. The manufacturer mayalso affix the trade mark or brand name of the company,who in turn markets the products.

Court referred various circulars issued on the subject, byCBDT and also referred various court decisions and cameto the conclusion that :-

(1) Where the material is provided by the purchaser andthe work of fabrication or manufacture is carried out bythe contractor, the agreement would constitute a contractof work.

(2) Where a manufacturer produces goods to thespecifications of the purchaser and the property passesto the purchaser only upon delivery, the contract wouldbe regarded as a contract of sale, if the raw material issourced by the manufacturer and is not supplied to himby the purchaser.

The view of several High Courts was that contracts where:-

(i) Property passes to the purchaser upon delivery of thegoods; and (ii) the raw material was sourced by themanufacturer and was not supplied by the purchaser donot fall within the scope and ambit of section 194-C.

LIQUIDATED DAMAGES FOR DELAY IN SUPPLYOF PLANT IS CAPITAL RECEIPT :

CIT V/S. SAURASTRA CEMENT LTD. (2010) 233 CTR 209

Issue :

Liquidated damages received for late delivery of plant andmachinery is capital receipt or revenue receipt?

Held :

As per agreement for supply of plant, a provision was madethat certain liquidated damages shall be paid by the supplierfor late delivery of plant, calculated at certain parentage ofthe price, without proof of actual damages the assesseewould have suffered on account of delay. The delay of supplycould be of the whole plant or a part thereof but thedetermination of damages was not based upon the calculationmade in respect of loss of profit on account of supply of aparticular part of the plant. It is evident that the damages tothe assessee was directly and intimately linked with theprocurement of a capital asset i.e. cement plant, which couldobviously lead to delay in coming into existence of the profitmaking apparatus, rather than receipt in the course of profitearning process. Compensation paid for the delay inprocurement of capital asset amounted to sterilization of thecapital asset of the assessee as supplier had failed to supplythe plant within time as stipulated in the agreement andrelevant clause came into play. The amount received by theassessee towards compensation for sterilization of the profitearning source, not in the ordinary course of their businesswas a capital receipt in the hands of the assessee.

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CONSTITUTIONAL VALIDITY : RULE OFINTERPRETATION :

TUBE INVESTMENTS OF INDIA LTD. V/S. ASSTT. CIT(2010) 325 ITR 610 (MAD)

Issue :

What are the rules of interpretation to decide constitutionalvalidity of a taxing provision?

Held :

While upholding constitutional validity of provisions of Sec.40(a)(ia), High Court held as under :-

While considering the constitutional validity of a statute saidto be violative of article 14 of the constitution, it is necessaryto bear in mind certain well established principles which havebeen evolved by courts as rules of guidance in discharge ofits constitutional function of judicial review. The first is thatthere is always a presumption in favour of the constitutionalityof a statute and the burden is upon him who attacks it toshow that there has been a clear transgression of theconstitutional principles. This rule is based on the assumption,judiciary recognized and accepted that the Legislatureunderstands and correctly appreciates the needs of its ownpeople, that its laws are directed to problems made manifestby experience and its decimation is based on adequategrounds. The presumption of constitutionality is indeed sostrong that in order to sustain it, the court may take intoconsideration matters of common knowledge, matters ofcommon report, the history of the times and may assumeevery state of facts which can be conceived existing at thetime of legislation. Another rule of equal importance is thatlaws relating to economic activities should be viewed withgreater latitude than laws touching civil rights such as freedomof speech, religion etc.

NOTICE U/S 143(2) IS MANDATORY IN U/S 148PROCEEDINGS :

CIT V/S. RAJEEV SHARMA (2010) 192 TAXMAN 197 (ALL)

Issue :

Whether notice u/s 143(2) is a must before proceeding topass order in u/s 148 proceedings?

Held :

When a statute provides for a particular procedure, theauthority has to follow the same and cannot be permitted toact in contravention of the same. It has been hithertouncontroverted legal position that where a statute requiresto do a certain thing in a certain way, the thing must be donein that way or not at all.

The provisions contained in sub section (2) of section 143are mandatory and the Legislature, in its wisdom by usingthe word ‘reason to believe’ has cast a duty on the A.O. toapply his mind to the material on record and after beingsatisfied with regard to escaped liability, to serve noticespecifying particulars of such claim.

In view of the above, after receipt of return in response tonotice u/s 148, it shall be mandatory for the AO to serve anotice under sub section (2) of section 143 assigning reasonstherein.

In the absence of any notice issued under sub-section (2) ofsection 143 after receipt of fresh return submitted by theassessee in response to notice u/s 148, the entire procedureadopted for escaped assessment shall not be valid.

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4141414141

From the Courts

Valay D. Shahson of our member CA. Dilip V. Shah

4242424242

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July, 2011


ARMAYEAH GLOBAL VS. ACIT 45 SOT 69(MUM),

ASSESSMENT YEAR 2007-08, ORDER DATED:FEBRUARY 23, 2011.

BASIC FACTS

The assessee was engaged in the business of manufacturingand exporting of hand embroidery and handicraft items. Itexports its products to foreign countries and for procuringexport orders, it took services of overseas commission agent.Agent was entitled for commission on actual sales executed.During the course of assessment, AO opined that the saidservices were managerial in nature and hence chargeable totax in India and consequently assessee should have deductedtax on it. On appeal CIT(A) upheld the disallowance andaggrieved of the same, assessee went into appeal beforeITAT.

ISSUE

Whether services of a commission agent for procuringexport orders were chargeable to tax in India andconsequently withholding provisions were applicable inthe absence of any permanent establishment in India?

HELD

ITAT after considering the facts of the case held that neitherthe services were rendered in India nor the agent has anypermanent establishment in India. The agent only receivedcommission as a percentage of sales as per the contractualterms. The payments made were not chargeable to tax inIndia as the same was neither fee for technical services northe same be said to be of managerial in nature. Hence inview of the same, tax was not deductible on the saidpayments.

GAUTAM CHAND JAIN VS. ITO 45 SOT 61JABALPUR

ASSESSMENT YEAR 2001-02, ORDER DATED: APRIL 20,2010

BASIC FACTS

Regular assessment was carried out for the year underconsideration for the assessee. Assessee went into appealbefore CIT(A) against the order of the AO. CIT(A) passedhis order and allowed the appeal partially. In the mean time,AO issued a notice u/s 154 to rectify the assessment orderin respect of an item of income while passing order giving

2020202020CA. Yogesh G. ShahThe author is practising since 1986. He can bereached at [email protected]

effect to CIT(A)’s order. Assessee objected on this issuebut assessing officer rectified the said order and enhancedthe income which was duly confirmed by the CIT(A).aggrieved of the same, assessee went into appeal beforeITAT.

ISSUE

Can assessing officer rectify the assessment order u/s154 while passing order giving effect to CIT(A)’s order?

HELD

After hearing both the sides, ITAT held that the assessmentorder was rectified after the completion of four years fromthe date of the assessment order which was beyond thetime limit provided in the act for rectification. Also it washeld that the assessment order was merged with the order ofCIT(A), hence only CIT(A)’s order can be rectified if anymistake is apparent from record. It was not allowed to amendthe original assessment order by invoking provisions ofsection 154. Assessing officer is only required to pass anorder giving effect to CIT(A)’s order. Hence in view of thesame, order of the CIT(A) was quashed.

ITO VS. HANS ROAD CARRIER(P.) LTD. 45 SOT149 (AHD) ASSESSMENT YEAR 2004-05, ORDER

DATED: AUGUST 31, 2010.

BASIC FACTS

The assessee was engaged in the business of transportationbusiness. Business consists of supply of own trucks on hireand arranging of trucks for customer on commission basis.During the perusal of TDS certificates, AO observed that inrelation of ‘S’ Corporation, on an amount of Rs. 34,24,868tax of Rs. 35,982 was deducted. However against the same,income offered by the assessee in this respect was only Rs.44,000. Assessee explained that the said amount consists

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of commission component which was Rs. 500 per truck andthe rest of the amount was paid directly to the owners of thetruck. AO opined that as the amount appearing in the TDScertificate does not matches with the amount recognized inbooks, he brought the differential amount to tax in the handsof assessee which CIT(A) deleted. Aggrieved of the same,revenue went into appeal before ITAT.

ISSUE

Whether it is necessary that amount shown in TDScertificate was income of the assessee and should betaxed wholly in the hands of the assessee?

HELD

As the nature of the business of the assessee involves thatassessee arranges trucks for the customers and receivedcommission for the same was complicated and AOmisinterpreted the same. Assessee explained that tax wasdeducted on the whole amount of freight on trucks suppliedthrough assessee but the said amount has an overriding rightof the truck owners. Also, it was held that TDS is not a levyof tax but just a mechanism of collection of taxes. Variousexamples were cited by the ITAT wherein it was establishedthat it is not necessary that the amount specified in TDScertificate is to be offered to tax in the same assessmentyear as shown in TDS certificate. It was brought to noticethat income on which tax is deducted as per TDS certificatemay or may not be chargeable to tax in the hands of therecipient assessee. Hence as the amount has an overridingright of the truck owners and that income is not the incomeof the assessee, order of CIT(A) was upheld.

DCIT VS. MOTHER DAIRY FRUITS & VEG (P.)LTD.45 SOT 186(DELHI)

ASSESSMENT YEAR 2003-04, ORDER DATED: JANUARY28, 2011.

BASIC FACTS

The assessee paid salary to staff at Netherlands, who wereresidents of Netherlands. It did not deduct tax on the saidpayments. AO invoked provisions of the 40a(iii) as TDS wasnot deducted on the said payment. CIT(A) deleted the saidaddition by agreeing on the submission made by assessee.Aggrieved of the same, revenue went into appeal beforeITAT.

ISSUE

Whether assessee is required to deduct tax on salarypaid in any foreign country when the services were notprovided in India and whether AO was justified indisallowing the amount by invoking provisions of section40a(iii)?

HELD

As the amounts were paid to non residents, deduction of taxon the said amount would arise only if the said amount istaxable in India. If the services are rendered in India, it isdeemed to accrue or arise in India and hence chargeable totax in India. In the present case, as the services were notrendered in India but in Netherland, payment is not chargeableto tax in India and hence withholding provisions will not apply.Therefore assessee was right in not deducting tax and appealof the revenue was dismissed.

ACIT Vs. GLOBAL VANTEDGE (P.) LTD 45 SOT140 (DELHI) Assessment Year 2005-06, Order

dated: May 06, 2011.

BASIC FACTS

The assessee was engaged in providing receivablemanagement services to its offshore clients. For the yearunder consideration, assessee had undertaken internationaltransaction with its associate enterprise namely, GVI. AOreferred the transaction to TPO for determining arm’s lengthprice (ALP). TPO made an addition of Rs. 12,37,05,850 tothe price declared by the assessee. AO made the said additionto the income of the assessee. CIT(A) provided relief to theassessee as the difference between ALP computed by himnot shown by the assessee was not more than 5%. Aggrievedof the same, revenue went into appeal before ITAT.

ISSUE

Whether CIT(A) was right in deleting the addition as thedifference between ALP determined by him and as shownby assessee was not more than 5%?

HELD

As the CIT(A) granted relief to the assessee because theALP determined by him was not more than 5% of whatassessee has disclosed. Therefore benefit of 5% was rightlygranted by the CIT(A). Also as in earlier assessment years,order of the CIT(A) has been upheld, the same was done forthe year under consideration.

KANPUR SUBHASH SHIKSHA SAMITI VS. DCIT45 SOT 153 (KANPUR)

ASSESSMENT YEAR 2006-07, ORDER DATED:FEBRUARY 28, 2011.

BASIC FACTS

The assessee was running educational institutes which wereregistered u/s 12A. For the year under consideration,assessee filed its return of income by declaring income atnil. AO opined that the assessee violated the provisions ofsection 13(1)(d) on the ground that it had given loan to another

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society in the financial year 2002-03 which continued to belent during the year under consideration. Hence AO held thatincome of the assessee was to be calculated without givingbenefit of sections 11 & 12. CIT(A) upheld the contentionsof the AO. Aggrieved of the same, assessee went into appealbefore ITAT.

ISSUE

Whether loan given to another society engaged in thesame activity of running educational institutes amountsto violation of provisions of section 13(1)(d) & hencewhether AO was justified in disallowing benefits ofsection 11 & 12?

HELD

Loan was given in the assessment year 2003-04 and thesame was received back in march 2009. It was noticed thatthe same loans were also givenin earlier years where nodisallowance was done. Further while passing order ofassessment year 2008-09, AO observed that the othersociety was also engaged in the same charitable activitiesas that of assessee. ITAT held that ratio of DIT Vs. AcmeEducational Society [2010] 326 ITR 146(Dsel.) was equallyapplicable in the said case. Following the said case, it washeld that the provisions of section 13(1)(d) read with section11(5) were not violated as the said loan was neitherinvestment not deposit. Also loan was given in assessmentyear 2003-04, however the matter has been raised by theAO in assessment year under consideration. Nothing wasbrought on record in the intervening years. Hence it was heldthat AO himself in the similar circumstances had acceptedthat the assessee was entitled to exemption u/s 11, thenprinciple of consistency should be followed and AO was notjustified in denying the exemption u/s 11. Also AO failed toprove that the said loan was given out of accumulated surplusof the year under consideration because in the assessmentorder, it was clearly mentioned that surplus of income overexpenditure is less than 15% of its gross receipts and henceincome of the assessee works out to be nil. Finally in viewof the aforesaid discussion appeal of the assessee wasallowed.

ITO, V. CHANDRAKANT PATEL 131 ITD 1 (AHD)

ASSESSMENT YEAR – 2006-07, ORDER DATEDAPRIL 8, 2011

BASIC FACTS:

The assessee showed long term capital gains on sale ofplots and showed sale consideration at 41,860 per sq. mt.The assessing officer made reference to DVO u/s 50C todetermine capital gain. The DVO calculated the same at45,000 per sq. mt. The assessing office on the basis of the

report of DVO made addition. On appeal, the assesseecontended that reference made u/s 50C was illegal. TheCIT(A) held that a reference to DVO can be made either u/s142A, or u/s 55A or u/s 50C. By, placing reliance on citedprinciples he had held that the assessing officer’s action ofreferring the matter to the DVO for substituting the saleconsideration was not legally sustainable. He had also opinedthat since the sale consideration as disclosed by theassessee being higher than the stamp value therefore, theassessing officer was not lawfully permitted to substitutethe consideration for the purpose of computation of capitalgains. In the appeal, he deleted the addition. Hence, theRevenue went in appeal.

ISSUE:

Whether for purpose of computation of capital gains u/s48, a reference made to DVO only in situation asprescribed u/s 50C and not otherwise?

Whether area of operation of section 142A was limited inits span and confined to provisions of section 69, etc;and section 56(2) ?

HELD:

It was held that if a reference can be made to ascertain thefair market value of a property, then wherever this phrase ‘todetermine the fair market value of the property’ was usedthere only the recourse of section 55A was possible. It washeld that for the purposes of computation of capital gains u/s 48, a reference could be made to DVO only in situation asprescribed u/s 50C, and not otherwise. The provision ofsection 142A were also to be examined which limit its spanof operation only to determine the value of investment inrespect of certain assets, such as bullion, jewellery, valuablearticles etc. In this section as well there was no power vestwith assessing officer to seek the help of valuation officer inrespect of determination of capital gains prescribed u/s 48of the Act. It was held that the assessing officer was notempowered to refer to DVO because as per section 50C(2)the assessing officer may refer the valuation of a capitalasset where assessee claims before assessing officer thatthe value adopted by the Stamp Valuation Authority exceedsthe fair market value of the property as on the date of transfer.The valuation as suggested by DVO and the consequentialaddition as made by the assessing officer was to be reversed.The view taken by the CIT(A) was to be upheld. In the result,all the appeal of the revenue was to be dismissed.

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In this issue we are giving full text of two importantrecent decisions pronounced by Mumbai Income taxAppellate Tribunal. The First one is regarding the powersof the Assessing Officer for invoking provisions ofsection 14A w.e.f. A.Y. 2008-09 r.w. rule 8D. The Hon’bletribunal observed that when the assessee makes theclaim regarding the quantum of expenses to thedisallowed in terms of section 14A of the Act, it wasincorrect on the part of the A.O. not to consider the claimof assessee accordingly. It was only when A.O. is notsatisfied with the claim of assessee that A.O. can resortto the provisions of rule 8D of the Income Tax Rules.The Hon’ble Tribunal further observed that thesatisfaction that the claim made by the assesseeregarding expenses incurred in relation to the incomewhich does not form part of the total income is notcorrect, has to be arrived at by A.O., on an objectivebasis. Without giving any finding with regard to theincorrectness of the claim made by the assesseeregarding disallowance to be made u/s 14A, A.O. cannotapply rule 8D.

The Second decision relates to the issue regardingdisallowance u/s 40(a)(ia) wherein the Bombay Tribunalwhile dealing with the issue whether TDS has to be madeu/s 192 or u/s 194J, by way of an observation, mentionedthat provisions of section 40(a)(ia) do not apply in theevent of lesser deduction of tax and apply only in theevent of non-deduction of tax.

We hope the readers would find them useful.

IN THE INCOME TAX APPELLATE TRIBUNAL

“C” Bench, Mumbai

Before Shri R.V. Easwar, President and Shri B.Ramakotaiah, Accountant Member

ITA No. 20/Mum/2010

(Assessment Year: 2006-07)

DCIT - 11(2) Vs. M/s. Chandabhoy & JassobhoyRoom No. 479, 4th Floor 208, Phonex House, ‘A’ WingM.K. Road, 2nd Floor, 462 Senapati BapatAayakar Bhavan Marg, Lower Parel, Mumbai 400013Mumbai 400020 PAN - AAAFC 5274 C

Appellant RespondentAppellant by : Shri Jitendra YadavRespondent by : Shri Percy J. Pardiwalla

CA. Sanjay R. ShahThe author is the past President of CAA,practising since 1981. He can be reached [email protected]

O R D E R

Per B. Ramakotaiah, A.M.

This appeal by the Revenue is against the order of the CIT(A)-III, Mumbai dated 20.10.2009.

2. Assessee is a partnership firm of Chartered Accountantsand in the scrutiny assessment, the A.O. consideredthat payment made to certain consultants engaged bythe Chartered Accountants’ firm are in the nature of feesfor professional services and accordingly provisions ofsection 194J would attract. It was the contention of theassessee that the consultants functioned as employeesof the firm and were engaged on full time basis.

They could not undertake any other job or assignmentsprivately and they were provided with annual leave andother benefits except bonus, gratuity and P.F. It wasfurther submitted that they were employees of the firmand tax was deducted under section 192 of the I.T Actand these persons filed their returns based on Form 16issued by the assessee firm and so their salary can notbe under the provisions of section 194J. The A.O.analyzing the agreements entered by the assessee firmwith the said consultants came to a conclusion that thereis no employee-employer relationship and assesseeshould have deducted tax under section 194J and sinceassessee has not deducted the tax, the amounts claimedof ‘26,75,535/- was to be disallowed under section40(a)(ia). The matter was carried to the CIT(A) who, afterexamining the issue and submissions of the assessee,deleted the addition by stating as under: -

“3.7.1. There is merit in this submission of appellant.The deduction of tax made by appellant thoughmade u/s. 192 has not been disputed by AO,neither has the TDS deposit in Governmentaccount been challenged, nor has thegenuineness of payment of monies to IHC beendoubted by AO. As such, the payments

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become allowable expense under the Act.These have been disallowed due to aninterpretation of the section under which thepayment made is to be considered i.e. whethersection 192 or section 194J. Without prejudiceto the decision in para 3.6 and 3.6.1 supra, inthe background of appellant’s submission andprecedence of many years in his own case, itis felt that even if payments were consideredto be u/s. 194J by A.O., the tax alreadydeducted by appellant could have beenconsidered against that due u/s 194J andshortage of TDS, if any, could have been arrivedat. The consequent shortage of TDS withinterest, if any, could have been considered asliability under the I.T. Act and as due from theappellant. Disallowance of the entire expenditureof Rs.26,75,535/- whose genuineness has notbeen doubted by the AO is not justifiable.”

3. We have heard the rival arguments and examined therecord. Assessee has employed about 18 consultantswith whom it entered into agreements for a period of twoyears renewable further at the option of either partiesand they were paid fixed amounts without any share inthe profit. These consultants are prohibited from takingany private assignments and worked full time with theassessee firm. There is no dispute with reference to thededuction of tax under section 192 and also the factthat in their individual assessments these paymentswere accepted as salary payments. It is also not disputedthat the entire amount paid for 18 consultants is only anamount of Rs. 26,75,535/-, which indicates that theyare in employment and not professional consultants. Itis also not the case that assessee has not deductedany amount. Assessee has indeed deducted tax undersection 192 and so we are of the opinion that provisionsof section 40(a)(ia) also do not apply as the saidprovision can be invoked only in the event of nondeduction of tax but not for lesser deduction of tax. Inview of this, we are of the opinion that there is no meritin Revenue’s contention that the amount paid to theemployees should be disallowed as provisions of section194J would attract. On the facts of the case, there is nomerit in Revenue’s appeal. Accordingly the order of theCIT(A) is confirmed.

4. In the result, appeal of the Revenue is dismissed.

Order pronounced in the open court on 8th July 2011.

Sd/- Sd/-(R.V. Easwar) (B. Ramakotaiah)

President Accountant Member

IN THE INCOME TAX APPELLATE TRIBUNAL,MUMBAI BENCH “B”, MUMBAI

BEFORE SHRI R.S.SYAL(A.M) AND SHRIN.V.VASUDEVAN(J.M)

ITA NO.1050/MUM/2010(A.Y.2008-09)

M/s. Multi Commodity Exchange The DCIT,of (India) Limited., Vs. Cen. Cir. 46,Exchange Square, CTS No.255, Mumbai.Suren Road, Chakala,Mumbai – 400 093PAN: AADCM 8239K

(Appellant) (Respondent)

Appellant by : Shri Chetan A. KariaRespondent by : Shri Satbir SinghDate of Hearing : 28/07/2011Date of pronouncement : 05/08/2011

ORDER

PER N.V.VASUDEVAN, J.M,

This is an appeal by the assessee against the order dated 4/12/2009 of CIT(A)-38, Mumbai relating to assessment year2008-09.

2. The assessee is a company. It is a regulator and carrieson the activity of a commodity exchange. The activitiesof the exchange are carried on by members of theexchange on an electronic platform and infrastructureprovided by the assessee. The activities of the membersare supervised and monitored by the assessee. Themajor source of income of the assessee is receipt ofmembership fee on grant of membership to newmembers, annual recurring fees and transactionprocessing charges for transaction carried out on theplatform provided by the assessee. In order to carry outvarious transactions smoothly and on a regular andconsistent basis, the assessee also invites depositsfrom the constituents. Such deposits are also allowedto be treated as margin money for transaction carriedout by them. The amounts received are invested in tofixed deposits of banks and units of mutual funds. Whileno interest is paid to the constituents on such deposits,the assessee earns interest on such deposits or earnsdividend from mutual fund. The assessee had madevarious investments into various scheme of mutualfunds and had earned dividend income as also shortterm and long term capital gains on such investmentson sale. The dividend earned during the year was Rs.20,80,89,624/-. According to the Assessee, the entireinvestments was made out of own funds and out ofvarious interest free deposits received from members.While the capital gains were taxed at appropriate rates,

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the dividend income was claimed as exempt dividendincome under section 10(35) (a) of the Income Tax Act,1961. Since the dividend income was exempt the AOexamined the question of disallowance of expenses inearning exempt income in view of sec. 14A of theIncome Tax Act, 1961 (the Act).

3. The assessee claimed that it had not paid any interestexcept interest on car loans and interest on loans forbusiness purposes to the extent of Rs.1,93,070/-(Including interest on delayed tax payment of Rs.57,739/-). No interest was paid for any loan to earnexempt income. There is no dispute on this claim of theassessee as the same was accepted by the AO.

4. The assessee claimed that it had not incurred any directexpenses to earn the income by way of dividend whichwas claimed to be exempt. The reason for not incurringany directs expenses according to the assessee wereas under:a. The entire investment was made under the advice

and guidance of distributors of mutual funds.b. No direct payment was made by the company to

such distributors.c. The activity of investing as also disinvesting

involved banking activities as also requesting mutualfunds for accepting fresh funds towards additionalinvestments as also redemption of existinginvestment. These activities were fully supportedby the employees of distributors of mutual fu

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