Volume : 38 Part : 04 July, 2014 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-41.pdfAhmedabad Chartered Accountants Journal July, 2014 185 Volume : 38 Part : 04 July, 2014 E-mail:

Ahmedabad Chartered Accountants Journal July, 2014 185

Volume : 38 Par t : 04 July, 2014E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

M ananamAudit of our Life..................................................................................Br. Atharvana Chaitanya............187

Editor ialAlas ! The Helplessness...................................................................... CA. Ashok Kataria .................... 188

From the President............................................................................CA. Shai lesh C. Shah.................189

Ar t icles

Not filing your returns on time=Risking 7 precious years of your life..... CA. Rajni M. Shah......................190

A case Study : Depreciation on Wind Mill........................................... CA. Pradip K. Modi....................196

Direct Taxes

Glimpses of Supreme Cour t Rul ings................................................... Adv. Samir N. Divatia................206

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal ............... 208

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 211

Unreported Judgements......................................................................CA. Sanjay R. Shah....................214Controversies......................................................................................CA. Kaushik D. Shah................. 216Judicial Analysis..................................................................................Adv. Tushar P. Hemani................222

FEMA & International Taxation

USA - Non Disclosure of Overseas Income Immunity..................................CA. Rajesh H. Dhruva................227FEMA Updates................................................................................... CA. Savan A. Godiawala............230

I ndirect Taxes

Service Tax

Service Tax Decoded.......................................................................... CA. Punit R. Prajapati................232Recent Judgements............................................................................. CA. Ashwin H. Shah...................237

Value Added Tax

VAT Demystified..................................................................................CA. Priyam R. Shah................... 238Recent Judgements and Updates........................................................ CA. Bihari B. Shah.....................243

Corporate Law & Others

Business Valuation.............................................................................. CA. Hozefa Natawala.................247Corporate Law Update.......................................................................CA. Naveen Mandovara.............251

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 254

From the Government ......................................................................CA. Kunal A. Shah..................... 256

Association News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi...................257

ACAJ Crossword Contest....................................................................................................................260

Ahmedabad Chartered Accountants Journal July, 2014186

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 (i f available) ` 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

even meant for publ ishing elsewhere. No correspondence will be made in respect of Articlesnot accepted for publication, nor wil l they be sent back.

6. The opinions, views, statements, results publ ished in this Journal are of the respective authors/ contributors and Chartered Accountants Association, Ahmedabad is neither responsible for thesame nor does i t necessarily concur with the authors / contributors.

7. Membership Fees (For ICAI Members)Li fe Membership ` 7500/-Entrance Fees ` 500/-Ordinary Membership Fees for the year 2014-15 ` 600/- / ` 750/-Financial Year : April to March

Publ ished 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 Publ ication 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 Awards

The best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'A llied Laws and Others' wil l be awarded the Trophies/ Certificates 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


We are fami l iar wi th audi t of accounts, records,documents, energy, buildings, facilities, infrastructureand other tangible objects of the material world. But wealso need to know that this process of inspecting,correcting and certifying is much needed in our life too.

1. Physical Audit:

Time to time, we need to examine the condition ofour body in order to be aware of the changes thattake place at the physical level. It is only when suchchanges come into the scope of our awareness, wetake necessary action. We wi ll have two choices:When we f ind changes happening as a naturalprocess, all we need to do is to learn to accept them.The changes that are effected by our unnaturall i festyle and behaviour must immediately becorrected. Such inspection and correction has to bedone by ourselves, and we do not always need adoctor to do that! A man awoke and f ound his fami l y and

neighbours preparing for his funeral. When heprotested, his wife asked him to lie down silentlysaying, “Do you know more than the doctor? Hehas certified, so you are dead!”

2. Mental / Emotional Audit:

We often find ourselves going through emotionalups and downs. We seem to be losing our patience.Intolerance has crept into our lives and is devouringour peace of mind. Emotional audit helps us to mindour mind better. The scriptures say, “Mind alone isour best friend, and it is our worst enemy too.” Mostof us know not the ways of our mind, and so feelhelpless and clueless when our mind takes us for aride. We do not know how to handle our ownemotions – positive or negative! A man won a lottery of rupees ten crores and was

unable to share this wi th his ai ling wife, whowould not be able to handle the joy. His friendoffered help, and asked the lady, “What wouldyou do if you get ten crores of rupees?” The wifecasually replied, “I would give half of the moneyto you.” Hearing this, the man col lapsed!

3. Intel lectual Audit:

We do update ourselves with knowledge related toour profession through journals like this one, or we

MananaMBr. Atharvana Chaitanya

[email protected]

Audit of Our Life attend conferences, use the internet and so on. Butprofession is just a small part of our life. Do weupgrade our knowledge and understanding ofourselves, our family members or our country? Weseem to have very little knowledge about our owncul ture and t radi ti on. We need to audi t ourunderstanding and thinking, so as to upgrade to thenext level at regular intervals. Occasions like newyears and birthdays give us a reason to make thisaudit. It is necessary to know how our intellect thinksand decides. As great men say, “What you think isimportant, but how you think is more important!” If you see others around you losing their head

over a problem, and you find yourself at peace,there are two possibi li ties: (a) you have notunderstood the problem (b) you are the problem!

4. Spir itual Audit:

This aspect of our personality is perhaps the mostneglected. It is said in our scriptures that this spirituallayer of our personali ty is capable of leading andguiding our life from limitation to immortality, fromdarkness to light, f rom sorrow to bliss. But for this,a regular spi ri tual audi t, termed as ‘sâdhanâ’ inSanskri t, is inevitable. We must train our instrumentsto remain sti ll and quiet, so that the Spi ri t getsenlivened and starts expressing itself . This can beachieved through different techniques like prayer,japa (repetition of a divine mantra), medi tation,mauna (si lence), solitude, study of scriptures etc.Keeping company of spiritual people (satsanga) isan easy and effective method.

Pujya Gurudev Swami Chinmayananda has given awonderful formula for achieving the above:

INTROSPECT daily: Being aware of oneself.

DETECT diligently: Know one’s positive and negativequalities.

NEGATE ruthlessly: Our weaknesses and undesirabletraits need to be removed.

SUBSTITUTE wisely: Negativities must be substitutedwith positive qual ities.

GROW steadi ly: This is an ongoing process, has tohappen regularly.

...and BE HAPPY! – This is our goal, isn’t it?!


The profession of chartered accountancy today is

at a cross roads facing tough challenges. It is notjust the prevalent economic scenario that is posingproblems but the matters within the domain of

professional interest and practice are erupting as aroadblock. There are various instances observed

today where a chartered accountant is found unsureof how to go about. Many professional brethrens

are found without any action plan and are stuck indi ff i cul ties arising on account of the changingscenario. All seem to be in a dilemma and are unsure

of the solutions to the rising problems.

The new Companies Act, 2013 has replaced theold Companies Act of 1956. The new law has

brought in a sea wide change in the manner theCompany Law is practiced. The Act of 2013 hasnot just brought the procedural chal lenges but the

entire legal framework for regulation of companieshas undergone a change under the new regime.

From the time the new provisions have come intoforce, various programs have been hel d and

continue to be held by various bodies includingbranches, chapters, study circles including theAssociation for their members to get acquainted

with the new Company law. Almost every charteredaccountant has attended some or other such

program. One of the big changes that has beenbrought by the Companies Act 2013 is that nowany sum accepted f rom sharehol ders wi l l be

considered as Deposit unl ike earlier which was notthe case for private l imited companies. There are

i nstances today where members are founddiscussing as to what would be the status of sums

accepted f rom shareholders before thecommencement of the new Act? A re theseacceptances outside the purview of the deposits or

not? Whether the Registrar of Companies is to beintimated before 30th June or not? After so many

programs on the new law, why the members areunable to come with a concrete answer to a very

Editor ialAlas ! The Helplessness

pertinent and basic question? Why this state ofhelplessness?

The example referred above is one of many where

chartered accountants are caught between optionsof ‘to do or not to do’. There are other kinds of

challenges raising the issue of how to comply with.One such chal lenge has now been thrown to thepracticing chartered accountants by the income tax

department. The Department, w.e.f. 19-06-2014 hasmade it mandatory for all assessees to update their

email-ids and mobi le numbers on its website. Theidea behind the move of the department may be

good, however, the manner and the time at whichthe procedure has been brought in is causing a lotof hardship for all tax payers and tax consultants.

It has been more than three months to the end of

the financial year and stil l the income tax departmenthas not been able to come out with the onl ine

version of return forms to enable assessees to fi letheir income tax returns and the due date for AY2014-15 is f ast approaching. Because of the

administrative failure on the part of the Income TaxDepartment to make available the new return forms

immediately after the end of the financial year, foral l practical purposes, the tax consultants and tax

payers get only about a month to file their incometax returns. Where the priority of all assessees andtax payers would be to file the tax returns after the

automatic curtailment of time period, the updationof individual email-ids and mobile number is a huge

and a daunti ng hurdl e i n complying wi th therequirement of fil ing income tax returns before the

due date.

May prudency shall prevai l and people at the helm

of affairs come out with some clari f ications andamicable solutions that would bring a sigh of relief

for all professionals unraveling them from this stateof helplessness!

Namaste,CA. Ashok Kataria

[email protected]


Dear Esteemed Reader,

With the new Government sworn in under the PrimeMinister Narendra Modi and the budget round the corner,the mood appears upbeat in every sector in the country.All eyes are on the new Indian government as thecommon-man expects the new team to unveil measuresto curb inflation, create jobs, speed up infrastructureprojects and create an environment that will boost theeconomy of the country.

The new Government is right now in its honeymoonperiod enjoying support from public that has voted it topower with great expectations. The announcements inbudget would be the first signal to restore the economichealth of the country and send out some positiveindications as to how the government proposes to deliverits poll promises.

The new Government may have sought 60 months fromthe electorate and these are early days, however, the ‘aamaadmi’, living in instant and impatient age suffers theever growing inflation and corruption, is already showingsigns of impatience to wait for fruits that will grow afterthe system is changed at the fundamental level – aspromised by Modi.

The New Government has already touched a raw nerveby increasing rail fares. The rationale behind the 14%hike – the first big one after 11 years – has been missedby a large section of the people. Some of the section ofthe people has welcomed the rise in the rai lway farementioning that rai lway department had reachedprecarious position and it was time to bite the bullet.

Though the bitter pill may be necessary for reviving theeconomy, it hurts the common man when it hits hispocket. The fare hike controversy and the fear ofrunaway inflation have, to an extent, overshadowed thepositive steps taken by the new government. The newGovernment has a window of opportunity how to setright the economy if it takes bold decisions and administerthe bitter pill which may hit popularity. It has the chanceto do things now as it has the mandate and good will.How far i t will go is to be seen.

The new Government realises that its’ time to take sometough decisions as they are ought to be taken at the start

From the PresidentCA. Shailesh C. Shah

[email protected]

of the term and not at the fag end. It is more likely thatthe initial unpopular measures might dent the faith ofpeople in the new government.. It would be importantfor the government to take people along and make themunderstand their initiatives if they are truly committedto their promises.

The economy is slipping because of various factors. Thefirst big challenge is the rising prices and inflation. Ofall types of inflation, when food prices rise, it causesimmense distress, leading to unrest and protests. Thesecond is the rising fuel prices in view of the ongoingIraq crisis. Thirdly, the prediction that there could beweak monsoon. Monsoon has had a delayed start thisyear, and the risk of it failing has been rising since Aprilwhen the Indian Meteorological Department released itsfirst forecast. The situation in the country would test theadministrative capabilities of the new government andPrime Minister Narendra Modi in particular and hisresponse considering the previous government’s utmostfailure to deal with these kinds of issues and ultimatelypeople voting them out of power.

The activities at the Association are in full swing.Association has made strong representation againstmandatory updation of email IDs and mobile number atthe time when the priority is to fi le income tax returnsbefore the due date. The Association has also maderepresentation on the draft noti fication under thecompany law. Further I am pleased to inform you thatduring the last month the Association had come out witha publication titled ‘Handbook on Companies Act 2013’.. The book was in good demand and all the copies printedare sold out. With your support, the entertainment programof ‘Hassayaro’ has also been a great success. World famousartist Shahbuddin Rathod and Jitubhai Dwarkawalaperformed at the program. The details of the upcomingprogram are given in the Association News column. Wecontinue to seek such co-operation from the membersround the year.

With regards,CA. Shailesh C. Shah

President


Introduction

Of late, section 276CC of the Income Tax Act hasbeen the most talked about section across thetaxpaying community. Be it the Tamil Nadu ChiefMinister Jayalalita’s case or the recently emergedNational Herald case, section 276CC has found aplace in the conversations.

At present there are omnifarious sections in theIncome Tax Act which have been introduceddecades back, the why and wherefore of whichrelate to the situation at that point of time. However,these provisi ons were dormant since l ong.However, lately various ‘enthusiastic’ officers havestarted applying such dormant provisions. Section276CC is one such glaring example. However, thebig idea behind such notices is to amass thecompounding fees.

Section 276CC of the Income Tax Act deals withpunishment for willful non furnishing of return ofincome wi thin the prescribed time period. Thelegislature has since inception always provided apunitive act for non compliance with the provisionsrelating to filing of income. Prior to 1989, non filingattracted penal ty u/s. 271(1)(a) as wel l asprosecution u/s. 276CC of the Act. However w.e.f.01.04.1989 the penalty u/s. 271(1)(a) has beendone away wi th and a provision for levy ofmandatory interest u/s. 234A has been introduced.However, the legislature has never waived orrelaxed the provisions relating to prosecution u/s.276CC of the Act.

Except for partnership firms and companies, fil ingof return of income is mandatory if the taxableincome exceeds the maximum amount notchargeable to tax. Filing of tax returns is mandatoryfor firms and companies irrespective of the taxableincome. These returns are required to be filed on or

before the due date specified under the Act. Nonfiling of the returns before the end of the relevantassessment year attracts a penalty of Rs. 5000 u/s.271F of the Act as well as interest u/s. 234A of theAct.

This is where the provisions of Section 276CC alsocome into play. Section 276CC provides forimprisonment f or minimum 3 months andmaximum 7 years in case of a willful failure to filethe income tax return u/s. 139(1) or 142(1) or 148if the amount of tax payable exceeds Rs. 3000.

Bare Provision

The provision of the section 276CC reads as under:

[Failure to furnish returns of income]

276CC. If a person willfully fails to furnish in duethe return of income which he is required to furnishunder sub-section (1) of section 139 or by noticegiven under clause (i) of sub-section (1) of section142 or section 148 or section 153A, he shall bepunishable,—

(i) in a case where the amount of tax, which wouldhave been evaded if the failure had not beendiscovered, exceeds twenty five hundredthousand rupees, with rigorous imprisonmentfor a term which shall not be less than sixmonths but which may extend to seven yearsand with fine;

(ii) in any other case, with imprisonment for a termwhich shall not be less than three months butwhich may extend to two years and with fine:

Provided that a person shall not be proceededagainst under this section for failure to furnish indue time the return of income under sub-section (1)of section 139—

CA. Rajni M. [email protected]

Not filing your returns on time =Risking 7 precious years of your life


Not filing your returns on time = Risking 7 precious years of your life

(i) for any assessment year commencing prior tothe 1st day of April, 1975; or

(ii) for any assessment year commencing on orafter the 1st day of April 1975, if—

(a) The return is furnished by him before theexpiry of the assessment year; or

(b) The tax payable by him on the total incomedetermined on regular assessment, asreduced by the advance tax, if any, paid,and any tax deducted at source, does notexceed three thousand rupees.]

In order to understand the draconian provisions ofSection 276CC, let us decode the entire sectionphrase by phrase in order to have a better clarity onthe issue

If a person willfully fails to furnish….

The opening lines of Section 276CC clearly providethat the provisions of the aforesaid sections wouldapply only when the default is will ful and nototherwise. Mere non fil ing of return does notconstitute an offence by itself.

The question that emerges is what is willful default?Willful default, as observed by Wilber Force J. inWellington v. Reynold (1962) 40 TC 209 is “somedeliberate or intentional failure to do what the taxpayer ought to have done, knowing that to omit todo so was wrong”. Earlier, there was a requirementfor establishment of mens rea. However the law atpresenti presumes the existence of mens rea and itis for the accused to prove otherwise.

The High Court has in the case of BhavechaMachinery and Ors (2010) 320 ITR 263 (MP) heldthat there has to be a cogent, clear and reliableevidence that fai lure to file return in time was‘willful’ and there should be no possible doubt ofits being ‘willful’. The failure must be intentional,deliberate, calculated and conscious with completeknowledge of legal consequences flowing fromthem.

The Andhra Pradesh High Court has in the case ofITO V/s. Autofil [1990] 52 TAXMAN 343 (AP)

held that “It is not the simple failure in submissionof the return by the due date that amounts to anoffence u/s 276CC but that failure should be willfulso as to cal l f or a convicti on. Wi l l f ul nesscontemplates some element of evil motive and wantof justification. Conviction u/s 276CC is an extremeand exceptional resort and gets warranted onlywhen willfulness in failure to submit the return intime is established beyond all reasonable doubtsand there should be present mens rea, a bad motiveand guilty mind. In the absence of this, no convictionshall follow the prosecution under section 276CC.

In the decision of Lal Saraf v/s State of Bihar[1999] 235 ITR 116 (PAT.) the Hon’ble HighCourt observed that when the assessee could notfile the return of income for want of books ofaccount which were seized by the income taxdepartment and the copies and extracts wereprovided after the due date of fil ing of the return,no proceedings under section 276CC can beinitiated. In the above case, the High Court correctlynoted that it was not the intention of the assesseenot to file the return of income, but due to non-availability of books of accounts which are verymuch required to file the return of income, he couldnot file before the due date. The failure was non-deliberate and no prosecution proceedings for suchnon-deliberate failure could be initiated under sec276CC.

….In due time

The provisions of Section 276CC further stipulatesthat the provision of the section would get attractedif the assessee fails to file the return of income in‘due time’.

The time within which the assessee is required tofile the return of income has been specified inSection 139(1).

As per the provisions of section 139(1) of theIncome Tax Act, 1961, any person under the Act,whose total income for the previous year exceedsthe maximum amount which is not chargeable totax, is required to file return of Income, within theprescribed statutory due date relevant for the


assessment year which is July 31 or September 30of the said assessment year, as the case may be.

It is therefore important to note here that theexpression ‘due time’ in the section encompassesthe time limit specified in Section 139(1) only andnot 139(4). Therefore, even if a return is filed withinthe time limit specified u/s. 139(4) of the Act, section276CC would get attracted, provi ded otherconditions get satisfied. This is simply because ofthe fact that if the contrary is permitted, the legislativeintent would be violated. However the proviso tothis section permits the assessees to file the returnof income before the end of assessment year andescape from the noose of section 276CC.

…….the return of income which he is requiredto furnish under sub-section (1) of section 139 orby notice given under clause (i) of sub-section (1)of section 142 or section 148 or section 153A

Section 276CC applies to si tuations where anassessee has failed to file a return of income asrequired under Section 139 of the Act or in responseto notices issued to the assessee under Section 142or Section 148 of the Act.

Section 139 of the Act placed a statutory mandateon every person to file an income tax return in theprescribed form and in the prescribed manner. Aplain reading of the above provisions indicates thatit is mandatory on the part of the assessee to file thereturn before the due date.

Further a reference to Sections 142 and 148 is alsonecessary to properly understand the scope ofSection 276CC.

Section 142 provides that the AO may serve on anyperson who has made a return u/s 139 or in whosecase the time allowed u/s. 139(1) has expired, anotice requiring him to furnish the return of incomeor the prescribed particulars as the case may be.Section 148 refers to the issue of notice whereincome has escaped assessment.

he shall be punishable,—

(i) in a case where the amount of tax, whichwould have been evaded

Going further, section 276CC stipulates thepunishment for default. However, the sectionprovides for a punishment only if the amountof tax which would have been evaded exceedsthe specified limit. However, while computingthe amount of tax, advance tax and tax deductedat source ought to be deducted.

However, It is pertinent to note that it is notonly when tax is evaded that section 276CC isattracted. Evasion of tax is not a pre-conditionfor attracting Section 276CC. Even if tax is notevaded, but there is a willful default to file thereturn of income, prosecution would belaunched provided other conditions are satisfied.

…evaded if the fai lure had not beendiscovered exceeds twenty-five hundredthousand rupees

Section 276CC provides that prosecutionwould be launched if the amount of tax thatwould have been evaded if the failure wouldnot have been detected exceeds Rs. 25,00,000.

…with rigorous imprisonment for a termwhich shall not be less than six months butwhich may extend to seven years and withfine;

Further, this section provides that if all theaforesaid conditions are satisfied, the assesseeshall be punishable with imprisonment for aminimum period of six months. However, theterm of imprisonment may even extend uptoseven years. However, this punishment isapplicable only if the amount of tax that wouldhave been evaded exceeds Rs. 25,00,000.Further, this section provides for levy of finealong with imprisonment.

…in any other case, with imprisonment for aterm which shall not be less than three monthsbut which may extend to two years and withfine:

However, if the amount of tax that would havebeen evaded does not exceed Rs. 25,00,000the term of imprisonment would be a minimum



period of 3 months. However, the aforesaidterm may even extend to 2 years along withfine.

Provided that a person shall not be proceededagainst under this section for failure to furnishin due time the return of income under sub-section (1) of section 139—

(ii) for any assessment year commencing on orafter the 1st day of April, 1975, if—

(a) the return is furnished by him before theexpiry of the assessment year; or

(b) the tax payable by him on the total incomedetermined on regular assessment, asreduced by the advance tax, if any, paid,and any tax deducted at source, does notexceed three thousand rupees.]

The proviso to section 276CC has been specificallyinserted to give some relief to the genuine assessees.The proviso provides a further period of time duringwhich the return can be furnished without theprovisions of section 276CC getting attracted. Inother words, even though the due date would be31st July of the assessment year as per Section139(1) of the Act, an assessee gets further eightmonths’ time i.e. till the end of the assessment yearto complete and file the return and such a returnthough belated, may not attract prosecution of theassessee.

Similarly, the proviso in clause ii(b) to Section276CC also provides that i f the tax payabledetermined by regular assessment has reduced byadvance tax paid and tax deducted at source doesnot exceed Rs.3,000/-, such an assessee shall notbe prosecuted for not furnishing the return underSection 139(1) of the Act.

Thus the proviso shields the genuine assessees fromthe rigor of the draconian provisions provided theyf ile the return before the end of the relevantassessment years. Secondly it also protects thosewho have paid substantial amounts of their tax duesby way of pre-paid taxes.

However it would be pertinent to note here that theproviso to Section 276CC nowhere specifies thatthose assessees who are covered by the proviso havenot committed the offence u/s 276CC of the Act. Itis only that no prosecution would be launchedagainst such assessees.

An assessee who comes within clause 2(b) to theproviso, no doubt has also committed the offenceunder Section 276CC, but is exempted fromprosecution since the tax falls below Rs.3,000/-.Such an assessee may file belated return beforethe detection and avail the benefit of the proviso.

Proviso cannot control the main section, it onlyconfers some benefi t to certain categories ofassesses. Thus, the offence under Section 276CCis attracted on failure to comply with the provisionsof Section 139(1) or failure to respond to the noticeissued under Section 142 or Section 148 of the Actwithin the time limit specified therein

Section 276CC, it may be noted, takes in sub-section (1) of Section 139, Section 142(1)(i) andSection 148. But, the proviso to Section 276CCtakes in only sub-section (1) of Section 139 of theAct and the provisions of Section 142(1)(i) or 148are conspicuously absent. Consequently, the benefitof proviso is available only to voluntary filing ofreturn as required under Section 139(1) of the Act.In other words, the proviso would not apply afterdetection of the failure to file the return and after anotice under Section 142(1)(i) or 148 of the Act isissued calling for fil ing of the return of income.Proviso, therefore, envisages the filing of evenbelated return before the detection or discovery ofthe failure and issuance of notices under Section142 or 148 of the Act.

Other Issues

The Curious Case of Jayalalitha

The Supreme Court recently, in the case of SasiEnterprises (Where in Ms. Jayalalitha is a partner)adopted a fi rm view. The facts of the case arenarrated hereunder:



Miss J. Jayalalithaa and Mrs. N. Sasikala werepartners of a firm. The firm did not file the Returnsof Income for A.Y. 1990-91, A.Y. 1991-92 and A.Y.1992-93. The Madras High Court confirmed thecomplaints against the said firm. The partners intheir individual capacity were being prosecuted fornon-filing of returns of income by the firm. In theirindividual returns, they mentioned that as the firmhad not finalised its accounts, no returns of the firmhad been filed. Thereafter, the Best JudgementAssessments were framed. Thereafter, sanction forprosecution was accorded by the Commissioner ofIncome tax. The learned Counsel argued on behalfof the firm that in a case when the assessment hasnot reached to finality, the provision of sec 276CCcannot be applied. The Counsel for the departmentstrongly relied on the principles laid down in thecase of Prakashnath Khanna & Another v/s CIT& Another (2004) 9 SCC 686 and submitted thatpendency of appellate proceedings is not a relevantfactor in relation to prosecution u/s 276 CC of theAct.

The outcome of the judgment is as under:

1. Non-compliance with a notice u/s 142(1)(i)may attract prosecution u/s 276CC.

2. Even after the provision for a levy of mandatoryinterest u/s 234A of the Act and deletion ofSec 271(1)(a), the legislature has never waivedor relaxed its prosecuting provisions u/s 276CCof the Act.

3. The Proviso u/s 276CC takes care of thegenuine assessees who either file the belatedreturns but within the end of the Assessmentyear or those who have paid substantial amountof their tax dues by prepaid taxes, from therigour of the prosecution u/s 276CC of the Act.

4. The Proviso to Sec 276CC cannot control themain section, it only confers some benefit tocertain categories of assesses.

5. Sec 276CC contemplates that an offence iscommitted on the Non-filing of the return andit is totally unrelated to the pendency of theassessment proceedings.

6. Merel y because there has been a BestJudgement Assessment u/s 144, it would notnullify the liability of the firm to file the returnas per Sec 139(1) of the Act.

7. The court in a prosecution of offence, like Sec276CC has to presume the existence of mens-rea and it is for the accused to prove the contraryand that too beyond reasonable doubt.

8. The appellants have to prove circumstanceswhich prevented them from filing the returnsas per Sec 139(1) or in response to notices u/s142 and 148 of the Act.

9. Finally it was decided that the criminal court isdirected to complete the trial within four monthsfrom the date of receipt of this Judgement.

Section 278E and Section 276CC

Section 278E deals with the presumption as toculpable mental state, which was inserted by theTaxation Laws (Amendment and MiscellaneousProvisions) Act, 1986. The moot question that arisesis that who is responsible for proving the existenceof guilty mind. It has been provided in section 278Ethat the Courts shall deem the existence of a culpablemental state. It is on the accused to prove thecontrary. Resultantly, it is on the assessee to provethe circumstances which prevented them from filingthe returns as per Section 139(1) or in response tonotices under Sections 142 and 148 of the Act.

Whether pendency of appellate proceedings area bar to invoking the provisions of Section276CC?

As per section 276CC, once there is a willful defaultin fil ing the return of income the provisions of thissection are attracted. Thus pendency of assessmentproceedings is not at all a condition relevant forinvoking the provisions of this section. However,for determination of the sentence of the offence,the department may resort to best judgmentassessment or otherwise to past years to determinethe extent of the breach.

It is clear from the language employed by section276CC that pendency of appellate proceedings is



not a bar to launch of prosecution proceedings. It istrite law that as already held by this Court in B.Permanand v. Mohan Koikal (2011) 4 SCC 266that “the language employed in a statute is thedeterminative factor of the legislative intent. It iswell settled principle of law that a court cannot readanything into a statutory provision which is plainand unambiguous”.

Should it have been the intention of the legislatureto hold up the prosecution proceedings till theassessment proceedings are completed whether byway of appeal or otherwise, it would have beenprovided in the section itself.

Section 276CC – A Non Cognisable Offence

Defaul t under this section is a non cognizableoffence. Under Section 279(2) of the I-T Act, eitherbefore or after the institution of proceedings theCommissioner has the power to compound theoffence under Section 276CC.

Order sanctioning prosecution

It is necessary that the authority sanctioning theprosecution should apply its mind before makingthe order. The authorities ought to refrain frommaking frivolous and vexatious orders. All therelevant evidence and materials must be considered.

Is charging of interest, levy of penalty andprosecution for same act of omission orcommission permissible?

Yes. Provisions for charging of interest, levy ofpenalty and prosecutions for same acts or omissionsexist simultaneously in the Act. The nature andobject of these three types of sanctions is differentfrom each other [Addl. CIT v. Darga pandarinathTuljayya& Co., (1977) 107 ITR 850 (AP).]. Interestis in the nature of compensation to the State forsuch acts of omission and commission which resultin delay in payment of various sums due to theGovernment, while penalty is intended to act asdeterrence to acting in contravention of law and toensure compl iance therewi th, prosecution islaunched to get the delinquents punished for actsof omission and commission which constitute crime

under the specific provisions of the Act. [VenkataKrishnnaiah& Co. v. CIT. (1974) 93 ITR 297(AP); Narandas Parmanand Das v. CIT. (1974)95 ITR 117 (Del.)]

Conclusion

Time and again the tax payers do not file the returnof income either due to lethargy or due to lack offunds for payment of tax. However, little they knowabout the consequences of their actions. But it ispertinent to mention here that this unawareness isdue to the inertia on the part of the RevenueDepartment till date. The department has alwaysstayed away from taking recourse to the provisionsof Section 276CC despite the section being a partof the Act since almost four decades.

Various recent Supreme Court rulings including themost talked about case of Sasi Enterprise (CriminalAppeal No. 61 of 2007) where in Ms. Jayalalithais a partner, have recapitulated the law of the landon the initiation of prosecution proceedings undersection 276CC of the Income Tax Act. TheRevenue Department has off late strangled theprocedures to identify those assessees who havefailed to f ile the return of income. With suchtightening procedures, the risk of launch ofprospection procedures will have to be borne inmind. Thus i t would be in the interest of theassessees to file their return of income within thestatutory time period or might be even before theend of the assessment year so as to sidestep fromthe strangles of Section 276CC of the Act.

The intention of the department is yet to becontemplated but prima facie it emerges thatamassing the compounding fees is the big idearather than to prosecute the assessee in default. Ithas been high time that a strong representation ismade so that the law framers relook into such harshand rasping provisions of the Act.

❉ ❉ ❉



It is an economic stimulus tragedy. The income taxdepartment has knack to i dent i f y f ew noncontroversial issues, which can be converted intocontroversies. Experts lament on this kind ofapproach with sigh. In the result, one needs to battleout these issues thru legal process. In a lighter tone,it is said, such approach gives stimulus to litigationpractice. Anyway let me come to the legal issue.This article is unleashed from such controversy. Oneof the non controversial i ssue of claimi ngdepreciation @ 80% (earl ier i t was 100%) onwindmill is attempted by dissecting the purchasevalue in building, plant and machinery and WindTurbine Machine and al lowing depreciation at10%, 15% and 80% respectively. The argumentsubscribed by Income Tax Department is, 80%depreciation is available only on “windmills andany specially designed devices which run onwindmills” which has limited meaning of standingstructure of wind turbine generator machine. Thelogic applied to arrive this conclusion is more

A case Study :Depreciation on Wind Mill

dangerous than interpretation. If this approach isgoing to continue, investment in solar based powerproject may face heat in coming days.

Histor ical Backgrounds of relevant provisions:

Under section 32 of Income Tax Act, depreciationis a mandatory to claim while working out Incomefrom Business or Profession. In case assessee doesnot prefer to claim depreciation at special rate underRule 5 (1A), he can claim under New Appendix I(w.e.f. A Y 2006-07), Part A, heading III, item No.8, Sub item (xiii) and clauses (l) for the specifiedrate of depreciation on wind mills. Which is readas Under :

“(8)

(xiii) Renewable energy devices being

(l) Wind mills and any specially designed deviceswhich run on wind mills” installed on or before*March 31 2012.

CA. Pradip K . [email protected]

Depreciation Rates:

Asst Yr. Particulars Rate of SubmissionDepreciation

1987-85 to Old Appendix I 30% Wind mills and special devices runs on1987-88 Par t I wind mill including Electric Generators

Heading III and pumps are two different category.I tem DSub Item 10A In case legislator wants to define windClause (xii) turbine is equal to wind mills thenWind Mills and any specially Clause (xiii) was sufficient to cover thedesigned devices which run on intention.wind millsClause(xiii)Any special devices includingelectric generators and pumpsrunning on wind energy


1988-89 to Old Appendix I 100% Wind mills and special devices runs on2002-03 Par t A wind mill including Electric Generators

Heading III and pumps are two different category.I tem 3Sub Item (xiii) In case legislator wants to define windClause (l) turbine is equal to wind mills thenWind Mills and any specially Clause (m) was sufficient to cover thedesigned devices which run on intention.wind millsClause(m)Any special devices includingelectric generators and pumpsrunning on wind energy

2003-04-to Old Appendix I 80% Wind mills and special devices runs on2005-06 Par t A wind mill including Electric Generators

Heading III and pumps are two different category.I tem 8Sub Item (xiii) In case legislator wants to define windClause (l) turbine is equal to wind mills thenWind Mills and any specially Clause (m) was sufficient to cover thedesigned devices which run on intention.wind millsClause(m)Any special devices includingelectric generators and pumpsrunning on wind energy

2006-07 to New Appendix I 80% Wind mills and special devices runs on2012-13 Par t A wind mill including Electric Generators

Heading III and pumps are two different category.I tem 8Sub Item (xiii) In case legislator wants to define windClause (l) turbine is equal to wind mills thenWind Mills and any specially Clause (m) was sufficient to coverdesigned devices which run on the intention.wind millsClause(m)Any special devices includingelectric generators and pumpsrunning on wind energy

2013-14 New Appendix I 15% *Income-tax (Fourth AmendmentPar t A Rules, 2012 – Depreciation restrictedHeading III to 15% on wind mills installed after 31-I tem 8 3-2012Sub Item (xiii) Notification No. 15/2012Clause (l) [F.No.149/21/2010-SO (TPL)]

A case Study : Depreciation on Wind Mill


Wind Mills and any specially S.O.694(E), dated 30-3-2012designed devices which run onwind millsClause(m)Any special devices includingelectric generators and pumpsrunning on wind energy

Thus, A wind turbine is such device comprises ofTower, Gearbox, brakes, rotor, generator, yaw drive,Nacelle, blades, shaft, which are used to generateelectricity by converting the energy of wind intorotational motion, and then in to electricity. The totalexpenses incurred for bringing machine shown asper figure 2 and not only in figure 1, should beconstrued as wind mill. A stand alone machine asper figure 2 without infrastructure is no use andInfrastructure of figure 1 is also of no use withoutwind turbine generator. Therefore it is interlinkedand interconnected, which can not be detached ordissected for different rate of depreciation byhypothetical formula.

Income Tax Depar tment Approach:

Sr. Nature of work /I tem Allowable %no depreciation as

per I TDepar tment

1 Supply of Wind turbine 80%generator

2 Erection & installation of 10% in someWTG And civil including cases 5%foundation work.


Income Department’s view is to dissect thePurchase value of Wind Mill into Building for thevalue of Foundation Cost, normal plant value forlabour charges, power evacuation structure cost,grid connectivity charges, transformer cost and allother i tems other than mai n wind Turbi neequipment. Whether the stand taken by Income Taxdepartment holds good ? This article is evaluatingthe stand taken by I T department in followingparagraphs.

(a) What is a Wind M ill?

A wind mill includes wind turbine generator,blades, cables, electrical apparatus, towers,permits, rights, transformer, meter and otherinfrastructures facilities. It is used to generateelectricity by converting the kinetic energy ofwind into electrical energy.

(b) What is renewable energy?

Renewable energy is energy which comes fromnatural resources like sun-light, wind, rain, tidesand geothermal heat, which are renewable(naturally replenished). Energy from any sourcewhich is not naturally replenish-able is callednon-renewable energy. Wind turbine is used toGenerate renewable energy.

Figure 1 Wind Mill


3 Works contract For Electrical 15% in somework Including supply and cases 10%installation of electrical items

4 Power Evacuation 15%Infrastructure cost

5 Providing sub lease Rights May or may notof Land and rights of allowable orsuitable access of SLM no ofsurrounding years dividedfor Wind mill by holding

period

6 Any other related expenses 15%

Here whole cost of wind mill purchase is separatedas per various contract entered with turnkey projectsuppl ier. Whether the approach of Income taxdepartment is correct ?

A Case Study:

The first and foremost question comes to mind iswhether the dissection done by Department basedon various contracts is a correct approach? Answershall be no. The contracts in this case is preparedfor allocation of work among the various agenciesof wind mill supplier. Agencies or companies maybe associates or outside agency but the fact is Buyeris entering into contract to buy out wind mill fromsupplier and to ascertain the value of goods andservices for other statutory compliance. Thisunderstanding may or may not be acceptable. Oneneed to discharge onus based on practical aspectsof wind mill.

It should be clear from the works order that all thework to be carried out in relation to Wind Mill onlywi th speci f ic attached job related to ei therinstallation of wind turbine tower or transformerplatform or testing and commissioning services orconnecting electrical line and cable from maingenerating unit to metering and grid. Any activityrelated to passive work or alternate use should beignored.

The word used in applicable Income Tax Rule is“WIND MILL”, which has a wide meaning andnot confined to generator or gearbox etc. Any act

or deed attached to bring wind turbine in active useof power generation should be treated as a part ofWind Mill. Wind Mill is a plant as defined undersection 43(3) of Income tax act and it is undertakingitsel f (M/S The Hutti Gold Mines Co. Ltd. vsDepartment Of Income Tax, ITA No. 832/Bang/2012 –A Y 2008-09). If meaning of wind mill isnarrowed to only wind turbine or standing structureof tower or together both, will not justify correctlegal position. If meaning is narrow down to suchextent, active use of wind turbine wi ll not bepossible. All standing equipments are bald anduseless. It needs to be integrated and therefore anyexpenses related to such integration and helping thisplant to bring them in use must be said as a part ofwindmill. Any payment made for labour charges,Government fees, statutory fees, foundation workexpenses, electrical components and cables-electrical work within turbine or connecting powergenerated to grid and transformer expense, meteringwork charges, surfacing works cost, data lock andcontrol machine cost etc should be treated as acomposite cost of Wind Mill. It is mandatory toestablish that all expenditures must be relevantto the Wind Mill and do not result in creating anyindependent asset.

It is pertinent to discuss the object of providinghigher rate of depreciation on Wind Mil l. Thecountry was a part of Kyoto Protocol Treaty andexpressed desi re to promote renewal energyvoluntari ly. The country is power def ici t andtherefore to fill ip the gap of power generation bythis mode may hel p to i ncrease the powergeneration. Keeping in view this, time and againincome exemption under section 80IA and 80IBfor extension of time limit for setting up powergeneration unit, amendments have been carriedout. Not only that additional depreciation undersection 32(1)(iia) has also been provided.

The fol lowing passage from Memorandum ofFinance (No.2) Bill 1998 suggests the object orthrust of Government to Boost power sector andprovide incentives on continuous basis to theelectricity generation activities.



Finance (No. 2) Bill, 1998 Provisions Relating toDirect Taxes” Incentives for InfrastructureDevelopment and Industrialisation

Tax Holiday to enterprises generating or generatingand distributing power extended up to 31.3.2003.

Under the provisions of section 80-IA of the Income-tax Act, a five-year tax holiday and a deduction of25% (30% in the case of companies) of profit in thesubsequent five years is allowed, inter-alia, to anundertaking engaged in the business of generation,or generation and distribution of power or to anindustrial undertaking set up in backward States/districts. The undertaking under the existingprovisions should start generating power on orbefore 31.3.2000.

The country continues to require large investmentsin power. As the gestation period for such projectsis long, to remove uncertainty from the minds ofpotential investors, the Bill proposes to extend thebenefit to undertakings, which commencegeneration, or generation and distribution ofpower on or before 31.3.2003. The proposedamendment will take effect from 1st April, 1999 andwill, accordingly, apply in relation to assessmentyear 1999-2000 and subsequent years. [Clause 37]

Thus, it is clear from the explanation made as abovethat power sector and more particularly Renewableenergy generation and use of devices based on suchenergy are eligible for special treatment in terms oftaxation. The higher rate of depreciation is a part ofsuch scheme. If we look at the realistic and practicalapproach that many investments has made due totax incentives in the form of higher depreciationrate and tax exemption on such income. One needto take holistic view based on the words used inthe Act, Rules and schedules attached to that.

Construction and interpretation of word “WindMill –Special designed device”:

If word “Wind Mills” interpreted in narrow termsthen i t may be equated to denial of equi ty andjustice. If in real terms , legislator has intention toallow depreciation only on wind energy equipments,in that case word could have been used WindTurbine Generator (WTG) and not wind mills. Of

course both the word sounds in common languagesynonymous but wind turbine generator has verylimited application. If legislator has intention toprovide i tem based depreciation and not in acomprehensive way, it could have been laid downunder Rule 5 (1A), Para Appendix 1A for separatedepreciation provision similar to table of Appendix1A.

Therefore it is humbly perused that all relevantexpenditure to bring assets (Wind Mill) in operation,should be capitalized and depreciation at the rateprescribed against windmill should be applied ontotal value.

Support of fol lowings few judgments may beavailed for applying ratio, while interpreting word“Wind Mill”.

CAS:1 In the scheme and context of a taxingprovision, it would not be right to isolate a word,ascertain i ts meaning wi th reference to LawLexicons and attach to it a meaning which it wasnever intended to bear. A statute cannot always beconstrued with the dictionary in one hand and thestatute in the other. Regard must also be had to thescheme, context and to the legislative history of theprovision [CIT vs. N.C. Budharaja & Co. Etc. Etc.(1993) 114 CTR (SC) 420.

CAS:2 An expression may have a variety ofmeanings but the sense in which it is employed mustbe gathered from the context. It would not be correctto adopt a strictly literal or technical meaning ofan expression while construing a section. In otherwords, one must not construe a statutory provisionmechanically. One must construe it having regardto the object which the legislature had in view inenacting it and in the context of the setting in whichit occurs [CIT vs. Insaniyat Trust (1988) 71 CTR(Guj) 145

CAS:3 Words have no absolute meaning. Theyderive colour from those which surround them. Itis true that meanings generally overlap. Few wordshave exact synonyms. The overtones are almostalways different [Brutus vs. Cozens (1972) 3 WLR521, per Lord Reid] . Words are the greatesttricksters. They play pranks with the human mind.



The Courts must discover the intention of thelegislature. So the Courts must not be strictconstructionists. The Courts have to be intentionseekers [STO vs. Byford Ltd. (1984) 145 ITR 537(Del)] .

CAS:4 Bajaj Tempo Ltd Vs Commissioner ofIncome Tax, (1992) 196 ITR 188 Deduction unders. 15C of 1922 Act (s. 80J of 1961 Act)— Allowabili ty— Industrial undertaking established in abuilding taken on lease used previously for otherpurpose— Tools and implements worth Rs. 3,500of the previous undertaking also transferred— Reliefunder s. 15C is allowable— Clause (i) of sub-s. (2)of s. 15C does not apply— The provision grantingrelief was enacted to encourage industrializationand has to be construed liberally— Tools andimplements transferred were of insignificant valueas compared to the whole assets and li teralconstruction of cl. (i) of s. 15C (2) would defeat thevery purpose of enacting the provisions— The keyto interpretation is that the new undertaking shouldnot be ‘formed’ by transfer of building, plant ormachinery— Emphasis is on formation not on use.

Case Laws Based on identical facts:

The income tax assessment is based on facts of eachcase. The facts are varied from case to case orassessment year to assessment year for the sameassessee. Therefore each assessment year is consideras independent for assessing the income. Howeverprecedent has its own legal value. When facts areidentical and judgments are delivered based onsimilar facts, which is to be considered as precedent.Whether precedent has a legal force, need to beexamined. It has two exceptions; (1) the doctrineof per incuriam; (2) doctrine of sub-si lentio.Therefore while interpreting statute, one need topay attention to the full judgments rather thanconclusion of judgments. Of course conclusion isvery important but at the same time, while declaringjudgments whether judgment passed by same courtor larger bench or higher court has been consideredor not to be seen. Secondly whether judgments isrendered on the point, which were never beenargued is not binding and doctrine of precedent is

not applicable. The principle of stare decisis isimportant while applying rule of precedent.

However when the facts are identical, issue iscovered by some judgment of JurisdictionalTribunal or High court, is binding to al l lowerrevenue authori t ies working wi thin samejurisdiction. The subordinate authorities includingcommissioner appeals can not take different viewsby adopting untenable grounds. Interesting twohigh court judgments, which are relying on supremecourt's judgments, are given below.

Bank of Baroda vs. H.C. Shr ivastava (2002) 175CTR (Bom) 663 : (2002) 256 ITR 385 (Bom) :(2002) 122 TAXMAN 330 (Bom)

Held

“ The judgment delivered by the Tribunal was verymuch binding on the AO. The AO was bound tofollow the judgment in its true letter and spirit. Itwas necessary for the judicial unity and disciplinethat all the authorities below the Tribunal mustaccept as binding the judgment of the Tribunal. TheAO being inferior officer vis-a-vis the Tribunal, wasbound by the judgment of the Tribunal and the AOshould not have tried to distinguish the same onuntenable grounds. In this behalf, it will not beout of place to mention that in the hierarchicalsystem of Courts which exists in our country, ‘itis necessary for each lower tier’ including theHigh Court, to accept loyally the decisions of thehigher tiers. ‘It is inevitable in hierarchical systemof Courts that there are decisions of the supremeappel late Tribunals which do not attract theunanimous approval of all members of the judiciary.But the judicial system only works if someone isallowed to have the last word, and that last wordonce spoken is loyally accepted. The better wisdomof the Court below must yield to the higher wisdomof the Court above.— CCE vs. Dunlop India Ltd.AIR 1985 SC 330 applied.” (Para 16)

Agrawal Warehousing & Leasing Ltd. vs.Commissioner of Income Tax (2002) 177 CTR(MP) 15 : (2002) 257 ITR 235 (MP) : (2002) 124TAXMAN 440



“Held

Sub-s. (4) of s. 254 attaches finality to the orders ofthe Tribunal subject to the provisions of s. 256 (ors. 260A). Needless to say that the orders passedby the Tribunal are binding on all the Revenueauthorities functioning under the jurisdiction ofthe Tribunal. Obviously, the CIT(A) not onlycommitted judicial impropriety but also erred inlaw in refusing to follow the order of the Tribunal.Even where he may have some reservations aboutthe correctness of the decision of the Tribunal, hehad to follow the order. He could and should haveleft it to the Department to take the matter in furtherappeal to the Tribunal and get the mistake, if any,rectified.— Kamlakshi 1991 (55) ELT 433 (SC)applied.” (Paras 7 & 8)

It is equally accepted principle that Judgment ofother jurisdictional Tribunal and High Courts arehaving persuasive value and can not be brushed aside by just saying not applicable or distinguishingfacts by placing few words in assessment order orappeal order. The order of jurisdictional tribunal isbinding to Income Tax authority. Hence either A Oor CIT (A) can not take different views by takingplea that department has not accepted tribunaljudgment and has gone for appeal in High court.The relevant judgment’s extract is reproduced asunder:

Assistant Commissioner of I ncome Tax vs.Rajave Textiles (P) L td. (2013) 22 ITR (Trib) 475(Chennai)

Held

“In the case law of KKSK Leather ProcessorsPrivate Limited (supra) the Coordinate Benchabove said had decided the issue in favour of theassessee. On that, the argument of the Revenuewas that the said order had not been accepted andit had preferred tax case appeal before thejurisdictional High Court. Such, did not form avalid ground so as to take a different view andthat too without any distinguishing featurespointed out by the Revenue. Therefore, CIT(A) hadrightly accepted the claim made by the assesseequa depreciation at 80 percent pertaining to thewindmills in question. Thus, order of the CIT(A)upheld and Revenue’s appeal dismissed.”

(para 9 & 10)

In the present case study ,the facts are related tointerpreting word “Wind Mill”. Bringing wind millin existence and operation is based on scientificmethod. Wind Mill comes in existence by installingvarious components, hi ring labours, gettingpermission from various state electricity board,connecting power supply cable to state electricitygrid or pooling station, developing approach roadand laying down cable for power transmission andbuilding control room in case wind mill is Latticestructure otherwise inside the tubular tower.Therefore facts remain same irrespective of size ofelectricity generation capacity of Wind Mill. Thequantity of work and value of Wind Mill may goup or down depending on capacity of Wind Mill.However facts will remain same. Followings aredirect judgments on identical facts.

Sr. Nature of work Allowable % Tr ibunal’s viewno /I tem depreciation

as per I TA.O’s version

1 Supply of Wind turbine generator 80% 80%. This apparatus is only to be treated as WindMi l l as per AO's view. Therefore nocontroversies.

2 Erection & installation of WTG 10% in some 80%.1 In the Income Tax Appellate Tribunal atAnd civil including foundation cases 5% Ahmedabad, "A" Bench ITA No.3317/Ahd/



work. 2011, Wi th CO No.44/Ahd/2012[Asstt.Year:2007-2008] , ACIT (OSD) Vs ParryEngineering & Electronics P. Ltd. Date ofPronouncement : 02-03-2012

2 Aminity Developers & Builders, vs DepartmentOf Income Tax, ITA No. 1505/PN/2011 ,PuneBench

3 D.Murugesh, Karur vs Department Of IncomeTax , I.T.A. No. 1938/Mds/2011, AssessmentYear : 2007-08

4 J. Sons Foundry Pvt. L td.,, Sangl i vsDepartment Of I ncome Tax , ITANos.815,891,1494&1600/PN/2011

5 Enercon Wind Farms ( Jaialmer) P. ... vsDepartment Of Income Tax , ITA No. 6402 to6405/Mum/2010

6 M/s British Weaving Company v. DCIT inI.T.A. No.511/Mds/2009 dated 12th March,2010.

7 M/s.Asian Handloom Vs. DCIT (I.T.A. No.No.2291/Mds/2008 dt.20.11.09)

8 JCIT Range-1, Sangl i Vs. M/s. WesternPrecicast Pvt. Ltd., Sangl i, ITA No.890/PN/2011dated 31.12.2012.10%

9 Poonawala Finvest and Agro Pvt. Ltd V/s. ACIT(2008) 118 TTJ (Pune) 68.

Sent back for factual aspects verification

10 The A. C. I . T. (OSD), Ci rcle-5 Vs M/s.Precisi on Technofab & Engi neeri ng, I TANo.3200/Ahd/2011 and 167/Ahd/2012, (A.Y.:2008-09 and 2009-10)

3 Works contract for electrical 15% in some 80%1 In the Income Tax Appellate Tribunal atwork including supply and cases 10% Ahmedabad,installation of electrical items “A” BENCH ITA No.3317/Ahd/2011, With CO

No.44/Ahd/2012 [Asstt.Year:2007-2008], ACIT(OSD) Vs Parry Engineering & Electronics P. Ltd.Date of Pronouncement : 02-03-2012

2 M/s.Asian Handloom Vs. DCIT (I.T.A. No.No.2291/Mds/2008 dt.20.11.09)

3 D.Murugesh, Karur vs Department of IncomeTax, I.T.A. No. 1938/Mds/2011, Assessment Year: 2007-08



4 J. Sons Foundry Pvt. Ltd., Sangli vs Departmentof Income Tax, ITA Nos.815,891,1494&1600/PN/2011

4 Power Evacuation 15% 80%1 M/s.Asian Handloom Vs. DCIT (I.T.A.Infrastructure Cost No. No.2291/Mds/2008 dt.20.11.09)

2 Asst. Comm. Income Tax Circle

1 Ludhiana Vs. Rakesh Gupta 36 TAXMANN546 (2013)

3 Trumac Engineering Co. (P.) Ltd. v. ITOMumbai ITA NO. 55S/Mum/2003 dated 27-6-2008

4 Providing sub lease Rights of May or may 80%1 Asst. Comm. Income Tax CircleLand and rights of suitable not allowable 1 Ludhiana Vs. Rakesh Gupta 36 TAXMANNaccess of surrounding for Wind or SLM no of 546 (2013)Mill years divided

by holdingperiod

5 Any other related expenses 15% 80% 1 J. Sons Foundry Pvt. L td., Sangl i vsDepartment of Income Tax, ITA Nos.815, 891,1494 & 1600/PN/2011

If meaning of Wind Mill is interpreted in limited ornarrow way i.e. standing tower housed with variousmachinery equipments, parts and blade then theobject for which incentive provisions inserted foraccelerated depreciation rate is defeated. Relianceof fol l owing judgments can be placed forapplication of ratio to interpret that word Wind Millis assigned to composite structure of wind turbinegenerator and not only standing structure of windturbine generator.

Addit ional Commissioner of Income Tax vs.Madras Cement L imited 110 ITR 281 (MAD),Foundation done in reinforced concrete for fixingmachinery is to be treated as part of the plant anddepreciation to be allowed on the plant includingthe cost of the foundation.

CAS 1.3 Commissioner of Income Tax vs. R.G.Ispat L imited. High Cour t of Rajasthan JaipurBench 210 ITR 1018 (Raj ): In order to determinewhether a structure is a building or plant, functionaltest should be applied— If a structure is raised tomake the plant operative which could not have

functioned in its absence, the structure is plant unders. 43(3)— Massive reinforced concrete structurespecially designed to take up load of cranes,therefore, constitutes plant .

CAS 1.4 Commissioner of Income Tax vs. SibbalCold Storage, High Cour t of Madhya Pradesh(1996) 136 CTR (MP) 244, In fact the plant cannotsurvive independent of building. Some building hasto be there in order to house the plant; and as such,the building which houses the plant is a plant.Therefore, the plant includes within i ts ambitbuilding in which machineries are housed. ‘Plant’includes a bui lding in which machineries arehoused.

CAS 1.5 [2013] 37 taxmann.com 264(Ahmedabad - Tr ib.) In the ITAT AhmedabadBench ‘B’ Gujarat Green Revolution Co. L td.Vs. Assistant Commissioner of Income-tax - 1(1),Seen in the light of the functional test laid down bydecision of High Court cited above, we are of theview that in the peculiar facts of the present casethe “green house” is an essential part for a company



engaged in the business of Tissue Culture. It cannotbe considered as a simple “building” but has to beconsidered as a plant.

CAS 1.6. In the judgment of the Hon’ble DelhiHigh Court in the case of CIT v. MahanagarTelephone Nigam Ltd. as repor ted in 254 ITR627, wherein it has been held that the undergroundcables for telecommunication network form the linkbetween the telephone exchanges and as such formspart of the apparatus of the plant of the assesseengaged in providing the telecommunicationnetwork and therefore, the extra shift allowance wasallowed on underground cables.

CAS 1.7 In case of CIT Vs. BSES YamunaPowers Ltd. (2013) 40 TAXMANN 108 (Delhi)it has been held that computer accessories andperipherals such as, printers, scanners and server,etc., form an integral part of computer system and,hence, they are entitled to depreciation at higher rateof 60 per cent .

CAS 1.8 In the case of CIT v Delhi Ai rpor tService [2001] 170 CTR (Delhi) 534 whereinthe Hon’ble Delhi High Court held that Ai rcondition plant is an integral part of the bus andtherefore, depreciation on air conditioner fixed inbus is allowable at the rate applicable to Bus insteadof rate applicable to Air conditioner.

CAS 1.9 In the case of CIT VS. SRC Aviation PLtd. (2013) 37 TAXMANN 308 (Delhi) held thatAll types of crafts or modes of transport aided byflight, are entitled to 40 per cent depreciation. In depreciation table ‘airplane-aeroengine’ which isentitled to 40 per cent depreciation, cannot be givena restrictive interpretati on so as to includeaeroengine only; it will also include ‘aircraft’ whichgives a broader description which includes allmanner of craft or means of transport aided byflights such as balloons, planes, etc .

CAS 1.10 CIT v. Karnataka Power Corporation(247 ITR 268) where it was held that whether athe building can be treated as a plant

Consequently it is profoundly be said ,Wind Millshould mean a comprehensive word and all relatedexpenses f or i nstal l at ion, erect ion andcommi ssioning of Wind Turbine Generator,incurred for Civil Including Foundation & alliedworks, Electrical work Including supply andinstallation of electrical items , Power evacuationinfrastructure Cost, Specific Professional fees,interest payable till electric generation starts, beconsidered as inseparable part of purchase cost.Therefore Composite /Integrated cost of purchaseof Wind mill should be qualified for depreciation at80% of composite value.

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Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

Practice and Procedure –Appeal :

Three basic principles regarding right of appeal, andforum of appeal that can be culled out are :

The forum of appeal available to suitor in a pendingaction of an appeal to a superior Tribunal whichbelongs to him as of right is a very different thingfrom regulating procedure :

That it is an integral part of the right when the actionwas initiated at the time of the institution of action;and

That if the court to which an appeal lies is altogetherabolished without any forum constituted in its placefor the disposal of pending matters or for lodgmentof the appeal, vested right perishes.

It is well settled proposition of law that enactmentdeal ing with substantive rights are primarilyprospective unless they are expressly or bynecessary i ntenti on or impl icat ion gi venretrospectively. The aforesaid principle has full playwhen vested rights are affected. In the absence ofany in equivocal expose, the piece of legislationmust exposit adequate intendment of legislature tomake the provision retrospective. The right of appealas well as forum is a vested right unless the saidright is taken away by the registration by an expressprovision in the statute by necessary intention.

[Himachal Pradesh State Electricity RegulatoryCommission and other vs. Himachal Pradesh

State Electricity Board (2014) 5 SCC 219]

Res Judicata – Review – Precedents:

(a) Res Judicata : The literal meaning of ‘res’ is‘everything that may form an object of rightsand includes an object, subject-matter or status’and ‘res judicata’ li teral ly means ‘matteradjudged; a thing judicially acted upon ordecided; a thing or matter settled by judgments’.

Res judicata pro veritate accipitur is the fullmaxim which has, over the years, shrunk to mere‘res judicata’, which means that res judicata isaccepted for truth. The doctrine contains the ruleof conclusiveness of the judgment which isbased part ly on the maxi m of Romanjurisprudence interest reipublicae ut sit finis litium(it concerns the State that there be an end to lawsuits) and partly on the maxim nemo debet bisvexari pro una et eadem causa (no man shouldbe vexed twice over for the same cause).

Even an erroneous decision on a question of lawattracts the doctrine of res judicata between theparties to it. The correctness or otherwise of ajudicial decision has no bearing upon thequestion whether or not it operates as res judicata.

(b) Review: Order sought to be reviewed mustsuffer from error apparent on face of order – Inabsence of such error apparent, even anerroneous judgment / order cannot be a groundfor review and finality of judgment order cannotbe disturbed.

(c) Precedents: What Court actually decides, notwhat follows from it, would be binding – Ratioof a decision should be understood i nbackground of facts of the case and can berelied on considering how fact situation of casefits in case to be relied on.

The ratio of any decision must be understood inthe background of the facts of the case and the caseis only an authority for what it actually decides,and not what logically follows from it. ‘The courtshould not place reliance on decisions withoutdiscussing as to how the factual situation fits in withthe fact situation of the decision on which relianceis placed.’

[Dr. Subramanian Swamy vs. State of TamilNadu and others (2014) 5 SCC 75]

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Char itable purpose – Exemption –Sec.13(1)(b):

(a) Determination of the nature of the trust as whollyreligious or wholly charitable or both charitableand religious under the Act is not a question offact. It is a question which requires examinationof the legal effects of the proven facts anddocuments, that is, the legal implication of theobjects of the assessee-trust as contained in thetrust deed. It is only the objects of a trust asdeclared in the trust deed which would governits right of exemption u/s 11 or 12. It is theanalysis of these objects in the backdrop of fiscaljurisprudence which would i lluminate thepurpose behind creation or establishment of thetrust for either religious or charitable or bothreligious and charitable purpose. Therefore, theHigh Court had erred in refusing to interfere withthe observations of the Tribunal in respect of thecharacter of the trust on the grounds that theywere pure findings of fact.

(b) That the objects of the assessee-trust were notindicative of a wholly religious purpose but werecollectively indicative of both charitable andreligious purposes. Although objects (c) and (f)which provided for activities completely religiousin nature and restricted to the specific communityof the assessee-trust were objects with religiouspurpose only, the fact that the other objectstraced thei r source to the Holy Quran andresolved to abide by the path of godliness shownby Allah would not be sufficient to conclude thatthe entire purpose and activities of the trust werepurely religious in colour. The objects reflectedthe intent of the trust as observance of the tenetsof the Islam, but did not restrict the activities ofthe trust, to religious obligations only and forthe benefits of the members of the community.The provision of food to public on religious daysof community, the establishment of Madarasasand organizations for dissemination of religiouseducation and rendering assistance to the needyand poor for religious activities would reflect theessence of charity. The activity of providing forfood on certain specific occasions and otherreligious and auspicious events of the DawoodiBohra community did not restrict the benefit tothe members of the community. When the objectsof the trust exhibited the dual tenor of religiousand charitable purposes and activities. Section11 of the Act allowed such trust with composite

objects to claim exemption from tax as a religiousand charitable trust subject to the provisions ofsection 13. The activities of the trust under suchobj ects would, therefore, be ent i tled toexemption accordingly.

(c) That the objects of the assessee-trust were basedon religious tenets under the Quran accordingto the religious faith of Islam. The activities ofthe trust though both charitable and religiouswere not exclusively mean for a particularrel igious communi ty. The objects did notchannel the benefits to any community if notthe Dawoodi Bohra communi ty and thus,would not fall under the provisions of section13(1)(b) of the Act. The assessee-trust was acharitable and religious trust which did notbenefit any specific religious community and,therefore, it could not be held that section13(1)(b) of the Act would be attracted to theassessee-trust and thereby, it would be eligibleto claim exemption under section 11 of the Act.

[CIT Vs. Dawoodi Bohra Jamat (364 ITR 31)]

Interest on Refund – Sec.244A:

Interest is a kind of compensation for use and retentionof money col l ected unauthorisedly by theDepartment. A general right exists in the State toretain any tax collected for its purpose, and acorresponding obligation exists to refund toindividuals any sum paid by them as taxes whichare found to have been wrongfully exacted or arebelieved to be, for any reason, inequitable. Thestatutory obligation to refund carries with it’s the rightto interest also. This is true in the case of assesseesunder the Act. When the collection is illegal, there isa corresponding obligation on the Revenue to refundsuch amount with interest inasmuch as it had retainedand enjoyed the money deposi ted. Even theDepartment understood the object behind insertionof section 244A, as that, an assessee is entitled topayment of interest for money remaining with theGovernment which would be refunded. There is noreason to restrict the right to assessees withoutextending the benefit to a deductor who has deductedtax at source and deposited it before remitting theamount payable to a non-resident.

[Union of India vs. TATA chemicals Ltd. (363ITR 658)]

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Glimpses of Supreme Cour t Rulings

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Order pr onounced by ITAT in openCour t ef f ect of : Attachment andRecovery in defiance thereof.

A.T. Kearney India P. L td. v/s. ITO

(2014) 363 ITR 172 (Delhi)

Issue :

Whether order pronounced by ITAT in open courtis binding on ITO, can ITO plead ignorance of thesame ?

Held :

CIT (Appeal ) held in favour of revenue. Therevenue issued a notice u/s 221 of the I.T. Act,1961 to the assesse for recovering the demandamounts due. The assessee filed a letter stating thatit had preferred an appeal and stay applicationbefore the Tribunal. The Tribunal granted stay andpassed an interim order for the period of onehundred eighty days. Even though the Departmentrepresentative appeared before the Tribunal andthe Order on the stay application was pronouncedin open court, the authorities attached and tookaway the proceeds of the assessee’s bank account.

On a writ petition, High Court has held as under :

The submission of the revenue that the concernedA.O. was not intimated, cannot be accepted. If suchan argument was made before this court whereorders are pronounced in court in the presence ofcounsel, it would certainly not be accepted and infact would be seriously viewed. In the facts of thecase, it clearly amounts to overreach of the interimorder of the Tribunal , in a similar situation, thiscourt itself would possibly be initiating contemptproceedings. In these circumstances, the court is ofthe opinion that the respondent should lif t theattachment and ensure that the amounts recoveredare deposited back in the petitioner’s account withina week.

CA. C. R. [email protected]

Interest on Refund :India Trade Promotion Organizationv/s. CIT(2013) 263 CTR 18 (Del ) : (2013) 93DTR (Del) 425

Issue :

How the interest on refund/part refund due is to beconsidered?

Held :

The words used in Sec. 244A are “where refundof any amount becomes due and payable to theassessee under the Act” the assessee shall be entitledto receive in addition to the said amount simpleinterest calculated in the manner stipulated. Thelegislature has not used the words “tax paid” or “theprinciple amount of tax paid”. The words used bythe legislature in Sec. 244A are “any amount” and“said amount”. The words are therefore much widerand broad. The words “any amount” word includewithin its scope and ambit the interest element,which has accrued and is payable on the date ofrefund. Thus when the revenue does not pay fullamount of refund but part amount is paid, theywi ll be l iable to pay interest on the balanceoutstanding amount. The balance outstandingamount may consist of the tax paid or the interest,which is payable till the payment of the part amountand interest payable on the principle amount, whichremained outstanding thereafter. I t would beincorrect and improper to regard payment of interestwhen part payment is made as interest on interest.

Reopening on the basis of hypothesis notvalid : DHFL Venture Capital Fund v/s.ITO (2012) 358 ITR 471(Bom)

Issue :

Can there be a valid reopening on the basis ofhypothesis? What is the meaning of words in section“has escaped assessment”.

From the Courts

CA. Jayesh C. [email protected]

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Held :

In this case the whole basis of reopening was thehypothesis that if the provisions of Sec. 61 to 63were attracted as had been claimed by the assesseeand the income of Rs. 32.83 crores which had beenclaimed by the assessee to be exempt was treatedas exempt, in that event an alternate basis for taxingthe income in the hands of the association of personsof the contributories was sought to be setup. Theentire exercise was only contingent on a futureevent and a consequence that may enure upon thedecision of the Tribunal, if the Tribunal were tohold against the Revenue. A reopening of anassessment u/s 148 could not be justified on such abasis. There had to be a reason to believe thatincome had escaped assessment. “ Has escapedassessment” indicates an event which has takenplace. Tax legislation cannot be rewritten by theRevenue or the Court by substituting the words“may escape assessment” in future.

Retirement from Firm and Sec.45(4) :CIT v/s. Dynamic Enterpr ises(2013) 263 CTR (FB) 138 (Kar ) : 359ITR 83 (Kar ) (FB).

Issue :

Whether provisions of Sec. 45(4) are applicable onretirement, when retiring partner takes only cashand no asset?

Held :

Sub-sec. (4) of Sec. 45 deals with a distribution ofcapital assets on the dissolution of a firm or otherAPO or BOI or otherwise. If in the course of suchdistribution of capital asset there is a transfer of acapital asset by the firm in favour of a person and itresults in profits or gains to the firm, then the saidprofits or gains shall be chargeable to tax as incomeof the firm and again for computing said income,Sec. 48 is attracted. In other words, in the processof dissolution of a fi rm, i f a capital asset istransferred to a partner which results in profits orgains, then that income is chargeable at the handsof the firm under this provision. In order to attractsub (4) of Sec. (45), the conditions precedent are :

(1) There should be distribution of capital assets ofa firm; (2) Such distribution should result in transferof a capital asset by firm in favour of the partnerand (3) On account of the transfer there should bea profi t or gain derived by the fi rm; (4) Suchdistribution should be on dissolution of the firm orotherwise.

Therefore in order to attract Sec. 45(4) the capitalasset of the firm should be transferred in favour ofa partner, resulting in firm ceasing to have an interestin the capital asset transferred and the partnersshould acquire exclusive interest in the capital asset.In other words, the interest the firm has in the capitalasset should be extinguished and the partners inwhose favour transfer is made should acquire thatinterest. Then only the profits and gains arising fromsuch transfer are liable to tax u/s 45(4).

When a partner takes away only money towardsthe value of his share in the firm and when there isno distribution of capital asset/assets among thepartners, there is no transfer of a capital asset andconsequently no profits or gains are chargeable totax u/s 45(4).

Sec. 244A : I nter est on Refund i sautomati c : CI T v/s. Sahar a I ndiaSavings and Investment Cor por at ionLtd. (2013) 218 Taxman 363 (All)

Issue :

Whether an application to claim interest on refundis necessary?

Held :

It may be mentioned that no application is necessaryfor interest on refund u/s 244A. Interest on refundgoes along with refund. No application is requiredfor this purpose in view of mandatory provision u/s 244A(1)(b) of the Act as observed in the case ofNational Horticulture Board v/s. Union of India(2002) 253 ITR 12 (P & H). The argument that theassessee should have made an application forrefund was found to be without any merit. Denialof interest on delay attributable to the assessee asprovided u/s 244A (2) would have no application,

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From the Cour ts

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merely because of delay in application for refund.At any rate, when the refund is pending before theauthorities, failure to apply for the refund cannotbe treated as delay attributable to the assessee.

Capital Gain u/s 50 and investment u/s54EC : CIT v/s. Aditya Medisales L td.(2013) 218 Taxman 477 (Guj )

Issue :

Exemption for investment u/s 54EC in respect oflong term capital gain, deemed short term u/s 50,can be allowed ?

Held :

Gujarat High Court followed two decisions (1) CITv/s. ACE Builders (P) Ltd. (2006) 281 ITR 210(Bom) and CIT v/s. Assam Petroleum Industries(P) Ltd. (2003) 262 ITR 587 (Gau) and held asunder :-

“We concur with the above decisions. We are inagreement with both the decisions as stated abovein holding that capital gain arising of long termcapital asset and exemption provided u/s 54 EC ofthe Act cannot be denied to the assessee only onaccount of the fact that deeming fiction is createdunder sec. 50 of the Act. In other words, legalfiction created u/s 50 of the Act is though restrictedto computation of capital gains, such deemingfiction cannot restrict application of Sec. 54 ECwhich allows exemption of capital gains, if assesseemakes investment in the specified assets. Thus, theassessee cannot be charged to capital gains whenshort term gains of long terms capital assets getinvested in the areas specified under the law”.

Profit u/s 115JB and brought forwardloss/depr eciat ion : CIT v/s. PrakashTubes L td. (2013) 219 Taxman 22(Delhi)

Issue :

When tax is payable as per provisions of Sec. 115J, the brought forward loss/depreciation remainsand to be carried forward in entirety?

Held :

When the MAT provisions u/s 115J are applicable,at the first stage, profits are computed under thenormal provisions and deductions allowable underthe Act have to be taken into consideration. Thedeductions which are allowed, do not get disturbedor obliterated even if the assessee pays tax on thebooks profits u/s 115J. Thus when Sec. 115J isinvoked and is appl ied, i t does not affect thecomputation made under the normal provisions.They stand on their own legs and do not get effected.Accordingly, the unabsorbed losses, includinginvestment allowance which were duly taken intoconsideration and accounted for while computingtax under the normal provisions, do not getdisplaced or erased and adjustments made have tobe given full effect to.

High court took support of the Supreme Courtdecision in Karnataka Small Scale IndustriesDevelopment Corporation Ltd. v/s. CIT (2002) 258ITR 770, (2003) 126 Taxman 121.

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From the Cour ts

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Be strong, my young friends; that is my advice to you. You wi llbe nearer to Heaven through footbal l than through the study ofthe Gita. These are bold words; but I have to say them, for I loveyou. I know where the shoe pinches.

- Swami Vivekananda


SICOM L td. VS. JCIT 147 ITD 383(Mum.)Assessment year : 1997-98 to 2000-01Order Dated: 22nd May, 2013

Basic Facts

The assessee is engaged in the business of financingindustrial units by providing loans and also bygiving assets on lease. During the year underconsideration it had claimed depreciation in respectof leased assets under section 32(1). The AO, afteranalyzing the various lease agreement, came to theconclusion that those were nothing but financiallease in the nature of financial transactions andassesse not being the owner of the assets was notentitled to depreciation in such transactions. TheCIT(A), looking to the nature of the various leaseagreements, held that there were mainly twocategories of lease transactions one in the nature ofsale and leaseback transactions and other financelease i.e. normal lease transactions. In case of normallease CIT(A) held that the assessee was entitled forclaiming the depreciation since it was the owner ofthe asset and after the expiry of lease period, theequipment or assets were to be returned back to thelessor. So far as sale and leaseback transactionswere concerned he set aside the matter to the file ofAO to decide the issue afresh. The departmentchallenged the CIT(A)’s order.

Issue

Whether assesse was entitled to depreciation onassets given normal lease transactions& in caseof sale and leaseback transactions?

Held

The Hon’ble ITAT noted that depreciation has beendisallowed on assets which were given on leasedearlier and on which depreciation has been allowed.These assets are also forming part of the “Block ofassets”. Not only that the depreciation has been

al lowed in the subsequent assessment yearswherein the Department is not in contest. Oncethese assets have found to be a part of the Block ofassets and depreciation has been allowed in theearlier years, the depreciation on some assets cannotbe disallowed on the opening written down valueby taking a new stand on exactly similar nature oftransaction. The tribunal further held that thoughthe principle of res judicata does not apply in incometax proceedings, however if the similar facts arepermeate through all assessment years and bothparties have accepted a particular stand then theprinciple of consistency has to be fol lowed.Accordingly the Tribunal held that in so far as theclaim of depreciation on opening written downvalue in case of normal lease & sale & lease back isconcerned it cannot be disallowed following theprinciple of consistency and also that these areal ready a part of block of assets on which thedepreciation has been allowed and the same cannotbe disturbed from the block of assets.

In the new lease entered during the year the tribunalgranted depreciation in respect of normal lease onthe basis of the Supreme Court decision in case ofICDS Ltd. The issue of depreciation on sale & leaseback transaction entered into during the year, thematter was set aside to the file of AO for decidingissue fresh since proper material was not available.

ACIT v. Nicholas Piramal India L td. 147ITD 675 (Mum)Assessment Year :1998-99 Order dated:15th March, 2013

Basic Facts

The assessee had incurred expenditure on providingstreet lights on the road which leads to assessee’sfactory, providing ambulance for meeting medicalemergencies for residents of village tarsadi, cost ofpublic garden developed. And claimed the sameunder section 37 of the Act. The AO disallowed

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

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the expenses holding that the same could not beconsidered as incurred wholly and exclusively forthe purpose of the assessee’s business. The CIT(A)also confirmed the said disallowances for the samereasons as given by AO.

Issue

Whether community development expensesincur red by assessee company are allowable asdeductible business expenditure under section37(1)?

Held

The Hon’ble ITAT allowed the claim of the assesseon the basis of the Madras High Court decision incase of Madras Refineries Ltd. Wherein it was heldthat the concept of business is not static. It hasevolved over a period of time to include within itsfold the concrete expression of care and concernfor the society at large and the people of the localityin which the business is located, in particular. Beingknown as a good corporate citizen brings goodwillof the local community, as also with the regulatoryagencies and the society at large, thereby creatingan atmosphere in which the business can succeedin a greater measure with the aid of such goodwill.

Saurashtra Cr icket Association V. CIT148 ITD 58(RAJ)

Order Dated: 25th October, 2013

Basic Facts

The assessee-trust was created for the promotionof game of cricket in Saurashtra region.TheCommissioner cancelled the registration of theassessee-trust by invoking provisions of section12AA(3) by observing that the trust has arrangedone day international matches of cricket and in turnhad received TV subsidy/subvention income i.e.sharing of TV broadcasting right income fromBCCI and advertisement sales i ncome. TheCommissioner was of the view that the assessee-trust had carried out the activities in the nature oftrade, commerce or business in view of the firstproviso to section 2(15) and, therefore, the objectof the assessee-trust are no longer of charitable innature. The assesse trust filed appeal to the Tribunal.

Issue

Whether on the given facts, Commissioner wasr ight in cancelling the registration under section12AA(3)?

Held

The Registrat ion has been cancel l ed byCommissioner on the basis of amended provisionsof secti on 2(15). The acti on taken by theCommissioner, does not fall within the permissiblel imits of section 12AA(3) and, therefore, theimpugned order is bad in law.The issues raised bythe Commissioner, in the impugned order regardingthe activities of the trust can be examined by theAssessing Officer in the appropriate proceedings.The findings given by the Commissioner in theimpugned order is not permissible keeping in viewthe limited power available to him under section12AA(3). Therefore, i t would be open for theAssessing Officer to consider all the issues raisedin the impugned order, if so advised, in the courseof assessment proceedings of relevant years.Therefore, the Registration granted to the assessee-trust under section 12A was to be restored.

ITO vs. Zinger Investment (P.) L td. 147ITD 694 (Hyd)Assessment Year : 2007-08 Order Dated:21stAugust, 2013

Basic Facts

The assessee had transferred its manufacturingdivision to Novapan Industries Limited (NIL) undera scheme of amalgamation. As per scheme ofamalgamation under section 391/394 of theCompanies Act, all the assets and liabilities of theassessee were vested with NIL against which, theassessee was given investments held by NIL besidesallotment of equity shares to the shareholders ofthe assessee. The AO held that the transfer of themanufacturing division to NIL tantamount to a‘slump sale’ within the meaning of section 50Battracting liability of capital gains therein.On appeal,the assessee submitted that the provisions of section50B were applicable only in the case of sale of anundertaking and not in the case of an arrangementbetween two companies under section 391/394 of

Tr ibunal News

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the Companies Act, 1956. The CIT(A) deleted theorder of the Assessing Officer.

On revenue’s appeal:

Issue

Whether since no monetary consideration wasinvolved in transferr ing manufacturing divisionwith all its assets and liabilities to ‘N’ underscheme of amalgamation approved by Hon’bleHigh Cour t of AP, could same be considered tobe a slump sale within meaning ascr ibed undersection 2(42C) so as to attract liability of capitalgain under section 50B?

Held

To qualify as slump sale, two conditions have to besatisfied viz., (1) there must be transfer of one ormore undertaking as a result of sale and (2) the saleshould be for a lump sum consideration withoutvalues being assigned to the individual assets andliabilities. In the case of the assessee it is not disputedthat there is no monetary consideration received fortransfer of the assets and l i abi l i ti es of themanufacturing division to Novapan Industries Ltd.though there may be a transfer of an undertaking.Therefore, considering the facts of the instant case,since there is no monetary consideration involvedin transferring the manufacturing division with allits assets and liabilities to Novapan Industries Ltd.under scheme of amalgamation approved by theHon’ble High Court of AP it cannot be consideredto be a slump sale within the meaning ascribedunder section 2(42C) so as to attract the liability ofthe capital gain under section 50B. Accordingly theCIT(A)’s order was upheld.

IJM (India) Infrastructure L imited vs.ACIT 147 ITD 437 (Hyd)Assessment Year : 2008-09 Or derdated:22nd August, 2013

Basic Facts

The assessee was a closely held limited companypromoted by IJM Corporation, Berhad. It wasengaged in the business of works contracts,construction and maintenance of roads, bridges,townships, residential and commercial buildings.It had entered into certain transactions with IJM-

IJMII JV between assessee and IJM Corporation,PE of IJM Corporation, Berhard, Malaysia andIJM-NBCC-VRM (JV) between National BuildingConstruction Co. Ltd., VRM and the assessee, whowere residents of India. The TPO has treated thetransactions between the assessee and its AEs, asinternational transaction and determined the arm’slength price. The objection was raised before theDRP however, the DRP confirmed the Order ofTPO.

Issue

Whether since impugned transactions wer eentered between two resident par ties, there wasno possibility of shifting of profit outside Indiaor erosion of country’s tax base and therefore,transactions between assessee and its AEs wereoutside purview of transfer pr icing regulations?

Held

On the facts of the case, Tribunal held that thePEshould be treated as resident in India inasmuch asthe business profits attributable to PE are taxable inIndia and all business decisions relating to PE areentered and concluded in India. In other words, thecontrol and management of the affairs of PE aresituated in India, the PE should be treated as residentin India.

Further, the decisions relating to the affairs of theJoint Venture are taken in India and the business isexecuted i n Indi a through a Joint VentureAgreement in India. Therefore,the Joint Venturesare residents in India. Moreover, clause 3 of article4 of Malaysia provides that a person which includesAOPs also shall be deemed to be residents of theState in which its place of effective management issituated. On perusal of the Joint Venture agreements,it can be seen that all the decisions relating to theJoint Venture are taken in India and, therefore, theJVs are to be treated as ‘residents’ only. Apart fromthe above noted points, the present transactions arebetween two resident parties and therefore, there isno possibility of shifting of profits outside India orerosion of country’s tax base. Hence, thetransactions with AEs are outside the purview ofthe transfer pricing regulations.

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contd. on page no. 226


In this issue we are giving gist of a very importantdecision of Hon’ble Gujarat High Court in the caseof Sahkar i Khand Udyog Mandal L td., whereinthe Hon’ble Court has decided the time limits forthe purpose of fulfil ling the requirements on the partof A.O. as well as assessee before A.O. takes upthe reassessment of an assessee.

The decision is also important from another angleon the ground that an issue which has already beendecided by the High Court in favour of the assesseeand on that very issue a notice for reopening isissued, such notice for reopening can be quashed.

We hope readers would find it useful.

In the High Cour t of Gujarat at Ahmedabad

Special Civil Application No. 3955 of 2014

Sahkar i Khand Udyog Mandal L td.… …Petitioner(s)

Versus

Asstt. Commissioner of Income Tax… …Respondent(s)

Appearance:

M r. M anish J. Shah, Advocate for thePetitioner (s) No.1

M r . Sudhi r M . M ehta, Advocate for theRespondent(s) No.1

Coram : Honourable Mr. Justice Akil Kureshi

and

Honourable Mr. Justice Sonia Gokani

Date : 31/03/2014

CA. Sanjay R. [email protected]

Unreported Judgements

Gist only

Facts and Contentions :

The original assessment in the case of PetitionerCo-operative Society for A.Y. 2008-09 was framedu/s 143(3) wherein the brought forward unabsorbeddepreciation pertaining to A.Y. 2000-01 wasallowed to be carried forward for subsequent year.

Thereafter, assessment was reopened wi thin aperiod of four years on the ground that suchunabsorbed depreciation for A.Y. 2000-01 couldonly be allowed upto A.Y. 2008-09 and not beyondit and therefore the mention in the original orderthat the same is allowed to be carried forward forA.Y. 2009-10 is against provisions of law and hencethere was reopening of assessment by way of issueof notice u/s 148.

The assessee Petitioner in the Writ Petition to quashthe notice and subsequent proceedings relied on thedecision of Hon’ble Gujarat High Court in the caseof General Motors India P. Ltd. v/s DCIT 354 ITR244 in which it is held that such carried forward ofunabsorbed depreciation and set off would bepermissible without reference to any time limit.

On the other hand Counsel for the departmentopposed the petition contending that in the originalassessment this question was not examined andsince notice has been issued within the period offour years from the end of relevant assessment year,it is a valid assumption of jurisdiction by A.O. forreopening of assessment.

The petitioner alternatively submitted that since thisvery Court has decided the issue on merits in favourof the assessee, there is no purpose going to beserved by allowing the reassessment proceedingsto be continued against the Petitioner and hencethe notice be quashed and subsequent proceedingsmay also be not allowed to be persisted with.


Decision of the Hon’ble High Cour t :

The Hon’ble High Court held as under :

i) Admittedly there were no queries by the A.O.with respect to carry forward of unabsorbeddepreciation beyond eight years and nocorresponding representation from the Petitionerin the original assessment proceedings andtherefore on this ground reassessment noticecannot be quashed.

ii) However, the Hon’ble High Court found muchforce in the alternative contentions of thePetitioner that the issue itself has been decidedby the Hon’ble Gujarat High Court in favourof the assessee on merits of the case andtherefore held that when the ground on whichpresent notice is founded is held to be invalidin law, the very foundation for issuance ofnotice would not be surviving and hence onthat ground the impugned reopening notice isliable to be quashed.

iii) Incidentally, while dealing with the procedurelaid down by the Hon’ble Supreme Court inthe case of GKN Driveshafts (India) Ltd. v/sITO 259 ITR 19,the Hon’ble High Court laiddown further time limit qua different stages inthe reopening proceedings in respect of whichHon’ble Supreme Court in the above case wassilent. The same are reproduced hereunder:

“(1)Once the Assessing Officer serves to anassessee a not ice of reopeni ng ofassessment under section 148 of theIncome Tax Act, 1961, and within the timepermitted in such notice, the assessee fileshis return of income in response to suchnotice, the Assessing Officer shall supplythe reasons recorded by him for issuingsuch notice within 30 days of the filing ofthe return by the assessee without waitingfor the assessee to demand such reasons.

(2) Once the assessee receives such reasons,he would be expected to raise hi sobjections, if he so desires, within 60 daysof receipt of such reasons.

(3) If objections are received by the Assessingofficer from the assessee within the timepermi tted hereinabove, the AssessingOfficer would dispose off the objections,as far as possible, within four months ofdate of receipt of the objections filed by theassessee.

(4) This is being done in order to ensure thatsuffi cient time is avai lable wi th theAssessing officer to frame the assessmentafter carrying out proper scrutiny. Therequi rement and the time-frame forsupplying the reasons wi thout beingdemanded by the assessee woul d beapplicable only if the assessee fi les hisreturn of income wi thi n the peri odpermitted in the notice for reopening.Likewise the time frame for the AssessingOfficer to dispose of the objections wouldapply only if the assessee raises objectionswithin the time provided hereinabove. This,however, would not mean that if in eithercase, the assessee misses the time limit, theprocedure provided by the Supreme Courtin the case of GKN Driveshafts (India) Ltd.(supra) would not apply. It only means thatthe time frame provided hereinabove wouldnot apply in such cases.

(5) In the communication supplying thereasons recorded by the Assessing Officer,he shall intimate to the assessee that he isexpected to raise the objections within 60days of receipt of the reasons and shallreproduce the directions contained in sub-para 1 to 4 hereinabove giving referenceto this judgment of the High Court.

(6) The Chief Commissioner of Income Taxand Cadre Controlling Authority of theGujarat State, shall issue a circular to allthe Assessing Officers for scrupulouslycarrying out the directions contained inthis judgment.”

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Unrepor ted Judgements


When Investments are made in acquiring sharesof subsidiary company, whether interest paidon loan utilized for acquir ing such shares canbe disallowed?

Issue:

X Ltd. is holding Co. of Y Ltd. X Ltd. has madeinvestments in acquiring the shares of subsidiarycompany. X Ltd. has also overdraft facility withthe bank and paid interest on such overdraft facility.The Assessing Officer is of the view that interestpaid on overdraft is for acqui ring shares of thesubsidiary company and hence such interest cannotbe allowed as deduction either u/s 36(1)(iii) or u/s57(iii).

Proposition:

When investment is made in acquiring shares ofthe subsidiary company even out of overdraftfacility, the interest has to be allowed as deductionas promoting the business activity of subsidiarycompany is commercially prudent and is in theinterest of holding company. To support the businessact ivi ty of subsi di ary company is alwayscommercially prudent and is in the interest ofholding company.

Relevant provisions of the Act:

Section 36(1)(iii) of the Income Tax Act, 1961provides that interest is allowed as deduction if thefollowing conditions are satisfied :

(a) The assessee must have borrowed money.

(b) Interest is paid or payable on such borrowal.

(c) The borrowed money is used for the purposeof business and profession.

As per Section 57(iii);

“The income chargeable under the head ‘Incomefrom Other Sources’ shall be computed after makingthe deduction; of any other expenditure (not being

in the nature of capital expenditure) laid out orexpended wholly and exclusively for the purposemaking or earning such income.”

View in favour of the proposition:

Pert inent to the proposi t ion made for thiscontroversy, I cite the novel case of S.P. JaiswalEstateVs. CIT [ 2013] 29 taxmann.com 221(Kol kata-Tri b.). The assessee-company wasengaged in hotel business. In the course of i tsscrutiny assessment proceedings for the relevantassessment year, the Assessing Officer, noted thatthe assessee had not charged any interest onadvance given to a subsidiary company andadvance to a group company whereas the assesseehad paid interest on secured loans taken. TheAssessing Off icer noted that the subsi diarycompany, was demerged from the assessee-company and that the said company did not haveany commercial activity at present. The AssessingOfficer questioned commercial expediency ofgranting interest f ree loan to the subsidiarycompany.

As regards the availability of sufficient interest freefunds, the Assessing Officer rejected the claim ofthe assessee on the ground that while there was anincrease in interest free loans to subsidiaries in thecurrent year, there was no such correspondingincrease of share capital and reserves and that theincrease in the source of funds in the current yearwas in secured loans from banks. The AssessingOfficer thus disallowed interest paid by the assesseeon its borrowings in proportion of total advancesto the subsidiary and group companies.

On further appeal , the Tribunal held that sinceassessee’s own interest bearing funds were far inexcess of the interest free advances given to thesubsidiaries, deduction claimed under section36(1)(iii) in respect of interest on its borrowingscould not be declined. It was further observed that

CA. Kaushik D. [email protected].

Controversies


as the assessee was engaged in the hotel businessand the subsidiaries were also set up to acquire, setup or manage the hotels, which will advance thecause or achieve objects of the assessee-company,the advances given to the subsidiary companies arerequired to be treated as having been given in thecourse of business of the company. Thus thedisallowance was deleted.

I would also like to refer to following decisions :

a) Rajeeva Lochan Kanoria ( 208 ITR 616)

b) Srishti Securities v/s JCIT (152 Taxman 40).ITAT (Mum). Later Confirmed by BombayHigh Court in 2009-TIOL-178-HC-Mum-ITvide order dated 22/01/2009 where it was held:

“In above cases, it has been held that interest paidon borrowings for investing in shares of companieseither as stock in trade or for acquiring controllingstake is allowable u/s 36(1)(i ii ). Furthermore,interest expenditure is allowable in view of thejudgment of the Hon ‘ble Apex Court in case ofS.A builders 288 ITR 1 cited by the appellant. TheAppellant’s application to RBI for acquisition ofApplisofts shares demonstrates that the Appellantexpected a substantial business from Applisoft onaccount of Technical services/ Consultancy fees innext 5 years. This conclusively proves the “businesspurpose” of the investment being made in the saidcompany. I agree that the case laws relied upon bythe A.O. are distinguishable on facts from the caseof the appellant. In case of V.I baby and others(Supra) cited by the AO, the loans were advancedto partners and relatives of the firm as well as sisterconcerns interest f ree and no commercialexpediency could be proved. The facts of otherjudgments relied upon by the AO are also different.The recent decision of the Apex Court in S.A.Builders” case clinches the issue in favour of theAppel lant. In view of the above discussiondisallowance of interest expenditure made by theAO is deleted.”

Further it was held by Hon. ITAT Mumbai benchin the case of Tr igyn Technologies Ltd, ITA No.4855 (Mumbai) of 2009 as under:

“We have carefully considered the submissions ofld. Representative of parties and orders of authoritiesbelow. We have also considered earlier order ofTribunal dated 28.1.2011 for assessment years2002-03 and 2003-04. We observe that the AOmade disallowance of interest of Rs.5,74,25,564/-in assessment year 2002-03 for similar reasons asstated in the assessment year under consideration.We observe that the ld. CIT(A) confirmed the actionof AO. But the Tribunal in further appeal afterconsidering the submissions of the assessee videpara 11 at page 9 of the order allowed the claim ofthe assessee. It is relevant to state that the Tribunalhas stated that ld. CIT(A) in the next assessmentyear viz assessment year 2003-04 himself allowedthe relief to the assessee. Tribunal allowed the claimof the assessee in AY 2002-03 after observing thatin case business of subsidiary is collapsed it willhave severe repercussions on the assessee company.That the synergies of the business operation of theassessee company and its subsidiaries were re-aligned and the functions of the various companieswere made complimentary and supplementary toeach other, so as to avoid duplication of interestand deriving maximum value in its operation. Thateach company is inter dependent on the other. Thatthe survival of assessee is also at stake, if thesubsidiaries fail. The Tribunal also observed thatsection 14A of the Act would also not come in theway for the reasons that the majority of thesubsidiaries are foreign subsidiaries and thequestion of section 14A being applied for dividendreceived from them does not arise. The Tribunalalso held that section 14A and section 36(1) (iii)operate in different fields.”

View against the proposition:

The Assessee in the latest case of CIT vs. DeepakAgarwal [ 2013] 357 ITR 741 (Al lahabad) wasengaged in business of financing, invested interestbearing funds in shares of company in whichassessee had substantial interest. Assessing Officer,on observing that no income had been derived inrespect of such i nvestment, disal lowedproportionate interest under section 36(1)(iii) onground that interest bearing funds had been diverted

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to extend financial support to related company. Asthe assessee was not engaged in business ofinvestment in shares, interest bearing funds investedin shares of related company could not be said tohave been utilized for purposes of business, andtherefore, proportionate interest was liable to bedisallowed under section 36(1)(iii).

I refer to a current judgement in the case of CIT Vs.Subrata Roy [ 2013] 38 taxmann.com 324(Allahabad High Court), wherein the assesseeclaimed deduction in respect of interest paid on loanfor purchase of shares under head ‘Income fromother sources’. Assessing Off icer found thatborrowed funds had been invested in a loss makingcompanies of same group in which assessee hadsubstantial interest. Accordingly, he held thatassessee had adopted a colourable device to reducetax liability and disallowed interest claimed byassessee.Since assessee had invested in companiessuffering heavy losses and was aware aboutfinancial health of all companies of group, therewas no possibility to receive any pecuniary benefitand thus, investment made by assessee could notbe considered for purpose of business. Interest paidby assessee on borrowed funds was not exclusivelyand whol ly for purpose of business but was acolourable device for tax evasion. The interest onborrowed funds was thus disallowed.

In the case of Kal indi Investments (P) Ltd. Vs.CIT[2003] 260 ITR 261(Gujarat), assessee alimited company borrowed certain sum, major partof which was invested in purchasing of shares ofcertain company which were subsequent lytransferred to its wholly owned subsidiary companyfor consideration to be received in instalmentswithout interest. Assessee’s claim for deduction ofinterest on borrowed fund was disal lowed onground that expenditure was not incurred whollyand exclusively for purpose of making or earninginterest.On reading of provision of section 57(viii)in l ight of facts found there was no making orearning of income relatable to transaction inquestion and as assessee admi ttedly was notcarrying on any business and, thus, was not havingincome from business, Tribunal held that assessee

was not enti tled to deduction of interest undersection 57(iii).

The assessee in case of CIT Vs. Smt. LeenaRamchandran [ 2011] 10 taxmann.com 109(Kerala)was running a business as proprietorengaged in trading of goods. During the relevantassessment year, she paid i nterest on fundsborrowed for purchase of shares in a company ofwhich she had acquired 90 per cent controllinginterest in the course of ten years. The assesseeclaimed that said company was engaged in leasingof household articles and she sold such articles tothe said leasing company and, therefore, theutilization of borrowed funds for acquisition ofshares of that company was for business purposeentitling her to deduction of interest. The AssessingOfficer held that the only benefit, the assessee gotfrom the investment was dividend income whichwas exempt under section 10(33) and, therefore, inview of section 14A interest paid for earning saidincome could not be allowed.The Tribunal rightlyheld that the util ization of borrowed funds foracquisition of shares would not entitle the assesseefor claiming deduction of interest paid on suchborrowed funds. The assessee was not entitled todeduction of any amount towards interest paid onfunds borrowed for acquisition of shares in thecompany, which helped the assessee only to earnsome dividend.

Let me refer to the case of Sarabhai Sons(P) Ltd.Vs. CIT [ 1993] 201 ITR 464 (Gujarat).Theassessee, a shareholder of company Swastik OilMills Ltd. (hereinafter referred to as “SOML”),decided to take over the shares f rom othershareholders so that it could hold 100 per cent sharesin ‘SOML’ and implement its expansion projects.The assessee met with some difficulties in acquiringcertain shares as there was resistance from theowners of those shares. Meanwhile, a proposal wasput forward by company Karamchand PremchandPvt. Ltd. (hereinafter referred to as “KPPL”) topurchase al l the shares of company SOML.Pursuant to that proposal, the assessee sold equityshares of SOML to KPPL at the same purchaseprice. During the relevant assessment year the

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assessee paid certain interest to the shareholdersfrom whom i t had purchased shares and alsoreceived certain interest from KPPL for unpaid priceof shares which it had sold to KPPL. The assesseeclaimed net deficiency in the interest accountcalculated on the basis of interest paid by theassessee to the shareholders of the company S onthe unpaid purchase price and interest received onunpaid sale price by the KPPL as a deduction incomputing its income from other sources. The ITOwas of the view that the expenditure in questionwas of capital nature. He also held that the shareswere acquired with a view to hand over the sameto KPPL and as such the expendi ture incurredtowards interest could not be said to have beenincurred for the assessee’s business or for earningincome from other sources. Taking this view, theITO rejected the claim of the assessee for deductionunder section 36 and also under section 57(iii). Onsecond appeal the Tribunal rejected the claim madeunder section 36 as it found that the assessee wasalready the managing agent of SOML and purchaseof the shares had nothing to do with the managingagency. But, as regards the claim for deductionmade under section 57(iii), the Tribunal held that,for an assessment year, its claim was well-foundedas it had derived dividend income; however, theassessee’s claim for a similar deduction for thesucceeding assessment year was not tenable as theassessee had not received any dividend during thatyear and, secondly, because the obligation of theassessee to make payment of interest to theshareholders of SOML was independent of the rightto receive interest from KPPL and, therefore, it wasnot possible to say that payment of interest wasrequired to be made by it to the shareholders ofSOML in order to earn or derive income by way ofinterest from KPPL.

The connection between the expenditure incurredand the income earned need not be direct. Even ifthe connection is indirect or incidental, that can beregarded as sufficient for the purpose of section57(iii). It is also equally clear that, for attractingsection 57(iii), it is not necessary that any incomein fact should have been earned as a result of theexpenditure.

In the instant case the shares which were purchasedby the assessee were not for the purpose of earningincome, though that could be regarded as theultimate motive. The shares were purchased by theassessee with a clear purpose or object of getting100 per cent control over company SOML. If thepurpose was to earn income only, or even if thatwas the dominant purpose, it would not have soldthe shares again to KPPL as, by that time, it hadalready acquired more than 90 per cent shares, andthat would have satisfied its object of earning moreincome by possessing more shares. The reason whythe assessee sold the shares was that it was not ableto get 100 per cent control by purchasing all theremaining shares. Thus from the nature of thetransaction, it became apparent that the expenditurewhich was incurred by the assessee was not for thepurpose of earning income, but for the purpose ofgetting full control over company SOML. Thus, itbecame clear that the dominant purpose for whichexpenditure was incurred was not to earn income.At the highest, it was a mixed purpose. For thatreason, it would have to be held that the expenditureincurred in that behalf fell outside the purview ofsection 57(iii). The Tribunal was therefore, justifiedin disallowing the assessee’s claim.

Summation:

Let me refer to the recent case of PeninsularInvestments Ltd [2013] 213 Taxman 327 (AndhraPradesh). The assesse was engaged in business ofinvestment in shares. During the relevant assessmentyear, the assessee took loans from i ts groupcompanies. A part of said loan was used forpurchasing shares of another group company ofinterest. The assessee claimed deduction undersection 36(1)(iii ) in respect of interest paid onamount borrowed for the purchase of shares. TheAssessing Off icer rejected the assessee’s claimholding that amount of loan was not utilized forearning business income, but it was an attempt toreduce taxable income by paying interest to sisterconcerns. The Commissioner (Appeals) finding thatassessee had shown income from sale of shares ascapital gains, took a view that as assessee was not

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engaged in the business of sale and purchase ofshares.

The Memorandum of Association of the assessee-company provided that the assessee could carry onthe business of investment, f inancing, buying,selling, investing, transferring, disposing off andotherwise dealing in shares, stocks etc., also, theassessee was registered with the R.B.I. as a Non-Banking Financial Company. In the audit reportfiled by the assessee, the nature of business wasreferred to as Investment Company and the methodof valuation of closing stock was stated to be thelower of cost or market value which method isapplicable in case of business stock only. Merelybecause the assessee had shown the receipts on saleof part of shares as ‘long term capital gains’, is notconclusive. The Tribunal has held that an entry inthe books or classification of a particular item inthe annual accounts does not determine the characterof income or asset.

The Tribunal has correctly appreciated the evidenceon record and came to the conclusion that thebusiness of the assessee is to invest in shares, thatthe borrowing was for the purpose of business andthat the entire amount paid by the assessee on theloans taken by it is allowable as a deduction undersection 36(1)(iii).

In the case of Amola Holding (P) Ltd.[2010] 328ITR 275 (Gujarat), the AO had disal lowedassessee’s claim of interest u/s 36(1)(iii) on theground that the purchase of shares was mainly foracquiring controlling rights in another company. Thedisallowance was made on the base that borrowedcapital was utilized for investment in the shares insome companies. The investments being made bythe assessee in capital asset for acquiring controllingrights and the resultant expenditure is a capitalexpenditure. On the basis of the concurrent findingsCIT (A) as well as the Tribunal both found thatassessee-company’s main object was to carry onthe business of sale/purchase of shares, debentures,stocks, bonds, etc. The shares were purchased notfor acqui ring the controll ing rights in anothercompany, but the shares were purchased for non-business purpose, especially, for earning interest and

dividend and the disal lowance was deletedsubsequently.

Looking in the case of Rajeeva Lochman Kanoria[1994] 208 ITR 616 (Calcutta), the assessee, anindividual, declared income assessable under theheads ‘Profits and gains of business or profession’,‘Capital gains’ and ‘Income from other sources’.The ITO found that he had claimed a businessexpenditure on account of interest payment madeon moneys borrowed by him. It was contended byhim before the Assessing Off icer that he hadborrowed funds f or business purposes, l ikeacquisi tion of shares for acquiring control linginterest in various companies, making loans andadvances in the course of financing business andfor dealing in shares, etc. The Assessing Officeralso found that the assessee had invested in purchaseof shares of different companies for acquiringcontrolling interest and in the financing business.The Assessing Officer observed that the assesseemade investment on capital account and as suchthe interest, if any, paid on borrowed moneys couldnot be treated as relating to his business activitiesand, therefore, the net interest paid on borrowedmoneys was not deductible in computing thebusiness income under section 28. He, therefore,disallowed interest on the amount invested inpurchase of shares of different companies in whichthe assessee acquired controlling interest. On appeal,the Commissioner (Appeals) conf i rmed thedisal lowance made by the Assessing Off icer,holding that in the course of i ts operation ofpromotion, management, control and financing ofvarious companies, he earned income by way ofdirectors’ fees only. On second appeal, the Tribunalobserved that the disallowance of interest could notbe made merely on the ground that the assesseeacquired shares of different companies for acquiringcontrolling interest. The acquisition of shares foracquiring control ling interest may be a capi talexpenditure, but no disallowance could be madeunless it was found that the borrowed moneys werenot used for the purposes of the assessee’s business.The Tribunal held that interest paid on borrowedmoneys was admissible as a business deductioneven when the borrowed money was utilised for

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acquiring capital assets, and therefore, the assesseewas entitled to deduction.

Referring the case of Srishti Securities [2010] 321ITR 498 (Bombay), the assessee-company hadborrowed funds which were utilized in its businessof acquiring shares by way of investment as wellas by way of stock-in-trade. It paid interest onborrowed funds and claimed deduction thereofunder section 36(1)(ii i). The Assessing Officerdisallowed the entire amount of interest paid on theground that the object of acquiring shares was notto earn dividend but to acquire a controlling interestin the company. On appeal , the Commissioner(Appeals) divided the interest between investmentand stock-in-trade on a pro rata basis and held thatthe assessee was entitled to deduction of interest tothe extent borrowed funds were used for acquiringshares by way of stock-in-trade. On appeal, theTribunal deleted the disal lowance made by theCommissioner (Appeals) holding that if funds areborrowed by an investment company for makinginvestment in shares which may be held asinvestment or as stock-in-trade or for purpose ofcontrolling interest in other companies, interest paidon such borrowed funds would be deductible undersection 36(1)(iii).

Let me now refer to recent decision of AhmedabadITAT – ITA No. 2369/Ahd/2010 for A.Y.2007-08 and ITA No. 2452/Ahd/2010 for A.Y.2007-08 decided on 29.4.14 in the case of Dinesh M illsLtd.

It was noted by the AO that the assessee did notcharge any interest on the investments. As perassessee’s explanation, the investment was madein the subsidiary company out of internal accrualsof the current f i nanci al year. Al though theinvestment was made to earn income as perassessee’s explanation, but no income was earnedduring the year. The AO noted that if assessee hashuge reserves and surplus then what was the needto take a term loan and to pay interest on the loan.So, the objection was that on one hand, the assesseewas paying huge interest on borrowings, but onthe other hand huge amount was invested in equityshares of the subsidiary company. Therefore, as per

the AO, interest to the extent of investment insubsidiary company was to be charged at the rateat which assessee was paying interest.

The learned CIT(A) was of the view that theinvestments made for purchase of shares waslegitimate business activity. According to him, asubstantial amount was invested in earlier yearswherein no such disallowance was made; thereforehe held that the AO was not justified for makingdisallowance. As per Hon. ITAT, each year is anindependent year. Facts of the relevant year are tobe seen independently and not to be governed bythe decisions taken in past.

In this regard I l ike to mention the decision ofjurisdictional High Court in case of K alindiInvestments (P) L td. 124 Taxmann 475, it washeld as under;

“Tribunal disallowed assessee’s claim for deductionon account of interest – whether Tribunal wasjustified in disallowing assessee’s claim in view offact that assessee’s claim on account of interest hadbeen disallowed on similar facts in earlier years –Held, yes.”

Also other decision of Delhi High Court, theirlordships of Delhi Court in Friends Clearing agencyPvt. Ltd. 332 ITR 269 held that if interest is allowedin past same cannot be disallowed in current year.

Also, in the case of Visen Industries Limited it washeld that “the investment made by the assessee inthe earlier years could not have been taken intoconsiderat ion for the purpose of makingdisallowance of interest in relevant year.”

In my respectful submission, investing in the sharesof the subsidiary company has to be considered aspromoting the business activity of the subsidiarycompany as noted in the case of S.P. Jaiswal Estate.The interest has to be allowed as deduction asencouraging the business activity of subsidiarycompany is commercially prudent.

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Scope of assessment in set aside proceedings

Gemini Oils Pr ivate L imited vs ITO (ITA No.2563/Mum/2005)

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10. I t is a settled law that the scope of theproceedings after remand will necessarily haveto be determined with reference to the terms ofthe order whereby the appellate authority hasremitted the case to the AO. The AO has samepowers in making fresh assessment as he hadoriginally when makingthe assessment orderu/s. 143 of the Act. However, this power canbe used only when the Fi rst Appel lateAuthority set aside the assessment and directthe AO to make a fresh assessment, withoutimposing any restrictions or limitations as tohow the fresh proceedings are to be conductedby the AO which means that as long as norestrictions have been placed by the AppellateAuthority on the scope of the proceedings afterremand by directing a fresh assessment to bemade by the AO, the AO is competent to redothe assessment in accordance with law aftertaking into account all matters and aspects thatwould be relevant in making the originalassessment, which also means that it is open tothe First Appellate Authority to limit the scopeof the enquiry by the AO to any specific aspector issue. It is well settled that an AppellateAuthority while setting aside the case can givedirections and lay down limits for the inquiryto be made by the assessing authority. Whensuch a direction is made and limits are laiddown, the power and jurisdiction of theassessing authority to deal with the case, afterremand, depend on the specifications of theremand order, which means that the assessingofficer has no jurisdiction to enter into anyquestion which falls outside the limits laiddown.

Advocate Tushar [email protected]

Judicial Analysis

11. In the case of CIT Vs Mansa Ram and Sons(1991) 190 ITR 453 (All.) Hon’ble High Courthas held that where the revisional order limitsthe AO’s jurisdiction to make a fresh assessmentwith regard to only two items, the AO has nopower to add other amounts or to make otheradditions to the assessee’s income.

12. A similar view has been taken by the Hon’bleM.P High Court in the case of CIT Vs HopeTexti les L td. (1997) 225 ITR 993 (MP)wherein the Hon’ble High Court thus held that“that the Commissioner (Appeals) had in hisremand order made a clear direction to theAssessing Officer to reconsider the case onlyin regard to the matter relati ng to thedisallowance out of machinery repairs. TheAssessing Off icer had, therefore, clearlytravel led beyond the specif ications of theremand order in making the additions and theappellate authorities were right in deleting theadditions. The order of the Tribunal was basedon a proper appreciation of the settled legalposition and did not, therefore, give rise to anyreferable question of law”.

14. A similar view has been taken in the case ofCIT Vs Jawaharlal Nagpal (1988)171 ITR 136(MP) in which the Court has held that “in thefresh assessment proceedings after the originalassessment had been set aside, the ITO had nojurisdiction to tax new sources of income.”

15. In short, the scope of the fresh assessmentfollowing the Appellate order depends on thesubject matter of the appeal and the appellateorder read as a whole in its proper context. If asubordinate Tribunal refuses to carry outdirections given to it by a superior Tribunal inthe exercise of its powers, the result will bechaos in the administration of justice. This ratiois laid down by the Hon’ble Supreme Court in


the case of Bhopal Sugar Industries Vs ITO(1960) 40 ITR 618. No doubt in order to attractthis principle, It is necessary that the order ofthe superior Appellate authority should beclear, certain and definite in its terms andwithout any ambiguity.

16. Let us now consider the above judicialdiscussion in the light of the order of the Ld.CIT(A) whi le disposi ng the ori gi nalassessment order. A perusal of the findings ofthe Ld. CIT(A) clearly show that the CIT(A)was concerned with the additions made in theoriginal assessment order. In the light of theadditions made therein, the CIT(A) set asidethe assessment for denovo consideration whichclearly show that the di rections of the Ld.CIT(A) for denovo assessment were restrictedto the additions made by the AO in the originalassessment order.

17. We have careful ly perused the assessmentorder under appeal before us and we find thatin the denovo assessment, the AO has travelledbeyond the directions of the Ld. CIT(A) bymaking additions which were not at all therein the original assessment proceedings. To sighta few instances in the original assessment order,the AO has made additions in respect of sundrycreditors in the name of 5 parties holding thatthe sundry creditors shown by the assessee arenot genuine which resulted into an addition ofRs.11,67,360/- in the denovo assessment, TheAO has made addition to the tune of Rs.2,50,14,190/- u/s. 69 of the Act as boguspurchases made from these 5 parties. Anotherexample, in the original assessment, the AOhas made addi tion of Rs. 50,00,000/- asunaccounted estimated purchases and Rs.1,95,000/- on account of opening work-in-progress whereas in the denovo assessment,the AO has made addition of Rs. 50,03,000/-on account of creditors not payable. The aboveexample clearly show that the AO has travelledbeyond the directions given by the Ld. CIT(A)while setting aside the original assessmentorder. As the AO has failed to carry out the

legal duty to impose on him which has resultedinto the destruction of a basic principle ofnatural justice, such action of the AO cannotbe upheld.

xxx…

19. In our considerate view, the additions made bythe AO were not made in the ori gi nalassessment and by making such addition theAO has travelled beyond the directions of theCIT(A), in the light of the discussions madehereinabove. The additional grounds raised bythe assessee deserve to be al l owed.Accordingly, we quash the order of the AOand reverse the findings of the Ld. CIT(A). Aswe have decided the appeal on the point oflaw by quashing the assessment order, we donot propose to decide the issue on merit.

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Kel logg I ndia (P.) L t d. v. ACIT [2013] 33taxmann.com 397 (Mumbai - Tr ib.)

29. In ground No. 1, the assessee has challengedthe disallowance of Rs. 39,47,212, in respectof free food allowance.

30. The facts, whi ch are rel evant for ouradjudication, are that this is the second roundof appeal and in the first round, the AssessingOfficer has made 50 per cent. of disallowanceout of these expenses on ad hoc basis. Thiswas further reduced to 25 per cent. by theCommi ssioner (Appeals). Against thi sdisallowance, the assessee went in appealbefore the Tribunal, wherein the Tribunal setaside this matter before the Assessing Officerto examine this issue afresh.

31. In the second round of appeal, the AssessingOfficer, in pursuance of the directions givenby the Tribunal , made 100 per cent ofdisallowance at Rs.39,47,212, on the groundthat these expenses are already a part of costof raw material and processing of the said freefood and is included in manufacturing cost andpurchases. Such a disallowance of 100 per centhas been conf irmed by the Commissioner

Judicial Analysis


(Appeals) on the ground that it amounts toclaim of double deduction.

32. Before us, learned counsel for the assesseesubmitted that once the matter has been set asideby the Tribunal, the assessee cannot be put intoa worst situation than what it was at the timeof original assessment. Since after giving effectto the order of the Tribunal, there cannot beany scope of enhancement of assessment and,therefore, the disallowance made in the originalassessment should stand. In support of thiscontention, he relied on the judgment of thehon’ble Supreme Court in Mcorp Global (P.)Ltd. v. CIT [2009] 309 ITR 434/178 Taxman347 (SC).

33. On the other hand, the learned DepartmentalRepresentative submitted that this is clearly acase of double deduction and does not amountto any kind of enhancement of assessment asthe verdict of the Tribunal was to examine theissue afresh.

34. We have heard the rival contentions andperused the material available on record. It isnow a settled proposi tion of law that theAppellate Tribunal under section 254(1) of theAct, had no power to take back the benefitconferred by the Assessing Officer or enhancethe assessment. When the matter has beenrestored by the Tribunal, the income cannot beenhanced by the Assessing Officer from thatdetermined at the time of original assessmentproceedings, which was the subject matter ofdispute before the Tribunal. This propositionof law has been uphel d by the hon’bleSupreme Court in Hukumchand Mills Ltd. v.CIT [1967] 63 ITR 232, and had now beenreiterated in Mcorp Global (P.) Ltd. (supra).Therefore, in view of this proposition of law,the enhancement of assessment by making 100per cent disallowance in respect of free foodallowance cannot be sustained and the same isrestricted to 50 per cent, as made by theAssessing Officer in the original round ofproceedings. Consequently, this ground isallowed to this extent only.

S.P. Kochharv. ITO [145 ITR 255 (All.)

xxx…

9. Two questions fall for our consideration in thesewrit petitions: Firstly, whether after remand ofthe case by the Tribunal, the ITO could havegone beyond the directions given in the remandorder and look into the matters which were notthe subject-matter of appeal before the Tribunal.The second question is as to whether noticeunder section 148 could be issued when theassessment proceedings were still pending.

xxx…

11. As for the powers of the Tribunal, sub section(1) of section 254 says that the Appel lateTribunal may, after giving both the parties tothe appeal an opportunity of being heard, passsuch orders thereon as it thinks fit.

12. The powers of the Tribunal in dealing withappeals are expressed in the widest possibleterms and are similar to the powers of anappellate court under Civil Procedure Code.The Tribunal may, after giving both the partiesto the appeal an opportunity of being heard,pass such orders thereon as it thinks fit. Theword ‘thereon’ is significant in as much as itrestricts the jurisdiction of the Tribunal to thesubject matter of the appeal. In other words,the original grounds of appeal and suchadditional grounds as may be raised by the leaveof the Tribunal constitute the jurisdiction of theTribunal. I t can only adjudicate upon suchgrounds and not beyond them. It is not open tothe Tribunal to adjudicate or give a finding ona question which does not consti tute thesubject-matter of the appeal as constituted bythe original grounds of the appeal and suchadditional grounds as may be raised by the leaveof the Tribunal. Further, the words, ‘pass suchorders thereon as it thinks fit’ include all thepowers except the power of enhancementwhich is conferred upon the AAC by section251. The distinction that the AAC is competentto examine al l matters covered by theassessment order whi le the Tribunal is toconfine itself to the subject-matter of the appealis also to be kept in view.

Judicial Analysis


13. The scope of ITO’s powers to make a freshassessment under an order of remand passedby the appellate authority has come up forconsideration in numerous cases. This Courtin J.K. Cotton, Spg. &Wvg. Mills Co. Ltd. v.CIT [1963] 47 ITR 906, laid down that whereon an appeal from an assessment, the AAC setaside the assessment and directed the ITO tomake a fresh assessment, the ITO is bound bythe directions of the AAC in making the freshassessment. But subject to those directions, hehas the same powers in a fresh assessment ashe had originally when making an assessmentunder section 23 of the 1922 Act. The sameview was reiterated in Abhai Ram Gopi Nathv.CIT [1971] 79 ITR 339 (AH.). The KeralaHigh Court in K.P. Moideenkuttyv. CIT [1981]131 ITR 356 has held that the competence ofthe AAC is not restricted to deal with thesubject-matter of the appeal. He may examineall matters covered by the assessment order andcorrect the assessment in respect of suchmatters even to the prejudice of the assesseeand may remand the case to the ITO forenquiring into the items which were not thesubject-matter of appeal. Where, on appealfrom an assessment, the AAC sets aside theassessment and directs the ITO to make a freshassessment without imposing any restriction orlimitation as to how the fresh proceedings areto be conducted by the ITO, the ITO has thesame powers i n making any such freshassessment as he had originally when makingan assessment under section 143 of the Act andthe ITO is competent to re-do the assessmentin accordance with law after taking into accountall matters and aspects that would be relevantin making the original assessment. It is open tothe AAC to limit the scope of enquiry by theITO to any specified aspect or issue.

14. The decision of the Calcutta High Court inKatihar Jute Mills (P.) Ltd. v. CIT [1979] 120ITR 861 is to the same effect. The Punjab andHaryana High Court in Kartar Singh v. CIT[1978] 111 ITR 184 ruled that where anassessment is set aside by the Tribunal and

remanded to the ITO, it is not open to him tointroduce into the assessment new sources ofincome so as to enhance the assessment. Anypower to enhance is confined to the old sourcesof income which were the subject matter ofappeal to the Tribunal.

15. What thus comes out is that the powers of theAAC are wider than those of the Tribunal. TheAAC while hearing an appeal under section251 can examine all matters covered by theassessment order and correct the assessmentin respect of all such matters even to theprejudice of the assessee. He may remand thecase to the ITO for enquiring into the itemswhich were not the subject- matter of appealalso. If he sets aside an assessment and remandsthe case to the ITO for making a freshassessment, the powers of the ITO whilemaking the fresh assessment are the same as ifhe were making an original assessment undersection 143(3) of the Act. The AAC can,however, limit the powers of the ITO by givingsuitable directions in regard to the scope ofenquiry by the ITO. In the absence of suchdirection or restriction on the power of the ITO,while making a fresh assessment, the ITO isnot bound by anything that had happened eitherwhen he made the original assessment or whenthe appeal was heard. When the remand ismade by the Tribunal, the position is different.The powers of the Tribunal are confined to thesubject-matter of appeal as constituted by theoriginal grounds of appeal and such additionalgrounds as may be raised by the leave of theTribunal. Thus, when the Tribunal allows theappeal and sets aside the assessment andremands the case f or making a freshassessment, the power of the ITO is confinedto such subject-matter only. He cannot take upthe questions which were not the subject-matterof appeal before the Tribunal. This will be soeven though no specific direction has beengiven by the Tribunal. If a specific direction isgiven, then there is no scope whatsoever forthe ITO to travel beyond those directions orrestrictions.

Judicial Analysis


16. In the instant case, the matter had come upbefore the Tribunal in the appeal filed by therevenue. The revenue had challenged thedeletion of three additions, viz., Rs. 85,625,profit on sale of land, Rs. 3,420, profit on saleof land to Smt. Bawa and Rs. 2,268, profit onplot sold to Smt. Krishna Kochhar. In regardto latter two additions, the Tribunal agreed withthe AAC and held that in respect of sale of landto Smt. Krishna Kochhar, there was noextraneous consideration involved and noquestion of earning any profit. As regards saleof plot to Smt. Bawa, it was held to be a distresssale made to purchase peace and that also didnot yield any profit. As regards the profit ofRs. 85,625, the view taken by the Tribunal wasthat insofar as the sales which had been madeprior to the relevant previous year wereconcerned, they could not be considered forarriving at any such profit in respect of the yearunder consideration, that is, 1970-71. In therelevant previous year apart from the two saledeeds, one made in favour of Smt. Kochhar

and the other in favour of Smt. Bawa, therewas only one more sale deed of Rs. 40,000 infavour of Smt. Sandhu which alone wasrelevant for consideration in this year. Theprofit in respect of this transaction could bearrived at by estimating the cost price of theplot and the land sold and there from the costprice of the building and the plot retained bythe petitioner shall be excluded and further heshall be given the benefit of the developmentexpendi ture, i f any, incurred by him fordeveloping the land. The subject- matter ofinqui ry was, therefore, restricted by theTribunal to this very transaction only and themethod in which the profit was to be arrived atwas also indicated. That being so, the ITO wasnot justified in embarking on an enquiry intoany other item not covered by these directions.Certainly the various notices issued by himunder sections 142(1) and 143(3) of the Actwere not justified. This petition, therefore, isliable to succeed.

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contd. from page 213 Tr ibunal News

Viacom 18 Media (P.) L td. Vs. ADIT 162TTJ 336 (Mum).Assessment Year 2009-10 TO 2011-12;Order dated:28th March, 2014

Basic Facts

The assessee, engaged in broadcasting televisionchannels from India, received transponder servicefrom Intelsat, a tax resident of USA, in lieu of afee. The assessee approached to the AO under195(2) of I -T Act for Ni l wi thhol di ng taxcertificates, for such payment of fees to Intelsat,which was denied by the AO

Issue

Whether fee payable to Intelsat is in the natureof ‘Royalty’ in the light of amended provisionsof section 9(1)(vi) as well as under Ar ticle 12 ofIndo-US DTAA?

Held

The def i ni t ion of term ‘royal ty’ remainedunchanged despite insertion of Explanation 6 by

Finance Act 2012. The introduction of Explanation6 w.e.f.01-6-1976 is clarificatory in nature and,therefore, it does not amend the definition of royaltyper se. There is no quarrel on the point that anypayment for use or right to use of process is in thenature of royalty as per the provisions of Article12(3) of DTAA as well as per the Explanation 2 ofsection 9(1)(vi) of the Act. Since the term ‘process’is not defined under the DTAA, therefore, by virtueof Article 3(2) of the India-US DTAA, the meaningof term ‘process’ as defined in the Act would applyfor this purpose. The use of transponder by theassessee f or tel ecasti ng/broadcast ing theprogramme involves the transmission by the satelliteincluding up-linking, amplification, conversion fordownlinking of signals which falls in the expression‘process’ as per Explanation 6 of section 9(1)(vi).Hence the payments made for use/ right to use ofprocess falls in the ambit of expression ‘royalty’ asper DTAA as well as per provisions of Income TaxAct.

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Judicial Analysis


CA. Rajesh H. [email protected]

As elaborated earlier in August 2013 issue UScitizens, Green Card Holders, H1B Visa holders andall USA tax residents are required to report globalincome in their Federal Tax Return and Federal Taxon such global income is payable subject to creditbeing granted for tax paid overseas.

US tax residents are also requi red to reportmaximum value of specified foreign financial assetsto the US treasury on or before 30th June everyyear and since 2011 reporting of overseas financialassets has become mandatory if the maximum valueof overseas assets exceeds US$ 50,000 as on 31stDecember or US$ 75,000 during the tax year andin case of married couple tax-payers filing US$100,000 and US$ 150,000 respectively in Form8938 together with Federal Tax Return in Form1040.

Out of ignorance great majority of US tax residentshad not disclosed their foreign income or assets but unfortunately ignorance of law not being anexcuse such defaults were subject to civil andcriminal penalties. To mitigate this difficulty IRShad offered Offshore Voluntary Disclosure Initiative(OVDI ) and Offshore Voluntary Discl osureProgram (OVDP) requiring tax residents to paytaxes for 8 years and file Foreign Bank AccountReport (FBAR) returns for 8 years and also paypenalty of 25% / 27.5% penalty of maximum valueof overseas assets during last 8 years.

The Internal Revenue Service of USA probablysensed that this penalty of 27.5% was a hurdlef or defaul t ing US tax residents to opt forOVDP and therefore the IRS has extended af riendly gesture to the defaul ting taxpayersby forgiving them for their genuine and bonafidenegl igence of not paying federal tax on such

overseas income and not declaring overseasfinancial assets to the Treasury by reducing thepenalty to a token 5% of the peak year end balanceof the preceding six years and federal tax forprevious three years only under the StreamlinedFil ing Compliance Procedures “(SFCP) beingintroduced recently on 18th June, 2014.

For availing the benefits of SFCP the tax payershould not be under audit or criminal investigationby the IRS. The tax payer is also required to certifyunder penalty of perjury that non compliance of UStax and reporting of Foreign Assets were "nonwi l l f ul " . Each case wi l l be reviewedindependently by the IRS and i f the FinancialInstitutions is under investigation by IRS where inthe US resident is maintaining a financial accountoffshore penalty will be 50% of maximum valueof overseas financial assets. For such FinancialInstitutions wherein IRS is already investigating taxpayers will have the option of buying peace of mindby paying miscellaneous offshore penalty of 50%of the value of overseas assets.

US tax payer residing outside USA has beengranted exemption from the token 5% penalty too.As such they are required only to pay federal taxfor preceding 3 years and file delinquent ForeignBank Account Report (FBAR) returns forpreceding 6 years together wi th appropriateapplications.

The IRS has shown extreme leniency and grantedtotal immunity from civil and criminal penalties byrequiring innocent non-willful defaulter US taxpayers to pay a token penalty and minimal tax. Aback-of-the envelope calculation shows that the IRSleniency results in tax savings bonanza for a taxpayer who could have skipped tax payment on

USA - Non Disclosure ofOverseas Income Immunity


overseas income for a period of 20 years and alsoresults in substantial tax savings for tax payerdefaulting for 10 years or more. Calculations for aUS$ 1 mn deposit in an overseas account in 1994show interesting results of interesting tax savings.

Over 20 years US$ 1 mn would have grown toUS$ 2 mn at nominal interest of 4% per year resultingin an income of US$ 1 mn . This overseas incomeof US$ 1 mn would have attracted tax liability ofsay US$ 0.30 mn.

Now under SFCP , only 5% penal ty wi l l beappl icable to maximum balance over last 6years say US$ 2 mn which amounts to US$ 0.10mn only. And the tax payer will be required to paytax for previous three years - say US$ 40000 being30% tax of US $ 0.135 mn. So the total paymentwill amount to US$ 0.14 mn and the SFCP resultsin tax savings of US$ 0.16 mn.

The relief from penalties is extended in case of nonfiling of FBAR returns too as even civil penalty forfailure of FBAR f iling is catastrophic. Penal tyfor non-willful FBAR filing failure is $10,000 foreach year whereas if proved willful the penaltiescan be as high as $100,000 or 50% of the amountin the account for each violation. A taxpayer inFlorida was penalised recently with 150% of hisoverseas account balance. Now under the SFCP adefaulting tax payer is required just to file FBARreturns for previous six years and the 5% penaltytakes care of FBAR failures too.

Salient features of the SFCP are :

I . Eligibility :

01 Only individual US tax payers are eligible toopt for SFCP.

02 This would include US citizens, Green CardHolders, H1B visa holders covered by thedefinition of US tax residents and any of suchtax residents residing abroad can also opt forSFCP.

03 The tax payer must have filed tax returns formost recent preceding 3 years. i.e. Year 2011,2012 and 2013.

04 If the tax payer has sought extension for fil ingtax returns for the year 2013 then most recentpreceding 3 years are year 2010, 2011 and2012.

I I . Non Eligible Individuals :

01 Tax payers in whose cases IRS has initiatedcivil examination of tax returns for any taxableyear.

02 It is not necessary that the examination resultsin undisclosed overseas assets or income.

03 Tax payers under criminal investigation by IRSare also not eligible.

04 Tax payers who have submitted applicationsunder Overseas Voluntary Disclosure Program(OVDP) can also opt for SFCP.

I I I . Penalty & Tax :

01 Penalties will be computed at 5% of amount ofhighest value of overseas assets during theperiod over last 6 years.

02 Federal Tax of hitherto undisclosed overseasincome for last 3 years is to be paid.

IV. Defaults Covered :

01 Failure of reporting overseas income and paytax thereon under US tax laws.

02 Failures to file FBAR reports. Earlier FBARreporting was required to file on form TD F90- 22.1 whi ch i s now repl aced f romthe current year by form FIN CEN 114 whichbe filed online and

03 Fai lures to f i le in speci f ied informationregarding such overseas assets in variousforms e.g. Form 3520 ; 8938 etc.

04 Such failure of fil ing should be by way of “Non-will ful conduct “ which is defined to

USA - Non Disclosure of Overseas Income Immunity


mean any conduct that is due to negligence,inadvertence, or mistake or conduct that is theresult of a good faith misunderstanding of therequirements of the law.”

V. Preconditions :

01 Tax payers opting for SFCP declaration shouldbe a tax payer who has failed to fulfil l statutoryobligations as a result of "non willful conduct".

02 Non willful conduct has been explained as"Non-willful conduct is conduct that is due tonegligence, in advertence, or mistake orconduct that is the result of a good faithmisunderstanding of the requirements of thelaw."

03 Tax payers who do not qualify for SFCP mayopt for OVDP and pay 27.5 percent offshorepenalty on the highest balance had duringprevious eight years.

04 However if the taxpayer has an undisclosedaccount at a bank listed on the IRS postedl ist the penalty is 50 percent.

05 The SFCP does not guarantee that the IRS willnot recommend crimi nal prosecut ion i frejected.

VI . Procedures :

01 Tax payer must file amended US Tax Returnstogether with all required information for last3 years.

02 One should file delinquent FBAR (New FormFinCEN 114) of last 6 years for which due datehas passed.

03 One is required to pay tax, interest and 5%offshore penalty on aggregated highest balanceof all foreign financial assets as at end of last 6years.

04 “Streamline Domestic Offshore Procedures”should be read in red at the top of the page ofamended tax returns.

VII. Conclusion :

01 Procedural compliance should be strictlyadhered to by f i ling specif ied documentstogether with receipts of tax and penaltypayment which are required to be physicallysubmitted to the IRS office Austin, Texas. Thetax payer will be free to opt for SFCP till theIRS declares closure of said scheme.

02 The SFCP is once in a life time opportunityfor defaulting tax payers who have not paidtaxes on overseas income or not f i ledappropriate forms or provided informationabout overseas Financial assets.

03 Besides the advantage of peace of mind andexemption from civil and criminal liabilities thetax payers actually saves on tax.

04 Post SFCP tax payer can freely repatriate hisoverseas weal th into USA and enjoy theliquidity in USA.

05 One can freely and legally enjoy the incomeand corpus of overseas financial assets in anyplace across the world too. Society is structuredaround rules and regulations and citizens areexpected to abide by the same. For easyenforcement of rules statutes provide for strictcivil and criminal penalties for the law-breakerslaws the rules. But when the law breaking isacross the board and that too more out ofignorance it is pragmatic for a Government tooffer immunity and give one time opportunityto citizens to revert back on the legal wayswith lenient penalties. IRS has chosen to takethis path breaking step of one time amnestyand i t would therefore be appropri atefor defaulting taxpayers to approach and takeadvice of an experienced Certi fied PublicAccountant and also a Law Attorney andproceed ASAP.

(This article is co-authored by CA. Darshi taSanghvi)

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USA - Non Disclosure of Overseas Income Immunity


CA. Savan A. [email protected]

Expor t of Goods - Long Term Expor tAdvances

In view of requests received from exporters, it hasbeen decided to permit AD Category- I banks toallow exporters having a minimum of three years’satisfactory track record to receive long term exportadvance up to a maximum tenor of 10 years to beutilized for execution of long term supply contractsfor export of goods subject to the conditions.

For full text refer to: A.P. (DIR Series) Circular No.132

h t t p : / / w w w . r b i . o r g . i n / sc r i p t s /BS_CircularIndexDisplay.aspx?Id=8890

Expor t of Goods - Long Term Expor tAdvances

An Authorised Dealer banks shall crystallise, thatis, convert the credit balances in any inoperativeforeign currency denominated deposit into IndianRupee, in the manner indicated below:

(i) In case a foreign currency denominated depositwith a fixed maturity date remains inoperativefor a period of three years from the date ofmaturity of the deposit, at the end of the thirdyear, the authorised bank shall convert thebalances l yi ng in the f oreign currencydenominated deposit into Indian Rupee at theexchange rate prevailing as on that date.

(ii) In case of foreign currency denominateddeposit with no fixed maturity period, if thedeposit remains inoperative for a period of threeyears (debit of bank charges not to be reckonedas operation), the authorised bank shall, aftergiving a three month notice to the depositor athis last known address as available with it,convert the deposit from the foreign currencyin which it is denominated to Indian Rupee atthe end of the notice period at the prevailingexchange rate.


h t t p : / / w w w . r b i . o r g . i n / sc r i p t s /BS_Circular IndexDisplay.aspx?Id=8909

Liberalised Remittance Scheme (LRS)for resident individuals-Increase in thelimit from USD 75,000 to USD 125,000

It has now been decided to enhance the existinglimit of USD 75,000 per financial year (April-March) to USD 125,000 with immediate effect.Accordingly, AD Category –I banks may nowallow remittances up to USD 125,000 per financialyear, under the Scheme, for any permitted currentor capital account transaction or a combination ofboth.



For eign investment in the I nsuranceSector – Amendment to the For eignDirect Investment Scheme

The extant FDI policy for insurance sector has sincebeen reviewed. Accordingly, eff ective fromFebruary 4, 2014, foreign investment by way ofFDI, investment by FIIs/FPIs and NRIs up to 26%under automatic route shal l be permi tted ininsurance sector subject to the conditions specifiedin the Press Note 2 (2014 Series) dated February 4,2014.



FEMA Updates

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For eign investment i n I ndi a –par ticipation by registered FPIs, SEBIregistered long term investors and NRIsin non-conver t ible/r edeemabl epr efer ence shar es or debentur es ofIndian companies

It has now been decided to allow registered ForeignInstitutional Investors (FIIs), Qualified ForeignInvestors (QFIs) deemed as registered ForeignPortfolio investors, registered Foreign PortfolioInvestors (FPIs), long term investors registered withSEBI – Sovereign Weal th Funds (SWFs),Mul ti l ateral Agencies, Pensi on/ Insurance/Endowment Funds, foreign Central Banks to investon repatriation basis, in non-convertible/redeemablepreference shares or debentures issued by an Indiancompany in terms of A.P. (DIR Series) Circular No.84 dated January 6, 2014 and listed on recognizedstock exchanges in India, within the overall limit ofUSD 51 billion earmarked for corporate debt. Further,NRIs may also invest, both on repatriation and non-repatriation basis, in non-convertible/redeemablepreference shares or debentures as above.



Pledge of shares for business purposesin favour of NBFCs

With a view to further rationalising the process andreducing the transaction time, it has been decidedto delegate to the AD Category – I banks the powersto allow pledge of equi ty shares of an Indiancompany held by non-resident investor/s inaccordance with the FDI policy, in favour of theNon - Banking Financial Companies (NBFCs) –whether listed or not, to secure the credit facilitiesextended to the resident investee company for bona-fide business purposes / operations, subject tocompliance with the conditions



Transfer of assets of L iaison Office (LO)/ Branch Office (BO) / Project Office(PO) of a for eign ent ity ei ther to itsWholly Owned Subsidiary (WOS) / JointVentur e (JV) / Other s in I ndia–Delegation of powers to AD Banks

With a view to smoothen the enti re process ofclosure of LO/BO/PO, i t has been decided todelegate the powers relating to transfer of assets ofLO/BO/PO to AD Category-I banks subject tocompliance with the prescribed stipulations.

For full text refer to: A.P. (DIR Series) Circular No.142h t t p : / / w w w . r b i . o r g . i n / sc r i p t s /BS_CircularIndexDisplay.aspx?Id=8939

Annual Return on For eign L iabilit iesand Assets. - Repor t i ng by I ndi anCompanies – Revised format

In order to collect information on Indian companies’Outward Foreign Affiliated Trade Statistics (FATS)as per the multi-agency global ‘Manual on Statisticsof International Trade in Services’, the FLA returnhas been modified marginally and is made availableon the RBI websi te (www.rbi .org.in ’! Formscategory ’! FEMA Forms) along with the relatedFAQs (www.rbi.org.in ’! FAQs category ’! ForeignExchange)

For full text refer to: A.P. (DIR Series) Cir. No. 145h t t p : / / w w w . r b i . o r g . i n / sc r i p t s /BS_CircularIndexDisplay.aspx?Id=8945

Expor t and Impor t of Cur rency:Enhanced faci li ties for residents andnon-residents

In view of the evolving economic conditions andwith a view to facilitating travel requirements ofresidents travelling aboard as well as non-residentsvisiting India, i t has been decided to allow allresidents and non-residents (except ci tizens ofPakistan and Bangladesh and also other travellerscomi ng f rom and going to Pakistan andBangladesh) to take out Indian currency notes upto Rs. 25,000 while leaving the country.For full text refer to: A.P. (DIR Series) Cir. No. 146

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FEMA Updates

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CA. Punit R. [email protected]

1. Renting of Immovable Proper ty

Many time validity of service tax on renting ofimmovable property has been challenged. Inthe case of Home Solutions Retails (India) Ltd.[2009 (14) S.T.R. 433 (Del.)], Hon’ble DelhiHigh Court had struck down the levy of servicetax on renti ng of immovabl e property.Although, the said judgment is overcome bythe amendment in the year 2010 and alsooverruled by the same High Court in case ofsame assessee [2011 (24) S.T.R. 129 (Del.)];matter is sti ll pending before the Hon’bleSupreme Court . To put the end of thecontroversies, now it is provided that rentingof immovable property is a declared service.Now, whether renting of immovable propertyis a service in general parlance or not isirrelevant and service tax has to be paid.

In terms of Section 65B(41) renting meansallowing, permitting or granting access, entry,occupation, use or any such facility, wholly orpartly, in an immovable property, wi th orwithout the transfer of possession or control ofthe said immovable property and includesletting, leasing, l icensing or other simi lararrangements in respect of immovable property.

It is worth noting that renting of residentialdwelling for use as residence is a service inNegative List in terms of Section 66D(m) andhence service tax is not to be levied in suchcase. Further, this entry in Negative List isapplicable only if both the following conditionsare satisfied. Firstly, the property should be aresidential dwelling i.e. meant for residence andsecondly, i t should be used as residence.Meaning thereby even if residential dwellingunit is rented out for a commercial use by the

Service Tax Decoded

Declared Services

Something that is in fact not true or in existenceshall be considered to be true or in existence if legalfiction is created by the deeming provision in thelaw. It is well settled principle that the Parliament isempowered to create a legal fiction and levy tax onthe subject which is not otherwise covered underthe normal provisions of the statue. Once theParliament has spoken, courts will give full effectto the legal fiction. Meaning thereby, courts willnot entertain disputes regarding taxability of thesubject covered under the legal fiction.

Section 66E of the Finance Act, 1994 creates legalfiction and declares nine services stated therein asservices irrespective of the fact that whether theyare “services” or not. Al l disputes prevai l ingregarding applicability of service tax in pre-negativelist era, on services stated in the list of declaredservices are now put to end by creating legal fictionsthrough Section 66E.

Section 65B(44) defines the term “service” andspeci f ical ly includes “Declared Services” ascovered in the Section 66E. Section 65B(22)defines “declared services” as any activity carriedout by a person for another person for considerationand declared as such under Section 66E. Thus, fordeclared services also, following conditions are tobe satisfied. There should be an activi ty, suchactivity should be carried out by a person for anotherand such acti vi ty should be carried out forconsideration. Hence, basic conditions as providedin definition of “service” are equally provided fordeclared services also.

As provided in the Section 66E, following shallconstitute declared services.


tenant, it will be subject to service tax. Similarly,a non-residential property is let out and tenantis using the same as residence, still service taxwould be applicable.

It is noteworthy that status of the tenant, whetherit is commercial concern or not is not importantbut the use of the property is important. Forexample, Mr. X has rented out a residential unitto M/s. ABC Private L imited for use of itsemployee as residence. It is a service coveredin Negative List.

Paragraph 6.1.5 of the Education Guide dated20-6-2012 clarifies that Halls, rooms etc. letout by hotels/restaurants for a consideration fororganizing social, official or business functionsor letting out of halls for cultural functions arecovered wi thi n the scope of renti ng ofimmovable property and would be taxable ifother elements of taxability are present.

2. Construction Services

Construction of a complex, building, civilstructure or a part thereof, including a complexor building intended for sale to a buyer, whollyor partly is declared service.

However, where the entire consideration isreceived after issuance of completion certificateby the competent authority is not a declaredservice. It means that where any unit is notbooked till the completion certificate, servicetax is not required to be paid on that unit.However, even i f only token amount asbooki ng is recei ved before i ssuance ofcompletion certificate and rest of amount isreceived after issuance of completion certificate,such activity by builder/developer is a declaredservice and service tax is to be discharged onentire consideration. Above deeming fiction isincorporated in the law w.e.f. 1st July, 2010.

Now, it can’t be argued that for the period beforesale deed, bui lder/developer is providingservices to himself as the right in the immovable

property transfers to the buyer only on executionof sale deed. Now, such controversies are putto end. Irrespective of the model adopted inthe construction scheme, if any considerationis received before issuance of completioncertificate, service tax is to be discharged.

Completion Certificate is to be obtained fromCompetent Authori ty. Competent Authoritymeans the Government or any authori tyauthorised to issue completion certificate underany law for the time being in force. Forexample, in Ahmedabad, Ahmedabad UrbanDevelopment Authority (AUDA) is authorizedto issue completion certificate and date onwhich certificate is issued by the AUDA willbe considered as cut-of f date. I f enti reconsideration is received after that date, servicetax would not be levied.

In the case where there is no requirement forsuch certificate from such authority, it will besufficient if certificate has been obtained fromany of the following authority.

1. Archi tect registered wi th Counci l ofArchi tecture consti tuted under theArchitects Act, 1972.

2. Chartered Engineer registered with theInstitution of Engineers (India).

3. Licensed surveyor of the respective localbody if the ci ty of town or vil lage ordevelopment or planning authority.

Further, in terms of explanation (II) to theSection 66E(b) of the Finance Act, 1994 theterm “construction” includes, not only newconstructi on but addi t ions, al terati on,replacements or remodelling of any existingstructure also.

3. Temporary Transfer of Intellectual PropertyRight

In terms of Section 66E(c), temporary transferor permitting the use or enjoyment of any

Service Tax Decoded


intellectual property right is a declared service.It is worth noting that permanent transfer ofIntellectual Property Right is not subject toservice tax. Such transfer may be subject tosales tax and Central Government doesn’t havepower to levy tax the same.

Copyright, patent, know-how etc. are examplesof Intellectual Property Rights. When ownerof such property doesn’t sale the property butmerely allows another person to use or enjoysuch intellectual property for consideration itis a declared service and service tax is to belevied thereon.

4. Information Technology Software

In the terms of Section 65B(28) ‘informationtechnology software’ means any representationof instructions, data, sound or image, includingsource code and object code, recorded in amachine readable form, and capable of beingmanipulated or providing interactivity to a user,by means of a computer or an automatic dataprocessing machine or any other device orequipment.

Development, design, programmi ng,customization, adaptat ion, upgradati on,enhancement, implementation of informationtechnology software is a declared servicesunder entry (d) of the Section 66E. It can beseen that the above entry is designed to coverall aspects of software development.

General ly, in software industry, developerkeeps ownership of the source code (intangibleproperty) and he just allows use of the softwareby buyer (or so called buyer). Developer don’ttransfer the right to use the software but justallow the use of the software, meaning thereby,person who gets the software is able to use thesoftware but not able to sale the same or allowany other person to use the software. Thus,developer merely grants the license to buyer touse the goods. Thus, in case a license to use

software, even if it is pre-packaged, imposesrestrictions on the usage of such licensesinterfere with the free enjoyment of the softwareby the buyer.

If i t is so, such license would not resul t intransfer of right to use the software within themeaning of Clause 29(A) of Article 366 of theConstitution of India and hence not excludedfrom the definition of the service as stated inSection 65B(44). If it is not deemed sale asstated in the said Article, Central Governmentis entitled to levy tax on such transaction andService Tax is being levied.

‘Even intellectual property, once it is put on toa media, whether it be in the form of books orcanvas (in case of painting) or computer discsor cassettes, and marketed would become“goods”.’- Hon’ble Supreme Court in the caseof Tata Consul tancy Services V. State ofAndhra Pradesh [2002 (178) E.L.T. 22 (SC)].As decided in the above case, sale of software,which is put on the media like Compact Disc(CD), is a “goods” and hence subject to levyof Sales Tax/Value Added Tax.

Now, if the software is put on the media likeCD and buyer is merely given a license to usethe software, transactions would be subject tolocal sales tax as well as of provision of serviceand both the taxes namely sales tax and servicetax would be levied. Now, as the contemporaryjudgments are being delivered by the variouscourts, it would not be the strong argument thatSales Tax and Service Tax are mutual lyexclusive.

Where source code are being transferred to thebuyer of the software and software is put onthe media and software is developed ordesigned or programmed or customized,speci fically for buyer, question may ariseweather it is a contract of sale of goods orprovision of service. As explained in theParagraph 6.4.5 of the Education Guide Dated

Service Tax Decoded


20-6-2012, the contract is essentially for designand development of software and it would fallin the declared list entry even if the software isf i nal l y del ivered in the f orm of goods.However, this is a question of fact and terms ofthe each contract should be referred to. But if,to devel opment, desi gn, programming,customization, adaptat ion, upgradati on,enhancement, implementation of software, areessential in the contract, it is a declared serviceunder entry (d) of the Section 66E and ServiceTax would be levied.

5. Agreeing to the obligation to refrain froman act, or to tolerate an act or a situation, orto do an act

Following three activities are covered in thisentry of declared services.

1. Agreeing to the obligation to refrain froman act,

2. Agreeing to the obligation to tolerate anact or a situation.

3. Agreeing to the obligation to do an act.

For all three activi ties, “agreeing to theobligation” is necessary. To refrain from an actor situation or tolerate an act/ a situation or todo an act should be “obligation” of a person.Further, a person shall “agree” to that obligation.If there is no obl igation, activi ty can’t beconsidered as declared service. Even if there isan obligation, but such obligation is not agreedby the person, but he is otherwise has to do theactivity, the activity can’t be considered as adeclared service under this entry.

As explained in the Education Guide, by virtueof a non-compete agreement one party agrees,for consideration, not to compete with the otheri n any speci f ied products, services,geographical location or in any other manner.Such action on the part of one person is also anactivity for consideration and will be coveredby the declared services.

6. Transfer of goods without transfer of r ightto use such goods.

To levy sales tax, it is not necessary that a legaltitle of the goods transfers from the seller tobuyer. When “Right to Use” goods are alsotransferred along with the goods, it is a deemedsales under Article 366(29A)(d) of theConstitution of India and hence subject matterof the States and hence, only state Governmenthas power to levy tax on that and it is subjectto Sales Tax.

If goods are transferred but “right to use” thosegoods are not transferred, it is not deemed saleand Central Government has power to levy taxon that and it is subject to service tax. It is adeemed service under Section 66E(f) of FinanceAct, 1994.

Allowing use of goods and transfer of right touse are two different things. Where, possessionand control both are transferred along with thegoods, it is a transfer of “right to use”. Wherethe control is still with the person who transfersthe goods, it is not a transfer of “right to use”and that will subject to service tax.

Whether, a transaction involves transfer ofpossession and control is a question of factsand it is to be decided based on the terms of thecontract and other material facts. This could beascertainable from the fact whether or not VAT(sales tax) is payable or not. – Paragraph 4.4.3of the Circular No. 334/1/2008-TRU dated 29th

February, 2008.

7. Activities in relation to Hire Purchase orSystem of Payment by Instalments

In terms of Article 366(29A)(c) of theConstitution of India delivery of goods on hire-purchase or any system of payment byinstalment is a deemed sale and there is noquestion of levy of tax by Central Government.However, service portion is also involved insuch transactions and it is not pure contract ofsale. Only service portion, i.e. related activities

Service Tax Decoded


are declared service under Section 66E(g) ofthe Finance Act, 1994.

8. Service por t ion in execution of a workscontract

In terms of the Article 366 (29A) of theConstitution of India, transfer of property ingoods involved in execution of works contractis deemed to be a sale of such goods. Onlygoods portion in the works contract are deemedto be a sale and not the entire contract andservice portion in particular. Such serviceportion in the works contract only is a declaredservice under Section 66E(h).

Works contract means contract wherein transferof property in goods involved in the executionof such contract is leviable to tax as sale ofgoods and such contract is for the purpose ofcarrying out constructi on, erecti on,commissioning, installation, completion, fittingout, repair, maintenance, renovation, alterationof any moveable or immoveable property orfor carrying out any other similar activity or apart thereof in relation to such property –Section 65B(54).

W.e.f 1st July, 2012, contracts related movableproperty, are also covered in the definition ofthe works contract.

Applicability of service tax under the categoryof the works contract is depend on theapplicability of the sales tax/value added tax.To consider a contract as works contract underservice tax it is prerequisite that the transfer ofproperty in goods involved in the execution ofsuch contract is leviable to tax as sale of goods.If such transfer of property in goods is notsubject to sales tax, such contract can’t beconsidered as works contract under service tax.

Further, valuation of a works contract isgoverned by Rule 2A of the Service Tax(Determination of Value) Rules, 2006. In termsof sub-rule (i) of the said rule, for service tax,value of the a works contract shall be grossamount charged for the works contract less the

value of property in goods transferred in theexecution of the said works contract. Hence,only service portion is subject to service tax.Central Government neither has power to levytax on sale of the goods in works contract northat portion is subject to service tax.

9. Serving of Food

In terms of Article 366(29A)(f) the supply, byway of or as part of any service or in any othermanner whatsoever, of goods, being food orany other article for human consumption or anydrink is a deemed sale and State Governmentis empower to levy tax on that and CentralGovernment is not entitled to levy tax on that.However, service portion in such transactionsis a declared service under Section 66E(i) ofthe Finance Act, 1994.

In terms of Rule 2D of the Service Tax(Determination of Value) Rules, 2006, thevalue of an activity in such a contract shall be40% and 60% for restaurant and outdoorcatering respectively. It is noteworthy thattechnically it is not the abatement from thetaxable value but the taxable value itself is 40%/60% as the case may be. For example, totalturnover of a restaurant is Rs.20 Lacs in thefinancial year 2013-14. In this case taxableturnover for service portion is only Rs.8 Lacsonly and the threshold exemption of Rs.10Lacs as provided under Notification No. 33/2012-ST is still available to that restaurant inthe financial year 2014-15.

It is noteworthy that in the case of KeralaClassified Hotels and Resorts Association V.Union of India, [2013 (31) S.T.R. 257] Hon’bleHigh Court of Kerala has struck down the levyof service tax on service in relation to servingof food or beverages and held that the CentralGovernment is not empower to levy tax on suchservices. Although the decision is delivered inthe context of pre-negative list provisions, ratiolaid down is still applicable.

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Service Tax Decoded


CA. Ashwin H. [email protected]

Banas Secur i ty & Per sonal For ce v.Commissi oner of Centr al Excise &Service Tax [ 2014] 45 taxmann.com 84(Gujarat)

Where an impor tant ground/contention raisedin wr itten submission is not considered, ordermust be set aside and r emanded back forconsideration afresh.

Facts

Assessee did not appear in person before Tribunalbut sent a request to decide appeal on merits afterconsidering synopsis, compilation and submissionsalready fi led. Though ground of valuation ofservices was raised in submissions, Tribunal passedorder only considering issue of penalty. Assessee’srequest for rectification of appellate order was turneddown.

Held

The High Court of Gujarat held that an importantground/contention raised in written submission wasnot considered. Hence, appellate and rectificatoryorders were set aside and matter was remandedbefore Tribunal for fresh consideration wi th adirection to assessee to attend personal hearing.

D.P. Singh Chadha v. Commissioner ofCentral Excise, Ludhiana [ 2014 ] 44taxmann.com 395 (Punjab & Haryana)

Composite services could not be classified ascommercial or industr ial construction servicesafter introduction of works contract ser vicesfrom 1-6-2007.

Facts

Assessee entered into composite contracts forconstruction of residential flats for ImprovementTrust. Department demanded tax thereon wi thinterest and penalty. On assessee’s stay application,Tribunal opined that composite services could not

be classi f ied as commercial or i ndustrialconstruction services after introduction of workscontract services from 1-6-2007 and also theassessee’s claim of benefit of composition schemewas invalid, as assessee neither filed ST-3 Returnsnor remitted service tax liabi lity after avail ingComposition Scheme or exhibit overt conduct. Theassessee was liable to pre-deposit the service taxliability plus proportionate interest out of demandwith interest and penalty.

Held

The High Court of Punjab and Haryana held thatPre-deposit of tax along with proportionate interestout of total demand plus interest and equal penalty,was reasonable and justified. Hence, appeal wasdismissed being devoid of substantial question oflaw.

Greenwich Mer idian Logistic (I ) (P.) L td.v. Commi ssioner of Ser vi ce Tax,Mumbai-I I , [ 2014 ] 42 taxmann.com536 (Bombay)

Freight forwarders are not, pr ima facie, liableto ser vice tax and even other wise, case isar guable one; ther efor e, pr e-deposi t wasreduced.

Facts

Assessee, a freight forwarding agency, was engagedin business of booking cargo space on shippinglines for consideration and thereafter allotting sameto exporters for consideration. Department soughtlevy of service tax under business auxiliary serviceson ground that assessee was promoting service ofcargo space provided by shipping line. Assesseeargued that it was not agent of shipping lines andwas not providing any service but was buying cargospace from shipping lines and selling such space toexporters, which amounts to trading and resultant

Service Tax -Recent Judgements

13

14

15



CA. Pr iyam R. [email protected]

VAT on Construction Contracts

1. Introduction

As we all are aware that anything which canbe taxed under VAT has to be ‘goods’ and thereshould be ‘sale of goods’. Entry 92A of ListI (i.eUnion List) and entry 54 of List II (i.eState list) of Seventh Schedule of Constitutionof India reads as under:

Entry 92A of L ist I : Taxes on the sales orpurchase of goods other than newspapers,where such sale or purchase takes place in thecourse of inter-state trade or commerce.

Entry 54 L ist I I: Taxes on the sale or purchaseof goods other than newspapers, subject to theprovisions of entry 92A of List I

On first principles, it is generally understoodthat VAT can be applicable only on sale ofgoods and similarly Service Tax is applicableonly on providing services, and therefore beenthe general understanding that a sale ofimmovable property cannot be a subject matterof tax under VAT.

This principle is wel l accepted in case of‘resale’ of immovable property by an investoror in case of second sale.

Conceptually, a works contract involves someedition, accretion or accession in relation to abasic goods or nucleus belonging to the owner/ contractee.

2. Types of Works Contracts

Divisible Contracts

Divisible Contracts are contracts in whichvalue of material and labour are separatelymention.

Indivisible Contracts

Indivisible Contracts are such contracts inwhich value of material and labour are notseparately mention or not ascertainable.

3. Position pr ior to 46th Amendment in theConsti tution

Prior to 46th amendment in the constitution,divisible contracts were chargeable to tax onmaterial part, but indivisible contracts were notchargeable to tax reason being they areindivisible contracts and value of material isnot separately ascertainable. The landmarkcase is discussed below:

The State of Madras V.GannonDunkerley&Co.(Madras) Ltd. reported in 9 STC353 (SC)

Case was before the Hon’ble Supreme Courtof India, to decide whether value of materialused in the construction works liable to tax onsales under Entry 54 in List II in Schedule VIIof the Constitution.

Hon’ble Supreme Court held that “ we are ofthe opinion that there is no sale as such ofmaterials used in a building contract, and thatthe Provincial Legislatures has no competenceto impose tax thereon under Entry 54.”

Hon’ble Supreme Court further clarified that“it must bestated that the above conclusion hasreference to works contracts, which are entireand indivisible”.

4. 46th Amendment in the Constitution

Article 366‘(29A) “tax on the sale or purchaseof goods” includes-

(b) a tax on the transfer of property in goods(whether as goods or in some other form)

VAT Demystified


involved in the execution of a workscontract;

As a resul t of the 46thconsti tuti onalamendment, the contract which was singleand indivisible has been altered by legalfiction into a contract which is divisibleinto one for a sale of goods and otherfor supply of labour and services and asaresult such a contract which is single andindivisible has been brought at par with acontract contai ni ng two separateagreements.

5. A transaction may be ter med as workscontract, if:

Hon’ble Supr eme Cour t in the case ofHindustan Shipyar d L td. Vs. State ofAndhra Pradesh (2000) 119 STC 533 (SC)

A transaction may be termed as workscontract, if:

(i) There is transfer of chattel to chattle i.e.work on the property of the contracteeor work has been executed solely on thebasis of specification provided by thecontractee.

(ii) Contractee becomes the deemed ownerduring construction itself andthe contractorhas no ri ght to remove the goodstransferred during construction;

(iii) There must be a principle of accretion andaccession. In case of works contract ofimmovable property, goods are transferredon the principle of accretion and in the caseof movable property, on the principle ofaccession; and the contract must be anindivisible contract.

6. The Journey up to K . Raheja DevelopmentCorporation. 141 STC 298 (SC).

Background of the case:

Company enter into development agreementwith owners of lands. Thereafter they get plans

sanctioned. After approval of the plans theyconstruct residential apartments and/orcommercial complexes. In most cases beforethey construct the residential apartments and/or commercial complexes they enter intoagreements with the intended purchasers.

The agreements provide that on completion ofthe construction the residential apartments and/or commercial complex would be handed overto the purchasers who would get an undividedinterest in the land also. The owner of the landwould then transfer the ownership directly tothe society which is being formed under theKarnataka Ownership Flats Act,1974.

The question before cour t was, whether theappellants are dealers and are liable to paytax under the Karnataka Sales Tax Act.

Held t hat, “Thus the appel l ants areundertaking to build as developers for theprospective purchaser. Such construction/development is to be on payment of a price invarious instalments set out in agreement. Asthe appellants are not the owners they claim‘lien’ on the property. Of course, under clause7 they have right to terminate the agreementand to dispose off the unit i f a breach iscommitted by the purchaser. However, merelyhaving such a clause does not mean that theagreement ceases to be a works contract withinmeaning of the term that the said Act. All thatthis means is that if there is a termination andthat particular unit is not resold but retainedby the appellants, there would be no workscontract to that extent. But so long as there isno termination the construction is for and onbehalf of purchaser. Therefore, it remains aworks contract within the meaning of the termas def ined under the said Act. I t must beclarified that if the agreement is entered intoafter the flat or unit is already constructed, thenthere would be no works contract. But so longas the agreement is entered into before theconstruction is complete, it would be a workscontract.”

VAT Demystified


7. Supreme Cour t Judgement in the case ofL ar sen and Toubr o L td v. State ofKarnatake [2013] 65 VST 1(SC)

Recently hon’ble Supreme Court has deliveredjudgement in above case and held that:

a) For sustaining the levy of tax on the goodsdeemed to have been sold in execution ofa works contacts, three conditions must befulfilled:

There must be a works contracts

The goods should have been involvedin the execution of a works contractand

The property in those goods must betransferred to a third party either asgoods or in some other form.

b) The domi nant natur e test has noapplication and the traditional decisionswhich have held that the substance of thecontract must be seen have lost thei rsignificance where transactions are of thenature contemplated in article 366(29A).

Even i f the dominant intention of thecontract is not to transfer the property ingoods and rather it is rendering of serviceor the ultimate transaction if transfer ofimmovable property, then also it is opento the states to levy sales tax on thematerials used in such contract if suchcontract otherwise has elements of workscontracts.

c) Activity of construction undertaken by thedeveloper would be works contract onlyfrom the state the developer enters into acontract with the flat purchaser. The valueaddition made to the goods transferred afterthe agreement is entered into with the flatpurchaser can only be made chargeable totax by the State Government.

8. Provisions under Gujarat VAT Act.

Sec 2(10)”dealer”: means any personwho, for the purpose of or consequentialto his engagement in or, in connection withor incidental to or in the course of hisbusiness buys, sells, manufactures, makessupplies or distributes goods, directly orotherwise, whether for cash or deferredpayment, or for commission, remunerationor otherwise and includes,-

f) any person who transfers proper ty ingoods (whether as goods or in someother form) involved in the execution ofworks contract;

Section 2(13) “goods”: means all kindsof movable property (other thannewspapers, actionable claims, electricity,stocks and shares and securi ties) andincludes live stocks, all materials, articlesand commodi ties and ever y kind ofproper ty (whether as goods or in someother form) involved in the execution ofwor ks cont r act , al l i ntangi bl ecommodities and growing crops, grass,standing timber or things attached to orforming part of the land, which are agreedto be severed before sales or under thecontract of sale;

Section 2(23) “sale”:means a sale ofgoods made within the State for cash ordeferred payment or other valuableconsideration and includes,-

(b) transfer of property in goods (whether asgoods or in some other form) involved inexecution of a works contract,

Section 2(24) “sale Pr ice”:means theamount of valuable consideration paid orpayable to a deal er or received orreceivable by a dealer..........and includes,-

(a) … … … … .,

VAT Demystified


(b) in relation to the transfer of property ingoods (whether as goods or in some otherform) involved in the execution of a workscontract, such amount as is arrived at bydeducting from the amount of valuableconsideration paid or payable to a personfor the execution of such works contract,the amount representing labour charges forsuch execution;

(c) … … … … … ..,

Sect i on 2(30) “t axable t ur nover ”:means the turnover of all sales or purchasesof a dealer during the prescribed period inany year, which remains after deductingtherefrom,-

(a) … … … .,

(b) … … … … ,

(c) in case of turnover of sales in relation toworks contract, the charges towardslabour, service and other like charges, andsubject to such conditions as may beprescribed:

Provided that in the cases where theamount of charges towards labour, serviceand other like charges in such contract arenot ascertainable from the terms andconditions of the contract, the amount ofsuch charges shall be calculated in suchmanner as may be prescribed;

14A.Composition of tax on works contract.r.w.Rule 28(8).

(1) Notwithstanding anything contained inthis Act, the Commissioner may, in suchci rcumstances and subj ect to suchconditions as may be prescribed, permitevery dealer referred to in sub-clause (f)of clause (10) of section 2 to pay at hisoption in lieu of the amount of tax leviablefrom him under this Act in respect of anyperiod, a l ump sum tax by way of

composition at such rate as may be fixedby the State Government by notificationin the Official Gazette having regard to theincidence of tax on the nature of the goodsinvolved in the execution of the total valueof the works contract.

(2) The provisions of sub-sections (3) and (4)of section 14 shall apply mutatis mutandisto a dealer who is permitted under sub-section (1) to pay lump sum tax by way ofcomposition.

(3) Where any dealer has opted forcomposition of tax under the earlier lawand commenced the work in pursuance ofany specified works contract prior to theappointed day and such work is notcompleted before the appointed day, suchdealer shall pay the tax for the remainingwork in accordance with the provisions ofthis Act.

Sub-sections (3) and (4) of section 14

(3) A dealer who is permi tted under sub-section (1) to pay lump sum tax

(a) shall not be entitled to claim tax creditin respect of tax paid by him on hispurchases,

(b) shall not charge any tax under this Actin his sales bil l or sales invoice inrespect of the sales on which lump sumtax is payable; and

(c) shall not issue tax invoice to any dealerwho has purchased the goods fromhim.

(4) A dealer who is permi tted under sub-section (1) to , pay lump sum tax shall beliable to pay purchase [ tax leviable undersub section (1)(3)(4)and(6)of section 9,]in addition to the lump sum tax under thissection.( On the purchases effected fromunregister dealer )

VAT Demystified


Rule 18AA: Deduct ion of char ges towar dslabour, service, etc.

(1) The value of the goods at the time of thetransfer of property in the goods (whether asgoods or in some other form) involved in theexecuti on of a works contract shal l bedetermined by deducting the amounts paid byway of price for sub-contract made with aregistered dealer, if any, pertaining to the saidworks contract.

(2) A registered dealer who claims any deductionreferred to in sub-clause (c) of clause (30) ofsection 2, shall -

(a) maintain true and correct records for suchdeductions;

(b) prove to the sati sf acti on of theCommissioner that he has actually paid theamount in the year in which he claims suchdeduction; and

(c) furnish true and correct evidences forclaiming such deductions at the time ofassessment or when asked to furnish in anyproceedings:

Provided that where the amount of chargestowards labour, service and other like chargesare not ascertai nabl e or the accountsmai ntai ned by the contractor are notsufficiently clear or intelligible, a lump sumdeduction shall be admissible in accordancewith the percentage mentioned in the Tablebelow, and the sale price of the goods at thetime of the transfer of property shal l bedetermined accordingly.

TABLE

Sr. Description of Works Percentage ofNo. Contract deduction

1. Construction, improvement Thirty peror repair of any building, cent.road, bridge, dam, canal orother immovable property.

Rule 28(8) (vi-a)

(1) the dealer shal l not use the goods in theexecution of works contracts covered underthe permission to pay lump sum tax, if suchgoods are›

(i) purchased in the course of inter-State tradeor commerce or imported from outside theterritory of India, or

(ii) received from his branch situated outsidethe State or f rom his consigning agentoutside the State ;

(2) if such dealer uses any taxable goods in theexecution of works contract covered under thepermission to pay lump sum tax, such goodsought to have borne the tax payable under theAct;

(3) if such dealer has already claimed the tax creditfor the goods held in the stock on the date ofeffect of permission and such goods are goingto be used in the works contract for whichpermission to pay lump sum tax is sought for,he shall reverse such tax credit; and

(4) i f the permission to pay lump sum tax isgranted under clause (bb), the dealer shall notdispatch the goods to his branch situatedoutside the State or to his consigning agentoutside the State:

Conclusion

In short, as per Gujarat VAT Law, on workscontracts the dealer is liable to pay either at normalrate u/s 7 i.e on deemed sale value of goods withreference to rule 18AA or liable to pay undercomposition scheme u/s 14A of Gujarat VAT Act.

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VAT Demystified


CA. Bihar i B. [email protected].

Statute Updates

[I ] Impor tant Judgments:

[1] M/s. Gunjan Times v/s. State of Gujarat(Second Appeal Nos. 128 & 129 of 2014dated 22.04.2014]

Issue:

The business under Proprietorship transferredto a Pvt. Ltd. Co. Under the circumstances,whether new registration is to be taken or onlychanges are to be made?

Facts:

The appellant is a dealer registered underGVAT Act as wel l as CST Act and theappel lant has started the business underProprietorship of Mr. Gaurish Madan. Thebusiness of the appel lant was trading inwatches and goggl es. The busi ness i stransferred to a Pvt. Ltd. Company under thename of M/s. Gunjan Times Pvt. Ltd. Sincethere was a change in the ownership of thebusiness, in view of the provisions containedin section 26(1)(a) of the Vat Act, Companyhas made appl icat ion by making anyamendment in the registration certi ficate.However, the Ld. Commercial Tax Officer hasrejected the said appl ication of makingamendment in the certificate of registration byinvoking the provisions contained in sec, 26(6)and sec. 15(2) of the Vat Act, observing that aPvt. Ltd. Company being a legal entity andtherefore amendments in the certi ficate ofregistration cannot be granted. Under theci rcumstances, the appel lant has fi led theappeal before the Hon. Tribunal

Order :

The Hon. Tribunal after discussing the entirefacts and circumstances of the case, ordered

that the authorities refusing to grant amendmentin the registration certificate are not just andproper and made it clear that as and when suchregistration is restored, the amendment soughtto be made by the appellant in the registrationcertificate is required to be granted.

The important paragraphs are reproducedhereunder for the benefit of the readers.

The Hon. Tribunal has considered rivalsubmissions and the facts of the case. The Hon.Tribunal has also gone through the relevantstatutory provisions relied upon by both theparties. There is no dispute about the fact thatthe appellant has made an application seekingamendment in the registration certificate forinvoking provisions contained in Section26(1)(a) and (d) of the Vat Act. Section 26(1)(a)says that where a registered dealer transfershis business, in whole or in part, or transferhis place of business, by sale, lease, leave orlicense, hire or any other manner whatsoever,or otherwise disposes of his business or anypart thereof or effects or comes to know ofany other change in the ownership of thebusiness or as per the clause (d) of section 26(1)where the regi stered deal er enters i ntopartnership or other association in regard tohis business or effects any changes in theownership of the business, he shall within theprescribed time inform the prescribed authorityaccordingly of the change in the constitutionor as the case may be, dissolution of the firm.Based on these provisions of the Vat Act, theappellant has made an application within theprescribed period of 30 days to the learnedCommercial Tax Off icer for change inregistration certi ficate as admittedly theappel lant was originally carrying on thebusiness under the proprietorship of M/s.Gaurish Shashi Madan and from 1st April 2013

VAT - Recent Judgementsand Updates


the said business was transferred to the Pvt.Ltd. Company, namely Gunjan Times Pvt. Ltd.In the company, the Proprietor of the appellantfirm is also one of the directors as well asvendors. Thus, the action of the appellantsatisf ies the f i rst condi tion namely, theappellant has transferred his business and as aresul t thereof there was a change in theownership of business. The appellant has alsosatisfied the condition laid down in section26(1)(d) of the Act as the appellant has enteredinto an agreement to form private limitedcompany in relation to his business andeffected change in the ownership of business.Thus, the appel lant has rightly made anapplication for amendment in the registrationcertificates. Even Rule 8 of the Vat Rules dealswith amendment in certificate of registration.It says that when the registered dealer changesthe place of business which is situated withinthe jurisdiction of his registering authority oran of the contingency or event mentioned inclause (a) to (d) of section 26(1) of the Act,such dealer shal l give intimation of suchchange in writing within 30 days from the dateof change to the registering authority. Theappel lant has, therefore, rightly made anapplication to the Commercial Tax Officerinforming about the changes and requestinghim to grant the amendment in the registrationcertificate. Sub Rule (2) of Rule 8 makes itobl i gatory on the part of the learnedCommercial Tax Officer to make necessaryamendment in the certificate of registration and

to return the certificate of registration tothe dealer within 30 days from the dateof receipt of the application. Insteadof doing that the learned CommercialTax Officer has rejected the saidappl ication under mis-conception offacts and law.

As a matter of fact, provisions contained insection 21(7) of (7A) are not applicable at all.The appellant has not applied for cancellationof registration as neither the appellant has

discontinued hi s business or absol utelytransferred the said business to the Pvt. Ltd.Company. He has kept his interest in thebusiness so transferred to the Pvt. L td.Company as he is one of the directors and alsostake holders. Provisions of Section 21(7A)are also not applicable as simply because theregistered office of M/s. Gunjan Times Pvt.Ltd. is situated in the State of Maharashtra, itdoes not mean that the business transferred tothe said company would not be carried out inthe State of Gujarat where the appellant wascarrying on business under proprietorship ofGaurish Shashi Madan. Even otherwise, it isnot open for the registering authority to cancelthe registration of the appellant as section27(1)(b) of the Act makes it very clear thatwhere in the case of transfer of whole businessby a dealer, the transferor al ready holdcertificate of registration under this Act, theCommissioner may cancel the certificate ofregistration of such dealer or the transferor asthe case may be, from such date as may bespecified by him. Admittedly, in the presentcase, even if it is admitted that the appellanthas transferred his business to Gunjan TimesPvt. Ltd. it is nobody’s case that Gunjan TimesPvt. L td. is already holding certi ficate ofregistration under this Act. In this view of thematter, it is not just and proper to refuse theamendment sought by the appellant in theregistration certificate.

[2] M /s. Star Baker y v/s. State of Guj arat(Appeal No. 928 to 931 of 2011 dated21.4.2014)

Issue:

The dealer is having the permission of payingLump Sum Tax. Whether he has to pay thetax of the sale of tax free goods or not?

Facts:

The appel l ant is running a bakery andmanufacturing Breads, Pastry Cakes etc. Thesale of breads is tax free u/s. 5 of the Vat Act.Pastry and cakes etc. are taxable u/s. 7 of the

VAT - Recent Judgements and Updates


Vat Act. The appellant has opted Lump SumPayment of Tax under the scheme provided u/s. 14 of the Vat Act. The appellant is payinglump sum tax at 2% notified by the bakeryactivity and is not paying lump sum tax on theturnover of sale of breads covered u/s. 5 of theVat Act. The A. O. whi le f inal izing theprovisional asst. order has imposed the lumpsum tax on the tax free sales against which theappellant has preferred the first appeal and onthe dismissal of first appeal, the appellant haspreferred a second appeal before the Hon.Tribunal.

The Hon. Tribunal has dismissed the appealfiled by the appellant and the orders passed bythe authority below are confirmed i.e. the taxis to be paid on the sale of tax free goods underthe provision of payment of lump sum taxscheme and also levied the interest but nopenalty was imposed.

The important paragraphs of the judgment arereproduced hereunder for the benefit of thereaders.

The Ld. S.T.P. of the appel lant furthersubmitted that since the appellant had not paidthe lump sum tax on tax free sales on the bonafide understanding of law that it is not liable totax on the sales covered under section 5, theLd. Assessing Officer has no jurisdiction toassess the appellant provisionally under section32 of the Act. It is not a case of concealmentor evasion of tax. Therefore, the provisionalassessment order passed by the AssessingOfficer is sacking the jurisdiction and hence itis required to be quashed and set aside. Hehas, therefore, submitted that this Tribunalshould hold that the appellant’s holdingpermission under section 14 of the vat Act arenot required to pay tax on the tax free goods.This Tribunal should further hold that the dealerholding lump sum permission has to pay lumpsum tax @ 2% modified by notification issuedon the turnover of sales liable to tax undersection 7 of the Vat Act. This Tribunal shouldalso hold that the words “turnover of sales” ofthe noti f ication should be understood as

“turnover of sales” liable to tax under section7 of the Act in order to meet with the ambitand scope of section 14 of the Vat Act.

The Ld. Government Representative appearingfor the respondents in all these appeals hasrelied on the orders passed by the authoritiesbelow and submitted that the Assessing Officerhas rightly levied lump sum tax on sales of taxfree goods viz. breads. He has further submittedthat the appellants once having opted to paylump sum tax under section 14 of the Act isnot entitled to contend before the Tribunal topay such lump sum tax only on the taxablegoods as the appellants are liable to pay suchlump sum tax on total turnover of sales. Hehas further submitted that section 14 of the Acthas to be read as a whole along with provisoto subsection (1) of section 14 and all its subclauses.

I t is also important to note here that theappellants are enjoying the benefit of lump sumtax on turnover of their sales, by virtue of theprovision contained in section 14(1)(a) of theAct. Section 14(1)(a) of the Act, no doubt,refers to the payment of lump sum tax in lieuof the amount of tax payable under section 7of this Act and section 7 refers to the levy oftax on the turnover of sales of goods specifiedin Schedule II or Schedule III.

However before invoking the provisions ofsection 14(1)(a) of the Act, one cannot ignorethe proviso wi th i ts sub-cl auses and asdiscussed above the proviso, specifically statesthat, the Commissioner shal l not grantpermission to pay lump sum tax under sub-section (1) of section 14 of the Act to a dealerwho is engaged in the previous year or engagedin the activity of the manufacture, other thansuch activity as the State Government may, byan order in wri ting speci fy. Since StateGovernment has already specified in writingwhile issuing their notification, the accessibilityof the turnover of sales are governed by thesaid notification and the appellants are liable



to pay lump sum tax @ 2% on the totalturnover of tax whether taxable or tax free.

In view of the facts and the provisions of law,The Hon. Tribunal does not f ind muchsubstance in the various submissions made onbehalf of the appellant in support of their claimin these appeals. The Hon. Tribunal is also ofthe view that the authorities relied upon by theLearned Counsel appearing for the appellantin support of their claims are not applicable tothe facts of the case. The Hon. Tribunal doesnot find that the notif ication issued undersect ion 14(1) (a)(vi ) of the Act or i tsinterpretation made by us is contrary to theprovisions contained in section 5 or section 7of the Act.

The Hon. Tribunal, however, makes it clearthat the issue involved in all these appeals ispure and simple legal issue and everythingdepends upon the legal interpretation of thestatutory provisions contained in the Act andon the basi s of these provisions i f theappellants have formed one particular beliefand filed their returns or took a particular stand,it cannot be said that they have committed anydefaul t, hence, the penal ty levied by theAssessing Officer in Second Appeal No. 1068/2012 filed by M/s. Bismillah Bakery deservesto be deleted.

❉ ❉ ❉

contd. from page 237 Ser vice Tax - Recent Judgements

16

profit could not be charged to service tax. Tribunalheld, that the appellant rendered services to theshipping lines and was liable to pay service taxunder the category of business auxiliary services.

Held

In view of judgment in Leaap International (P.) Ltd.v. CST [2013] 40 STT 340/35 taxmann.com 14(Mad.) where pre-deposit ordered was much lessthan demand within period of limitation, assesseewas entitled to relief in this case. Moreover, assesseehas an arguable case in appeal pending beforeTribunal. Hence, requirement of pre-deposit washalved.

State Trading Cor pn. of India L td. v.Commissioner of Service Tax, Mumbai[2014 ] 43 taxmann.com 165 (Mumbai -CESTAT) CESTAT, Mumbai Bench

In case of high-sea sales transactions, marginearned by seller, which forms par t of customsvalue for charge of customs duty in hands ofbuyer, cannot be charged to service tax underBusiness Auxiliary Services.

Facts

Assessee, engaged in trading/import/export ofvarious commodities, used to : (a) place import

orders on behalf of various traders/merchants; (b)purchase said goods on own account; and (c) whengoods arrive in India, sell these goods to customerson High Seas Sale basis adding a mark-up rangingfrom 1 per cent to 1.5 per cent of value of goods.Import formalities were being complied with bycustomers and they were paying customs duty ontheir purchase price (inclusive of assessee’s margin).Department argued that assessee was renderingservices of import and export to customers, andtherefore, margin of 1 per cent to 1.5 per cent wasliable to service tax.

Held

It was evident from import documents as well asinvoices that transaction was one of trading or sale.As per Board’s circular dated 11-5-2004, in caseof High Seas Sales transaction, customs duty wasto be discharged on value inclusive of trade marginand same had actually been subjected to customsduty. Therefore, mark-up/margin part of customsvalue cannot be taken out and subjected to ServiceTax under guise of Business Auxiliary Services.

❉ ❉ ❉



CA. Hozefa [email protected]

natural resource reserve as an option. The value ofan option is determined by six variables – thecurrent value of the underlying asset, the variancein this value, strike price, life of option, the riskfree interest rate and the expected dividends/ returnson the assets.

There are two types of real options:

• Growth options

• Flexibility options.

Growth options give a firm the ability to increaseits future business. Examples include research anddevelopment, patent or brand development, mergersand acquisitions, leasing or developing land, or mostpertinent launching a technology initiative.

Flexibility options, on the other hand, give a companythe abi l ity to change i ts plans in the future.Management can choose the option to delay, expand,contract, switch uses, outsource or abandon projects.

One critical difference between traditional incomeapproach and real options is the effect of uncertainty(or risk) on value. Uncertainty typical ly isconsidered bad for the valuation of traditional cashflows. In contrast, uncertainty increases the valueof real options.

Rule of thumb

International glossary of business valuation termsdef ine “Rule of thumb” as “a mathematicalformula developed from the relationship betweenprice and certain variable based on experience,observation, hearsay or a combination of these;usually industry specific”.

Rules of thumb are simple pricing techniques thatare typically used to approximate the market valueof a business. Rules of thumb typically come in theform of a percentage of revenues or a multiple of alevel of earnings. For example, a rule of thumb forpricing a auto manufacturer may be 40% of annual

Business Valuation

Academic Refresher :Understanding the Value,

Business Valuation and its fundamentals- I IApproaches to Valuation

In last article we referred fundamentals of valuationlike definition of value, importance of purposecalling the need of valuation, deciding on thevaluation date, premise of valuation and standardsof valuation. Once these fundamentals of valuationare decided, the next is choosing the appropriatetechnique/s of value estimation based on theselected approach/es.

Approaches to Valuation

In broadest possible terms, there are threeapproaches to value any asset, business or businessinterest:

1. The asset approach2. The income approach3. The market approach (Relative valuation

approach)

Option Pricing (Real Option)

One other approach called, Option Pricing orcontingent claim method is emerging as a bettercontender to value assets that have option l ikecharacteristics.

There are some assets that cannot be valued withconventional valuation models because their valuebui lds up almost enti rely f rom thei r optioncharacteristics. For example, a biotechnology firmwith a single promising patent for cancer drugwending its way through the approval process cannot be easily valued using discount cash flow orrelative valuation models or just considering its assetsstrength. Real option technique is also used whenwe want to consider the option to delay makinginvestment decisions or option to expand thebusiness or to value a patent or an undeveloped


revenues plus inventory or two times seller’sdiscretionary earnings (pre-tax net income +depreciation + interest + salary for one owner/operator at the market rate of compensation). It maybe a multiple of specific measure of a business likeprice per seat in case of call center business or priceper room for hotel business or price per student forprivate coaching classes or price per Bed fornursing-home operators, or price per subscriber forcable television business.

Rules of thumb fail to consider the speci f iccharacteristics of a company as compared to theindustry or other similar companies. In addition,rules of thumb do not reflect changes in economic,industry, or competitive factors over time. None ofthe rules provide sufficient information to assessthe uniqueness of the business, such as managementdepth, customer relationships, industry trends,reputation, location, competition, capital structureand other information unique to the business. It isalso a question for an appraiser to decide whetherto use a trailing or historical data or current yearsdata or estimated figures (forecasted or leading) toapply with the chosen rule of thumb.

Widely-accepted business appraisal theory andpractice does not include specific methodology forrules of thumb in developing a value estimate, asthere is typically no empirical evidence relating tohow the rules were derived or if, in fact, the rulesare reflective of transactions in the market. As such,business appraisers do not use rules of thumb indetermining an indication of value. However, rulesof thumb can be useful in testing the valueconclusion arrived through the appraiser’s selectedapproaches and methods. Such sanity checks are away for busi ness appraisers to test thereasonableness of their value conclusion. “Becareful, thumbs come in many sizes and shapes!”

So, we can conclude that although rules of thumbmay provide insight on the value of a business, it isusually better to use them for reasonableness testsof the value conclusion.

Impor tant infor mat ion to consider whi leselecting the approach/es for valuation

Rul e of thumb bei ng useful to test the

reasonableness of value and Option pricing beinga technique useful for particular cases and to valuespecific assets or business only, normally appraisersconcentrates more on three basic approaches whichare the most popular and applicable while valuinga business. So, let us get back to the most widelyused approaches to valuation viz. Asset Approach,Income Approach, and Rel at ive Valuat ionApproach.

The leading business valuation associations, theAmerican society of Appraisers (ASA), the Instituteof Business Appraisers (IBA) and the NationalAssociat ion of Certi f i ed Valuation Analysts(NACVA) and now, the draft rules under theCompanies Act, 2013, all have recognized the abovethree as major approaches to business valuation.

There are numerous methods within each of theseapproaches that the appraiser or valuer may considerin performing valuation. For example, under the assetapproach, the appraiser often need to choose betweeneither valuing just tangible assets or valuing tangibleand intangible assets on stand-alone basis or allintangible assets as a collective group. In the incomeapproach, the appraiser can use a discounted cashflow method or a capitalization of earnings method.Again these can be applied to value the entire businessor only equity value. In the market approach, theappraiser can use guideline company multiples ormultiples derived from near past transactions, maybe of public or/and private business concern. Somemethods focuses usage of historical performance,some give some other weight to expectedperformance in near future while some relies oncurrent data and market happenings. Therefore,many times, appraiser determines final value byapplying average/weighted average / mean /geometric mean on values derived by one or moremethods, relevant for the purpose of valuation.

All three approaches should be considered in eachvaluation. However, it is not common to use all threeapproaches in each valuation.

Which approach should be used ?

Now, the essential question is which approach is toconsider for valuing a business?

Business Valuation


The appraiser faced with the task of valuing abusiness or its equity has to choose among differentapproaches – Asset Valuation, Earnings Valuation,and Relative Valuation and within each approach,he must also choose among di fferent models.Reliant on the purpose of the valuation, the task ofchoosing appropriate valuation techniques will bedriven by the characteristics of business beingvalued – Asset involvement and its dispositions, thelevel of earnings, growth potential, the sources ofearnings growth, the stabi lity of leverage anddividend policy. Matching the valuation model tothe business being valued is as important a part ofvaluation as understanding the models and havingthe right inputs. It is like a kitchen that has manychefs with multifarious stuff on platform but norecipes. A business appraisal is in fact an opinionof the individual appraiser, and the appraiser hassignificant flexibility in formulating his opinion.

Rule 17 of Draft Rules formulated for ChapterXVII Section 247 of the Companies Act 2013,lay down several points need to be considered whiledeciding the appropriate technique to proceed onvaluation assignment:

a) Nature of the business and the history of theenterprise from its inception;

b) Economic outlook in general and outlook ofthe specific industry in particular;

c) Book value of the stock and the financialcondition of the business;

d) Earning capacity of the company;

e) Dividend paying capacity of the company;

f) Goodwill or other intangible value;

g) Sales of the stock and the size of the block ofstock to be valued;

h) Market prices of stock of corporations engagedin the same or a similar line of business;

i) Contingent liabilities or substantial legal issues,within India or abroad, impacting the business;

j) Nature of instrument proposed to be issued, andnature of transaction contemplated by theparties.

International Pr ivate Equity and Venture CapitalValuation (IPEV) Guidelines (Oct. 2006) says that

“The valuer will select the valuation methodologythat is the most appropriate and consequently makevaluation adjustments on the basis of their informedand experienced judgment. This wi l l includeconsideration of facts such as:

- relative applicability of the methodologies usedgiven the nature of industry and current marketconditions

- quality and reliability of the data used in eachmethodology

- comparability of enterprise or transaction data

- the stage of development of the enterprise; and

- any additional considerations unique to thesubject enterprise”.

So, IPEV also emphasis to consider the basiccharacteristics of all the three approaches. Howeverit gives more weight age to use market basedapproach for deciding the fair investment value. Itnarrates that:

“ In assessi ng whether a methodology i sappropriate, the valuer should be biased towardsthose methodologies that draw heavily on market-based measures of risk and return. Fair valueestimates based entirely on observable market datawil l be of great rel iabi lity that those based onassumptions.

Methodologies utilizing discounted cash flows andindustry benchmarks should rarely be used inisolation of the market-based measures and thenonly with extreme caution. These methodologiesmay be useful as a cross-check of values estimatedusing the market-based methodologies.”

“… … .Due to high level of subjectivity in selectinginputs for this technique, DCF based valuationsare useful as a cross check of values estimated undermarket based methodologies and should only beused in isolation of other methodologies underextreme caution.”

IPEV indicates the usage of DCF for the businesseswith absence of significant revenues, profi ts or

Business Valuation


positive cash flows, however with the caution aboutthe i nherent disadvantage of hi gh level ofsubjectivity involved in the method.

For FAS 157, FASB (Financial AccountingStandard Board) clarifies that,“consistent wi th existing valuation practice,valuation techniques that are appropriate in thecircumstances and for which sufficient data areavailable should be used to measure fair value. ThisStatement does not specify the valuation techniquethat should be used in any particular circumstances.Determining the appropriateness of valuationtechniques in the circumstances requires judgment.”The statement provides for using single techniqueor multiple techniques, subject that, the results ofthose techniques evaluated and weighted, asappropriate, in determining fair value. The valuationtechniques may differ, depending on the asset orliability and the availability of data. However, inal l cases, the objective is to use the valuationtechnique (or combination of valuation techniques)that is appropriate in the circumstances and forwhich there are sufficient data.

I PEV (I nt er nat i onal Pr i vate Equi t y andVenture) valuation Board while commenting onthe IASB’s discussion paper “Fai r valuemeasurements” publ ished in November 2006expresses its apprehension that“Having a single source of guidance for all fair valuemeasurements in IFRS’s would probably reducecomplexity and improve consistency in measuringfair value. However, in order to achieve its objective,such a document should not aim at being exhaustivein its guidance in order not to create more confusionfor accounts preparers, users and auditors.Consequently, the document should adopt aconsistent theoretical approach and should not tryto solve issues that are specific to certain markets,assets or asset classes and then apply thosesolutions to all other situations. The IPEV valuationBoard fears that doing so will create principles andguidelines that are too theoretical and difficult toapply to specific situations.”

So, the valuation guidelines should not aim to beexhaustive and it must not restrict the analyst’swisdom to apply in specific circumstance.

Business Valuation

As read from the Para 13 of CCI guidelines(1990), “The guidelines are intended to provide thebasic framework for valuation and to minimize theelement of subjective consideration. While theyshould be applied fairly and consistently in all cases,they should not be regarded as el iminating theexercise of discretion and judgment needed to arriveat a fair and equitable valuation.”

The values that we obtain from the dif ferentapproaches described above can be very differentand deciding which one to use can be a critical step.This judgment, however, will depend upon severalfactors, some of which relate to the business beingvalued but many of which relate to us, as the appraiser.

For FAS 157, FASB (Financial AccountingStandard Board) clarifies that,

“consistent wi th existing valuation practice,valuation techniques that are appropriate in thecircumstances and for which sufficient data areavailable should be used to measure fair value. ThisStatement does not specify the valuation techniquethat should be used in any particular circumstances.Determining the appropriateness of valuationtechniques in the circumstances requires judgment.”

The fair value hierarchy under FAS 157 also,focuses on the inputs, not the valuation techniques,thereby requiring judgment of appraiser in theselection and application of valuation techniques.It specifically requires that the valuation techniquesused to measure fair value should maximize the useof observable inputs and minimize the use ofunobservable inputs.

Valuation is relative to purpose. Therefore, thecalculated value of a business will vary dependingon how it’s intended to be used, and the differencescan be substantial. The value established for taxpurposes or for investment is not the same valueestablished for divestiture.

The values that we obtain from the dif ferentapproaches described above can be very differentand deciding which one to use can be a critical step.This judgment, however, will depend upon severalfactors, some of which relate to the business beingvalued but many of which rel iant to us, as anappraiser.

❉ ❉ ❉


CA. Naveen [email protected]

(A) MCA UPDATES:

1. Cer tification of E-for ms/ non e-forms underthe Companies Act, 2013 by the Pr acticingProfessionals:

· The Ministry has clarif ied that where anyinstance of filing of documents, applicationor return or petition etc. containing false ormisleading i nformation or omissi on ofmaterial fact or incomplete information isobserved, the Regional Director or theRegistrar, shal l conduct a quick inquiryagainst the professionals who certified theform and signatory thereof including anofficer in default who appears prima facieresponsibl e for submi tt ing fal se ormisleading or incorrect information pursuantto requirement of the prescribed Rules; 15days notice may be given for the purpose.

· The Regional Director or the Registrar willsubmit his/her report in respect of theinquiry initiated, irrespective of the outcome,to the E -Governance cel l of the Ministrywithin 15 days of the expiry of period givenfor submi ssi on of an expl anati on withrecommendation in initiating action u/s 447and 448 of the Compani es A ct, 2013wherever appl icable and also regardi ngreferral of the matter to the concernedprofessional I nsti tute for i ni ti at ingdiscipl inary proceedings.

· The E-Gov cell of the Ministry shall processeach case so referred and issue necessaryi nstructions to the Regi onal Di rector/Registrar of Companies for initiating actionu/s 448 and 449 of the Act wherever primafacie cases have been made out. The E-Govcell wil l thereafter refer such cases to theconcerned Insti tute for conductingdisciplinary proceedings against the errantmember as wel l as debar the concernedprofessional from fi ling any document onthe MCA portal in future.

[General Circular-10/2014 dated 07th May, 2014]

Corporate Law Update

2. One time oppor tunity for extension of Per iodof Reser vation of Name:

· Many stakeholders had reserved names forthe purpose of Company incorporation with60 days prescribed val idi ty expiring duringthe above mentioned period but they couldnot avai l of the 60 days prescribed periodfor usi ng the name to compl ete thecorresponding incorporation requirementsdue to the non-avai labi l ity of services onthe MCA21 portal to stakeholders from 1st

April, 2014 to 28th Apri l, 2014, hence, theM CA has extended the val i di ty ofreservation up to 31st May, 2014, of all suchnames with due date of expiry between 1st

April, 2014 to 28th Apri l, 2014.

[General Circular-11/2014 dated 12th May, 2014]

3. Applicability of PAN r equirement for ForeignNationals.

· To remove the diff iculties being faced byForeign Nationals while fil ing Incorporationform (lNC-7) due to mandatory requirementof submission of PAN details of intendingDirectors at the time of filing the applicationfor incorporation, the MCA has clarif ied thatPAN details are mandatory only for thoseforei gn nati onal s who are required topossess “PAN” in terms of provisions of theIncome Tax A ct, 1961 on the date ofapplication for incorporation.

· Where the intending Director who is aForei gn Nati onal i s not required tocompulsori ly possess PAN, i t wi l l besufficient for such a person to furnish his/her passport number, alongwith undertakingstati ng that provisions of mandatoryapplicabi li ty of PAN are not appl icable tothe person concerned.

[General Circular-12/2014 dated 22nd May, 2014]

4. Extensi on of val i di ty per i od for namesreserved as on 31st March, 2014.

· In continuation of the General Circular No.11/2014 dated 12/05/2014, approval of the


Competent Authori ty is hereby conveyed toextend continuity of all reserved names ason 31st March 2014 for another fif teen daysperiod from the date of issue of this circular.

[General Cir cular -13/2014 dated 23/05/2014]

5. Clar ifications on Rules prescr ibed under theCompanies Act, 2013 – M atters r elating toappointment and qualif ications of dir ectorsand Independent Director s. :

(i ) Section 149(6)(c): “pecuniary interest incertain transactions” :—

· The MCA has clariûed that in view of theprovisions of section 188 which take awaytransactions in the ordinary course of businessat arm’s length price from the purview ofrelated party transactions, an ‘ID’ will not besaid to have ‘pecuniary relationship’ undersection 149(6)(c) in such cases.

· I t is al so clari f ied that ‘pecuni aryrelationship’ provided in section 149(6)(c)of the Act does not incl ude recei pt ofremuneration, from one or more companies,by way of fee provided under sub— section(5) of secti on 197, reimbursement ofexpenses for participation in the Board andother meetings and proût relatedcommission approved by the members, inaccordance with the provisions of the Act.

(i i)Section 149: Appointment of ‘IDs’:

· Explanation to section l49(1l) cl earlyprovides that any tenure of an ‘ID’ on thedate of commencement of the Act shal l notbe counted for his appointment/ holdingoff ice of director under the Act. In view ofthe transitional period of one year providedunder section 149(5), it is hereby clari fiedthat it would be necessary that if it is intendedto appoint existing ‘IDs’ under the new Act,such appointment shall be made expresslyunder section l49 (10)/ (11) read wi thSchedule IV of the Act within one year from13th April, 2014, subject to compliance witheligibility and other prescribed conditions.

(iii) Section l49(10)/(11) – Appointment of ‘IDs’for less than 5 years:-

· The MCA has clarif ied that section l49(10)of the Act provides for a term of “up to fiveconsecutive years” for an ‘ID’. As such whileappointment of an ‘ID’ for a term of less than

five years would be permissible, appointmentfor any term (whether for five years or less)is to be treated as a one term under sectionl49(10) of the Act. Further, under section l49(11) of the Act, no person can hold office of‘ID’ for more than ‘two consecutive terms’.Such a person shall have to demit office aftertwo consecutive terms even i f the totalnumber of years of his appointment in suchtwo consecutive terms is less than 10 years.

· I n such a case the person compl eting‘consecutive terms of less than ten years’shall be eligible for appointment only afterthe expiry of the requisi te coo1ing— offperiod of three years.

(iv) Appointment of ‘IDs’ through letter ofappointment:—

· The MCA has clarified that in view of thespeci f i c provi si ons of Schedul e IV,appointment of ‘IDs’ under the new Actwould need to be formalized through a letterof appointment even in case of appointmentof existing ‘IDs’ .

[General Circular-14/2014 dated 09/06/2014]6. Clar i fication r egar ding maintaining register

in new format [sub-section (9) of section 186]:

· The Ministry has clari f ied that registersmai ntai ned by companies for l oans/guarantee/securi ty/maki ng acquisi t ionpursuant to sub-section (5) of Section 372Aof Companies Act,1956 may continue asper requirements under these provisions andthe new format prescribed vide Form MBP-2 shall be used for particulars entered insuch registers on and from 01/04/2014.

[General Circular -15/2014 dated 09/06/2014]

7. Applicability of PAN r equirement for ForeignNationals :

· In continuation of the General Circular No.12/2014 dated 22.05.2014 regards theabove subject, the MCA has clarif ied thatthe provisi ons of the said Circul ar areappl icable to a Foreign National who is asubscri ber / promoter at the ti me ofincorporation of the Company.

· In case, the said subscriber/promoter doesnot possess Permanent Account Number(PAN), he / she shal l furnish a declarationin the prescribed proforma, as an attachmentto the Incorporation Form (INC-7).

Corpor ate L aw Update


· MCA has further clarif ied that, in case of aResident Director of the proposed companyhe/ she shall be required to submit PANdetails at the time of incorporation.

[General Circular-16/2014 dated 10/06/2014]

8. Fi lling of MGT-10:

· In continuation of General Circular No. 06/2014 dated 29.03.2014 and 09/2014 dated25.04.2014, MCA has cl ari f i ed thatstakeholders are required to fill Form MGT-10 physically, get it duly signed/certified bya professional and f ile it along with otherrequired enclosures as attachments with theprescribed General E-form No. GNL-2.

· This temporary arrangement wil l continuetill an E-Form for MGT-10 is made available.Fee appl icable for MGT-10 wi ll be as perthe Table of Fees prescribed in Companies(Registration Offices and Fees) Rules, 2014.


9. Clar i fication for f iling of Form No. I NC-27for conver sion of company fr om publ ic topr ivate under the pr ovisions of CompaniesAct, 2013:

· As the relevant provisions of Companies Act,2013 (second proviso to sub-section (1) andsub-section (2) of section 14) have not beennotified, the MCA has clarified that in viewof this, the corresponding provisions ofCompanies Act, 1956 (Proviso to sub-section(1) and sub-section (2A) of Section 31) shallremain in force till corresponding provisionsof Companies Act, 2013 are notified.

· The Central Government has delegated suchpowers under the Companies Act, 1956 tothe Registrar of Companies (ROCs) vide itemNo. (c) of the noti f ication number S.O.1538(E) dated the 10th July 2012 and thisdelegated power remains in force.

· A ppl i cations for such conversions,therefore, have to be filed and disposed asper the earlier provisions.


10. Clar ifications on Rules prescr ibed under theCompanies Act, 2013 – M atters r elating toshare capital and debentures :

(i ) Share Transfer Forms executed before 1st

April , 2014:—

· In case of the Share Transfer Formsexecuted before 1st April, 2014 as per earlierForm 7B but which are yet to be accepted /registered by companies, the M CA hasclari f ied since the transaction relating totransfer of shares is a contract between twoor more persons / shareholders, any sharetransfer form executed before 15th Apri l ,2014 and submi tted to the companyconcerned within the peri od prescribedunder relevant section of the CompaniesAct, 1956 needs to be accepted by thecompanies for registration of transfers.

· I n case any such share transfer form,executed prior to 1st Apri l , 2014, i s notsubmitted within the prescribed period underthe Companies Act, 1956, the concernedcompany may get itsel f satisf ied sui tablywi th regard to justi f ication of delay insubmission etc.

· In case a company decides not to accept theshare transfer f orm, i t shal l convey thereasons for such non-acceptance within timeprovided under section 56(4)(c) of the Act.

(i i)Delegation of powers by board under rule6(2)(a):

· The MCA has clari fied that the powers ofthe Board provided under rule 6(2)(a) ofcompanies (Share Capital and Debentures)Rules, 2014 with regard to issue of duplicateshare cert iûcates can be exercised by aCommittee of Directors, subj ect to anyregulations imposed by the Board in thisregard.


11. Clar ification with regar d to voting thr oughelectr onic means:

· The MCA has noticed that compliance withprocedural requirements, engagement ofDepository Agencies and the need for clarityon matter like demand for poll/postal ballotetc will take some more time. Accordingly, ithas decided not to treat the relevant provisionsas mandatory till 31st December, 2OI4.


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Corpor ate L aw Update


AS-15 Employee Benefits

Notes forming par t of financial statements forthe year ended 31-03-2014

CMC Limited

Employee benefits include provident fund, gratuityfund, superannuat ion fund, employee stateinsurance scheme, compensated absences, and post-employment medical benefits.

Post–employment benefit plans

Payment to defined contribution retirement benefitschemes are charged as an expense as they fall due.

For defined benefit plans in the form of gratuityfund and post-employment medical benefits, thecost of providing benefits is determined using theProjected Uni t Credit method, wi th actuarialvaluations being carried out at each Balance Sheetdate. Actuarial gains and losses are recognised inthe Statement of Profit and Loss in the period inwhich they occur. Past service cost is recognisedimmediately to the extent that the benefits arealready vested and otherwise is amortised on astraight-line basis over the average period until thebenefi ts become vested. The retirement benefitobl igation recognised in the Balance Sheetrepresents the present value of the defined benefitobligation as adjusted for unrecognised past servicecost, as reduced by the fair value of scheme assets.Any asset resulting from this calculation is limitedto past service cost, plus the present value ofavai lable refunds and reduct ions in futurecontributions to the schemes.

Short-term employee benefits

The undiscounted amount of short-term employeebenefits expected to be paid in exchange for theservices rendered by employees are recognisedduring the year when the employees render theservice. These benef i ts include performanceincentive and compensated absences which are

expected to occur within twelve months after theend of the period in which the employee rendersthe related service. The cost of such compensatedabsences is accounted as under:

I. In case of accumulated compensated absences,when employees render the services thatincrease their entitlement of future compensatedabsences; and

II. In case of non-accumulating compensatedabsences, when the absences occur.

Long-term employee benefits

Compensated absences which are not expected tooccur within twelve months after the end of theperiod in which the employee renders the relatedservice are recognised as a liability at the presentvalue of the defined benefit obligation as at theBalance Sheet date less the fair value of the planassets, if any out of which the obligations areexpected to be settled.

ICICI Bank L imited

Staff Retirement Benefits

Gratuity

The Bank pays gratuity to employees who retire orresign after a minimum prescribed period ofcontinuous service and in case of employees atoverseas locations as per the rules in force in therespective countries. The Bank makes contributionto a trust which administers the funds on its ownaccount or through insurance companies.

The actuarial gains or losses arising during the yearare recognised in the profit and loss account.

Actuarial valuation of the gratuity liabil ity isdetermined by an actuary appointed by the Bank.Actuarial valuation of gratuity liability is determinedbased on certain assumptions regarding rate of

CA. Pamil H. [email protected]

From Published Accounts


interest, salary growth, mortality and staff attritionas per the Projected unit credit method.

Superannuation Fund

The Bank contributes 15.00% of the total annualbasic salary of certain employees to superannuationfunds managed and administered by insurancecompanies for its employees. The Bank also givesan option to its employees, allowing them to receivethe amount contributed by the Bank along with theirmonthly salary during their employment.

The amount so contributed/paid by the Bank to thesuperannuation fund or to employee during the yearis recognised in the profit and loss account.

Pension

The Bank provides for pension, a defined benefitplan covering eligible employees of erstwhile Bankof Madura, erstwhile Sangli Bank and erstwhileBank of Rajasthan. The Bank makes contributionto a trust which administers the funds on its ownaccount or through insurance companies. The planprovides for pension payment including dearnessrelief on a monthly basis to these employees on theirretirement based on the respective employee’s yearsof service with the Bank and applicable salary.Actuarial valuation of the pension l iabi li ty isdetermined by an actuary appointed by the Bank.Actuarial valuation of pension liability is calculatedbased on certain assumptions regarding rate ofinterest, salary growth, mortality and staff attritionas per the projected unit credit method.


Employees covered by the pension plan are notel igible for employer’s contribution under theprovident fund plan.

Provident Fund

The Bank is statutorily required to maintain aprovident fund as a part of retirement benefits to itsemployees. Each employee contributes a certainpercentage of his or her basic salary and the Bankcontributes an equal amount for eligible employees.The Bank makes contribution as required by TheEmployees’ Provident Funds and Miscellaneous

Provisions Act, 1952 to Employees’ PensionScheme administered by the Regional ProvidentFund Commissioner. The Bank makes balancecontributions to a fund administered by trustees. Thefunds are invested according to the rules prescribedby the Government of India.

Actuarial valuation for the interest rate guaranteeon the provident fund balances is determined by anactuary appointed by the Bank.


Leave encashment

The Bank provides for leave encashment benefitbased on actuarial valuation conducted by anindependent actuary

Chemfab Alkalis L imited

1. Defined Contribution Plan

a. Fixed contribution to provident fund arerecognized in the accounts at actual costto the company.

b. Super Annuation Fund: The Companymakes contribut ion to a schemeadministered by the insurer to discharge itsliabilities towards super annuation to theemployees. The Company has no otherliability other than its annual contribution.

2. Defined Benefit Plan

a. Gratui ty: The Company makescontribution to a scheme administered bythe insurer to discharge gratuity liabilitiesto the employees. The Company recordsits gratuity liability based on independentactuarial valuation as at the Balance Sheetdate using the Projected Uni t Credi tMethod. Actuarial gains and losses areimmediately recognized in the Statementof Profit and Loss.

b. Accumulated compensated absence: TheCompany records i ts Compensatedabsence l iabi l i ty based on actuarialvaluation as at the Balance Sheet date byan independent actuary using the ProjectedUnit Credit Method.

From Published Accounts



CA. Kunal A. [email protected]

From the Government

Income Tax

1) CBDT notified cost inflation index for thef inanci al year 2014-15 as 1024, videnotification no. 31, dated 11/06/2014.

Wealth Tax

1) Not i f icat ion r egar ding amendment inWealth – tax Rules, 1957

CBDT here by makes the fol lowing rulesfurther to amend the Wealth tax Rules, 1957, namely:

A) In case of individuals, HUF and companiesthe return of net wealth in respect ofassessment year 2013-14 and earl ierassessment years shall be in form BA.

B) I n case of i ndividuals, HUF andcompanies the return of net wealth inrespect of assessment year 2014-15 andany other subsequent assessment yearsshall be in form BB.

C) In case of individuals and HUF the returnof net wealth in form BB in respect ofassessment year 2014-15 and any othersubsequent assessment years shal l befurnished electronical ly under digi talsignature , provided provisions of section44AB of the income tax are applicable tosuch individuals and HUF. Otherwise theycan file the wealth tax return in a paperform.

D) The return of net wealth in form BB shallnot be accompanied by a statement ofcomputation of tax payable or proof of taxand interest paid or any other documentrequired to be attached with the return ofnet wealth under any provisions of the Act.

(For form BB and full text refer notification no.32, dated 23/06/2014)

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3. Other Employee Benefits

Other employee benefits are estimated andaccounted as per the Company’s policyand the terms of the employment contract.

Clar is L ifesceinces L imited

Retirement benefits

Defined Contribution Plan :

The Company’s contributions paid/ payable for theyear to Provident Fund and ESIC are charged tothe profit and loss account for the year.

Defined Benefit Plan :

The Company’s liabilities towards gratuity and leaveencashment are determined using the projected unitcredit method which considers each period of

contd. from page 255 From Published Accounts

service as giving rise to an additional unit of benefitentitlement and measures each unit separately tobuild up the f inal obl igation. Past services arerecognised on a straight-line basis over the averageperiod until the amended benefits become vested.Actuari al gai n and losses are recogni sedimmediately in the profit and loss account as incomeor expense. Obligation is measured at the presentvalue of estimated future cash flows using adiscounted rate that is determined by reference tomarket yields at the balance sheet date onGovernment bonds where the currency and termsof the Government bonds are consistent with thecurrency and estimated terms of the defined benefitobligation.

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Association News

CA. Abhishek J. JainHon. Secretary

For thcoming Programmes

Date/Day Time Pr ogrammes Speaker Venue

14.07.2014 6.00 pm to Technical Aspects of Shri Saurabh N. Tagore Hal l,8.00 pm Finance Bill, 2014 Soparkar Paldi, Ahmedabad.

18.07.2014 5.00 pm to 3rd Study Circle Meeting on Service tax - H.K. College7.00 pm “Budget Amendment“ CA. Nilesh V. Suchak Conference Hall,

and Income Tax - H. K. College,CA. Jignesh Shah Ashram Road, Ahmedabad.

02.08.2014 41st Residential Various Speakers Jaypee Palace Hotel &to Refresher Course Convention Centre,06.08.2014 AGRA.

09.08.2014 2nd Brain Trust Meeting on CA. Sanjay R. Shah ATMA Hall,"Issues on Tax Audit Ashram Road,

(Tax and Audit Perspective) Ahmedabad.

CA. Nirav R. ChoksiHon. Secretary

Glimpses of events gone by: A Programme 'Hassayro' Organised by the

Entertainment and Cultural Committee on 13th June2014, at Tagore Hall, Ahmedabad.

A Programme by Information Technology Committeeon “Generat ing Financial Statements in RevisedSchedule VI was held on 20th June 2014 at AMA, ATIRACampus, Near IIM, Ahmedabad.

(L to R C.A. Abhishek J. Jain, CA. Shailesh C. Shah,Speaker Mr. Deepak Gupta, CA. Anuj J. Sharedalal and

CA. Vijay M. Valia)

1st Brain Trust cum Workshop Committee Programmewas held on 21st June 2014 on the topic of “Issues inService Tax – A Mixed Bag” at ATMA Hall, AshramRoad, Ahmedabad.

(L to R CA. Abhishek J. Jain, CA. Shailesh C. Shah,Speaker CA. Rajiv Luthia, CA. Kunal A. Shah and CA.

Yogi K. Upadhyay )

2nd Study Circle Meeting was held on 25th June 2014 onthe topic of “CA as a Practitioner and Net Workingof CA Firms at H.K. College Conference Hall, AshramRoad, Ahmedabad.

(L to R CA. Naishal Shah, CA. Shailesh Shah, SpeakerCA. Dhinal Shah, CA. Abhishek Jain, CA. Mehul Shah)


Acr oss

1. Manufacture, supply and installation of lift istreated as ________________.

2. Due to peculiar nature of services it is difficultto determine the _______ of service.

3. Service tax paid on Group Personal Accidentof ___________ is eligible for credit as inputservice.

4. Interest on enhanced compensation is to betaxed on ______________ basis.

Down

5. Benef it of _________ is not avai lable toIndependent Directors.

6. If tax payable determined does not exceed_______ thousand rupees, in such casesassessee cannot be prosecuted u/s 276CC.

7. CAA’s updates are now available on this socialnetworking site.

8. This is how E.Sreedharan popularly known as.

ACAJ Crossword Contest # 3

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 # 1 - SolutionAcross1. RegisteredValuers 2. Shantiniketan3. Agra 4. Bangladesh

Down5. Gross Profit 6. Mananam7. RBI 8. Service

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 2

1. CA. Kamlesh Parikh

2. CA. Gaurang Choksi

3. CA. Dhaval Patel

4. Members may submi t thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 28/07/2014.

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

Documents

Volume : 38 Part : 04 July, 2014 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-41.pdfAhmedabad Chartered Accountants Journal July, 2014 185 Volume : 38 Part : 04 July, 2014 E-mail: